Greetings, and welcome to the Park-Ohio Holdings Group Corp. Third Quarter 2025 Results Conference Call and Webcast. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Chairman and CEO, Matt Crawford. Please go ahead, sir.

Thank you, Kevin, and welcome to our third quarter call. Our third quarter was marked by our ongoing transformation into a more efficient and predictable business throughout the business cycle. While demand was mixed in various end markets, particularly in the U.S., where we generate most of our sales, we were able to maintain consistent operating profit and margin performance. Though we do not expect a significant rebound in demand during the fourth quarter, we aim to build on our initiatives as we head into 2026 and will also benefit from new business and robust backlogs. We talk a lot about transformation, and I want to clarify what this means as we progress towards 2026. Our transformation started several years ago when we re-evaluated our capital allocation strategy and divested assets that were underperforming or not suited for a higher-growth, higher-margin, and less capital-intensive business. We then prioritized investment in areas where we see substantial opportunities for operating leverage and established competitive advantages. While this approach allowed for some acquisitions, we have increasingly focused on long-term competitive strength, the right products and services, and building customer partnerships. In 2025, we have witnessed this transition take effect. While the mixed demand signals from our diverse customer base have somewhat tempered the enhancements in our operational execution and earnings quality, we recognize the improvements and have seen a steadier stream of earnings results despite the volatility. We firmly believe that 2026 will be another crucial step forward as we integrate these productivity improvements with new business and strong backlogs. Additionally, we anticipate accomplishing these goals while significantly reducing our debt during the fourth quarter and continuing that trend into 2026. I want to express my gratitude and commend the efforts of our entire Park-Ohio team as we navigate today’s challenges while looking forward to the exciting times ahead. Pat, can you cover the third quarter, please?

Thank you, Matt. Our third quarter results were generally in line with our expectations for the quarter given the mixed industrial environment, and we continue to see positive trends in each of our business segments. Before I get into the details of our third quarter results, I want to provide a few highlights achieved during the quarter. First, as we previously announced, we refinanced both our senior notes and our revolving credit facility, extending maturity dates by 5 years and strengthening our balance sheet and liquidity. We incurred bond-related expenses of $2 million related to the redemption of our previous bonds, including a noncash write-off of unamortized costs. These expenses reduced our GAAP earnings during the quarter by $0.11 per share. In connection with the refinancing of our bonds, we received upgraded ratings on the new senior secured notes from Moody's, S&P Global and Fitch Ratings. Second, we continue to make strategic capital investments in new technology and information systems, capacity expansion and margin improvement initiatives. These investments will enable sales growth and higher profitability in the future. And finally, new equipment orders in our industrial equipment business continue to be very strong with new bookings and backlogs at record high levels at most locations. Our business strategy focuses on end market and application diversification beyond traditional end markets. Most notably, we continue to see strong order activity in the electrical steel processing to support both expanded application usages and electrical grid infrastructure and in the defense markets for munitions and shell production and armored vehicle protection plating. Bookings year-to-date are highlighted by an order from a major steel producer totaling $47 million for induction slab heating equipment for high silicon steel production. Further enhancing the strong demand for our induction products is our global operational footprint, enabling our customers to diversify their supply chains with local content to help minimize their risk and reduce their overall costs. Backlogs as of September 30 were up 28% since year-end and are expected to remain strong heading into 2026. Turning now to our third quarter results. Third quarter revenue totaled $399 million and was stable in each business segment sequentially. The year-over-year sales decline was a result of lower end market demand, most notably in certain North American industrial end markets, which more than offset growth in Europe, where demand from electrical end markets continues to be strong. Third quarter gross margins of 16.7% were slightly below prior year's gross margins, demonstrating our pricing discipline and operational consistency despite modest volume pressure in certain end markets. Adjusted EPS was $0.65 per diluted share in the quarter compared to $0.66 in the first quarter and $0.75 in the second quarter of this year. Results in the third quarter underscored cost control and productivity gains, offsetting higher interest expense of $1.1 million from our new senior secured notes, which reduced adjusted EPS by $0.07 per diluted share. We generated EBITDA of $34.2 million in the quarter. As a percentage of net sales, our EBITDA margin was 8.6% in the quarter. On a trailing 12-month basis, our EBITDA as defined totaled $140 million. In the quarter, we recorded an income tax benefit on pretax income of $4.5 million, driven by ongoing federal research and development credits and other discrete tax items. We expect our full year effective tax rate to range between 13% and 16%, reflecting the positive impact of ongoing tax initiatives. During the quarter, our working capital initiatives drove positive operating cash flow of $17 million compared to $9 million last year. We are currently estimating fourth quarter free cash flow to be strong and range between $45 million to $55 million. Full year free cash flow is estimated to range between $10 million to $20 million, driven by reduced working capital levels in each business. Our liquidity continues to be strong and totaled $187 million as of September 30, which consisted of approximately $51 million of cash on hand and $136 million of unused borrowing capacity under our various banking arrangements. Turning now to our segment results. Supply Technologies net sales of $186 million in the quarter were in line with sales in both the first and second quarters of this year. Sales were down compared to a year ago as lower customer demand in certain key end markets, including industrial equipment, bus and coach and consumer electronics, partially offset increases in electrical, heavy-duty truck, semiconductor and agricultural end markets. Geographically, total sales in Europe were stronger year-over-year, but were offset by lower sales in North America and Asia on a year-over-year basis. Our proprietary fastener manufacturing business performed well in the quarter despite a slight decline in demand for its proprietary products, primarily in North America. Adjusted operating income in this segment totaled $18 million, an increase sequentially compared to last quarter and a decrease from $21 million in the prior year due to lower year-over-year sales. Adjusted operating margins increased 100 basis points to 9.9% in the current quarter compared to 8.9% last quarter and down from 10.5% a year ago. The overall operating margins in this segment continue to exceed historic levels due to efforts to improve operating efficiencies in our warehouses and manufacturing plants around the world. During the quarter, we completed the consolidation and expansion of certain facilities in the U.K. and Ireland in support of expected growth in the electrical distribution market, supporting the data center build-out. We recorded $1 million in expenses related to these activities and have added back these one-time nonrecurring costs to arrive at adjusted earnings per share. We expect further expansion resulting from investments to optimize warehouse operations and manufacturing capacity around the world. Although current demand in several end markets has remained stable to slightly down year-over-year, we expect improved demand trends and average daily sales levels in 2026 in certain end markets, including power sports, agriculture, semiconductor, consumer electronics, and aerospace and defense. In our Assembly Components segment, sales improved sequentially to $97 million in the quarter. The sequential improvement compared to last quarter reflects increased production and new program launches beginning to ramp up. Segment adjusted operating income was $6 million compared to $6.1 million last quarter and $6.6 million a year ago. In this segment, we continue to win new business in each of our product lines, which includes fuel filler and fuel rail products and molded and extruded rubber and plastic products. We are currently launching over $50 million of incremental business across all product lines throughout 2026. During the quarter, we incurred costs to expand our production capacity, improve asset utilizations and expand our rubber mixing capacity to accommodate the sales growth in each of our product lines. These nonrecurring costs are added back to arrive at our adjusted earnings in the quarter. In our Engineered Products segment, sales were $116 million compared to $124 million a year ago, with the decrease driven by lower demand in our forged and machined products business and lower levels of production in our industrial equipment facilities in North America and Asia. Aftermarket sales remained strong during the quarter throughout most of our global service centers. In our Forged and Machined Products Group, the lower sales were driven by lower railcar demand and the closure of a small manufacturing operation last year. New equipment bookings were $174 million in the first 9 months of the year. And as I mentioned, we expect to achieve record annual bookings exceeding $200 million this year. Our capital equipment backlog continues to be strong, totaling $185 million, an increase of 28% compared to backlogs at the end of last year. In addition, order intake from aerospace and defense and power generation customers continues to be strong in our forging plant in Ohio. During the quarter, adjusted operating income in this segment was $3.7 million compared to $5.2 million a year ago. The decrease in profitability in the quarter was a result of the lower sales levels in our forged and machined products business. We continue to implement plant floor improvements in this part of our business and our 2 forging plants, which will drive higher margins as sales volumes improve. I'll conclude my comments with an update on our current expectations for the full year. We expect full year 2025 net sales to be in the range of $1.600 billion to $1.620 billion and adjusted earnings per share to be in the range of $2.70 to $2.90 per diluted share. We also expect full year free cash flow to be in the range of $10 million to $20 million and fourth quarter free cash flow between $45 million to $55 million. Now I'll turn the call back over to Matt.

Thanks, Pat. We'll now open the floor for questions.

Our first question is coming from Steve Barger from KeyBanc Capital Markets.

This is actually Christian Zyla on for Steve Barger. First question, kind of a 2-part question. First, how are you accounting for the recent large orders in your EP backlog? Is that percentage of completion or completed contract? And then maybe just broader, do you expect that large order from last quarter to be largely delivered in '26? I guess that would imply double-digit growth rate in EP, assuming a steady business otherwise. So can you just help us square that circle and how you're thinking about EP?

Absolutely, Christian. This is Pat. Our contracts in that part of our business are accounted for using the percentage of completion method. So as it relates to the large order of $47 million, it represents 5 pieces of equipment. We expect 3 of the 5 to be recognized during the course of 2026, with the latter 2 in the following year in 2027.

Christian, I would just add that I think we said it a lot, but I want to be crystal clear. We are seeing electrical infrastructure, industrial electrification, whether it be the single order we talked about or a myriad of orders related to graphite and other things that are important to, again, the grid and battery technology are underpinning significant growth in this business, not just around that one order, around a myriad of orders globally. So this is a very, very exciting part of our business, and we will see it begin to impact maybe a little bit at the end of the year, but really into 2026 and beyond. This is not something that is stopping. This is something that is beginning. So we feel that, that big order is really important, but also symbolic for what is happening in industrial electrification where we are extremely well positioned, both from an OE perspective and an aftermarket perspective. So this is one of the most exciting. And I think, as you know, why we have focused in our transformation a fair amount of energy around our business that focuses on this. But as Pat points out, these things are not built overnight. Even if you take percentage of completion, it will be a little bit choppy, but we'll begin to see the benefit of it clearly going into 2026.

Completely understood. And I guess with those comments, just doing the math, I think $50 million of orders this quarter for EP solid momentum. The backlog is at, I think, record highs from what we can see. So I guess a question on that is with the orders that are coming in the new business and part of EP's margin performance in this quarter, are you having margin pressure from some of those front-end investments of your projects? Does that abate as we go into '26 and '27 as you see that business ramp? Or just how should we think about the ramp of those contracts in that business related to the margin cadence?

No, that's a great question. I need to emphasize transformation. To clarify, the value stream we are discussing includes not just graphite and steelmaking, but also mining, rare earth mineral mining, and companies that produce mining equipment. The distribution of the value stream and the benefits we are seeing are significant. We haven’t seen much activity in mining for a while, but that is changing. There seems to be a shift in our order book as well. Additionally, I would point out the defense sector as another area where a transition is occurring in our orders. This year, particularly in the third and fourth quarters, we have focused on filling our order book and preparing for future demand by onboarding staff and making our facilities ready for what we anticipate will be a substantial period of activity. We've also been clearing out some older projects that faced challenges. I do sense there has been margin pressure, not from customer or market issues, but as we prepare our business for what we expect will be a significant workload from our backlog. Furthermore, we are observing strong performance in the aftermarket, which supports our transition as we modernize key facilities in Europe. While we are experiencing cost pressures from onboarding new staff and investing in facility upgrades, the pipeline is much larger than just a single order. You can see that reflected in the order book, which encompasses not just steel but all parts of the value stream, including defense and more.

Got it. And then if I could just follow up on that. Do you expect that margin pressure to then flip into a benefit in parts of '26? Or is that a '27 event? Just how should we think about it in terms of the ramp versus the execution of the contract and when that business starts kind of flipping and performing as you expect?

Yes, this is Pat again. Margins are expected to improve as each contract is priced individually. We are estimating our end margin for each job under the percentage of completion method and recognizing this as we complete the work. Additionally, with strong margins in aftermarket sales, we believe that margins in our industrial equipment segment will continue to rise. Historically, this segment has had the highest margins for our business. The repricing of new jobs and various value drivers that we are implementing in our manufacturing facilities globally will certainly contribute positively to future margins.

Christian, I want to be careful not to exaggerate. While I hesitate to be negative, some of the jobs that have affected profitability in 2025 are linked to orders made one or two years ago, which faced challenges such as inflation, execution, and labor. Currently, we aren’t seeing those risks in the marketplace. Regarding tariffs, they benefit us, not just in terms of our customers' health, but also because our global footprint makes us very adaptable compared to our competition regarding where and how we manufacture our products. All of these factors contribute positively to margin growth. As Pat mentioned, this business has historically operated at a 10% margin, and there’s nothing indicating that the situation today is worse. The mix of aftermarket services is better, margins are solid, and our customer relationships are strong. Our operational locations are suitable and cost-effective. We are investing in modernizing some of these locations, which is encouraging. This is an exciting time for us. Therefore, I expect to see significant progress in 2026, and not just at the end of that year.

Great. I appreciate that answer. If I could sneak in one more, and we appreciate you letting us take the time for the questions. But just last question on free cash flow, Pat. Your guide of $45 million to $55 million would be a record free cash flow quarter. Can you just talk about what's embedded in that expectation? I mean, is that largely working capital benefits, less CapEx that quarter? And then just what drove the overall difference or reduction from last quarter?

No problem. Let's discuss the decrease in our guidance. Previously, we projected $65 million for the second half of the year. Our updated forecast for the quarter reflects a reduction in the third quarter results, which amounted to $7 million in free cash flow. Across all our businesses, we have observed year-over-year growth in working capital, mainly in receivables and somewhat in inventory. In the fourth quarter, we are focusing on collecting receivables and managing various working capital elements. Management at Supply Technologies is scaling back on receipt activities, which should decrease inventory levels in line with the revenues expected in the fourth quarter and the first quarter ahead. More importantly, we are effectively reducing the number of days inventory is held and improving lead time management. Last year, faced with tariff threats, there was significant pre-buying and excessive ordering by our suppliers, leading to high inventory levels in the first half of the year. Now, we are witnessing a marked reduction in lead times, contributing to a decrease in days on hand and inventory levels, and this trend began in the third quarter with a more pronounced drop in the fourth quarter.

Christian, I would frame it differently as well. Historically, we are still not achieving the necessary level of working capital efficiency. The fourth quarter is a step towards correcting that, although it's not enough to reach our goals. There are no underlying fundamental issues causing this; as Pat mentioned, it's related to our customers’ actions regarding tariffs, variations in demand planning, and delays in new product launches that we expect to materialize as we move into 2026. These factors have contributed to our less efficient management of working capital compared to the past. However, we anticipate significant progress, driven partly by new product launches and improved clarity regarding tariffs and supply chains. Additionally, while we don't foresee a substantial economic upturn, companies are becoming more adept at managing their supply chains.

Next question is coming from Dave Storms from Stonegate.

I want to start at a high level here. The latest potential macro headwind is this government shutdown domestically. Are you seeing any impacts of that ripple through to your business lines?

I don't have any specific examples of that. We know it can't be positive. As you know, Dave, we've observed considerable strength across the business from defense. I'm sure it has slowed down some of the internal processes related to major orders or updates and changes, which are the kinds of things that happen daily behind the scenes. I don’t want to imply that we aren’t experiencing some adverse effects, but they aren't significant enough to warrant detailed discussion.

That's perfect. I just wanted to check to see if...

No, it's a great question.

Moving on, I did want to touch on Supply Tech, too. It sounds like you're seeing some volume pressure in a couple of end markets and a couple of different geographies. But it seems like pricing is still holding up. How sustainable do you think this is? Do you feel like we're maybe reaching an inflection point where margin can maybe get back to growing further in Supply Tech?

I believe we performed exceptionally well last year in managing pricing, and we've handled this year's tariff exposure quite effectively. Currently, our focus is on strategic initiatives aimed at driving growth, which will provide the operating leverage we know is available in the business, enabling us to reach higher levels. We've also made transformative investments that will significantly impact our costs and our market approach. I frequently discuss our competitive long-term advantages, and the infrastructure investments we are implementing for product distribution and data management will be important for years to come. There's potential for improvement on the margin side, but it's important to note that right now it's more about enhancing our competitiveness and achieving the operating leverage that comes with increased volume. Managing volatility is challenging in any business; it's not just about major fluctuations but also the month-to-month inconsistencies. When we observe generally lower build rates across Industrial America adjusted for inflation, that's one aspect, but the ongoing volatility is particularly difficult to navigate. This year has seen a considerable amount of that. I commend the Supply Tech team for their ability to adapt to rapid changes, such as shifts from flat to down 10% one month to up 10% the next. It's a complex situation rather than a straightforward decline in performance. Overall, it has been challenging to manage this year, especially with expectations for a robust performance in 2026. So we have to consider that as well.

Understood. That's great commentary there. And just kind of sticking with that, as you're adding improvements of macro theme for the last year or so has been the implementation of AI. Are you seeing any areas to strategically implement AI to further enhance your operations?

We can spend considerable time attempting to define AI, but I want to say a definite yes in one specific way and then open up a discussion. Our investments in information technology over the past few years, which now involve utilizing AI for data cleaning, data management, and data management tools, have been foundational in positioning ourselves for some of the AI use cases we are encountering. When I consider the business improvements we expect in 2026 and the efficiencies we will achieve, much of that relates to how we manage data differently and the quality of data we have in the business today. This is especially true in supply technology, which fundamentally operates as a data-driven business. We are starting to see the advantages and the building blocks for some use cases that will drive efficiencies. We do observe incremental improvements in this context, and as we develop better and broader use cases throughout the business, it will present a larger opportunity for us. However, the current benefits are primarily related to data management, whether AI is involved or not.

Understood. And then one more for me, if I could sneak it in here. you pretty explicitly mentioned that your outlook for 2025 is meaningful cash generation with the goal of debt reduction. Are there any metrics that you could put around that debt reduction maybe in terms of market debt levels or timelines?

Yes. Well, the debt reduction as a result of the strong free cash flow in the quarter, clearly will happen. When you look at the amount of the free cash flow for the full year, $10 million to $20 million after the payment of our quarterly dividends, you can extract the debt reduction from that. So it's roughly $5 million to $10 million year-over-year. And as we step into next year and expect an improvement in free cash flow, that debt reduction will increase.

But explicitly in the fourth quarter, the end of this quarter, what do we expect to reduce debt?

Of the $45 million to $55 million, we would expect $35 million to $45 million of debt reduction.

Yes, that's, I think, the answer to your question.

Quarter-over-quarter.

Quarter-over-quarter, we're expecting $35 million to $40 million of debt reduction from free cash flow.

We reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

Great. Thank you all, and thank you for your very important questions. It allowed us, I think, to highlight some of the positive changes happening in the business. We look to not only close out the year strong, but also to begin to set the table as we are for a really successful 2026. Thank you for your time today. Bye-bye.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.