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Edited Transcript of PKOH earnings conference call or presentation 8-Aug-19 2:00pm GMT

Q2 2019 Park Ohio Holdings Corp Earnings Call

CLEVELAND Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Park Ohio Holdings Corp earnings conference call or presentation Thursday, August 8, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Matthew V. Crawford

Park-Ohio Holdings Corp. - President, Chairman & CEO

* Patrick W. Fogarty

Park-Ohio Holdings Corp. - VP & CFO

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Conference Call Participants

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* Christopher Ralph Van Horn

B. Riley FBR, Inc., Research Division - Analyst

* Marco Andres Rodriguez

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

* Robert Stephen Barger

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

* Edward F. Crawford

Park-Ohio Holdings Corp. - Former Chairman and CEO

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Presentation

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Operator [1]

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Good morning. Welcome to the Park-Ohio Second Quarter 2019 Results Conference Call. (Operator Instructions) 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. The list of relevant risks and uncertainties may be found in the earnings press release as well as in the company's 2018 10-K, which was filed on March 5, 2019, with the SEC.

Additionally, the company may discuss adjusted EPS and EBITDA as defined. Adjusted EPS 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 of EBITDA as defined, please refer to the company's recent earnings release.

I would 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. - President, Chairman & CEO [2]

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Thank you very much, and good morning, and welcome to Park-Ohio's Second Quarter 2019 Earnings call, or performance call, I guess, I should call it. These are very exciting times at Park-Ohio. We're launching record levels of new business. We just are commissioning our nearly $20 million fully automated forging press in Arkansas. We are improving performance at 3 new facilities around the world. We completed an outstanding strategic acquisition in the second quarter, and we achieved results in line with our expectations, which are near record results.

The best part is, we did this while facing some adversity: labor shortages continue in some markets; inflation, tariff and otherwise; a significant slowdown in the auto space in China; and some volatility in end-market U.S. demand and European demand. This should be no surprise to anyone on this call. Park-Ohio is a diverse company, both in terms of products and markets. We continue to focus vigilantly, as always, on expenses, and we are a very agile company.

I often get the question about last year and how robust our 17% growth was last year. And I remind people, at any given time, part of the business is up, and part of the business is down. So in response to that and being as agile, as always, we continue to make adjustments both in terms of facilities. We endured some plant closures during the first half of the year. And also in terms of adjusting our workforce appropriately. We will continue to do that to meet our performance.

We have reaffirmed our guidance for the second half of the year. Certainly, since our last call, macroeconomic risks have increased, but we're happy to bet on ourselves and the diversity of the business and our ability to be agile relative to cost and footprint.

With that, I'll turn it over to Pat Fogarty.

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

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Thank you, Matt. Overall, the results for the second quarter were positive and continue to demonstrate the strength of our diversified operations, products and geographic locations.

Key highlights in the second quarter included the completion of the acquisition of Erie Press Systems, which will add tremendous value to our Engineered Products segment. We expect Erie's results in the second half of 2019 to be accretive to our earnings. Also in the second quarter, we continue the start-up of over 50 new auto-related programs in our Assembly Components segment, which will add over $125 million of revenues annually, most of which is incremental to today's business.

The production ramp-up has begun in most of our facilities, both in North America and Asia and will positively impact our second half results. In addition, we completed 2 plant closures in this segment, and we'll see the benefit from these actions throughout the remainder of 2019 and beyond.

And finally, our engineered products segment results reflect continued strong demand for our induction equipment, our aftermarket parts and services and our forging products used by our aerospace and rail customers.

Turning now to the consolidated results for the quarter. Sales were $415 million compared to $432 million last year. The sales decline year-over-year was a result of weaker demand in Asia and Europe in certain key end markets in both our Supply Technologies and Assembly Components segments. These declines more than offset strong top line performance in our Engineered Products segment, where the business climate continued to be strong.

Consolidated gross margins in the second quarter were 15.9% compared to 16.9% a year ago. The margin decrease was due primarily to $1.7 million of onetime plant closing costs in our Assembly Components segment. Excluding those charges, gross margin in the quarter would have been 16.3%. Our gross margin was also affected, to a lesser degree, by the lower sales levels, unfavorable product mix and increased product and new business start-up costs. We expect second half consolidated gross margin to improve, as production increases on the new business and the costs associated with launching these programs ends.

SG&A expenses were $47 million compared to $48 million a year ago. SG&A in 2019 included a onetime compensation expense of $4.3 million. Excluding this expense, SG&A expenses were down as a percentage of sales to 10.3% versus 11.1% last year. This decrease was due primarily to lower employee-related costs and professional fees and the result of actions taken across several of our business units.

Operating income was $19.3 million in the second quarter. On an adjusted basis, operating income was $25.4 million this year versus $25.6 million last year. Adjusted operating income as a percentage of sales was up 20 basis points year-over-year to 6.1% and up 40 basis points on a sequential basis.

Our effective tax rate in the second quarter was 34%, which includes the effect of certain nondeductible expenses incurred during the quarter. We expect our full year effective income tax rate to be 26% to 28%.

Our GAAP earnings per share were $0.61 compared to $1.18 a year ago. On an adjusted basis, our EPS was $1.07 compared to $1.08 a year ago. Our adjusted earnings improved 6% compared to the first quarter of this year.

Through 6 months, our operating cash flow was $2.8 million versus a use of $1.3 million last year. We expect to generate strong operating cash flows of $50 million to $60 million in the second half of the year, which will enable us to reduce our long-term debt by $20 million to $25 million by year-end. We are in a strong liquidity position of $224 million at June 30, including $45 million of cash and cash equivalents on hand and $179 million of availability under our credit arrangements.

CapEx in the quarter was $10 million in support of various growth projects. As we mentioned on our first quarter earnings call, these investments support the newly awarded business in our aluminum, molded and extruded rubber and fuel-related businesses. Also in our Engineered Products segment, we are completing the new forging line in Arkansas, as Matt mentioned, which we expect to be operational in the fourth quarter of this year. For the full year, we expect CapEx of approximately $30 million to $35 million compared to $45 million in 2018.

Moving to our individual segment results in the second quarter. In Supply Technology, sales in the quarter were $162 million compared to $166 million a year ago. The decline in sales was driven by lower year-over-year demand, primarily in Asia and Europe. This impacted our sales to the semiconductor and consumer electronics markets, which were down 19% and 13% year-over-year, respectively.

These decreases were partially offset by sales growth in the heavy-duty truck and truck-related markets, which were up 18% year-over-year and the aerospace and defense market, which was up 10% year-over-year.

Operating income was $11.3 million compared to $13.5 million a year ago. Operating margins during the quarter were affected by the lower sales levels, unfavorable product and end-market mix and an increase in product costs resulting from general inflation and tariffs on imported products from China. We have offset a large portion of these cost increases with various supply chain and customer pricing initiatives throughout the first half of the year and expect to continue to recover the margin impact of product cost increases throughout the second half of the year.

Moving to our Assembly Components segment, sales were down 11% year-over-year, driven by the impact of end-of-life programs in our fuel products business and lower levels of production of certain auto platforms in our aluminum business in our facilities in China.

New business launches accelerated in the second quarter, affecting the majority of our operating locations and product lines. As I mentioned earlier, we expect incremental annual revenues of $125 million to begin in the second half of this year.

We believe we are well positioned to benefit from the recent trends in the global auto industry, which are aimed at producing vehicles to comply with more stringent global emission regulations. The use of lighter componentry, cooling applications and direct injection technologies will continue to be a focus in the global auto market, and we expect that these trends will increase our content per vehicle over the next several years.

Segment operating margins declined year-over-year from 7.6% last year to 6.1% in Q2 of 2019, primarily due to the $1.7 million of plant closing costs previously mentioned, lower sales levels and new business launch costs. Excluding the plant closing costs, operating margin would have been 7.3% in the second quarter, which is an improvement from 7% in the first quarter of this year. We expect continued improvement in operating margins in the second half of the year, as production levels ramp up and the impact of completed margin improvement initiatives fully take effect.

In our Engineered Products segment, sales in the second quarter were up 4% compared to a year ago, driven by increased customer demand for our induction heating and melting equipment, our aftermarket parts and services, which were up 30% year-over-year, and our forged products sold into the aerospace and rail end-markets. Bookings of new equipment and current backlogs in this segment continue to be strong, with second quarter bookings up 12% over the second quarter of last year.

Year-to-date, new equipment bookings are up 21% over new equipment orders in the first half of 2018 and up 6% over the last half of '18. We expect sales in this segment of our business to be strong for the rest of the year, due in part to the improved business conditions in the U.S. metal markets as well as strength in the specialty steel, rail and aerospace markets.

Operating income in this segment was up 21% from the second quarter of 2018, from $9.5 million to $11.5 million. Operating income margin was 9.8% in the quarter, an increase of 140 basis points year-over-year. These increases in year-over-year profit and margin were driven by higher sales and favorable sales mix, including a higher percentage of aftermarket parts and services in our capital equipment businesses.

Corporate expenses were $7.5 million in the quarter compared to $9.4 million last year, a reduction of 20%. The decrease was due primarily to lower professional fees and reduced employee-related expenses during the quarter. For the first 6 months of 2019, our corporate costs are down $3.6 million or 20%.

Finally, with respect to our 2019 guidance, we are updating our GAAP guidance to $3.70 to $4.05, as a result of the onetime expenses incurred during the second quarter. However, we are maintaining our adjusted EPS guidance range of $4.30 to $4.60 per diluted share. We are optimistic that we will finish the year with stronger second half results, given the production and the margin expectations from the new business being launched and the margin effect of the cost reduction actions taken in each of our business segments.

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

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

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Great. Thank you very much, Pat. I -- before turning over to questions, I want to echo some of Pat's final comments and his theme throughout the presentation.

There obviously is some incremental headline risk given what's going on in the global economy. But our focus for the rest of this year will be on strong cash flows; and, secondly, continuing focus on quality of earnings, around new business, the utilization of the new investments that we've made, pricing strategy and when necessary cost structure. So that's where our focus is for the rest of the year. We certainly hope to grow and have the diversity of what we're doing impact our overall results. But regardless, our focus is on strong cash flows and margin enhancement.

With that, I'll turn it 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 is the former Chairman and CEO of Park-Ohio and the current U.S. Ambassador to Ireland, Ambassador Edward Crawford.

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Edward F. Crawford, Park-Ohio Holdings Corp. - Former Chairman and CEO [2]

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Well, good morning. Great quarter, gentlemen. Would you comment further on Park-Ohio's diversified international development plans and its long-term effect on the company?

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

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Sure. Well, I'll begin by reminding everyone that our global footprint and our diversity by product and end-market has existed for 15 to 20 years. So this strategy is not new to Park-Ohio.

Having said that, the backbone of the current strategy is around innovation. Particularly in some of the auto investments we've made in China related to the electrification transfer of technology and the fuel emissions regulatory environment in particular, as well as some of the investments that we're leveraging over the acquisitions we've made in Europe and in the U.K. regarding the aerospace group.

So not only do we think we've got diversification in terms of place and product, but it's also the part of our portfolio that is based on our most innovative products.

I don't know if you have anything to add?

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Patrick W. Fogarty, Park-Ohio Holdings Corp. - VP & CFO [4]

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Yes, I would add by saying when you look at the business that we're launching, that covers many different plants, many different products, many different customers, not only the large OEMs, but also the Tier-1 customers around the world. So that particular segment is seeing a very large increase in diversification as we grow the business.

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Operator [5]

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Our next question is from Chris Van Horn with B. Riley FBR.

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Christopher Ralph Van Horn, B. Riley FBR, Inc., Research Division - Analyst [6]

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I guess as I look at the guidance, you have a little bit of a range here. I'm just curious of what the puts and takes are for the guide? And is it dependent on some end-market factors? Or there's some things operationally that gets you within that range?

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Matthew V. Crawford, Park-Ohio Holdings Corp. - President, Chairman & CEO [7]

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Chris, I can't answer that question without starting with the fact that the range, while maybe considerable on an EPS basis is relatively small on a nominal dollar EBIT or EBITDA amount. So we feel like, at this point, we're projecting a fairly narrow set of dollar earnings. With the limited share count, it manifests itself in a little bit of a bigger gap on the EPS side.

So I want to -- it's always a bit of a trick bag and I applaud Pat and his team to be able to convert that to such a narrow EPS band. Having said that, as I've mentioned, no, we are certainly focused on and need a reasonably steady industrial market.

But having said that, our business plan this year was predicated more on finishing the year strong relative to some of our investments and the -- beginning to see the impact on some of our margin strategies. So I think that, that -- what we need to do is we need to continue to make headway and execution as it relates to the new investment launches, and some of the pricing strategies in response to some of the inflation we've seen in the marketplace. That's how we're going to make our numbers.

Certainly, we're somewhat reliant on a well-balanced revenue approach. But as I mentioned in the past, our diversity suggests that we'll get there, absent a recession or a significant sell-off in the industrial marketplace.

So this is a balanced approach. I mean we do need some help from the economy to stay steady globally, but we've taken our hits on that side. And our business plan now is built on executing the investments we've made over the last 18 to 24 months.

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Christopher Ralph Van Horn, B. Riley FBR, Inc., Research Division - Analyst [8]

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Okay, got it. That's fair. When I look at your end market exposure, obviously, you have some automotive. But it sounds like you're winning some new business there that might be a secular theme. Many people are kind of opining that the truck cycle might be peaking here.

And just curious, your view on those markets? And how maybe Park-Ohio is a little bit more resilient than others because you have been able to see growth in those areas, despite the commentary around these cycles kind of peaking?

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

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Yes. And that's a fair comment. I think that there is certainly -- the truck market from a revenue standpoint has been a strong participant in our revenue growth, both last year and continues to be a contributor this year. So watching that cycle weaken a touch, or is expected. It's a very cyclical market. I mean people said that the auto is cyclical. Well, if you've been in Class 8 trucks, that's a real cycle. So we're familiar with it, and we'll manage it.

From an earnings perspective, it does tend to be as a segment, profitable, but dilutive to our overall margins. So you've heard us talk a lot about mix. Some -- to the extent that the mix turns, and we see some recovery in some higher-margin markets and lose some revenue in some lower margin that could be bad for revenue, good for margin. We'll see.

The punch line is, is truck is still a minority of the revenue at Supply Technologies let alone the overall business. So it could be a headwind. But relative to its margin profile and the size of it relative to all Park-Ohio, I think it's manageable.

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Patrick W. Fogarty, Park-Ohio Holdings Corp. - VP & CFO [10]

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Chris, the only comment I would add is that we talked about diversification. Well, the truck market is no different. Not only do we service the Class 8 market, but we're also servicing the Class 5 to 7 market, which tends to run a different -- a little bit different cycle than the Class 8 market.

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Christopher Ralph Van Horn, B. Riley FBR, Inc., Research Division - Analyst [11]

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Okay, got it. And then last one for me. You've always done a really good job at finding and kind of integrating some of these acquisitions. I just was still a bit curious, how Erie Press came up? And are they exposed to any specific end market versus another? And how you see the pipeline for future acquisitions.

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

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I'll take the first part, and then Pat, who many of you know, does corporate development as well as being our Chief Financial Officer, can comment on the current environment.

Erie Press is a business that we have been familiar with at Park-Ohio, through our equipment business, and in particular, our Ajax at Chambersburg hammer and mechanical forging press business for a long, long time. We have been desirous of adding that to our portfolio for a long, long time.

Now not only do I think it builds out the portfolio of our ability to make now mechanical presses as well as hydraulic and other kinds of presses, but it also allows us to leverage some of the machining capabilities, some of the aftermarket business, et cetera.

So this is a classic example of a deal that we've been tracking at the business unit level for a long time that our team has been desirous of getting -- bringing into the fold for many, many years. And we formed a relationship with the family that owned it. Wonderful people. They're still active in the business. This is exactly a Park-Ohio kind of deal. So we're very excited about it, and it fits perfectly.

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

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Yes, Chris, I would add that Erie, despite the similarities and the strategic reasons for doing that deal, their end customer market is primarily aerospace. And that adds a different market to our forging press business and tremendous opportunity to expand our presence in that market. So for all of those reasons, it was a really great deal for us.

Relative to the acquisitions in the marketplace, we continue to see deals regularly. Our focus is on looking at those that are strategic and growth companies. So the deal flow continues to be good. I see valuations tracking downward a little bit. And as banks tighten up in their lending, we'll see multiples start to come into the range where we really look to take on opportunities.

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Operator [14]

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Our next question is 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 [15]

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Can you talk more specifically about the profitability of the $125 million in incremental revenue? What is it about those programs that bring so much leverage? Did you get better pricing? Or is this a function of utilization or absorption? Just trying to understand your confidence here.

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Matthew V. Crawford, Park-Ohio Holdings Corp. - President, Chairman & CEO [16]

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Yes, I would choose not to talk about a particular margin profile across 50 platforms. But I think what I can comment on is, it is rare, in fact, I think unprecedented in Park-Ohio's history to be launching over an 18-month period in essentially 4 different locations at once. So I think it is fair to assume that we have seen dilution to our earnings as we launch those businesses.

Having said that, simply making them profitable and starting to absorb some of the expenses and the overhead there will be -- will contribute meaningfully to our performance. So we don't need those business to get to peak margins. I think that our unprecedented investment in these 4 facilities -- we'll begin to see margin enhancement, just based on that, as we see the operating leverage there.

Having said that, we are investing in parts of our business that traditionally have been accretive to our overall margin. So I think, I wouldn't expect anything different going forward.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [17]

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That's good to hear. And the reason I ask is, if I look at the first half '19 operating margin versus the first half of '18, it's up 10 basis points. And historically, Park-Ohio's had low incremental contribution margin on modest revenue increases, which I think is what we're looking at in the back half, plus or minus, as I think about the puts and takes of launches mix versus end-market challenges. So, again just you are confident you are going to see that step-up in consolidated margin in the second half of this year.

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Matthew V. Crawford, Park-Ohio Holdings Corp. - President, Chairman & CEO [18]

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Yes. Steve, I -- you said it right. But I want to clarify what you said. More recently, as we have seen the mix of our growth be more weighted toward Supply Technologies, we have -- and we have been investing and spending the money in these other businesses, we have seen lower incremental margin improvement off revenue dollars.

I think it's a little unfair to say that in a truly negative sense, because I think, you have the weigh-down of these businesses who are investing for the future, combined with a Supply Technology business that particularly in 2018 did very well, has a wonderful financial model, as you know, and yet tends to have a lower margin profile.

So I hear what you're saying, it's completely accurate, but I also want to make sure people understand that margin accretion, with that mix, and those business launches, probably undersells what's actually being accomplished.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [19]

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That's great detail. For Supply Technology, specifically, are you seeing customers scale back on production broadly? And is your operating cash flow guidance anticipating a big working cap benefit from destocking in 2 -- in the second half?

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Patrick W. Fogarty, Park-Ohio Holdings Corp. - VP & CFO [20]

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Yes, Steve, this is Pat. I think normal cyclicality of our business annually will show you that we generally generate a lot of cash in the second half of the year. Clearly, some of that is the improvement in our working capital metrics, not only in Supply Technologies, but in every one of our businesses. At the end of June, we saw customers stretching out their payment longer than normal. And so we do expect the $50 million to $60 million of operating cash flow to -- we're going to benefit from reduced working capital requirements.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [21]

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Got it. Well, and just to go back to the question specifically, Supply Tech is obviously tied into a lot of production plans for customers. Are you seeing -- just as we see macro decelerate, is that translating into more cautious customer production plans, broadly speaking, going into the back half?

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Patrick W. Fogarty, Park-Ohio Holdings Corp. - VP & CFO [22]

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Yes. I think we're seeing a little more volatility in our end-markets than we have over the last year. And so there is some of that. I don't think it's -- from a -- it's not material. But we are seeing more swings in volatility with our production requirements of our customers.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [23]

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Okay. For your rail-oriented businesses, can you talk about what you're seeing in terms of track and infrastructure versus railcar components versus locomotive products?

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Matthew V. Crawford, Park-Ohio Holdings Corp. - President, Chairman & CEO [24]

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Steve, that's a good question. I don't -- wouldn't be prepared -- and I don't know that Pat is -- to break that business apart. But a lot of that -- all of it really resides in our Engineered Products segment, and then inside of that in our forging group. We have seen robust activity in our forged rail part of our business. I wouldn't be prepared to comment right now on what's driving that; if it's just rail builds or track maintenance. I'm not sure at this moment.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [25]

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Okay. And just last one for me. Any update on China auto for both international nameplates and the domestic producers there. Has that market softness slowed down industry consolidation talk or accelerated it?

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Matthew V. Crawford, Park-Ohio Holdings Corp. - President, Chairman & CEO [26]

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Well, clearly, I think it was June 1, I believe, was the deadline for noncompliant cars to be sold. So I mean, it would be hard to articulate how disastrous the first part of this year was for selling parts to players who are -- who had noncompliant inventories, which they were slashing, I think, up to 50% and 60% and 70% off brand-new cars. So that was a disaster. No question about it. And it really slowed down the launch of 1 of our facilities, in particular, I think probably set it back a year, for lack of a better word, from a timing perspective from our expectations.

Having said that, I think that I can really only talk about our experience, Steve. We are a -- most of the Chinese national OEMs as well -- SAIC included as well as the multinationals are absolutely getting the message that they need to invest in products that meet the regulatory elements at this point.

So we continue to see real energy in the quoting environment. That will be certainly helpful to us as we get late into this year and early next year. Whether that precipitates some consolidation or not, is a great question because, certainly, the smaller Chinese national companies are going to have to find a way to meet these compliance standards. So you would think that would precipitate some consolidation, but I don't know that we're privy to that at this point.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [27]

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So the emissions and mileage requirements are not in name only, they're really pressing the OEMs to hit these targets?

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Matthew V. Crawford, Park-Ohio Holdings Corp. - President, Chairman & CEO [28]

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Yes, I can tell you, if you look -- everyone talks about sales rates; production rates for people like Shanghai GM, I think were off 50% or 60% for the first part of this year because they were just trying to blow through inventory for their products that were noncompliant.

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Operator [29]

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Our next question is 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 [30]

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I was wondering if you can talk a little bit more about Supply Technologies, the component side. Obviously, you guys called out some weakness in the semiconductor market and consumer electronics, especially in Asia. Can you maybe provide a little more detail there on the CE side, are there specific areas that you're seeing weakness in like maybe handset manufacturers?

And then on the semi side, there -- is that just a broad semiconductor weakness that you're seeing? Or are there specific areas within the semiconductor industry that you're seeing that weakness?

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Matthew V. Crawford, Park-Ohio Holdings Corp. - President, Chairman & CEO [31]

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Yes, Marco, I -- yes, that would be -- I mean, don't get me wrong, consumer electronics and semi are important segments, albeit on a relatively smaller side in Supply Technologies. And they have been impactful to our performance.

Having said that, with our customers, who are sort of the large contract manufacturers or large tool suppliers, I'm not sure I would be prepared to understand what's driving their underlying performance.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [32]

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Got you. And then switching over to Engineered Products, you guys had mentioned that you're seeing a lot of strength there, some good movement going forward based on just sort of a global reinvestment cycle in the metals market.

Can you maybe talk a little bit more about that, what you're kind of seeing there in terms of expectations going forward? And maybe where you might be inside that cycle?

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Matthew V. Crawford, Park-Ohio Holdings Corp. - President, Chairman & CEO [33]

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Yes. It's interesting because we have a tendency, I think, to look at commodity prices as a driver to those businesses. And I think over the mid- to long-term, commodity prices are very relevant to investment in that business and trends for our business as well.

Having said that, I will -- what you're seeing, I think, relative to investment -- particularly, let's focus on the steel industry for a moment -- is you continue to see massive investments in the steel sector to upgrade their assets whether it be to improve their assets in terms of their ability to make different types of alloys, or high-strength steels, which I think is sort of the wave of the future, if you will. So I think that is a -- or specialty metals -- I think that's sort of a cycle that's going on.

Secondarily, they are very focused on margin. I think they realize they're going to have to make money at lower pricing over the long term. So investing in productivity, I think, is important as well. I don't have these numbers at my fingertips. But I think, for example, U.S. steel might have spent double last year than the year before for CapEx, as they sort of upgrade their facilities and make them more productive and invest in the right places in the market.

So I think despite the pricing in the steel market -- which is still, on a historical basis, okay -- I think that they need to modernize their facilities, and I think we can be part of that, whether it be on the aftermarket basis or on the new equipment side.

I think the same is true a little bit on the oil and gas side. I think that depending on where you are in that cycle -- or where in that supply chain, there's still a pretty heavy rig count. So while natural gas prices, in particular, and oil are off considerably, and we've seen a little bit of that impact to parts of our business, there's still a significant rig count out there. So supporting that can still be reasonably steady in the macroeconomic sense.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [34]

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That's very helpful. And last question, just coming back on the acquisition landscape for you guys and sort of current debt levels. Some of the metrics have kind of crept up a little bit here over the last year. So just can you maybe update us in terms of your comfort levels on debt, where you think you kind of max out, if you will, where you feel uncomfortable in terms of adding on additional debt?

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Matthew V. Crawford, Park-Ohio Holdings Corp. - President, Chairman & CEO [35]

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So this is Matt, and then I'll let -- I mean Pat is in a better position to answer. But let me just comment generally. We have a stated goal of trying to get our leverage ratio under 3x. We think that is the right place to be in this part of the cycle to achieve the flexibility we want in -- going forward.

So I do think you've seen in 2019, a subtle shift towards a focus on that deleveraging. That doesn't mean we'll skip great acquisitions. It just means that we are -- that is a strategy, sort of a named strategy, if you will, for 2019. And we sort of reflect on that when we're screening deals.

But I also want to point out something else. Don't get me wrong. We focus on leverage. We certainly think about it. But where the rubber hits the road really is coverage. We've paid a lot of money, obviously, to create a structure that includes a significant amount of -- or 2/3 of our debt essentially is fixed, nonamortizing, 6-and-change in terms of coupon and not due until 2027. So we have liquidity that's well in excess of $200 million. We have coverage, something on the order of $150 million worth of EBITDA against $30 million, $35 million worth of interest. So we're covering in that metric over 4x.

I am just commenting to you how we think about the ability. You can't be agnostic -- you can't focus on leverage and be agnostic to rates. I mean we've set up a structure that we believe gives us maximum flexibility.

So we are interested in decreasing leverage. It is a focus of our process. But it's a much more intricate thought process relative to structure and relative to rates and coverage that we consider. So we will continue to look at deals. We'll continue to do good deals and strategic deals. But having said all that, yes, we are interested in paying down some debt as well.

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

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I echo Matt's comments, Marco. We've stated what our goal is to get our net debt leverage below and right around 3. We've indicated we plan to do 1 strategic deal this year. We're not going to pass up on a very strategic deal. But we also view getting our leverage down as a key metric for us going forward.

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Operator [37]

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Our next question is from [John Baum], private investor.

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Unidentified Participant [38]

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Congratulations on a good quarter and nice guidance in the face of maybe a softening industrial environment. It was nice to hear from our #1 shareholder and former CEO as the first call in, so I hope (multiple speakers)

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Matthew V. Crawford, Park-Ohio Holdings Corp. - President, Chairman & CEO [39]

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We agree, it was a little bit of a surprise, but it was great.

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Unidentified Participant [40]

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Hopefully, we can get a little Irish business out of there too, so let's get a plug in. I hope he's still listening there.

Is it possible to -- your guidance was especially, shall I say, admirable with respect to what we see with Chinese tariffs. I think you've said before that you're in Asia to sell to Asia -- or in China to sell to China. So is it possible to quantify the tariff impact? Or is it not really material because you're not in China necessarily to export back to the U.S., but basically to sell into China. Is there any thoughts on that and perhaps on a hard Brexit, too, if we talk about foreign exchange? Go ahead.

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Matthew V. Crawford, Park-Ohio Holdings Corp. - President, Chairman & CEO [41]

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I'll start. I'm lucky, I get to start and Pat gets to clean up, he has the harder job. Let me just start by saying -- I mean, the Supply Technologies, in particular -- I don't want to undersell the attention this gets in our automotive group because it matters there, too. But to your point, we tend to buy and sell in the region we're in.

This -- Supply Technologies is particularly exposed here because they do a lot of consolidating, and they do a lot of business either directly or indirectly in Asia and in some cases, in China. So inflation is -- and to be honest with you, it's been a lot of work for them. Because sometimes a supplier to us that may supply a relatively large number can negotiate a price increase and then we've got to distribute that over 1,000 parts to 25 customers. It can be -- the timing can be a more -- a bit interesting.

Having said that, our team is all over it. This is not -- nothing is new to them. They understand the impact. It has been, I think, as we mentioned on prior calls, since the beginning of this tariff issue -- which began a year ago, March, I think, or a year ago, April -- we have paid considerable attention, tracked it and it is a multimillion-dollar issue, there's no doubt about it.

But we are focused on this on the supply chain side, when necessary on the pricing side. And I just want to assure you that we are -- while it has impacted our margins negatively, this is not something that we lack an understanding or a strategy around.

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Patrick W. Fogarty, Park-Ohio Holdings Corp. - VP & CFO [42]

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John, my comments are similar to Matt's in that, in Supply Technologies, they import very little directly from China. All right. But there is some amount and the tariffs on those imported goods are really what we're talking about. And we're fighting hard to resource and get proper pricing from our customers on a daily basis, and that's occurring.

Relative to our business in China, our strategy is that we are in China for China. And we are not importing product back to the States from China. So the currency drop that we have seen recently there should not have a material effect on our business. Our business in China within Supply Technology is mostly done in U.S. dollars. In our start-up plants in our assembly components business that are in local currency would have a translation effect that's not positive. But right now, those plants are not material to our overall business. So I wouldn't expect any significant hits from that.

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Unidentified Participant [43]

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Let's see, some granular questions for Patrick, overall question back to Matt, and I'll finish up. I guess looking at cash taxes on a go-forward basis, I know it's complicated with various jurisdictions; but I don't know, are we looking at 25% to 30% on that? And I'll forward that one to Pat.

And, Matt, I'll let you finish up with are you still reaffirming $2 billion in sales and a 10% EBITDA margin coming up in the future?

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Patrick W. Fogarty, Park-Ohio Holdings Corp. - VP & CFO [44]

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Cash taxes paid through 6 months, we paid $5.3 million. I would expect that to range from $15 million to $20 million for the year, which is consistent with pretty much where we were a year ago.

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Operator [45]

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We have reached the end of the question-and-answer session. I will now turn the call over to Mr. Matthew Crawford, for closing remarks.

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Matthew V. Crawford, Park-Ohio Holdings Corp. - President, Chairman & CEO [46]

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Great. Well, thank you for the great questions today. Thank you for your interest. I hope you're as excited as we are. We're not ignorant of some of the volatility and some of the risks that are going on geopolitically and otherwise. But we think we've got the team, and we think we've got the products and the leadership team, in particular I should say, to get through this and get through it positively.

I also want to recognize we have an increasingly a complex business from a financial perspective. And today, we have Mike Volchko, our former Corporate Controller; and Rob Pierce, our VP of Corporate Finance. And I just want to compliment both of them on the work they do to get the books closed, to get them straight and help us look good and smart on these calls because they're doing most the heavy lifting. So thank you to both of you, who are in the room with me, and we appreciate your time today. Thank you very much. Bye-bye.

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Operator [47]

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This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.