Greetings, and welcome to the Park-Ohio Holdings Group Corp. Third Quarter 2025 Results Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Chairman and CEO, Matt Crawford. Please go ahead, sir.

Thank you, Kevin, and welcome to our third quarter call. Our third quarter was highlighted by our continued transformation into a leaner, more predictable business through the business cycle. While many end markets, particularly here in the U.S., where we derive a majority of our sales, showed mixed demand, we were able to demonstrate consistent operating profit and margin performance. While we did not -- while we do not anticipate a meaningful rebound in demand during the fourth quarter, we do expect to build on these initiatives as we move into 2026 and will also benefit from new business and strong backlogs. We use the word transformation here quite a bit, and I want to be more precise regarding what that means as we move towards 2026. Our transformation began several years ago as we challenged our capital allocation model and shed assets that were either underperforming or we felt were ill-suited for a higher growth, higher margin and less capital-intense business. We then began to invest more urgently in those businesses, which we have great opportunities for significant operating leverage and include clear competitive moats. While this model continued to support some level of acquisition, we were and are more focused on long-term competitive advantage, the right kind of products and services and customer partnerships. During 2025, we have seen this transition take hold. While mixed demand signals from our diverse customer base have muted the improvements in our operating execution and quality of earnings, we see the improvements and also have seen a more consistent stream of earnings results despite the underlying volatility. We firmly believe that in 2026, will be another important step forward as we combine these productivity improvements with new business and strong backlogs. Equally important is that we expect to do these things while reducing debt meaningfully during the fourth quarter and we will continue that trend into 2026. I want to thank and applaud the effort of our entire Park-Ohio team as we manage the challenges of today with an eye toward the exciting times ahead. Pat, can you cover the third quarter, please?

Thank you, Matt. Our third quarter results were generally in line with our expectations for the quarter given the mixed industrial environment, and we continue to see positive trends in each of our business segments. Before I get into the details of our third quarter results, I want to provide a few highlights achieved during the quarter. First, as we previously announced, we refinanced both our senior notes and our revolving credit facility, extending maturity dates by 5 years and strengthening our balance sheet and liquidity. We incurred bond-related expenses of $2 million related to the redemption of our previous bonds, including a noncash write-off of unamortized costs. These expenses reduced our GAAP earnings during the quarter by $0.11 per share. In connection with the refinancing of our bonds, we received upgraded ratings on the new senior secured notes from Moody's, S&P Global and Fitch Ratings. Second, we continue to make strategic capital investments in new technology and information systems, capacity expansion and margin improvement initiatives. These investments will enable sales growth and higher profitability in the future. And finally, new equipment orders in our industrial equipment business continue to be very strong with new bookings and backlogs at record high levels at most locations. Our business strategy focuses on end market and application diversification beyond traditional end markets. Most notably, we continue to see strong order activity in the electrical steel processing to support both expanded application usages and electrical grid infrastructure and in the defense markets for munitions and shell production and armored vehicle protection plating. Bookings year-to-date are highlighted by an order from a major steel producer totaling $47 million for induction slab heating equipment for high silicon steel production. Further enhancing the strong demand for our induction products is our global operational footprint, enabling our customers…

Thanks, Pat. We'll now open the floor for questions.

[Operator Instructions] Our first question is coming from Steve Barger from KeyBanc Capital Markets.

This is actually Christian Zyla on for Steve Barger. First question, kind of a 2-part question. First, how are you accounting for the recent large orders in your EP backlog? Is that percentage of completion or completed contract? And then maybe just broader, do you expect that large order from last quarter to be largely delivered in '26? I guess that would imply double-digit growth rate in EP, assuming a steady business otherwise. So can you just help us square that circle and how you're thinking about EP?

Absolutely, Christian. This is Pat. Our contracts in that part of our business are accounted for using the percentage of completion method. So as it relates to the large order of $47 million, it represents 5 pieces of equipment. We expect 3 of the 5 to be recognized during the course of 2026, with the latter 2 in the following year in 2027.

Christian, I would just add that I think we said it a lot, but I want to be crystal clear. We are seeing electrical infrastructure, industrial electrification, whether it be the single order we talked about or a myriad of orders related to graphite and other things that are important to, again, the grid and battery technology are underpinning significant growth in this business, not just around that one order, around a myriad of orders globally. So this is a very, very exciting part of our business, and we will see it begin to impact maybe a little bit at the end of the year, but really into 2026 and beyond. This is not something that is stopping. This is something that is beginning. So we feel that, that big order is really important, but also symbolic for what is happening in industrial electrification where we are extremely well positioned, both from an OE perspective and an aftermarket perspective. So this is one of the most exciting. And I think, as you know, why we have focused in our transformation a fair amount of energy around our business that focuses on this. But as Pat points out, these things are not built overnight. Even if you take percentage of completion, it will be a little bit choppy, but we'll begin to see the benefit of it clearly going into 2026.

Completely understood. And I guess with those comments, just doing the math, I think $50 million of orders this quarter for EP solid momentum. The backlog is at, I think, record highs from what we can see. So I guess a question on that is with the orders that are coming in the new business and part of EP's margin performance in this quarter, are you having margin pressure from some of those front-end investments of your projects? Does that abate as we go into '26 and '27 as you see that business ramp? Or just how should we think about the ramp of those contracts in that business related to the margin cadence?

No, that's a great question. Really good question. So you're going to -- I'm going to have to harp on transformation again. Let me start by saying, again, I didn't misspeak, but I want you to understand the value stream we're talking about here. This is not just graphite and steelmaking. This is also mining. rare earth mineral mining, the Caterpillars of the world, all the people that make mining equipment. I mean the distribution of the value stream and where we're seeing the benefit is remarkable. Again, we haven't seen much in the way of mining in a long time, and we are. So I think there is some transition going on in the order book. I would also highlight defense. I know it's not related to this, but highlight defense as well. There is a transition going on vis-a-vis our order book. And I think that we have seen this year sort of a period of time in the third and fourth quarter where we were filling the order book and preparing to respond to this. We were onboarding people and preparing our facilities for what we think is a pretty long run. And to some extent, clearing out some old jobs that we've mentioned in the past that had some challenges. So I do feel as though there has been margin pressure, not from the customer standpoint, not from the market standpoint, but really around preparing this business for what we anticipate is going to be a heck of a run here on this backlog. So -- and I would also highlight that to say where we are seeing very strong performance is in the aftermarket. So we continue, I think that's, as we've discussed, a razor-razor blade model. And our expectation is that continues to underpin and pay for this transition as we modernize our key facilities, both here in Europe. So we're making some investments here around long-term competitiveness. So you're right, we are seeing some cost pressure as we as we bring people on board to prepare for these orders, we are seeing some investment around modernizing these facilities, preparing for these large orders. But this pipeline is a lot bigger than just that one order, I can tell you that. And you're seeing it in the order book. And it's not just steel. It's all aspects of that value stream as well as defense and others.

Got it. And then if I could just follow up on that. Do you expect that margin pressure to then flip into a benefit in parts of '26? Or is that a '27 event? Just how should we think about it in terms of the ramp versus the execution of the contract and when that business starts kind of flipping and performing as you expect?

Yes, Christian, I would -- this is Pat again. Clearly, margins will begin to improve as each individual contract is priced uniquely. So -- but clearly, there -- under the percentage of completion method, we're estimating our end margin on each of the jobs and recognizing that as we complete the job during the course. So coupled with aftermarket strong margins, we would expect margins in the industrial equipment side of our business to continue to improve. And keep in mind, this part of our business historically was our highest margin business. And so between the repricing of the new jobs and various value drivers that we're implementing in each of the manufacturing facilities around the world will clearly have a benefit on future margins.

Christian, I don't want to overstate. I hate to not be positive, but there are -- and again, we're just finishing, I think, in closing out. As Pat mentioned, some of these jobs take 18 months to complete. So a few of the jobs that have impaired profitability in 2025 have been related to orders that were placed a year or 2 ago, where there are some challenges around inflation, around execution, around labor. Those are the kinds of risks that we're just not seeing in the marketplace now. And you might or might not ask about tariffs. That's a positive for us here, not only in terms of our customers' health, but also in terms of our global footprint allows us to be exceedingly nimble versus our competition on where and how we make this product. So all of the above, every one of those things I just talked about is a positive for margin accretion. I don't -- to Pat's point, I don't really know another way to talk about it other than to say, for years, this business operated at 10%, and there's nothing about it that's worse today than it was then. The aftermarket mix is better. The margins are strong. The customer relationships are strong. Our locations and where we operate are appropriate and cost effective. Like I said, we're spending some money to modernize some of the locations, which I think is great. This is an exciting time. So yes, I would expect to see meaningful progress in 2026 and not the end of 2026.

Great. I appreciate that answer. If I could sneak in one more, and we appreciate you letting us take the time for the questions. But just last question on free cash flow, Pat. Your guide of $45 million to $55 million would be a record free cash flow quarter. Can you just talk about what's embedded in that expectation? I mean, is that largely working capital benefits, less CapEx that quarter? And then just what drove the overall difference or reduction from last quarter?

No problem. Let's talk about the reduction from the guidance. The previous guidance was $65 million for the second half of the year. Our guidance for the quarter takes down the results of the third quarter, which was $7 million of free cash flow. What we're seeing throughout every one of our businesses is the growth in working capital that we've seen year-over-year has primarily been in receivables and a little bit in inventory. We're seeing the harvesting of many accounts and various working capital items in the fourth quarter, primarily receivables. In inventory, there -- the management of Supply Technologies is reducing receipt activity, which will help lower inventory based on the revenues they're seeing in the fourth quarter and the first quarter. But more importantly, is the reduction of days on hand and the ability to manage lead times better. As we ended last year with the threat of tariffs, there was a lot of prebuy activity, a lot of excessive order taking by our supply base and delivering into our facilities in the first half of the year. We now see lead times reducing dramatically. So that helps days on hand. That helps our inventory levels, and we're seeing that happen. It began to happen in the third quarter, but significantly reducing levels in the fourth quarter.

Christian, I might say it a different way, too. I might just say that by historical standards, we are still not where we need to be in terms of our working capital efficiency. So this -- the fourth quarter begins to bring that back into line. It doesn't get us where we need to be. There's nothing underlying -- no fundamental issue on that. It's as Pat described, our customers push-pull in terms of tariffs, push-pull in terms of demand planning as well as new product launches that, in some cases, have been delayed, but we will see come to fruition as we get into 2026. So all those things have made us less efficient managing working capital than we have been in the past, and we see a significant move stride forward, some of which because new products will launch, some of which there's a little more clarity, if possible, on tariffs or at least supply chains and some of which I think is because we're not necessarily expecting a big uptick in the economy, but at least people are getting accustomed to how to manage their supply chains.

Next question is coming from Dave Storms from Stonegate.

I want to start at a high level here. The latest macro headwind -- potential macro headwind is this government shutdown domestically. Are you seeing any impacts of that ripple through to your business lines?

I don't have any explicit examples of that. I mean we know it can't be good, right? We have not -- we -- as you know, Dave, we've seen a lot of strength across the business from defense. I am sure it has slowed down the internal workings of some of the major orders or some of the updates or scope changes, the kinds of things that happen under the hood every day. So I don't want to suggest that we're not probably seeing a little bit of adverse effect, but not in a way that would be important to explicitly discuss.

That's perfect. I just wanted to check to see if...

No, it's a great question.

Moving on, I did want to touch on Supply Tech, too. It sounds like you're seeing some volume pressure in a couple of end markets and a couple of different geographies. But it seems like pricing is still holding up. How sustainable do you think this is? Do you feel like we're maybe reaching an inflection point where margin can maybe get back to growing further in Supply Tech?

Well, I think that we did an incredible job last year, I think, in managing price. I think we've done a good job today with some of the tariff exposure -- or this year with some of the tariff exposure we had. I think where we are today is more focused on strategic initiatives around growth, a return to growth to provide the operating leverage that we know exists in that business, which should take us to higher levels. And equally, some of the investments that we've talked about that will be transformative in terms of our costs and how we go to market. And I talk a lot about competitive long-term advantages. Some of the infrastructure investments we're making around how we distribute products and how we manage data are going to be meaningful over years to come. So I do think there's opportunity on the margin side. But to be clear, I think it's less today about pricing than it is about competitive -- improving our competitiveness as well as getting operating leverage that comes with some incremental volume. What's tough to manage in any business is volatility, right? It's not as simple as significant changes. It's the month-to-month variability. So when you see across Industrial America, a gross number of being things being -- build rates adjusted for inflation being down a little bit, that's one thing. The volatility is what's particularly hard to manage. And we've seen a lot of that this year. So I compliment the Supply Tech team and their service model being able to respond and react to somebody going from flat to down 10% one month to up 10% the next month. It's not as simple as everything just being down a couple of percent. So it's been difficult to manage this year. And again, against the backdrop of what we expect to be a strong 2026. So you got to manage that as well.

Understood. That's great commentary there. And just kind of sticking with that, as you're adding improvements of macro theme for the last year or so has been the implementation of AI. Are you seeing any areas to strategically implement AI to further enhance your operations?

Well, we can spend a long time trying to define AI. But I'm going to answer emphatically yes, in one particular way and then a good conversation going forward. But I'm going to answer emphatically that our investments in information technology over the last couple of years, which now include harnessing AI around cleaning data, around managing data, around investing in data management tools. These, I think, have been the building blocks to position ourselves for some of the use cases we're seeing on AI. So when I think about business improvements that we'll see in 2026 and efficiencies we'll garner from the business, a lot of that, I think, is just from how we manage data differently and the quality of data we have today in our business. So -- particularly in supply technology, which is really a data business in many ways. So that is where I think we're beginning to see the benefit and where we're beginning to see the building blocks of some of the use cases that are going to actually drive efficiencies in the business. So we do see incremental improvement in the context I discussed. And I think that as we build better and broader use cases across the business, that's going to be a bigger opportunity for us. But the benefits today are more just on the data management side, AI or not.

Understood. And then one more for me, if I could sneak it in here. you pretty explicitly mentioned that your outlook for 2025 is meaningful cash generation with the goal of debt reduction. Are there any metrics that you could put around that debt reduction maybe in terms of market debt levels or time lines?

Yes. Well, the debt reduction as a result of the strong free cash flow in the quarter, clearly will happen. When you look at the amount of the free cash flow for the full year, $10 million to $20 million after the payment of our quarterly dividends, you can extract the debt reduction from that. So it's roughly $5 million to $10 million year-over-year. And as we step into next year and expect an improvement in free cash flow, that debt reduction will increase.

But explicitly in the fourth quarter, the end of this quarter, the end of the fourth quarter, what do we expect to reduce debt?

Of the $45 million to $55 million, we would expect $35 million to $45 million of debt reduction.

Yes, that's, I think, the answer to your question.

Quarter-over-quarter.

Quarter-over-quarter, we're expecting $35 million to $40 million of debt reduction from free cash flow.

We reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

Great. Thank you all, and thank you for your very important questions. It allowed us, I think, to highlight some of the positive changes happening in the business. We look to not only close out the year strong, but also to begin to set the table as we are for a really successful 2026. Thank you for your time today. Bye-bye.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.