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Edited Transcript of PKOH earnings conference call or presentation 12-Mar-20 2:00pm GMT

Q4 2019 Park Ohio Holdings Corp Earnings Call

CLEVELAND Mar 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Park Ohio Holdings Corp earnings conference call or presentation Thursday, March 12, 2020 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. - Chairman, CEO & President

* 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

* Edward James Marshall

Sidoti & Company, LLC - Senior Equity Research Analyst

* George Melas-Kyriazi

MKH Management Company, LLC - President

* 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

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Presentation

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Operator [1]

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Good morning, and welcome to the ParkOhio Fourth Quarter and Full Year 2019 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 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 EPS to adjusted EPS and for a reconciliation of net income attributable to ParkOhio common shareholders to 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, CEO and President. Please proceed, Mr. Crawford.

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

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Thank you, and good morning. Welcome to our year-end and fourth quarter 2019 conference call. While I recognize that much of today's call will be focused on the current business conditions and the impact of coronavirus, I do want to open by discussing 2019 and some of the important accomplishments that occurred last year. First, the launch of 2 new production facilities in Assembly Components and the expansion of 1 in engineered components -- or Engineered Products, excuse me, which has already provided improved new business opportunities, better strategic product positioning and increased cost competitiveness.

Two, significant new business activity highlighted by over 100 new customer accounts in Supply Technologies, ongoing launches in Assembly Components relating to previously announced new business and strengthened backlogs in our capital equipment group due to a reinvigorated focus on key induction technologies and aftermarket offerings, supported by increased research and development. Three, successfully implemented an effort to combat tariff impact through supply chain adjustments and price increases. Four, implemented an effort focused on margin enhancement, which improved gross margins by 100 basis points between the first quarter and the fourth quarter of last year. And lastly, and perhaps most importantly, generated near-record operating cash flow.

These accomplishments were done during a remarkably turbulent year given the labor markets, trade disputes, customer work stoppages and declining industrial production during most of the late fall and early winter. Therefore, we enter 2020 excited about the foundation of our business and the opportunities that lay ahead. Having said that, we are cognizant of the current market sell-off and the concern over the social, economic and business impact of coronavirus, and I want to make a few points here.

First, we have no knowledge of anyone within the ParkOhio family who has contracted coronavirus, and we have implemented appropriate policies around travel, meeting and sickness protocols. Two, we've had no customer interruption or failure of service. Three, we have seen a significant slowdown in our Mainland China business. This has been particularly challenging regarding some of the new business we had hoped to achieve during 2019. And while China is not an overly significant part of our revenue profile, this will be a headwind to our improved performance there. Four, while we're unable at this point to quantify the impact of the virus to our business in 2020, it has become increasingly clear that the virus and the associated government response will likely impact our business. We have already seen some softening related to our oil and gas end markets, which touches our Engineered Products segment most directly.

I want to close by reminding everyone that while we didn't anticipate the headwinds that materialized in the end of 2019 or those occurring now, ParkOhio is designed to weather these events and even to benefit from them. To be more specific, we are a more diverse business regarding end markets, products and customers than ever before, our liquidity position is at or near all-time highs, and our management team has more than 25 years experience surviving and benefiting from business cycles. Lastly, I know it seems like a long time ago, ParkOhio had near-record sales and had record earnings performance during the first 6 months of 2019, and we continue to be very excited about our future.

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

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

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Thank you, Matt. Overall, our fourth quarter sales and earnings were below our expectations and were driven by onetime events as well as demand volatility in several of our key end markets. First of all, the impacts of the GM labor strike and customer delays in launching certain new car models were significant to our fourth quarter results. These unusual events affected most of our locations in our Assembly Components segment and negatively impacted our fourth quarter revenues by approximately $20 million and earnings per share by approximately $0.35. In the first 2 months of 2020, we have seen improved production rates on new business being launched and are optimistic this will continue throughout the year.

Secondly, in our Supply Technologies segment, we experienced an accelerating decline in customer demand in the second half of the fourth quarter from several end markets, most notably in the heavy-duty truck, agricultural equipment and defense markets. Daily sales levels in the fourth quarter decreased by 20% (sic) [12%] year-over-year in this segment. We believe these levels of demand were unusually low and a result of holiday schedules and end-of-year production and purchasing decisions. In the early part of 2020, our daily sales levels have improved compared to fourth quarter levels.

On a positive note, our fourth quarter and full year operating cash flows and free cash flow exceeded our expectations. Also, we made significant progress and are seeing the positive impact of our margin improvement initiatives. We continue to implement actions to improve margins in each of our business segments, which include streamlining certain operations in addition to actively managing customer and vendor pricing. Also, we completed several important capital projects, which have been ongoing over the past 2 years, including the installation of a 7,000-ton forging press in Arkansas, the expansion of our Acuña, Mexico plant and specific growth projects in our fuel, molded and extruded rubber and aluminum business.

Also during 2019, we amended our bank credit facility to extend its term to 2024 and provide for improved pricing on outstanding borrowings under the agreement. And finally, we completed the strategic acquisition of Erie Press, a supplier of capital equipment to the aerospace industry and to other end markets. The Erie results are included in our Engineered Products segment.

Turning now to the details of the fourth quarter. Our consolidated net sales were $380 million compared to $406 million in the fourth quarter of 2018. This 7% sales decline year-over-year was driven by lower volumes in our Supply Technologies and Assembly Components segments, as I previously discussed. Our fourth quarter gross margin was 16.4%. Excluding onetime costs, our gross margin in the second half of 2019 was 16.5% compared to 16.1% in the first half of the year, demonstrating that our margin improvement initiatives are beginning to take effect. Fourth quarter SG&A levels were slightly higher year-over-year driven by SG&A associated with the Erie Press acquisition.

Operating income in the quarter was $17.5 million compared to $23.2 million a year ago as a result of the lower profit flow-through from the lower sales levels. As a result, our GAAP EPS and adjusted EPS were $0.61 and $0.65, respectively. Operating cash flow in the fourth quarter was $30.2 million and free cash flow was $21.7 million. Since June 30, our free cash flow has been strong and totaled $41 million, an increase of 25% over the second half of 2018.

Now I'll comment on our segment results. In Supply Technologies, sales in the fourth quarter totaled $136 million compared to $155 million in the 2018 period. On a full year basis, segment sales were $612 million, down 4% year-over-year. Throughout 2019, we experienced reduced demand in several key end markets, including semiconductor, agricultural and industrial equipment and consumer products. While sales in the heavy-duty truck market grew 9% for the full year, we experienced a sharp decline in demand in the fourth quarter, which was down 20% compared to both the third quarter of 2019 and the fourth quarter of 2018. This decline was partially driven by an unanticipated labor strike at certain truck assembly facilities during the quarter.

Partially offsetting the demand volatility I just outlined, we saw increased sales volumes in our aerospace and defense market, which was up 7% for the full year. Our aerospace and defense business performed well in 2019, and we expect continued growth in sales and earnings in 2020. Our mid-market and industrial supply strategy continued to gain traction during the year. During 2019, we successfully added over 100 new customers. Although revenues to these new accounts did not have a significant impact on our segment results, we expect to continue to penetrate these customers with more products and services in 2020 and beyond.

Segment operating income for Supply Technologies in the fourth quarter was $7.6 million compared to $11.7 million a year ago. For the full year, segment operating income was $42 million compared to $49 million in 2018. The year-over-year decline in operating income was a result of lower sales volumes, increases in product cost from both tariffs and commodity price increases, which affected margins primarily in the first half of the year, and nonrecurring costs related to facility consolidations. Our Supply Tech team continues to adjust customer pricing and make changes to the supply chain to more than offset the increase in product costs seen in the first half of 2019.

In our Assembly Components segment, net sales in the fourth quarter totaled $129 million, down 3% compared to $134 million in the 2018 period. The previously mentioned impact of the GM strike and the delay in launching new car models, such as the Ford Explorer, the Lincoln mid-sized SUVs and the Ford Escape had a significant impact on our segment revenues in the fourth quarter.

Segment operating income in the fourth quarter of $9 million was essentially equal year-over-year as higher year-over-year operating income margins and favorable results from our aluminum business offset the negative impact of lower sales volumes in our fuel and rubber-related businesses. On a full year basis, segment sales in 2019 were $540 million compared to $578 million in 2018. Full year segment operating income was $36.2 million compared to $42.9 million in 2018. The decrease was driven by onetime plant closure costs of $3.3 million and the fourth quarter items previously mentioned.

We believe that our products are positioned for growth in this segment as new car and light truck model launches increase over the next 3 to 5 years. We also expect continued gains in content value per vehicle as technology demands increase relative to lightweighting, reduced emissions and electrification.

And finally, in our Engineered Products segment, sales in the fourth quarter were $114 million compared to $118 million in the 2018 period. Year-over-year sales were impacted by lower demand primarily from the oil and gas market, offset by the continued strength in the aerospace market and in our equipment aftermarket business.

For the full year 2019, segment sales were $467 million, an increase of 5% year-over-year. This increase was driven by increased customer demand for our induction heating and pipe threading equipment, our aftermarket parts and services in our industrial equipment group, and our aerospace products in our forged and machined products group. During 2019, our industrial equipment group continued to make the necessary investment in R&D to advance existing technologies and develop new products. We also improved the aftermarket profile of our European operations, which historically sold only new equipment.

Segment operating income was $7.8 million in the fourth quarter compared to $11 million a year ago. And for the full year, segment operating income was $37.7 million compared to $38.4 million in 2018. The fourth quarter decline in operating income year-over-year was primarily due to unfavorable product mix and the result of start-up costs relating to our new forging press line in our plant in Arkansas.

For the full year, our consolidated revenues of $1.62 billion were down 2% year-over-year and our adjusted earnings of $3.74 per share were down 13% compared to record earnings levels in the prior year. Our 2019 sales and earnings were impacted by a challenging global industrial environment and certain nonrecurring events affecting our automotive businesses, especially in the second half of the year. We ended the year and continue to have strong liquidity of approximately $251 million, including cash on hand of $56 million and $195 million of unused borrowing capacity under our various global financing arrangements.

And finally, due to the unknown financial impact of the coronavirus outbreak on our facilities, especially in China and Italy, and the certain impact on customer supply chains globally and end-market demand, we are foregoing issuing 2020 EPS guidance at this time. Our efforts in 2020 will be focused on increasing earnings year-over-year, improving consolidated operating margins through various initiatives, which have already been implemented and increasing free cash flow to reduce CapEx and working capital.

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

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

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Great. Thank you very much, Pat. Appreciate the color. We'll now open the floor for 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 the line of Chris Van Horn with FBR.

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Christopher Ralph Van Horn, B. Riley FBR, Inc., Research Division - Analyst [2]

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Now I know you're foregoing some concrete guidance for EPS. But could you give us a sense of -- and I know it's probably still new, but the sense of impact, are you still shipping? Are you seeing disruptions in certain end markets, but others are kind of status quo? Any additional detail what's happening like on the boots on the ground right now?

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

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Sure, Chris. I'll take a shot at that. I think as Pat and I both mentioned, we have seen a little softening in the oil and gas market. So that market -- end market has been challenging for us going into the year, but in particular, as of late, we anticipate that to continue to soften. So in our Engineered Products group, that's an important part of their business. So that will be a headwind without question. As we also mentioned, we haven't had any customer disruptions or failure to meet shipments. So it has not directly impacted our business at this point. We do have facilities around Europe. Most notably, we have facilities -- a facility in Northern Italy, in Turin. They are working a skeleton crew right now in conjunction with the regulation from the government in Italy regarding how to safeguard their population. So we will need to look at perhaps transferring production or helping meet customer requirements as is appropriate. That's a relatively small business for us. So we'll have to work around that.

In China, most all of our Chinese facilities are for China consumption. So those businesses have been in a situation where they've been shut down. Most of them, all of them, I believe, are back in operation and staffed. They've been anywhere from between -- as they ramp back up, 20% and 30% of capacity up to 100%. The good news there is, since it's been for Chinese consumption, most of our customers, all of our customers have been restricted relative to their activity as well. So the demand is not outstripping our supply.

But it appears that's not back on the upswing in terms of the business. So in terms of a direct impact to the business, as I mentioned in my comments, we're not seeing a ton. I think our greater concern is sort of where this goes from here relative to what, as I said, the virus itself and the government's response does to our economy in North America. We certainly came into the year very optimistic. We had a business plan that anticipated a nice year, up nicely over last year, but it's extremely difficult to tell at this point.

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Christopher Ralph Van Horn, B. Riley FBR, Inc., Research Division - Analyst [4]

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Okay. Great. And then on the oil and gas side, obviously headwinds from a demand perspective. But how does the price of oil affect your business maybe from a supply side? And I imagine, it affects it from a demand side, just due to the fact that your customers are buying less equipment, et cetera. But is there anything positive on the supply side?

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Matthew V. Crawford, Park-Ohio Holdings Corp. - Chairman, CEO & President [5]

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Great. That's a good question. We've been more focused, I think, on the demand side. I'm speaking so I can give Pat a moment to think. But to be honest with you, we've been -- the supply side on oil and natural gas has been exceedingly favorable for a long time. I can't anticipate -- while I anticipate probably some additional benefit, I can't imagine it being material. But I'm giving Pat a second here. You want to clean that up at all?

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Patrick W. Fogarty, Park-Ohio Holdings Corp. - VP & CFO [6]

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Sure. The oil and gas end market, Chris, affects our Engineered Products segment, in a significant way, especially in our forged and machined products group. And in the induction side, we ship our equipment into the tubular steel market, which would also be affected by less drilling as a result of lower oil and gas prices. And so the reverberation of lower oil and gas prices affects other end markets as well when you talk about mining, you talk about agricultural and other end markets that utilize our forging products as well as our equipment. So we continue to monitor that. But when prices drop as significantly as they have, demand for our products is definitely affected.

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Christopher Ralph Van Horn, B. Riley FBR, Inc., Research Division - Analyst [7]

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Okay. Makes sense.

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Matthew V. Crawford, Park-Ohio Holdings Corp. - Chairman, CEO & President [8]

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Now just to put that in context because I want to say that we have very diverse businesses, not just across ParkOhio, but also inside of the forging and equipment group. So that's where some of the aerospace and defense resides, that's where agricultural -- so this is incremental business and it's certainly in businesses that has relatively high fixed costs. So the loss in revenue has meaningful negative flow-through. But this -- even inside of the forged group and the Engineered Products group, we're extremely diverse.

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Christopher Ralph Van Horn, B. Riley FBR, Inc., Research Division - Analyst [9]

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Okay. One last for me and I'll jump back in the queue. Your cash flow continues to track better than expectation. It seems like you're managing your working capital really well. You saw a reduction in CapEx. Maybe what's driving those working capital improvements and the reduction in CapEx. And then I know you have a facility, but any need to draw on that at all as we head into some uncertain times here?

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Matthew V. Crawford, Park-Ohio Holdings Corp. - Chairman, CEO & President [10]

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Yes. I'll just start with a high-level comment. I think we can do a lot better on working capital. So I feel like that's an area that we will continue to try and focus on and harvest. Where I do think we have positioned ourselves through a lot of effort last year is I think we've got some nice traction on the operating margin. So I think, as I mentioned in my comments, that 100 basis point swing -- and some of that was mix. So to be clear, what we benefited -- just like we got hurt by the mix in the downturn, or excuse me, the increased volume in Supply Tech over the -- some of the good times. On the downturn, we're benefiting from that. But there's a tremendous amount of supply chain work and pricing work that went down last year that I think benefited us throughout the year, and those will benefit our cash flows going into this year. So those are real dollar-for-dollar improvements, which are in the millions. So I think that's number one.

I also think that the CapEx -- you've only begin to see us address CapEx. We pledged on the prior couple of calls that we're coming -- end -- to the end of our reinvestment cycle. We expect a meaningful improvement throughout this year as well. So I'll let Pat talk a little bit about working capital and then -- and the line of credit. But we've got some momentum in other areas. And we're actually anticipating pivoting and being more aggressive on working capital as the year goes on.

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Patrick W. Fogarty, Park-Ohio Holdings Corp. - VP & CFO [11]

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Thanks, Matt. Just to add a comment around CapEx. The last 2 years, we spent $85 million. And when you go back to our historical run rates, annually, we would spend somewhere between $25 million and $30 million. And in difficult times, we could ratchet that down to what we view our maintenance capital to be, which is somewhere around $15 million annually. So we can control that carefully. And -- but I also would say that we're not going to pass up on opportunities to take advantage of future growth. Relative to working capital, we did make some good progress during the year, and we expect continued progress, especially around inventory, managing our lead times better but there's still opportunity for us to improve that. And we expect and have implemented a number of things to do that.

Relative to our availability, we do have significant availability. Right now, based on where things stand, we don't expect to draw significantly down on our revolver. And as the year progresses, we would expect to pay that down versus draw on it. And obviously, that's a fluid situation depending on where our businesses head as a result of what's going on in the global economy. Hopefully, that's helpful.

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Operator [12]

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

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [13]

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Yes, I'm not sure -- I mean, I understand the reason for no EPS guidance. I'm just curious, did you give a -- did you just give a CapEx number and I missed it? Or were you just kind of talking in general terms? And if not, do you have an idea what CapEx might run this year, understanding that probably could change very soon?

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Patrick W. Fogarty, Park-Ohio Holdings Corp. - VP & CFO [14]

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Yes, I think what we've said, Ed, is that we expect CapEx to be dramatically lower than what it has been in the past 2 years. And historic levels would indicate that $25 million to $30 million would be a normal run rate for our CapEx, but we can manage that down depending on how the economy is reacting.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [15]

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Do you expect to be in that range of $25 million to $30 million, you think, and is what you're saying, and it could be lower, given further weakness?

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Patrick W. Fogarty, Park-Ohio Holdings Corp. - VP & CFO [16]

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Yes.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [17]

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Got it.

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Patrick W. Fogarty, Park-Ohio Holdings Corp. - VP & CFO [18]

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And I would expect to be in that range or lower.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [19]

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Got it. As we look at the virus, I understand you can't quantify it today. I'm just curious, we're hearing, especially on the supply chains within just-in-time manufacturers for automotive that it looks like around the April time frame, you might find, not you, but the industry might find shortages of certain parts. First, are you seeing that kind of dynamic (technical difficulty) noting that you get that -- a lot of that supply out of Asia?

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Matthew V. Crawford, Park-Ohio Holdings Corp. - Chairman, CEO & President [20]

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So you bounced in and out a little bit there. So we didn't hear the entire question, but I think I got enough. And if we miss some of it, then clarify the question. But I think that the -- as of now, we feel as though the year has opened stable in the auto environment. Now platform by platform could be -- have some volatility. But overall, particularly coming out of a particularly challenging fourth quarter, we've seen some stability. So we're -- and we have not been notified about -- in our forecasting and the information we get on a regular basis from our customers by the OE plant or by the tier that they expect any disruption. So we have heard some of the same stories. We are familiar that some of the OEs are paying some premium freight to get parts. But we are not aware at this time of gaps in the schedule for major OE facilities that would facilitate the kind of disruption you're talking about.

So as we sit here today, the year is off to a pretty stable start. The forecasts look stable as well, but obviously stay tuned. Speaking to our business, once again I -- to clarify, our Chinese manufacturing plants largely supply Chinese demand so that's not really an issue. We do import something less than $20 million worth of product in Supply Technologies from China. So we have been -- and we have boots on the ground there. We are and have been for quite a while all over the risks associated with our supply chain there, and at this point feel extremely comfortable that we don't have a major issue on the horizon. And my sense is, and this is just me being proud of our team, you can chalk this up that if there is a disruption at the OE level, it's not going to come from us. I can't promise it won't come from anywhere else, but it's not going to come from Supply Technologies. So that's how I feel about it.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [21]

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Got it, got it. Again, understanding the guidance, but I wonder if I can look at it a different way, likely to be less relevant in the short term. But do you have kind of books-to-bill that you might be able to provide to give us some understanding of how the business trended heading into Q1?

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

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I would comment that because we're in such a fluid situation, Matt mentioned that we started our planning process with improved outlook year-over-year. We think in light of where things are heading, we prefer not to comment on that.

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Matthew V. Crawford, Park-Ohio Holdings Corp. - Chairman, CEO & President [23]

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Yes. I mean I would -- I'm kind of -- but I'm going to refer generally to what we said before, which is we have seen some weakness in the oil and gas end market. Other than that, the year has begun on a relatively stable basis, and it's more the lack of visibility that troubles us than anything that's going on in the current environment, candidly.

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Operator [24]

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

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

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Again, I understand why you're foregoing guidance given all the unknowns. And I get that Engineered will face some real challenges this year, but just directionally, do you still expect growth for Supply Tech and Assembly?

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Patrick W. Fogarty, Park-Ohio Holdings Corp. - VP & CFO [26]

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Yes, we started the year, Steve -- this is Pat -- believing in Assembly Components that we would see some growth. Obviously, we've launched a number of new products and are actively booking more new business. In Supply Tech, it's a little challenging. Heavy-duty truck is expected to be down significantly before the coronavirus hit. And so we -- although we saw stability and growth in other end markets, such as semiconductor and aerospace and defense, aerospace -- just heavy-duty truck was going to provide challenges to 2020 for us.

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Matthew V. Crawford, Park-Ohio Holdings Corp. - Chairman, CEO & President [27]

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Yes, Steve, let's -- yes, Steve, let me ask a question -- answer a question you didn't ask. What I like about where we positioned ourselves at Supply Technologies with some of the new investments and some of the actions we've taken and the new business we've launched, while we have not seen -- while the new business continues to be a great hedge to any deterioration -- and that's why it's difficult to answer your question, not really understanding where the auto market is going to end up, where I am confident is we've created a great path at the margin line. So while we're going to stumble around on your question about volume and growth year-over-year, I think that the new business and the effort we put in the new fully launched facilities will provide us a path to incremental margin. I'm more confident about that.

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

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That's good detail. So I guess is 4Q Supply Tech margin representative of what we should expect in the first half? Or was that a function of the December slowdown, and that's likely the worst of it?

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Patrick W. Fogarty, Park-Ohio Holdings Corp. - VP & CFO [29]

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I would say the latter, Steve. We saw volumes at very low daily sales levels in December -- end of November and in December. And as a result, that did have an impact on our margins significantly. And we're seeing our daily sales levels increase. So I'm optimistic that our margins will not repeat the levels that we saw in December.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [30]

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Got it. And you did talk about some of the new programs that you had launched in Assembly. Just as I think about production cuts, wherever they may be taking place on the automotive front, versus your product launches versus the China exposure, should I assume negative growth in the first half and more positive in the back half against easier comps? Or is it too early to kind of call a cadence in Assembly?

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Patrick W. Fogarty, Park-Ohio Holdings Corp. - VP & CFO [31]

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I think it's too early. We see production levels be at expected levels in the first 2 months of the year. Depending on how auto suppliers react and where product is coming from, I'd be hesitant to give a first half versus second half comparison right now.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [32]

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Understandable. And Pat, just for modeling, do you expect you can hold SG&A flat in dollars this year versus 2019 or maybe talk through any unusual spending or cost controls that will swing that either way?

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Patrick W. Fogarty, Park-Ohio Holdings Corp. - VP & CFO [33]

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Well, I think we have -- as we have in the past, reacted to reductions in volume by taking the necessary steps to reduce SG&A. So I'm confident we're -- the levels that we're at, we should be able to maintain or reduce throughout the year.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [34]

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Got it. And Matt, you talked to this to some degree already, but when you think about the diversification of ParkOhio and the initiatives that you have in place right now, is it fair to say you expect a more resilient earnings profile relative to whatever the top line does, whether you're up mid-single-digit or down single-digit next year?

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

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Yes, that's a good question. I -- yes is the answer to the question. I think that we -- let me say it this way. It's hard. I mean when -- you try to stress test the business a little bit and think about how it will react. Obviously, it's difficult to stress test an '09 circumstance because it's almost beyond comprehension. But when we look back, we look back at 2016, for example, and try to understand the implications to the business. And we do think that we're a different business even since then. The incremental dollars that we have added in revenue since then, in general, are at a higher margin, are often in a different end market like aerospace and defense we've been focused on the last couple of years. So yes, I do think that our profile even since '16 is more diverse and better margins.

So yes, I do feel pretty good about that. But it's pretty hard to model, to be honest with you. So that's why a lot of our focus right now is -- and it pivoted really towards the end of last year as industrial production slowed down, is a facility consolidation. We're doing 3 of them or have done 3 of them, focusing on expense. I mean we're investing in our business, and we're pursuing the strategic objectives we have been. But we clearly are more focused on expense control right now as we recognize that we're going to see. So we're going to manage this at the expense line. We're going to manage it at the margin line and -- but I do think we're a broader business. I do like where that incremental revenue's come from since 2016. And I think that puts us in a better position.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [36]

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Great. And just last one for me. I mean obviously, we can all see what's happening in the public market multiples, and it's happened really fast. Any comment on private market or what are bankers saying about the M&A environment given the volatility that we're seeing in the public markets? So is that affecting valuation and -- for M&A?

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Matthew V. Crawford, Park-Ohio Holdings Corp. - Chairman, CEO & President [37]

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I'll let Pat answer, but I'm going to tell you, I don't think anyone's had time to digest what's happened in the market. I don't -- I mean, there's clearly going to be, in my opinion -- it's funny. I forwarded Pat an e-mail or a comment I saw this morning from a large sort of M&A think tank talking about how buyers and sellers are going to have a hard time finding a common ground for a little bit for a while here. I don't think this has been fully digested or even partially digested. Pat, do you have any...

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Patrick W. Fogarty, Park-Ohio Holdings Corp. - VP & CFO [38]

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I agree, Matt. I think efforts to beef up due diligence to better understand end markets that potential companies have is going to be front and center. I think there's going to be delays in deals as a result, which will impact valuations.

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Operator [39]

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Our next question comes from the line of Marco Rodriguez with Stonegate Capital Partners.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [40]

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Most of my questions have been asked and answered. Just kind of want to follow-up, I guess in terms of your thoughts for fiscal '20. Understand, as everyone does, as far as the point of the guidance, but just wondering if you can talk a little bit about, to the best of your ability, what is sort of the base case you are thinking about in terms of government responses, economic demand as we kind of play out into fiscal '20? I mean it kind of sounds like you're -- you sound comfortable with where you are and where things might go, but then also as well, if that doesn't necessarily play to plan, can you maybe talk as far as how quickly you can pivot production from different facilities to other facilities if necessary?

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

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So let me first comment that, as I said before, I said we're -- now this is a rapidly changing situation. We didn't pull our guidance because we felt as though we didn't have a grasp of our current environment. As I've mentioned before, some of our most diverse businesses are -- have started the year and are very stable. And their -- the demand signals they're getting from their customers are stable. So other than oil and gas, we're not foregoing guidance because we don't feel good about where the business is today. We pulled it because well, obviously even after last night, the President got on TV and said, "Hold on a second here, this is a really big deal." So until we can digest that, it's very difficult for us to -- and we're ultimately going to digest it by what our customers tell us. But as we sit here today, other than that 1 segment, we're not really seeing a robust commercial deterioration of demand. So it's anyone's bet how that plays out.

I'm not sure I understood your question in moving production. I think I talked a little bit about moving some production potentially out of hotspots like Italy into other European facilities, but I'm not sure what that -- what you meant with regard to the question.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [42]

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Right. Well, I guess, what I'm trying to get at is I understand it's a very fluid situation. But I would assume that you guys have scenario tested or have some sort of scenario analysis where you have a certain anticipation of what governments may or may not do in terms of how economics sort of impact your overall business. And it sounds like again, based on what your clients are telling you thus far, that the impact is not as great, perhaps as the volatility that we might be seeing in your stock price. But if things were to pass where additional countries or additional areas of specific countries might be shut or quarantined, can you move production from one area or one region to another quickly? Or does it take a great deal of time?

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Matthew V. Crawford, Park-Ohio Holdings Corp. - Chairman, CEO & President [43]

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In general, our business model, which we've spent a lot of money developing, not entirely, but in most cases, has production either in-country or regional. So while there are instances in our equipment business I just mentioned where that is not entirely true, and we will need to adjust, and we're in the process of doing some of that adjusting, we are generally in a position to support with in-country activities. An exception might be Mexico. If they close the Mexican border, I think that that's a bit of Armageddon for the industrial world. So that issue aside, I'm comfortable.

Having said that, you asked a different question, which was about understanding the ramifications to our business and how to -- what could happen and where our opportunities and weaknesses are in our forecast, and we have sensitivity tested. We've looked to 2016 to understand what a recently passed industrial recession looks like. And so we understand where those weak spots are, and they'll be the first ones that we address or are already addressing. I don't know if that helps but.

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Operator [44]

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Our next question comes from the line of George Melas with MKH Management.

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George Melas-Kyriazi, MKH Management Company, LLC - President [45]

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Question about Engineered Products. Basically, you have 2 sort of reporting segments there and you're telling us that industrial equipment was roughly flat on a revenue basis, and EBIT was up a little bit, 40 basis points, which sort of means that the forged and machined product business was down significantly. So my sort of like basic calculations suggest that it's down, in revenue, $3 million to $4 million, but also in EBIT, $3 million to $4 million, and the EBIT margin is down 10 points. So you've had some softness in oil and gas there. You've had the Arkansas, sort of the big new press there. Can you give us more color on the decline in EBIT in that particular segment?

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Patrick W. Fogarty, Park-Ohio Holdings Corp. - VP & CFO [46]

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Sure, George. I can address that. So in the forged and machined products group, the oil and gas effect in our forged group as well as some decline in rail demand is significant from a contribution standpoint. So that did have a significant effect on our year-over-year EBIT margins. In our forging plant in Arkansas, as we ramped up production on our new press line in Arkansas, a significant amount of costs were unabsorbed because production levels were down. And so that -- those 2 things really are the cause of that drop in EBIT.

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

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George, this is Matt. I'll talk explicitly about the press -- they're both material to that number. So without sort of dividing it, I would tell you they're both material. We launched that press in -- during the fourth quarter. So I think in terms of performance, I think we saw a very poor experience there, to a large extent forecasted, but nonetheless, always challenging. Like any capital expense of that size, it will -- and project of that size, it will get better every day and get better every week. And it would be important to say that our best period of production on that press, not coincidentally, has been the last couple of weeks. So we're going to continue to get better every day on that as we launch a highly automated, significant forging asset.

And I am optimistic that it will -- while it was a drain on earnings, as expected, maybe a little more than we expected, unfortunately, it's in a good place, and it's progressing and getting better every day. So we are excited about that asset. We're excited about that investment. It's a little tough to forecast week-to-week or month-to-month, but the trajectory of where we're going is very positive. For us to start to really see the benefit of it, we're going to have to get to 2 shifts. We're 6 months away from that. But we're getting closer to making the first shift optimized. And that's, I think, our initial goal, and we'll be working on that through the first quarter, and that means the results are going to get a little better all the time.

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George Melas-Kyriazi, MKH Management Company, LLC - President [48]

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Okay. That's helpful. Can you sort of help us understand -- I'm sorry to be so focused on that particular issue, but it seems interesting to me and an opportunity to dig in. What's roughly the CapEx involved in that forging asset? And at 1 and 2 shifts, what's the revenue expectations that you have from that?

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Matthew V. Crawford, Park-Ohio Holdings Corp. - Chairman, CEO & President [49]

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I think -- have we disclosed the CapEx, the size of the CapEx before? We have.

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Patrick W. Fogarty, Park-Ohio Holdings Corp. - VP & CFO [50]

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Yes, George, the capital spend on that equipment was roughly $18 million, funded primarily by the State of Arkansas. And that's been ongoing over the last 2.5 years. We expect, as we do on all of our capital projects, to have an internal rate of return in excess of 25%. So we fully expect that to be in line. So we rarely drill down that deeply into the revenues and the profitability of an individual plant. But I think from the standpoint of do we feel good about that investment on a long-term basis, absolutely. And we continue to be confident.

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George Melas-Kyriazi, MKH Management Company, LLC - President [51]

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Okay. Great. And what verticals does that asset serve? Is it a pretty diverse group of customers or...

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Matthew V. Crawford, Park-Ohio Holdings Corp. - Chairman, CEO & President [52]

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Well, that's what's kind of exciting about it. Traditionally, that -- and remember, this is really a facility expansion, not really a new facility. Traditionally, that has been a high-margin dominant player in the rail industry. This press will give us the capacity we need, not only to support our position in that business, but also to be able to diversify into other markets. And there's a few that are top of list. Construction is one that we're rather excited about. Unfortunately, some of those opportunities later in the year also were in oil and gas, which may not materialize. So -- but yes, we're looking -- this will provide us the opportunity to not only back up our current portfolio of customers and business and products but also expand, and those are some of the targets.

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George Melas-Kyriazi, MKH Management Company, LLC - President [53]

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Okay. Great. And then just one question about Assembly Components. It seems that you were sort of impacted -- well, you gave us some very clear numbers about the impact of the GM strike and some of the launch delays. But absent that, if that had happened, that would have been a stellar performance. Your EBIT was 9.3%, and it seems like the impact, if it was $0.35, was like probably about $4 million. So it seems like that business, despite some of the issues that you may have in some of the couple of plants in China where we've invested quite a bit of money, but hopefully, we'll see the -- I'm sure we'll see the results later on, it seems like something is going well. So I just want to point that out and maybe ask you to comment on that.

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Matthew V. Crawford, Park-Ohio Holdings Corp. - Chairman, CEO & President [54]

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George, it's like -- we appreciate the softball. I know you didn't intend it that way, but, listen, the story...

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George Melas-Kyriazi, MKH Management Company, LLC - President [55]

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The first one was not a softball.

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

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No, no, no. I meant the second one. Listen, our story in that business is evolving as the revenue growth becomes more uncertain. I mean we have felt very strongly about the business -- the investments that we've made in that business, and we felt very good about the new business. We are coming to the conclusion that because of what's happened in China relative to the new business we expected to have launched by now, we've come to the conclusion that, given some of the headwinds on the Explorer, in particular, and others, that some of the net new business we expected is not materializing. And it may but certainly not anywhere close to the time line that we discussed.

Having said that, it's an excellent hedge, the new business, to any pressure or volatility in the current market. But where the story is evolving to is those investments are paying off at the margin line. So I think you began to see that through your work that you just did and the math you just did in the fourth quarter. And I think you're going to see it throughout the year. So absent significant changes in the SAAR, I think we got a good margin story going on there, whatever happens to the revenue line, is the bottom line. So yes, we're optimistic that the story has changed, but we still like the bottom -- we still like the story at the bottom line.

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George Melas-Kyriazi, MKH Management Company, LLC - President [57]

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Okay. Great. And then one quick question for Pat.

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

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And George, I'm going to add. I'm sorry. I can't resist. We're not talking about a lot today because we're doing a bit of a triage here about the fourth quarter and the lack of visibility. But remember, too, we're increasingly seeing content that we like and getting new orders that are focused on our extrusion group and some of this conversion to electrification and lightweighting. So we continue to add business that is at -- generally at higher margins than our old business. So that is a good thing that's happening slowly but importantly inside of those revenue numbers, even if they're not growing at the rate we'd like.

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George Melas-Kyriazi, MKH Management Company, LLC - President [59]

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Okay. Great. And then I like the comment you made, Matt, on the working capital because it seems like this year, revenue's sort of flattish, but working capital sort of consumed cash. And I know it's impossible -- I mean, it's -- we live in such a fluid world, but were revenue to be flat, Pat, would you expect working capital to make a positive contribution to cash this year? How do you see that?

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Patrick W. Fogarty, Park-Ohio Holdings Corp. - VP & CFO [60]

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Yes, absolutely, George. I think what we saw in 2019 when -- was really more about mix. Each of our segments use a different level of working capital. And the Engineered Products segment tends to use a little more working capital than the other segments. And that business was up. And so our working capital was skewed a little bit during the year. But absent that, in a flat year based on initiatives we have in place, I would expect working capital to provide cash.

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Operator [61]

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Ladies and gentlemen, this concludes today's Q&A session. I would like to turn the floor back to management for closing comments.

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

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Great. Thank you very much. I want to reassure everyone that we are not -- we're keenly aware and frustrated with what's happened to all of our investments recently and we are balancing our focus on doing the right strategic things for the business and then what I say to our team around here, which is investing through the cycle, but we're balancing that with a very clear eye toward some of the risks and the importance of managing cash flow and expenses in a potentially dicey situation. So we can walk and chew gum at the same time. We've done it before, but we recognize -- and this is a very frustrating time for all of us. And you can be assured that we'll redouble our efforts. So thank you for your support, and have a good day.

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Operator [63]

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Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.