Park Ohio Holdings Corp Q1 FY2026 Earnings Call

Good morning, and welcome to the Park-Ohio First Quarter 2026 Results Conference Call. The operator provided instructions to participants. 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 the relevant risks and uncertainties may be found in the earnings press release as well as the company's 2025 10-K, which was filed on March 5, 2026, with the SEC. Additionally, the company may discuss adjusted EPS, adjusted operating income and EBITDA as defined. These metrics are not measures of performance under generally accepted accounting principles. For a reconciliation of EPS, adjusted EPS, operating income to adjusted operating income and net income attributable to Park-Ohio common shareholders to EBITDA as defined, please refer to the company's recent earnings release. I will now turn the conference over to Mr. Matthew Crawford, Chairman, President and CEO. Please proceed, Mr. Crawford.

Thank you, and thank you all for joining our first quarter earnings conference call. I'm pleased with the momentum which is building across our business. Not only are we observing growth in many of our end markets, both traditional and new, this strength comes in products and services, which are our most durable and innovative offerings. We've worked hard to transform all aspects of our business over the last several years by carefully allocating capital toward our goals of faster growth, higher sustainable margins and more consistent cash flow. Our progress is beginning to connect to the results. We will continue to invest in people, products and processes where we can accelerate these changes. We are just at the beginning of seeing these improvements. Regarding our strategic review of Southwest Steel Processing, we will respect the long-term contributions of our partners and associates who have created incredible value over the last 25 years. This fully automated forging site is one of the finest of its type anywhere, and we will find a way to optimize the hard work and investment of the Southwest Steel Processing team while improving the overall results of Park-Ohio. Thank you to all of our associates for their contributions to the start of 2026, and I look forward to answering questions after Pat reviews the quarter. Thanks, Pat.

Thank you, Matt, and good morning. Overall, our first quarter results exceeded our expectations and are highlighted by sales growth across all three of our business segments on a year-over-year basis and sequentially. Sales in the quarter totaled $421 million compared to $405 million a year ago, an increase of 4%. Sales growth in Supply Technologies was driven by increased customer demand in several key end markets. In our Assembly Components segment, sales growth of 3% was driven by new program launches throughout last year and increased year-over-year demand from various automotive platforms in each of our product lines. In Engineered Products, sales growth was 4% year-over-year, driven by strong capital equipment demand from several end markets in North America and Europe and continued strong aftermarket demand. Our consolidated gross margin was 17.3% in the quarter, up 50 basis points compared to a year ago, driven by flow-through from the higher sales levels and profit enhancement initiatives implemented in several business units. Excluding restructuring and other special charges of approximately $1 million in both periods, consolidated operating income was $21 million, up 6% versus last year. Sequentially, adjusted operating income increased 4% compared to the fourth quarter. SG&A expenses were approximately $52 million or 12.3% of sales compared to 11.9% of sales a year ago. The percent to sales increase was driven primarily by general inflation and increases in personnel costs. First quarter interest costs were $1.3 million higher than a year ago due primarily to the higher interest rate on our senior notes that we refinanced in the third quarter of last year. The increase was partially offset by lower interest rates on our revolving credit facility compared to a year ago. Our effective income tax rate improved to 17% in the quarter compared to 20% a year ago, driven by higher estimated federal research and development tax credits. We expect our full year effective income tax to range between 17% and 20%. GAAP earnings per share from continued operations for the quarter was $0.58 per diluted share and on an adjusted basis was $0.65 per share, both exceeding our internal expectations due to higher levels of segment operating income. During the quarter, cash flow from operations was a use of $8 million to fund working capital, primarily to support sales growth during the current year. Capital spending totaled $12.5 million, which included investments in information systems, automation equipment to help drive higher levels of profitability and improve plant floor efficiencies and growth capital. We expect our full year CapEx to be approximately $35 million. Our liquidity continues to be strong and totaled approximately $200 million at the end of the quarter, which consisted of approximately $47 million of cash on hand and $153 million of unused borrowing capacity under our various banking arrangements. Turning now to our segment results. In Supply Technologies, net sales totaled $195 million during the quarter compared to $188 million in the first quarter of last year, an increase of 4%. Higher sales were driven by strong customer demand in powersports, semiconductor, aerospace and defense, electrical and agricultural end markets. Our supply chain business continues to benefit from the increased demand from the semiconductor, technology and data center sectors, which in total increased 13% year-over-year. In addition, aerospace and defense demand in the first quarter continued to be strong and increased 15% year-over-year. We expect continued growth in these end markets throughout the year in addition to improved demand from certain industrial end markets, such as heavy-duty truck and consumer end markets as they recover from historically low levels in the prior year. During the quarter, the construction of our new state-of-the-art North American distribution center remained on track and is expected to be operational in the third quarter of this year. We believe this distribution center, once fully operational, will result in a highly efficient service center with automated sorting, kitting and packaging and provide additional value-added services to our customers. Our fastener manufacturing business performed well in the quarter. Net sales grew 18% sequentially and were slightly down compared to sales in the prior year quarter. Global customer demand for our proprietary products is expected to grow, resulting from the expanded use of lightweight materials and global production of electric and hybrid vehicles. Adjusted operating margins continued to be at historically strong levels and were 9% during the quarter, slightly down compared to last year, primarily due to product sales mix and higher personnel costs. In our Assembly Components segment, sales for the quarter totaled $100 million compared to $97 million a year ago, an increase of 3%, driven by new product sales launched last year in each product line and higher customer demand from various automotive platforms. Adjusted operating income in the quarter totaled $5.3 million compared to $5.5 million a year ago. And compared to the fourth quarter of last year, sales increased approximately 10% and adjusted operating income increased 23%. We continue to focus on improving operating margins in this segment. Several initiatives such as increasing our rubber mixing production to support sales growth of our molded and extruded products and plant floor automation investments are expected to improve segment operating margins. In our Engineered Products segment, sales of $126 million reached their highest quarterly level in recent years and were up 4% compared to last year and up 8% sequentially compared to last quarter. The increase in sales was driven by our industrial equipment group, which continues to maintain strong backlogs. Higher sales of new equipment in North America and Europe and strong customer demand for aftermarket parts and services resulted in a very strong quarter for our industrial equipment business. The increased capital equipment sales in the quarter were driven by strong customer demand in defense, steel production, data center, oil and gas and industrial cooling end markets. New equipment bookings were strong in the quarter and totaled approximately $62 million in the quarter compared to a quarterly average bookings of $54 million last year, an increase of 15%. Backlogs as of March 31 totaled $196 million compared to $180 million last quarter, an increase of 9%. During the quarter, our adjusted operating income in this segment improved 35% compared to a year ago to $6.2 million and increased $3.6 million from the fourth quarter of last year. This segment is experiencing strong demand from the aerospace and defense, power generation, steel production and data center sectors. Key products supporting these high-growth end markets include transformers, power generators, induction heating and forging-related equipment and pipe bending equipment. For example, our industrial equipment, which includes induction hardening and melting and forging-related equipment, is used to support a broad range of defense-related activities, including the production of munition shells, armored plate and the hardening of high-strength defense materials. And finally, within this business segment, we commenced a formal review of strategic alternatives for our Southwest Steel Processing business, which is included in our forged and machined products group. We have engaged an investment banking firm to assist us with our review, which may result in an ultimate sale of this business. With respect to our first quarter results, adjusted earnings from continuing operations, excluding Southwest Steel, would have increased from $0.65 per diluted share to $0.77 per diluted share. Turning now to our full year guidance. We are reaffirming our outlook provided last quarter, including net sales of $1.675 billion to $1.710 billion, an increase of 5% to 7% over last year. Adjusted EPS of $2.90 to $3.20 per diluted share, an increase of 7% to 19% over last year. EBITDA as defined of 8% to 9% of net sales and free cash flow of $20 million to $30 million. This outlook includes the impact of Southwest Steel, which is expected to generate $17 million in revenue and a net loss of $0.53 per diluted share. The outcome of the strategic review process with respect to this business represents potential upside to our current guidance. Now I'll turn the call back over to Matt.

Great. Thank you very much, Pat. And now we'll open up the line for questions.

The operator provided instructions to participants. Our first question comes from Steve Barger with KeyBanc Capital Markets.

This is Jacob Moore on for Steve today. First one from us is on backlog. It's really nice to see that up strongly again. I think you gave some pretty good color on the end markets that's coming from, which seems pretty broad. Do any one of those end markets stand out to you right now? For example, are defense orders coming in stronger than usual or electrical infrastructure? Any color you could give there?

Yes, Jacob. I would comment, all of the above. Historically, our capital equipment business was very strong in automotive and steel production. What we're seeing now is continued interest in using our equipment for aerospace and defense applications and for data center-related activities. In the first quarter, we also saw an uptick in bookings relative to the oil and gas sector, which historically has been at low levels. We're excited about the diversity of the orders we're getting and the quoting activity from many different end markets compared to historical end markets.

Jacob, I'll add that some of these jobs take a while to complete. The backlog still contains a significant amount of strength in battery steel and some of the big orders we talked about recently. There's been a nice migration, as Pat mentioned, to other industries, which typically can be smaller dollar amounts but can be executed more easily. That's a good rotation. We value the big jobs and the innovation around battery steel, but a more diverse set of customers and some smaller jobs is great for our product mix. We also talk a lot about power management these days. A big part of our business is making power supplies and transformers. While we started in the more difficult places to learn the business, like heating and melting of steel and other conductive metals, increasingly we're seeing demand from customers who understand how to manage large amounts of power and need components like transformers. The backbone of this business is the induction business, but power supplies are important as well.

That makes a lot of sense. Matt, to your point about longer-dated projects, could you give us a sense for the expected conversion timeline of the backlog? How much is shippable in 2026 versus 2027 and beyond?

Great question. Our speed of execution is better today than it's been in several years. I've talked in the past about good backlog and bad backlog. We're in a much better position regarding execution than before. We've made important investments in people and process at our key locations. That said, a number of projects, particularly the battery steel project, will take a couple of years to fully complete. On average, the completion time is about nine months. Pat, would you agree with that?

Yes, Jacob. The diversity of our brands allows us to manage production in several manufacturing sites, whether in North America, Italy or Spain. That enables quicker turnover. Nine to twelve months is a reasonable production timeline for the backlog we currently have.

That's really helpful. One more: you said you're in the early innings of electrical infrastructure spending. Could you help paint the picture for what the middle and late innings could look like for Park-Ohio?

I'll let Pat address that end market since it's grown so explosively. When I said early innings, I meant more broad-based activity than just electrical infrastructure. We're seeing stabilization and increasing demand across several end markets, including aerospace and defense. I'll let Pat add numbers.

Going back three years, we saw very little activity on the electrical side in both Supply Technologies and Engineered Products. Today, that revenue base starts at about $150 million and continues to grow north of 10% per year. It's unclear how much it could grow over the next five years, but the market indicates strong demand for our products in both Supply Technologies, where we support switchgear manufacturers needed for data center build-outs, and in Engineered Products, where we provide power management equipment and components for cooling systems used in data center activities.

The operator provided instructions to participants. Our next question comes from the line of Dave Storms with Stonegate.

I wanted to start with consolidated margin on an adjusted basis. You've talked about some Supply Technologies automation initiatives. Any color as to the timeline to complete those and what that could do to consolidated margin?

We're on the front edge of a multiyear investment cycle around people, process and information technology. We have not yet seen much, if any, impact from those investments. I'd view material margin improvement from those initiatives as more of a 2027 opportunity. We may see a little benefit later this year, but the primary benefits are expected in 2027 and beyond. These are durable investments that fundamentally change how we manage information and go to market for customers, as well as the value-add on the operations side.

Understood. And you mentioned some changes in Assembly Components between program launches last year. What are you seeing in terms of customer acquisition or new business for the remainder of 2026, given those program launches and potential for increased volumes?

In the Assembly Components segment, given the active quoting activity and the launches of new business that we're seeing—business launched in 2025 and new business launched this year—I would not expect acquisition activity within that segment. The products in that space include fuel filler-related products, fuel rail products, molded and extruded rubber products, and we see tremendous opportunities to grow organically. Our current initiatives around margin enhancement are critical, and we remain focused on that.

I'll add that we are always looking for highly accretive, thoughtful acquisitions. Assembly Components has been extremely focused on product innovation, vertical integration and new business launches. There has been a challenging environment with major OEM launches, supply chain disruptions such as the Novelis fire affecting the Ford F-150 and the shifting landscape for EVs in Europe and China. We're working through those product launches and the operating leverage in that business is teed up. We view the latter half of this year as very promising. While we remain open to the right acquisition, our best opportunities are in front of us given the investments we've made and the new business launches being mobilized.

Understood. I apologize for the wording earlier. One more: with the fire and the geopolitical events, are you seeing any supply chain ripple effects impacting your ability to procure materials?

Broadly speaking, the primary impact we've seen so far is increased freight costs. Those are real and require being addressed, sometimes within customer relationships and sometimes separately. If geopolitical events continue, we could see more material impacts to availability, but we're not hearing that from our supply base at this point.

The operator provided instructions to participants. Our next question comes from the line of Steve Barger with KeyBanc Capital Markets.

I have a couple on the Southwest Steel strategic review. The EPS drag you called out seems pretty stark. Do you think the business can transact at the $45 million asset value you called out? Relatedly, if it doesn't transact in an acceptable timeframe, is there a plan B for getting out or downsizing it over time?

We're at the beginning of that journey, not the end, so I'm reluctant to say more. I want to emphasize that over 25 years, the first two decades of that business were profitable and meaningfully accretive to margins. The business model is strong, with two fully automated forge lines. We have been impacted by a depressed rail market for an extended period, and efforts to expand the product offering have not moved quickly enough. This is a good business with valuable equipment, strong employees and long-term partners. The purpose of disclosing the strategic review was to be transparent about the current earnings drag and to indicate that we understand the magnitude of the impact. I will also say the business is improving and we are executing at a higher level. I don't have a definitive answer today, but the business has inherent value and we will pursue the right path.

If it does transact, would proceeds go to debt pay down? More broadly, what are your thoughts on incremental capital allocation going forward?

Reducing leverage is a key priority for the company. We have set an intermediate goal of 3x net debt to EBITDA. We will not forego critical investments in the business; we are spending between two to three times our maintenance capital for certain investments. Our management team is focused on allocating capital toward reducing leverage while continuing to invest in the business. We have ample liquidity, but reducing leverage remains an important priority for our shareholders and our management team.

There are no further questions at this time. I would like to turn the floor back over to Matthew Crawford for any closing remarks.

Great. Thank you very much for the questions today and for your attention and most notably your support of Park-Ohio. We are quite anxious to continue through this year. Thank you.

This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful rest of your day.