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Edited Transcript of PKOH earnings conference call or presentation 9-Aug-18 2:00pm GMT

Q2 2018 Park Ohio Holdings Corp Earnings Call

CLEVELAND Aug 28, 2018 (Thomson StreetEvents) -- Edited Transcript of Park Ohio Holdings Corp earnings conference call or presentation Thursday, August 9, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Edward F. Crawford

Park-Ohio Holdings Corp. - President & Director

* Matthew V. Crawford

Park-Ohio Holdings Corp. - Chairman & CEO

* Patrick W. Fogarty

Park-Ohio Holdings Corp. - VP & CFO

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Conference Call Participants

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* Daniel Lemont Drawbaugh

FBR Capital Markets & Co., Research Division - Former Associate

* Edward James Marshall

Sidoti & Company, LLC - Research Analyst

* Marco Andres Rodriguez

Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst

* Mario Joseph Gabelli

Gabelli Funds, LLC - CIO & Portfolio Manager

* Matthew T. Paige

G. Research, LLC - Research Analyst

* Robert Stephen Barger

KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Park-Ohio Second Quarter 2018 Results Conference Call. (Operator Instructions) Today's conference is also being recorded. If you have any objections, you may disconnect at this time.

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 2017 10-K, which was filed on March 8, 2018, with the SEC.

Additionally, the company may discuss as-adjusted earnings and EBITDA as defined. As-adjusted earnings and EBITDA as-defined are not measures of performance under Generally Accepted Accounting Principles. For a reconciliation of net income to as-adjusted earnings and for a reconciliation of net income attributable to Park-Ohio common shareholders to EBITDA as-defined, please refer to the company's recent earnings release.

I will now like to turn the conference over to Mr. Matthew Crawford, Chairman and CEO. Please proceed, Mr. Crawford.

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Matthew V. Crawford, Park-Ohio Holdings Corp. - Chairman & CEO [2]

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Good morning, and welcome to Park-Ohio's second quarter 2018 conference call. Joining me on the call today are Ed Crawford, our President; and Pat Fogarty, our Chief Financial Officer.

We're pleased to announce that we set a number of records during the quarter, including sales of $432 million and EBITDA of $41 million. Additionally, we set a record for adjusted EPS for the first 6 months of 2018 at $2 a share.

Our success during the quarter was in line with our goal to achieve long-term, double-digit profitable revenue growth. Our strategy focuses on achieving these goals by investing in growing global geographies and end markets, primarily through our current portfolio, which include a diverse set of industrial businesses which have strong product portfolios and are recognized leaders in their categories.

Additionally, we target the acquisition of profitable industrial companies which complement our current businesses and have strong reputations, a loyal customer base and often have developing technologies as well as other synergies. So far in 2018, we have added one such acquisition, Canton Drop Forge, and we are pleased with their contributions to date.

Going back to the second quarter results, we saw increases in revenue across all segments. While we had anticipated improved year-over-year results, we were ahead of our own expectations. Supply Technologies continued to see broad strength in most end markets. Organic growth of nearly 10% was excellent and included 40 new customer accounts on both the production and MRO business lines.

Assembly Components' operating results were slightly behind a strong second quarter of 2017, largely because we continue to absorb expenses related to the start-up of 3 new facilities in China and Mexico. 2 of the 3 facilities are now open and are in the early stages of achieving profitability.

Engineered components, traditionally a late cycle business, continued to see improving volumes in the equipment business, which benefits from the improving fundamentals in commodities and business expansion. This segment also benefited, importantly, from the acquisition discussed earlier.

Looking forward, we are committed to our current business portfolio and believe 3 investment themes will continue to emerge as we move into 2019.

First, we see tremendous opportunity in the migration from internal combustion engines to electric propulsion as well as the related advancements in emissions technologies like lightweighting. Direct injection and advancements in plastic and rubber hose technology will continue to play a bigger role for Park-Ohio.

Secondly, we'll continue to expand our products and services in our Supply Technologies segment aimed at reducing our customers' total cost of acquisition. Investments in MRO, mid-market and aerospace are current examples.

Lastly, we will continue to invest globally in our forging assets and induction assets, which provide unique manufacturing capacities and technologies and provide excellent diversification into military, agriculture, commercial aerospace and global commodities. In short, these businesses have wonderful strategic moats.

Turning to our outlook, we are pleased to increase our earnings guidance for 2018. This is consistent with the strong demand from most customers as well as the early signs of benefits from key investments in all 3 segments. While our view is positive, we are somewhat cautious, particularly given the global trade environment and the related tariff actions. We are currently feeling the impact of those tariffs at a manageable level but are watchful for developments.

And finally, and most importantly, I want to recognize the hard work of our teammates around the world who have gone above and beyond to meet increasing customer demands, launch new products and build new factories. Thank you very much.

Now I'll turn it over to Pat to discuss the specifics of the quarter.

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Patrick W. Fogarty, Park-Ohio Holdings Corp. - VP & CFO [3]

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Thank you, Matt. As Matt stated in his opening remarks, the second quarter was a strong quarter. We continued to build on the momentum that we saw in the first quarter, and we delivered strong financial results for both the quarter and year-to-date periods.

Our net sales of $432 million in the second quarter was an increase of 23% year-over-year. Of the increase, 13% was due to organic growth, driven by increasing customer demand in many of our key end markets across all 3 business segments, and the remaining 10% was due to the Canton Drop Forge acquisition and the acquisitions completed in the second half of 2017.

Gross margin as a percentage of sales was approximately 17% in the second quarter of both 2018 and 2017. We realized very good operating leverage and income flow-through in many of our businesses. However, second quarter margins have been impacted by continued new plant start-up costs, unfavorable sales mix in certain product lines and higher commodity prices driven largely by tariff-related price increases. Despite of these increases in costs, we still achieved a gross margin of 17%, which was almost 100 basis points higher than our first quarter 2018 gross profit margin.

Second quarter SG&A expenses were $48 million or 11.1% of sales this year compared to $37 million or 10.6% of sales in the prior year. The increases were driven primarily by SG&A related to businesses acquired in the past year and increased costs associated with higher sales and profit in 2018.

Operating income was $25.3 million in the second quarter, an increase of 12% from $22.6 million last year, due primarily to the higher sales volumes in the quarter. Also, in the second quarter, we sold our idle assets for cash proceeds of $2 million, resulting in a gain of $1.9 million. The gain on these transactions, which impacted EPS by $0.11 per share, is excluded from our second quarter adjusted EPS.

Interest expense was higher in the second quarter compared to the second quarter of 2017, resulting from higher average borrowings as a result of the recent acquisitions we have made. Conversely, our average borrowing rate decreased by 30 basis points, driven by a debt refinancing in April of last year.

Our effective tax rate in the second quarter was 27% compared to 38% in the second quarter of 2017. The effective tax rate for the quarter is lower due to the favorable impact of the U.S. Tax Act. For the full year 2018, we expect our effective income tax rate to be approximately 30%.

Our GAAP earnings per share in the second quarter was $1.18 compared to $0.24 in the second quarter of 2017. On an adjusted basis, our second quarter EPS was $1.08, up 24% from $0.87 in the prior year.

Our year-to-date cash used by operations was $1.3 million. While strong customer demand thus far in 2018 has increased our working capital needs, our network capital days were essentially flat year-over-year.

During the second quarter, we completed an amendment to our credit agreement, which increased our revolver from $350 million to $375 million and also increased various sublimits for our Canadian and European businesses.

We ended the quarter with strong liquidity, including cash on hand of $88 million and approximately $172 million of unused borrowing availability under our global banking arrangements.

In the second half of 2018, we expect to generate $40 million to $50 million in operating cash flows from profits and reductions in working capital. This second half cash flow will be used to fund CapEx needs for the remainder of the year and reduce our net bank debt position by approximately $20 million to $25 million. We expect CapEx for 2018 to approximate $35 million to $40 million.

Now let's look at our segment results. In Supply Technologies, sales were up $24 million or 17% year-over-year. Organic growth accounted for 9%, and 8% came from acquisitions made during 2017. The organic growth was driven by higher customer demand in most of our key end markets, including the heavy-duty truck market, which was up 30% year-over-year, and the aerospace market, which was up 27% year-over-year.

Also, we continue to see the increasing sales from our middle-market sales and new product initiatives. Our average daily sales were up 18% for the quarter and 23% year-to-date compared to the prior year, which reflects the increasing customer demand for our products. Also in this segment, our fastener manufacturing business continues to perform well, with second quarter results in line with a strong prior year quarter. We are continuing to see strong global demand for our proprietary products in this business.

Our self-piercing and clinch technology is gaining the acceptance of many customers as applications using this technology continue to expand with the increased usage of lightweight materials. Operating income in this segment increased in the second quarter to $13.5 million from $11.8 million a year ago, an increase of 14% driven by the sales volume increases I previously described. Operating margins as a percentage of sales declined slightly year-over-year from 8.3% to 8.1% and were up sequentially from 7.8% last quarter.

Now we'll turn to the Assembly Components segment. Sales were up 22% year-over-year in the quarter, driven primarily by higher sales volumes in our aluminum business. The improved sales in our aluminum business were due to expected increase in volumes on products launched in 2017, primarily on high-volume platforms which use 10-speed transmissions and the increase in demand for compact crossover SUVs.

In the second quarter, our fuel-related and rubber product revenues were down slightly in certain of our domestic facilities, which were affected by end-of-life programs. Our 3 new production facilities in both China and Mexico are progressing well and in line with our expectations. We are now operational in 2 of the 3 new plants and expect the third production plant, which is located in China, to be operational by the end of the year. Our current projections continue to show a steady sales ramp-up beginning in 2019, and we expect to exceed $100 million revenue run rate in 2020.

Segment operating income decreased year-over-year from $12.5 million in the second quarter of '17 to $11.7 million in the second quarter of this year. Operating income margins declined from 9.9% last year to 7.6% in the second quarter of 2018. These decreases were due to the impact of start-up costs related to our new production facilities in China and Mexico, unfavorable sales mix and raw material price increases resulting from U.S. tariffs on certain imported raw materials.

And finally, in our Engineered Products segment, sales were up 37% compared to a year ago, driven by a combination of organic growth of 13% and 24% from the acquisition of Canton Drop Forge. The organic growth in this segment was driven primarily by increased global demand for our induction hardening and pipe threading equipment. Our backlogs in our capital equipment and forging businesses continue to be robust and are expected to be strong throughout the second half of the year. In the month of July, we experienced a record level of new capital equipment orders, which will benefit the second half of 2018 and the first part of 2019.

Operating income in this segment was up significantly in the second quarter compared to a year ago, from $5.5 million to $9.5 million. Our second quarter operating income margin of 8.4% is an increase of 170 basis points year-over-year and 270 basis points sequentially. The significant increase in profitability of this segment was due to an increase in plant absorption resulting from higher sales levels and the impact of the Canton Drop Forge acquisition.

Finally, I would like to comment on our revised guidance. We expect continued strong sales and earnings in most of our businesses in the second half of 2018 as strong demand continues in our key end markets. Based on our current outlook for the second half, we are revising our full year 2018 adjusted EPS guidance to $3.80 to $4 per share, an increase of $0.18 to $0.24 -- I'm sorry 18% to 24% compared to 2017 adjusted EPS of $3.23.

Now I'll turn the call back over to Matt.

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Matthew V. Crawford, Park-Ohio Holdings Corp. - Chairman & CEO [4]

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Great. Thank you very much, Pat. As you can see, we're happy with the quarter, but actually quite a bit more focused on the investments and the opportunities as we head into the second half of the year and into 2019.

So with that, we'll turn the program over to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Christopher Van Horn with B. Riley FBR.

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Daniel Lemont Drawbaugh, FBR Capital Markets & Co., Research Division - Former Associate [2]

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This is Dan Drawbaugh on the call for Chris. Just to start on trade and tariffs, it's been a few months since we last talked about this, and obviously, the situation has developed pretty significantly since then. Just curious to know what you're thinking about the recently enacted tariffs potentially impacting costs, potentially impacting the competitive environment? And any conversations you've had with customers about how the tariffs may impact pricing or sourcing?

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Matthew V. Crawford, Park-Ohio Holdings Corp. - Chairman & CEO [3]

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Well, I'll take the first shot at that. This is Matt. This is a very fluid and complex issue. As we mentioned in our comments, we did see a impact in the second quarter. We viewed it as manageable in the context of the overall company, but it is not insignificant, and there are, it's fair to describe, relatively fierce negotiations, obviously, on both sides of the supply chain with our customers and with our vendors to try and not position ourselves as a shock absorber on this particular issue. So candidly, I think the swiftness with which the tariffs have been imposed have made it difficult to -- for the full supply chain to sort of metabolize it. So I think that what's currently in place, as we mentioned, is manageable. I think, that it'll probably end up being absorbed by multiple parts of the supply chain. I think you've heard, and particularly in the auto space, people talk about increased pricing coming through to the consumer. So once again, I think it is a very fluid situation, but manageable and certainly a headwind at some level.

Having said that, I think, that the additional potential tariffs, once again, I think are a little bit fluid in terms of what will exactly be enacted. So there is some concern that there will be additional pain felt by our business. We don't really know the size and scope of that. Obviously, some of the products being discussed and addressed are related to rubber coming out of the Far East. That could potentially cause us some additional pain. So I continue to think that in the context of the overall business, because we're localized production in so many parts of the world, most of our business in China is for China consumption. So because of the nature of those localized production facilities, I continue to think we will be able to manage our way through it, perhaps absorbing a little pain along the way.

A secondary issue I would mention is -- I don't know if it's embedded in your question -- but are any of the -- is the robust sales funnel in our equipment business related to some of the tariff actions. And that's a very interesting question. I would say that while I don't think we have direct evidence today that we are seeing more equipment orders because of the tariffs, you have seen some indications from major steel -- domestic steel suppliers and international to increase their capacity and restart plants in the U.S. So while we -- I can't tie it to any specific orders, there is no question that a more profitable domestic metals industry will benefit us in some way. So that, we view as a positive. Was that helpful at all?

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Daniel Lemont Drawbaugh, FBR Capital Markets & Co., Research Division - Former Associate [4]

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Yes, absolutely. That's very helpful. And then just to turn to the guidance. As I look at what you've put up in adjusted earnings so far for the year, $2, that gets you annualized to the high end of your new guidance range. I'm curious as to -- and you've also mentioned that start-up costs have been negatively impacting margins so far in the first half. I'm curious as to what you're thinking about the start-up costs in the back half of the year? Potentially what you're thinking about sales and cost cadence going forward into third quarter and fourth quarter?

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Patrick W. Fogarty, Park-Ohio Holdings Corp. - VP & CFO [5]

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Dan, this is Pat. I'll take that question. We continue to see in the second half of the year continued start-up costs in our 3 new plants. As you build the plants, the need to hire people, the need to ramp up production to less than what would be the optimal capacity in the plants will continue to be somewhat of a drag throughout the rest of the year, and then we expect 2019 to be in real production mode. So I would say that the start-up costs will continue, and we've considered that as part of our guidance.

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Matthew V. Crawford, Park-Ohio Holdings Corp. - Chairman & CEO [6]

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Dan, I'm going to probably speak out of turn, and some of the people that run this business will probably not agree with me. But I'm going to just do a swag and tell you that if you think about our goal that Pat reiterated earlier of in excess of $100 million in sales by 2020 and apply 10% or 11%, which is the corporate SG&A rate, that's $10 million or $15 million worth of cost. It's not unfair to assume we're absorbing most of that right now. Again, that's not a specific comment. I'm just talking generally about the costs you have to spend upfront relative to these businesses.

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Daniel Lemont Drawbaugh, FBR Capital Markets & Co., Research Division - Former Associate [7]

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Sure. Okay, that's very helpful. And then the last one from me. You're obviously digesting a couple of substantial acquisitions done in the last 12 months. I'm curious to know what kind of synergies you've identified within the segments? And how the sales of those businesses are tracking, particularly Canton? I mean, it sounds like you said organic growth in Engineered Products was 13%, I don't know if I misheard you. But that would imply a pretty substantial contribution from Canton in the quarter.

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Edward F. Crawford, Park-Ohio Holdings Corp. - President & Director [8]

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Hi, it's Ed Crawford. Well, number one, our aerospace initiative is clearly still in place. We started signaling 2 conference calls, if not further back, that we like that segment. We like the margins in the segment. Canton Forge is a company we've been looking at continually for the last 4 or 5 years. We were fortunate enough to finally acquire this company. It is an excellent company, and deeply in the aerospace business. So as we're talking about that and we're talking about the future, I want to comment on Matt's thoughts. We were talking about the 10-speed transmission and how important that was and our $25-million-investment, and I asked everyone to be patient for 2 or 3 years till it finally came home. The same thing is happening here. We're spending a tremendous amount of dollars for the future investments, starting plants. You won't see it yet, but Pat said 2019. So we're still very active in this area. The acquisitions are difficult at levels we like to acquire them. But we're optimistic, and there is sure a lot of traffic and a lot of availability.

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Matthew V. Crawford, Park-Ohio Holdings Corp. - Chairman & CEO [9]

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Dan, I might add on, in my opening comments I tried to remind people of our framework for acquisitions. I talked about buying profitable companies. I talked about complementing our current business. I talked about them having strong historic reputations in their business and having a very sticky and loyal customer base. This one ticks every box. And we are really not only pleased with their performance in terms of meeting the goals that were stated at the time of the acquisition, but I would say, more importantly, that team and the leadership that's coming out of that business has rippled beyond Canton Drop Forge. So both qualitatively and quantitatively, this has been a good investment for us.

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Operator [10]

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Our next question comes from Edward Marshall with Sidoti & Company.

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Edward James Marshall, Sidoti & Company, LLC - Research Analyst [11]

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So Assembly Components, I wanted to start with that. Matthew, I think, in a portion of your comments, you discussed the drag from an investment. I think you said it's easily, I think, $10 million to $15 million of cost drag right now. I'm assuming that's annualized. But you had mentioned, too, your profits, inflation and mix. And I'm wondering if you could kind of quantify the margin impact maybe from the 3 of -- those 3 buckets.

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Matthew V. Crawford, Park-Ohio Holdings Corp. - Chairman & CEO [12]

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Yes, let me -- I'm going to let Pat address the second part of that question. But let me make sure that I was understood in my comment about the $10 million to $15 million. All I was doing was suggesting that we're chasing a $100-million-plus sales initiative by 2020 out of these facilities, and I'm just suggesting, at our corporate rate, that would be $10 million to $15 million a year. So I just want to be specific. I wasn't making any specific guidance or estimate of the current cost. I was just trying to remind everyone that building new facilities isn't easy either economically or from a people standpoint. And once again, I'd be remiss in not thanking our people who are flying all over the world to make this happen. So it's a heavy toll, and I was just using that as a swag to sort of remind people that the costs are significant.

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Patrick W. Fogarty, Park-Ohio Holdings Corp. - VP & CFO [13]

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Yes, Ed, let me answer your question around the mix, which we saw in the quarter. In that segment, there's really 2 primary businesses. There's our aluminum business, and then there's the fuel and rubber products business. Our aluminum business showed -- had a great revenue quarter. Their margins are slightly lower than what we see in the fuel-related products. So part of that brought our overall segment margin down a little bit despite their fantastic performance.

The second part of the mix question, we had end-of-life programs in certain of our plants on the fuel side, which has been replaced and that business that is replacing it is currently being launched in different plants, which are coming through at lower margins at this time. We fully expect to get back to where what we view as the normal margin. So really that's the mix side of that segment.

And then finally, on the commodity price increases, where we saw, as you have seen in the marketplace, aluminum prices were increasing throughout the quarter. Now, we do get recovery from that price increase. That typically is a lag to when it actually is being realized from our vendors. So that was part of the drag on the margin, and then the other was the impact, which wasn't as significant, on the tariffs. So hopefully, that covers your question.

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Edward James Marshall, Sidoti & Company, LLC - Research Analyst [14]

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I'm curious, if I could dive in a bit further and say I know that there's been some long-term initiatives for that, for all 3 of your businesses and targets. I'm curious if you'd be willing to talk about maybe what a normalized earnings power or EBIT margin would be within Assembly Components to kind of give us a sense, once we're past all these costs, what you think that business does?

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Matthew V. Crawford, Park-Ohio Holdings Corp. - Chairman & CEO [15]

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I'll jump in on that briefly and say we believe that the initiatives that we have discussed in Assembly Components will be powerful to the revenue line and accretive to margins. But with so much capacity coming online, I personally wouldn't feel comfortable in making a specific expectation.

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Edward James Marshall, Sidoti & Company, LLC - Research Analyst [16]

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Okay. And of that $100 million that you talked from the new facilities, are you recognizing any of that today?

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Matthew V. Crawford, Park-Ohio Holdings Corp. - Chairman & CEO [17]

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A very small amount.

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Edward James Marshall, Sidoti & Company, LLC - Research Analyst [18]

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Okay. You mentioned about tariffs, and you said you're watching the situation closely, as obviously, we all are. I'm curious what are the warning signs that you're looking for from a company that would attract your business the most, that you're kind of focused in on or zeroed in on, that you're watching?

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Matthew V. Crawford, Park-Ohio Holdings Corp. - Chairman & CEO [19]

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Well, our biggest issue right now, candidly, has been less regarding the tariffs that have been targeting China and more regarding the tariffs that have been targeting Europe and Canada. There are significant -- and the President is not incorrect when he says that the United States is unable to make many special types of steel these days, specialty steels or products related to steel. So we're -- some of the products we buy in the metals industries are very narrow. There are very few suppliers of aluminum these days, particularly prime aluminum. So he's targeted some industries that the supply chain in the Western world is very, very consolidated and very, very difficult to meet the quality standards of our customers. So, I mean, certainly, China we're watching. But the negotiations around NAFTA, the negotiations with the EU around steel, are perhaps even more front of mind today.

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Edward James Marshall, Sidoti & Company, LLC - Research Analyst [20]

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Got it. And then final -- okay. I'm sorry. I won't speak again until you do.

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Edward F. Crawford, Park-Ohio Holdings Corp. - President & Director [21]

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No, that's all right. I want to shed some light on all the uncertainties around the tariffs and other issues that faces our company and faces all, particularly, manufacturing companies, American manufacturing companies all. Yes, there's some unknowns there. And there will be continuing unknowns as America tries to restructure kind of the way that business is done fairly. On the other hand, we are benefactors now of higher revenues. The economy is strong. The country is feeling good about itself. And that gives us more absorption in the plant. So there is a positive side to this. It's all not negative. Yes, there's been some inconveniences. Yes, we'll work our way through them.

But start with the fact that we have plants running at higher absorption rates, and that is a very important part of the other side of the argument, okay, or concerns. So are we willing to trade? Of course, we'd love to not have the issue about the tariffs and having the higher revenues. But we have the higher revenues. The plants are doing better. They're higher margins. That's the offset. So we can't sit here and operate the company worrying about the obstacles that we see -- are going to see. We just have to face them and address them.

So we're not panicked here. And each one of these things are almost isolated. We'll see how it goes between countries. Keep in mind, the volume, the majority, the high majority of volume in our facilities in China are for China. We are not exporting out of China. We haven't been. We're not there for that. We went there to be part of the family of growing Chinese manufacturing companies. So there's some strategy around this, and in our way it kind of offsets -- not that we knew anything about the tariffs then -- but this works in our favor. So we might be less affected because we are there for that market, not to ship it out of that country.

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Matthew V. Crawford, Park-Ohio Holdings Corp. - Chairman & CEO [22]

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And this is a case where our diversification -- I mean, we believe proudly in our strategy around diversification. Sometimes it helps. Sometimes it hurts. And in this particular case, this has been the benefit of being a diverse global manufacturer.

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Edward James Marshall, Sidoti & Company, LLC - Research Analyst [23]

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Makes sense. I'm curious, when I look at the SG&A line, just out of curiosity, obviously, it's run a little higher this quarter. I'm curious how much embedded in that is going to be onetime in nature versus the carrying the costs the remainder of the year? And I guess I'm specifically referring to maybe any catch-up. And you're obviously ahead of targets for the year. I'm assuming there was an accrual catch-up. And then also anything associated maybe with the retirement. If you can kind of help me out with those thoughts and what a normalized SG&A number might look like.

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Patrick W. Fogarty, Park-Ohio Holdings Corp. - VP & CFO [24]

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Yes, this is Pat. So I would say there were not any significant onetime SG&A hits in the quarter. I think when you look at our SG&A in whole dollars as well as a percentage of sales, we did show an increase in the percentage margin as a result of the acquired company's SG&A percentage to sales. In addition, we had some increases in professional fees, but I would not say that, that was onetime in nature. But on a normalized basis, we do expect those SG&A, at least SG&A as a percentage of sales to come down from its current percentage in the quarter. And I think you'll see that over the course of the year.

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Edward James Marshall, Sidoti & Company, LLC - Research Analyst [25]

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Got it. And I wanted to focus on -- one last question, if I could. You brought up Canton, and you're talking about how it's -- you're pleased with what you're seeing. And so I'm wondering if it was -- the benefits are -- it sounds like it's ahead of expectations. So if I think about what's driving that above-expectation growth, is it the capital you gave the business? Is it cross-selling between the 2 businesses that you have in that market? Synergies on a cost perspective? Is it just the market that you've already kind of mentioned as well. Just trying to get a sense as to why that's giving you so much of a surprise here.

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Edward F. Crawford, Park-Ohio Holdings Corp. - President & Director [26]

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Well, number one, it wasn't a surprise, okay? This is an acquisition. And as you know, we've done between 80 and 90 acquisitions here. So we're not surprised at all. This is a great company. We tried to buy it twice before. We finally ended up acquiring it. We are deeply in the forging business. We like the forging business. We've got Kropp and other investments. So we're not surprised at all about the company. In fact, a lot of -- it's created a lot of excitement in the forging business in the niche, and when we're talking about this, we're talking about forging prices or forgings at a certain size or level, and we plan to be a dominant force -- a dominant force in the small- to medium-size forging in North America. And we've moved to that position, and we're going to continue to go there, because we like the business and we like the margins and we like the customer base.

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Operator [27]

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Our next question comes from Steve Barger with KeyBanc Capital Markets.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [28]

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It's really good to hear the focus on the longer-term investment themes. Can you give us some more detail on how you see the growth in electric vehicles? How much revenue exposure you have to that subsegment right now?

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Matthew V. Crawford, Park-Ohio Holdings Corp. - Chairman & CEO [29]

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Sure. I'm happy to add some color on that. This is Matt. I think that what's important to understand when we talk about the migration to a fully electric vehicle is that, that includes a lot of different stages. I mean, obviously all of our cars for years have been electrified at some level. When we talk about propulsion, the fastest-growing segment of the electrification process globally are hybrid engines, and it's not even close, Steve. I mean, it's not even close. And they foresee that to be case for a long time. So there is a symbiotic relationship, in our opinion, and I think it's pretty commonly understood, between the improvements in the internal combustion engine and in advancements in battery technology. Most people globally want their cake and eat it too right now.

So I think that there's a lot of dinner table conversations and water cooler conversations about Tesla. But I think that when you look at the road map at the OEs, while the noise is all on the fully electric vehicle, there is real meat in the production numbers coming, particularly in China, but other places as well, on the hybrids. And I think that what's important in that is a couple of our -- so when you think about our automotive business, let's think about where we're positioned. Lightweighting, right? Which is roughly related to maybe half of our -- a little bit less than half of our automotive revenue, whether it be aluminum casting or self-piercing fasteners, these kinds of components are going to be ubiquitous regardless of the propulsion system. So that's a good place to be.

I think when we think about the direct injection technology, yes, of course, that's focused on the internal combustion engine. But once again, that is symbiotic for a long time to come, maybe in my kid's lifetimes, they won't have an internal combustion engine at all, but the real product road map right now at the OEs is how to make the current engine smaller, less expensive and more productive. So I think that, that's where I think direct injection technology has a very bright future. And while not just we, but a number of people that are in the industry as well, are building new facilities, because they just can't move fast enough. People like Bosch. People like Hitachi. Not just people like Park-Ohio.

So I think -- and then lastly, I think our expansion and thoughtfulness around extruded plastic, and particularly rubber hose, is very exciting. The example I would use is we sort of grew up, and that team grew up, in the fuel business, which is a corrosive material. So they are very savvy at understanding how to make extruded hose that doesn't permeate, and that has become increasingly important not just for the regulatory environment globally, but has also become important as you think about the electrification of the car. So -- and most notably, how batteries and such things are going to be cooled. So that maybe gives you a sense. So I view our portfolio right now, which I just mentioned 95-plus-percent of our portfolio in automotive, has a place in that transition from internal combustion to electric propulsion.

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Edward F. Crawford, Park-Ohio Holdings Corp. - President & Director [30]

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Steve, let me take another shot at this. You started with the word growth and where growth is and where we see it. As we've stated that we consider ourselves a diversified international company, and I think Matthew's comments earlier in the presentation about how it's working for us, and it's working very well to be a diversified industrial company with worldwide reach, if it continues to move in the direction it is, every single year, the percentage of sales outside North America grow. And we are committed to the concept that we want to be in the future where there is population growth. We think that growth is not going to be stagnant, but I don't think there's going to be a great growth of people and consumer consumption in America or in the eurozone. So we're interested in China. We're interested in India. We're interested in Mexico, and ultimately, Indonesia.

So when you want to talk about growth and creating value in the company, we've already made these investments to go to these locations. And this is really why we're excited about this commitment that we have made to one of the biggest markets, and that is China, and another incredible market, a growth market of people and consumers and people that buy things they call Mexico. So when we think of growth, when we think of where we're going, we already started to go there. This is not -- we're not developing now. We've been talking about this for 2 or 3 years. I've continually pointed out in the past that we're going to be a $2 billion company, and we're giving everyone the road map. We've said we're going to go there, and we're getting there. And it's the momentum, and the markets we're interested in are growth markets in the future.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [31]

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I think it makes a lot of sense. As you've added that capacity internationally, are you finding new customers for fuel injection or extruded products? Or is this more about growing with existing customers?

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Matthew V. Crawford, Park-Ohio Holdings Corp. - Chairman & CEO [32]

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It's about both. But I think that you would have predicted the latter, right? I mean, we'd like to go -- I've talked about our international expansions before and said we like to go with a purchase order, which is really great when you can do it. I think that we have -- we're building out additional capacity to absorb additional customers, particularly Chinese national companies, and we're bringing some technology, we believe, that will benefit those Chinese car companies that are trying to come up the quality curve and the regulatory curve faster than their installed base can take them. So, no, absolutely, we see this as being an advancement for us, which we used to go to China with a purchase order from a Western company. And now I think we feel that we've got the technology and the capacity to sell to local companies.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [33]

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Got it. And then on the other investment theme. I hear you. You like the forging business. You've been in Kropp for a long time. Can you be more specific about how you leverage the capacity of Kropp and Canton into domestic or global opportunities? Is this about taking share from existing customers? Is it about rolling up the space? How do you -- just what's the strategic view?

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Patrick W. Fogarty, Park-Ohio Holdings Corp. - VP & CFO [34]

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Steve, this is Pat, I'll take that. When we looked at acquiring Canton Drop Forge, we recognized that there was a lot of opportunity between the 2 businesses, not only from a cost standpoint but also from a sales and marketing standpoint. Many of our customers have unique requirements relative to their forgings, especially in the aerospace industries. And you have to be certified to be able to supply those forgings. So there's not many people in the supply chain that can do that and do it at the quality standards that are required. We have 2 such companies now that are able to do that. So our customer base is looking for us. And maybe because they didn't have enough confidence in their other suppliers long-term, but with us, they know that we are long-term investors. We're going to be around for a long, long time, and they're giving us an opportunity just to quote new business. So I think this is a case where 1 plus 1 equals 3, and we're starting to see the benefit of that.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [35]

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As you think about the future of the franchise, can you serve international markets from North America? Or do you expect to look for international forge acquisitions to grow that globally?

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Patrick W. Fogarty, Park-Ohio Holdings Corp. - VP & CFO [36]

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Those parts are large parts. Typically, you don't see them shipping across the water. But if there's an opportunity for us to acquire a company that has a strategic aspect to it, to these 2 businesses, we would definitely look at it. But most of what we're doing today, although we do ship some of the product overseas, most of the opportunities we're seeing will be in North America.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [37]

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Got it. Last question from me. When I look back at Engineered margins, in 2012 through 2014 it ran mid-teens. And I know that was during the shale plays. But even with the pretty strong recovery over the past 6 quarters, we're still running about half that. Has there been a structural change to the profitability of the segment? Or is mix that much different to prevent you from getting the margin profile that you had before?

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Matthew V. Crawford, Park-Ohio Holdings Corp. - Chairman & CEO [38]

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Let me take a shot at that first, Steve. This is Matt. I would be remiss by not commenting that the -- those days related to the buildup in capacity around pipe for shale, those days where China was still aggressively building out their capacity, their steel mill capacity and so forth, those were heady days. I mean, they were very significant for many parts of our capital equipment business. So I think that clearly was a unique time period.

Having said that, I would also tell you that -- so there are also, I think, some fundamental shifts. I would say, for example, as we've grown the business and invested more in the hardening side versus the melting side, we've seen the average order size come down. So I think that there has been a little bit of compression on the average order size. It doesn't mean we don't do wonderfully well on those orders. There has been some of the froth came off, some of that expansion that you just discussed and I just mentioned. So no, I would say that it would be fair to assume that those would be difficult to replicate.

Having said that, our aftermarket business has grown and sustained the profitability it had even in the best of days. And our equipment business is more diverse and healthier both from a product standpoint and a geographic standpoint. So it's a better business, and we will -- as we look for synergies and improve our manufacturing processes after what was a pretty difficult few years there, and cutting back in a lot of key personnel, we're going to see margin enhancement. We're going to see margin enhancement. So we're going to do better. And you're starting to see signs of that. But make no mistake, even at a compressed margin, this is a better business today than it was then. We were a narrower product portfolio that just happened to hit at all the right spots, and we reinvested that money to diversify the business.

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Operator [39]

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Our next question comes from Matthew Paige with Gabelli & Company.

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Matthew T. Paige, G. Research, LLC - Research Analyst [40]

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I first just wanted to clarify Pat's comments on the ramp-up at the Assembly Components facilities. And can you just help us understand the cadence of investments? Does that end at the end of the year?

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Patrick W. Fogarty, Park-Ohio Holdings Corp. - VP & CFO [41]

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So are you referring to the comments I made around the mix, the end-of-life programs?

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Matthew T. Paige, G. Research, LLC - Research Analyst [42]

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No, the 3 new facilities that are ramping up now, and you mentioned that 2019 was full production, I thought.

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Patrick W. Fogarty, Park-Ohio Holdings Corp. - VP & CFO [43]

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Right. Well, I mentioned that in 2019, we'll be at a revenue run rate of $100 million. So that's in 3 facilities, 2 in China and 1 in Mexico. All of those facilities are in early stages of either production or getting ready for production. So we expect a steady ramp-up over the next, really, 2 years in each of those 3 plants.

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Matthew T. Paige, G. Research, LLC - Research Analyst [44]

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Okay. And is that $100 million run rate incremental business? Or would that, otherwise, have come from other facilities?

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Patrick W. Fogarty, Park-Ohio Holdings Corp. - VP & CFO [45]

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The majority of that $100 million is incremental.

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Matthew T. Paige, G. Research, LLC - Research Analyst [46]

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Okay. And Matt, finally, congratulations on being elected Chairman and CEO. I know you've been with the company for quite some time, but now sitting in the CEO's chair, I wanted to give you the opportunity to talk about anything you wish was in the Park-Ohio portfolio, or maybe any product lines or businesses that you no longer see as core to the company.

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Matthew V. Crawford, Park-Ohio Holdings Corp. - Chairman & CEO [47]

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Well, thank you for that opportunity. I have to be careful; my old boss is in the room, so I have to be careful. No, I appreciate it. And let me -- I made some comments at the shareholder meeting, and I would repeat that I've been lucky enough to be one of the architects of what we have today in many of the strategies that I'm discussing. So I think that I'm very proud of the business of portfolio we have. So I would not expect to see any dramatic change. So I think that first of all, there's a saying, it's the doctor oath, first do no harm. So I think that what largely you can expect from me that may be subtly different than the past is not so much a significant strategic shift. Maybe a little more focus, I think, on the quality of earnings. We are a growth-oriented company. But I think that we've grown so quickly, we have the opportunity to focus on the bottom equally as much as the top, and I think there's some opportunities. And I think, while we will continue to be a company focused on acquisitions, I think you're seeing us focus on this call a little bit more on the organic growth opportunities. We've got a good portfolio of businesses. Are all these businesses able to grow 6%, 7% a year? No, no. Some of them are cyclical. But I think we do have some products, and you're hearing us highlight them a little bit more today than you have in the past on the opportunities where -- of our product portfolio, that with some investment and with some vision, that we can really push the needle on the organic growth side.

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Operator [48]

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(Operator Instructions) Our next question comes from Marco Rodriguez with Stonegate Capital Markets.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [49]

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I was wondering if you could talk a little bit more about Supply Technologies? The growth you're kind of seeing there from an organic standpoint? Are you seeing most of that growth coming from existing customers and their business is just doing better? Or is there a combination of you taking share?

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Matthew V. Crawford, Park-Ohio Holdings Corp. - Chairman & CEO [50]

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I'll take the third option, all the above. Pat can discuss it in detail, as he did during his comments. But, no, I think we're seeing -- the supply chain business is the first to react when -- it's our most diverse OEM end market business, and it's the first to react in a robust economy. So you're seeing the real-time benefits of an expanding economy. When you see the economic grow 4.2% or whatever, that supply, that's already in Supply Tech's numbers. So they will benefit quickly when there is a strong manufacturing environment, which there is now. So I think number one, I think that is very clear and very robust at this point.

I do think we are focused, back to my point a moment ago, on leveraging these ideas into adjacent markets and the services they provide regarding lowering total costs for customers. So we are succeeding in MRO, which was 0 a couple of years ago. We are succeeding in aerospace, which was 0 a couple of years ago. We are succeeding in re sort of initiating our mid-market business. So, yes, that share's coming from somewhere. So I think, when we say with pride that we took -- we signed up 40 new customers in the quarter, we're proud of that number. Now some of them weren't meaningful to the revenue line, but they're going to be.

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Patrick W. Fogarty, Park-Ohio Holdings Corp. - VP & CFO [51]

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I agree, Matt. Supply Technologies is the most diversified of our businesses, covering so many different end markets, and we've highlighted only a couple of them. But our penetration in each of these markets continues to grow. And having a list of 40 new customers in the quarter is really a substantial achievement by our business. So I agree with Matt's comments.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [52]

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Understood. Also, kind of a clarification question here on the 3 new plants that you have ramping up to a run rate of $100 million in fiscal '19. I'm assuming that's a second half type of event? And would those 3 plants be operating at maximum capacity, if you will?

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Edward F. Crawford, Park-Ohio Holdings Corp. - President & Director [53]

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Well, number one, we talked about a $100 million run rate, okay? We're not talking about $100 million. When we give projections, we talk about a run rate. This is a company, you have companies that are starting up. It will reach a run rate sometime in '19 of approximately that number. It might run into the following year. But we're talking about run rates. We're not talking about actual dollars of sales. So we're saying that it is on its way. The series of plants, setbacks, starting the plants. Again, run rate, not actual hard sales. If you want to talk about hard sales, you're going to have to move out until '20, if you want to think about hard sales -- or somewhere in that timeline.

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Patrick W. Fogarty, Park-Ohio Holdings Corp. - VP & CFO [54]

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Hey, Marco, let me just clarify, I agree. 2020 is when we're going to see those run rates. Maybe we'll get some of it in '19, like Eddie mentioned, but 2020 is where we're going to see that revenue run rate come in.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [55]

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And at that revenue run rare, are the plants operating at full capacity? Or are they still underutilized?

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Matthew V. Crawford, Park-Ohio Holdings Corp. - Chairman & CEO [56]

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No. This is Matt. As I mentioned, we built some extra capacity because we believe that we will be successful with customers that we haven't even talked to yet.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [57]

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Got you. Understood. And last very quick question, kind of high-level, and not to kind of beat a dead horse here on the tariff aspects, but just wondering if maybe you can talk a little bit about, I guess, a worst-case scenario from a NAFTA and Europe. Just kind of help us understand a little bit as far as how quickly you can kind of move through the conversations with your customers and supply chains to kind of manage the situation should that somewhat come to pass?

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Matthew V. Crawford, Park-Ohio Holdings Corp. - Chairman & CEO [58]

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There is a lot of discrete trade negotiations ongoing. So is there a specific one that I can comment on?

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [59]

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You mentioned in a response to one of your other questions on tariffs that NAFTA and the EU were more front and center to you versus the issues going on with China. So I was wondering if you can maybe comment on that in terms of how quickly -- if that really goes south, how quickly you can sort of manage that situation and what you would be doing?

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Matthew V. Crawford, Park-Ohio Holdings Corp. - Chairman & CEO [60]

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Well, I'll let Pat comment real quick, but we are managing that. That is ongoing. So it's not as though we're sort of just sort of sitting back and taking the hit. So we view this as important to be addressed immediately. And there's, as I mentioned earlier, discussions going on, on both sides of the supply chain, both with the customer and with the vendors.

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Patrick W. Fogarty, Park-Ohio Holdings Corp. - VP & CFO [61]

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Yes Marco, the tariff situation is, as Matt mentioned, is fluid. But in both -- in our businesses, it is somewhat isolated when you talk about aluminum or you talk about steel. And so we are working with our supply chain as well as our customers' to mitigate the effects. And those discussions are ongoing. But as soon as we realize that there is an impact to one of our vendors, we are all over it with our customer to try to resolve the situation. Because the last thing the customer wants is to disrupt the supply chain on an approved supplier of a specialty raw material. So obviously, they're working closely with us on all fronts on this matter.

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Matthew V. Crawford, Park-Ohio Holdings Corp. - Chairman & CEO [62]

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And to be clear, as mentioned in both of our comments, we have built in into our second half forecast the recognition that we're not going to get -- that we may not get every dollar. So -- but that doesn't mean that we're not going to try.

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Operator [63]

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Our next question comes from Mario Gabelli with Gabelli & Company.

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Mario Joseph Gabelli, Gabelli Funds, LLC - CIO & Portfolio Manager [64]

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Ed, delighted that we made the transition, Matt, and good comments. And a lot of the questions were answered. I've been in this for 25 years. You've had a lot of air pockets in the past. You've overcome them, and you guys have the knowledge of the factory like most companies that I have visited, you really excel at that. So thank you.

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Matthew V. Crawford, Park-Ohio Holdings Corp. - Chairman & CEO [65]

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Thank you, Mario. We appreciate you getting on the call today.

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Operator [66]

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Our next question comes from [John Baum].

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Unidentified Analyst, [67]

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I certainly would echo Mario's comments right there. Great to see you transition. And to echo, Eddie, you do have a great future both behind and ahead of you. I've got just a quick housekeeping question, I thought maybe this is directed to Pat. The tax rate you're guiding right now is like 30% baked in, 5 percentage points on that coming down to 25% would add about, I don't know, $0.25, $0.30 to the EPS. What's the goal to try to -- can you chart out getting down to 25% all-in worldwide? And is that a process of delevering? Or what have you got to do to try to shave that tax rate down?

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Patrick W. Fogarty, Park-Ohio Holdings Corp. - VP & CFO [68]

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We -- our '18 effective tax rate we're estimating at 30%. Are there ways in which we can bring that tax rate more in line with what we're seeing in the U.S.? It would take some effort, but it's a complex project, and we're going to work towards continuing to reduce that effective tax rate. So right now, that's really all I want to comment on. It's on our radar, and we're going to continue to try to move that rate down.

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Matthew V. Crawford, Park-Ohio Holdings Corp. - Chairman & CEO [69]

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And [John], nothing -- the strength of the U.S. economy benefits us here. I mean, that's one of the limitations, is the mix of foreign versus domestic earnings. So to the extent we're doing a little better than we thought, which I think is fair, Pat, on the blended tax rate, we stand to benefit from a strengthening U.S. economy and earnings mix.

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Unidentified Analyst, [70]

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Well, again, with the leverage you guys have got built in and the growth you've got built in, looking at the bottom line, we're picking away there, 1, 2 percentage points. But keep up the top line, the bottom line is going to work. So it's been a tremendous run. I'm looking forward to the next 20 years.

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Matthew V. Crawford, Park-Ohio Holdings Corp. - Chairman & CEO [71]

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Thanks, John. Thanks for your long-term support. We appreciate it.

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Operator [72]

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There are no further questions at this time. I'll turn it back to management for closing remarks.

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Matthew V. Crawford, Park-Ohio Holdings Corp. - Chairman & CEO [73]

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Great. Well, thank you very much for the excellent questions today and letting us talk about the things that we're most excited about, which is the future. We look forward to interacting again on next quarter's call. Thank you very much.

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Operator [74]

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Thank you. This concludes today's conference. All parties may disconnect. Have a great day.