PARK OHIO HOLDINGS CORP Q3 FY2024 earnings call

• Overall demand was stable during the quarter despite industrial headwinds, with expectation of growth in Q4 and 2025. - Margin profile improved with a 60 basis point year-over-year gross margin improvement, focus on execution and best products/services. - Continued efforts to reduce leverage by selling $25 million of common stock, with plans to use year-end cash flows and opportunistic stock sales for debt reduction. - Segment-specific highlights: Supply Technologies saw sales growth in aerospace, defense, consumer electronics, etc.; Assembly Components focusing on new business launches; Engineered Products saw sales growth in industrial equipment and aftermarket.

Supply Technologies: Q3 sales were $195 million, compared to $193 million a year ago. Operating income was an all-time record at $20.5 million, up 31% year-over-year, with operating margins at 10.5%, also an all-time record. Year-to-date, sales were $594 million and operating income was $59 million, both all-time records for the nine-month period. Assembly Components: Q3 sales were $99 million, down from $108 million a year ago. Adjusted operating income totaled $6.6 million, generally in line with the previous quarter. Year-to-date, sales were $309 million and adjusted operating income margin was 7.2%. Engineered Products: Q3 sales were $124 million, up 6% from $118 million a year ago. Operating income was $5.2 million, down from $7.1 million a year ago. Year-to-date, sales were $365 million, up 3% from last year, and adjusted operating income was $16 million, down from $20 million a year ago.

• Expect current year revenue growth between 1% and 2% and revenues to grow in the fourth quarter year-over-year. - Expect adjusted earnings per share to increase by more than 10% year-over-year. - Expect EBITDA as defined to be approximately $150 million, an increase of 12% over the previous year.

• Industrial market headwinds affecting various segments. - Challenges in replacing experienced employees in the forge segment. - Uncertainties in supply chains, particularly in aerospace and defense. - Potential impacts of trade policy changes on the business.

Q: Good morning, Matt and Pat. I'm going to start on the gross margin. You know, you pointed out it's been running well. It's really the highest rate in about ten years. And you mentioned investing in your best products and services. Can you just expand on that?

A: Sure. I mean, I think that we've been repositioning the portfolio for really going back to 2018 and 2019, and we've been doing it in several different ways. You know, I hesitate to use the word restructuring, but I think that we underwent a strategy to make our core manufacturing and distribution operations more nimble and more profitable, as I say, through the business cycle. As you know, we invested a lot in increasing productivity, whether it be plant closures or repositioning over a million square feet in the US. So we divested ourselves of some low-margin, high-capital businesses. So to begin answering your question, I want to talk about capital allocation and say the first horse at the trough, which I like to say, is making our business better and our earnings more sustainable. And that's true across the board. We like our portfolio. We like the businesses we're in. And, you know, we believe we can invest in those current business portfolios and be better at what we do to reposition ourselves for landing more business. And we're seeing that happen. We are absolutely seeing our new business pipelines get more robust every day. We've seen it in firm backlogs in the equipment business, but we've also seen it, I think, across the portfolio from automotive to the more diverse industrial businesses where we see a more robust pipeline of new inquiries and top-of-the-funnel action. So, first and foremost, I want to speak to that. Second of all, I think that we will continue to look at each of our businesses and really do a deep dive in understanding where the sustainable investment opportunities are. And, candidly, given the opportunity to invest in businesses that are not just high IRR but high margin. We've got some wonderful pockets in the business. I would highlight aftermarket in our equipment business. I would highlight adjacent markets like aerospace in our supply tech business. I would highlight some new business in the automotive segment that leans on some innovation that isn't new to us, but one plus one equals three in the extruded hose and bed metal space. So, I don't want to suggest that we're doing a different allocation broadly across the portfolio. What I'm saying is we're more cognizant inside each business of making sure we're investing for sustainable higher-margin businesses long term. Whether that be a new business or, again, the first horse at the trough is making our current businesses better. I think I've highlighted in the past, and I'll highlight again, we invested in vertical integration and mixing capacity in the automotive space. Again, that positions us for long-term sustainable growth. So I'm not using those terms to pick one business over the other. I'm using those terms to say we challenge each business unit to invest in their highest-margin, most sustainable innovations.

Q: Just wanted to touch on the forge segment and, you know, improvement operations there. Is there anything more you could give us on maybe the outlook on forged, what operational improvement looks like there? You know, anything you could give us there would be very helpful.

A: I think I've probably discussed over the last few, at least last two or three calls, the challenges in the Forge Group that I think are unique, and we've seen some of this in all of the engineered product group, including our equipment business. Some of the challenges that existed in the COVID and post-COVID environment, and I think I promised last time I'd never say COVID again. The kinds of employees and the kinds of knowledge that left the business have been the most difficult to replace anyone in our business. So I think I've talked openly about a hammerman in front of a forge. It's an art and a science losing decades and decades worth of experience. We are making progress. We are seeing incremental improvement month over month, and I expect 2025 to be a better year. But we have reason to be optimistic. But just to be clear, I don't anticipate that turning on a dime. I mean, we got a lot of work to do there. And, again, when those businesses are running well, they have proven to be our most sustainable highest margin businesses. And we have great exposure to great end markets, including aerospace and defense, including rail, some really nice long-term markets. Where we have good market share. But we have to get better at executing. It's not for lack of market opportunity. It's not for lack of demand. It's not for lack of customers. Not for lack of good assets. It's just we got to get better at executing. So we are getting better, but at the same time, I don't want to suggest to you or anyone that that is going to be as simple as a light switch or one quarter. We are improving, and I would anticipate continued improvement into 2025.