Park-Ohio Holdings Corp. (NASDAQ:PKOH) Q1 2024 Earnings Call Transcript

Park-Ohio Holdings Corp. (NASDAQ:PKOH) Q1 2024 Earnings Call Transcript May 1, 2024

Park-Ohio Holdings Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and welcome to the Park-Ohio First Quarter 2024 Results Conference Call. At this time, all participants are in a listen-only mode. After the presentation, the company will conduct a question-and-answer session. Today’s conference is also being recorded. [Operator Instructions] Before we get started, I want to remind everyone that certain statements made on today’s call may be forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected. A list of relevant risks and uncertainties may be found in the earnings press release as well as in the company’s 2023 10-K, which was filed on March 6, 2024, with the SEC.

Additionally, the company may discuss adjusted EPS, adjusted operating income and EBITDA as defined on a continuing operations or consolidated basis. These metrics are not measures of performance under generally accepted accounting principles. For a reconciliation of EPS to adjusted EPS, operated income to adjusted operated income and net income attributable to Park-Ohio common shareholders to EBITDA as defined, please refer to the company’s recent earnings release. I will now turn the conference over to Mr. Matthew Crawford, Chairman, President and CEO. Please proceed, Mr. Crawford.

Matthew Crawford: Great. Thank you very much, and welcome to the first quarter of 2024 conference call. Thank you for joining. We’re pleased with the performance of our company during the quarter, especially as it relates to our improved margins and our continued focus on managing improved cash flows. As most of you know, we’ve spent most of the last several years driving initiatives that would improve the quality of earnings across the businesses. These include commercial activity regarding pricing and exiting low or negative margin business, the restructuring of several high-cost locations, renewed focus on growing our highest-margin products and services and the sale of non-core assets. During the first quarter, we began to see a clearer picture of the momentum of those efforts and are proceeding towards a leaner, less capital-intensive and more predictable business.

I particularly want to acknowledge the efforts of Supply Technologies. Supply Tech has led the way as an agile supplier to many of the world’s most demanding and often volatile industries and customers, while driving continuous improvement initiatives deeper into the organization and investing aggressively in new productivity tools in both data intelligence and operating execution. Additionally, the innovative ideas in the fastener manufacturing group continue to bring important value-driven solutions to an increasing set of global customers, particularly in the EV space. ACG’s relentless focus on operations after several years of consolidations, which are now substantially complete, have not only created more improved and consistent performance, but allow us to quote new business and new products from a position of lower cost and world-class execution.

Our product portfolio is diverse and, in many cases, agnostic to the powertrain of the vehicle. EPG continues to benefit from strong backlogs in a growing and impressive aftermarket and service business precipitated by a massive installed base globally and trusted brands in the industrial space. We’re striving to improve execution in the new equipment business, where we’ve seen substantial turnover in key knowledge areas and expect improvements as we head into the latter part of the year. I remind us all that this group should and will be a leader in accretion to our consolidated marches. For the balance of the year, we anticipate improved year-over-year comparisons and annual growth in line with our guidance. stable demand generally combined with strong aerospace and defense volumes plus solid backlogs in the long-cycle businesses support that assumption.

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Q&A Session

Additionally, we believe macro trends and renewed spending in infrastructure, EV and semiconductor will play a larger role in our success towards the latter part of the year. With that, I’ll turn it over to Pat to cover the quarter results.

Patrick Fogarty: Thank you, Matt. Our first quarter results were a positive start to the year. Our revenues were in line with our projections and operating income, earnings per share and EBITDA exceeded our internal expectations. Sales in the quarter totaled $418 million, and customer demand continued to be strong in most key end markets. The strong end market demand along with operational improvements drove the strong performance during the quarter. Our consolidated gross margin was 17.1% in the quarter, up 120 basis points from the first quarter of last year. This is the highest level of gross margin in over 5 years. Also, our adjusted EPS of $0.85 per share was up 18% compared to $0.72 a year ago, and EBITDA as defined improved 19% year-over-year.

Consolidated operating income improved 19% to $24 million compared to $20.2 million in the first quarter of last year. Operating income margins improved 90 basis points year-over-year to 5.7% of net sales. The strong first quarter operating income performance was driven by record profit performance in Supply Technologies and operating income improvement in assembly components. SG&A expenses were $47 million compared to $45 million a year ago, with the increase driven by an increase in personnel costs. Interest costs increased to $11.9 million during the quarter compared to $10.7 million last year, driven by higher interest rates in the current year, partially offset by lower average borrowings outstanding in the quarter. Our effective tax rate was 25% in the quarter.

Foreign tax credits and research and development credits helped to offset the impact of higher foreign tax rates. We expect our full year effective tax rate to range between 23% and 25%. GAAP earnings per share from continued operations for the quarter improved 36% to $0.83 per diluted share compared to $0.61 last year. On an adjusted basis, our earnings per share was $0.85 compared to $0.72 a year ago, an increase of 18%. Our EBITDA as defined totaled $38 million in the first quarter. On a trailing 12-month basis, our EBITDA as defined was $141 million, resulting in improved leverage ratios compared to year-end. During the quarter, we generated improved year-over-year operating cash flows and free cash flow. We continue to implement working capital initiatives, which will drive improved free cash flow for the remainder of the year.

Our liquidity at the end of the first quarter was $168 million, which consisted of approximately $62 million of cash on hand and $106 million of unused borrowing capacity under our various banking arrangements. As we previously announced, S&P Global upgraded our credit ratings during the quarter due to our improved operating performance and reduced financial leverage. Also, during the quarter, we announced the acquisition of EMA GmbH. EMA strengthens our global induction heating expertise throughout Europe and expands both our portfolio of induction equipment brands and our aftermarket service capabilities. We have commenced the integration of EMA into our existing operations in Germany, and we expect EMA’s annual revenues to exceed $30 million and the results to be accretive to our operating margins and our earnings per share.

Turning now to our segment results. In Supply Technologies, net sales were $197 million during the quarter, up slightly from a year ago, reflecting continued strong demand in most key end markets and led by a 28% increase in our aerospace and defense business and strong growth in our industrial supply business. During the quarter, demand was lower year-over-year in the heavy-duty truck and agricultural equipment markets, which partially offset this growth. We also achieved record sales in our fastener manufacturing business, which were up 15% from a year ago due to strong customer demand for our proprietary products throughout North America and Europe. Operating income in this segment totaled a record $19.5 million compared to $14 million a year ago.

Operating margins were also a record at 9.9%, up 270 basis points from 7.2% a year ago. The higher profitability in the quarter was driven by an increase in sales from higher-margin products, lower operating costs in our supply chain business and sales growth in our proprietary fastener business. Our focus on reducing product costs, location profit improvement initiatives and expanding our higher-margin industrial supply and proprietary fastener products impacted the first quarter and will continue to positively affect future margins. In our Assembly Components segment, sales for the quarter continued to be strong across all product categories and totaled $107 million. This compared to the sales of $110 million a year ago, with the decline primarily due to lower unit volumes in our fuel rail and extruded rubber products businesses.

Despite the lower sales level, segment operating income increased 18% to $8.6 million from $7.3 million a year ago. Segment margins were also higher in the current year at 8% compared to 6.6% last year, an increase of 140 basis points. The improvement in profitability was driven by ongoing profit improvement initiatives, improved product pricing and the benefit from completed plant consolidations. In this segment, we continue to focus on improving operational execution in each of our manufacturing plants and are implementing other profit improvement actions, including expanding our rubber mixing capacity and increasing plant floor automation, which will positively impact our operating margins. In our Engineered Products segment, the demand continued to be strong across most product brands and geographies.

First quarter sales were $114 million compared to $117 million a year ago. The slight decline in sales was driven by lower sales of new equipment, primarily in the U.S. and in Europe. During the quarter, our aftermarket revenue increased 16% year-over-year. New equipment bookings totaled approximately $40 million in the quarter compared to average quarterly bookings of $43 million in 2023. Backlogs continue to be strong in this segment and totaled $151 million compared to $162 million last quarter. Revenues in our Forged and Machine products business also improved and increased 4% year-over-year. During the quarter, operating income in this segment was $3.5 million compared to $5 million a year ago. And on an adjusted basis, operating income was $3.8 million in the quarter compared to $7 million last year.

The profitability decline year-over-year in this segment was driven by lower and new equipment sales in our induction business, lower sales volumes, isolated in our forging operation in Arkansas and higher operating costs to complete new equipment. We are taking aggressive actions to improve profitability in this segment, including implementing initiatives to improve supply chain challenges experienced during the quarter and to improve the production throughput on new equipment orders. And finally, corporate expenses totaled $7.6 million during the quarter compared to $6.9 million a year ago, driven by higher purchasing costs. With respect to our full year 2024 guidance, we continue to expect year-over-year revenue growth in the mid-single-digit range.

We also continue to expect year-over-year improvement in adjusted earnings per share and EBITDA as defined. Now I’ll turn the call back over to Matt.

Matthew Crawford: Thanks, Pat. I appreciate the look at the first quarter. And now we’ll open the line up for questions.