Earnings Call Transcript
PARK OHIO HOLDINGS CORP (PKOH)
Earnings Call Transcript - PKOH Q2 2021
Operator, Operator
Good morning, and welcome to the Park-Ohio Second Quarter 2021 Results Conference Call. 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 2020 10-K, which was filed on March 5, 2021, 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 Park-Ohio common shareholders to EBITDA as defined, please refer to the company's recent earnings release. I will now like to turn the conference over to Mr. Matthew Crawford, Chairman, President and CEO. Please proceed, Mr. Crawford.
Matthew Crawford, CEO
Good morning, and thank you for joining us. I have Pat Fogarty, our CFO, with me. And after some comments, we'll open the line for questions. While we're pleased with the continued broad-based rebound in revenue across our business and end markets, the second quarter was frustrating as we managed a complex backdrop of challenges. Supply chain challenges, most notably related to semiconductor chips and our auto business, not only caused a significant reduction in revenue for the quarter, but perhaps more daunting caused weekly volatility in demand that created significant inefficiencies in our manufacturing facilities. In addition, availability of labor and labor costs were daily challenges across our North American footprint and exacerbated the difficulty of locations, which were seeing increased demand from their customers. Lastly, increases related to inflation and raw materials and freight continue to put pressure on the current period profits. Most of these challenges we discussed during the first quarter call; however, the size and speed with which they continued in the second quarter, especially in automotive, was more significant than we had anticipated. Having said that, our team continues to address these challenges with urgency. And although it may be difficult to see in the results, our strategies around pricing, continuous improvement activities, reducing costs through investment and utilizing our flexible manufacturing footprint continue to pay dividends. Pat will outline some of the specifics, but we anticipate that we have worked through some of the most challenging issues and will return to a more normalized profitability environment as the year progresses. On a more positive note, new business awards continue to outpace budget across our company. Notably, our Engineered Products segment has seen robust booking activity during the quarter. Recovery in this segment has taken longer than we hoped, but we have confidence that this segment, which has historically led our business and margins will make meaningful progress during the remainder of the year. I want to thank the entire Park-Ohio team. While these results are not what we have worked for, I'm proud of the way we have worked tirelessly supporting our customers and helping each other during a quarter filled with unexpected difficulties. With that, I'll turn it over to Pat.
Patrick Fogarty, CFO
Thanks, Matt. Our second quarter results reflect continued end market strength in our Supply Technologies segment, the impact of the semiconductor chip shortage, increasing raw material and labor costs in our Assembly Components segment, and strong bookings of new orders in our Engineered Products segment. Our consolidated net sales of $350 million in the quarter were up 53% compared to a year ago as demand levels in 2021 have substantially recovered from the low demand levels from a year ago caused by the pandemic. On a sequential basis, net sales in Supply Technologies were consistent with first quarter levels, and net sales in our Engineered Products segment increased 13% in the second quarter. The overall decline in second quarter sales compared to the first quarter was driven by the impact of the semiconductor chip shortage on product sales in several key OEM platforms, including the Ford Explorer and F-150, the Jeep Cherokee, and the Chevy Equinox, which impacted our Assembly Components segment. GAAP EPS for the quarter was a loss of $0.44, and adjusted EPS, which excludes primarily plant closure and consolidation costs, was a loss of $0.33. Our operating loss in the quarter was a direct result of the chip shortage, which caused significant volatility in certain facilities where volumes on key platforms fluctuated widely from week to week. We estimate the impact on our net sales in the quarter was $24 million, resulting in an EPS impact of approximately $0.55 per share. The EPS impact was a result of the low production levels in certain facilities, the labor inefficiencies caused by the demand volatility and labor shortages, and the low fixed cost absorption levels. In addition, significant raw material increases, most notably rubber compounds used in our molded and extruded rubber businesses and aluminum alloys used in our aluminum casting facilities, impacted our results by an estimated $0.15 per share. We expect the recovery of these raw material increases will occur throughout the second half of the year once pricing begins to stabilize. Other less significant impacts to the quarterly results included a labor strike at a key heavy-duty truck assembly plant, impacting Supply Technologies results, and increased freight costs and supply chain constraints affecting most of our businesses. These unfavorable events overshadowed the continued performance in our supply chain business and improved results in our capital equipment business. Our SG&A expenses were $43 million compared to $35 million a year ago, returning to a normal level versus a year ago. As a percentage of net sales, SG&A expenses in the current quarter decreased to 12% compared to 15% a year ago. Interest expense totaled $7.4 million compared to $7.5 million a year ago, the decrease driven by lower average borrowings during the quarter. The income tax benefit in the second quarter of $2.8 million represented an effective tax rate of 34%, which is higher than the U.S. statutory rate of 21%, due primarily to the recognition of certain discrete tax benefits during the quarter and the composition of earnings. For the full year 2021, we estimate an effective tax rate of approximately 22%. Our liquidity continues to be strong and totaled $221 million as of June 30, up 12% compared to a year ago and consisted of $55 million of cash on hand and $166 million of unused borrowing capacity under our various banking arrangements. During the first half of the year, net cash used by operating activities was $23 million, primarily to fund higher working capital levels. During the second quarter, inventory levels increased significantly in support of increased customer demand levels, extended supplier lead times, and global supply chain challenges. In addition, higher raw material and inbound freight costs and inventory builds to support our various plant consolidation activities also increased our inventory levels. We expect the incremental levels of inventory, which approximated $25 million year-to-date will decrease in the second half of the year and return to more normalized levels. Capital expenditures during the quarter were $8 million, primarily in our Assembly Components segment for new equipment to support new business launches in our aluminum and molded rubber products businesses. We continue to estimate that our full year 2021 CapEx will be in the range of $28 million to $32 million. Now turning to our segment results. In Supply Technologies, net sales were $155 million during the quarter compared to $158 million in the first quarter and $94 million a year ago. Average daily sales during the second quarter were similar to first quarter levels despite lower levels due to the heavy-duty truck end market caused by the labor strike at a major assembly plant, which affected a full month of sales. Overall, we saw continued strength in most end markets, notably in the semiconductor, power sports, civil aerospace, and electrical distribution end markets. We are encouraged by the sequential improvement in sales to the civilian aerospace market, which was up 45% compared to last quarter and sales from our recent acquisition, NYK. Operating income in this segment totaled $10.2 million, and operating income margin was 6.6%. Operating income and margin were both impacted by higher inbound domestic and import freight costs, including expedited freight caused by global supply chain constraints and the impact of the labor strike. Excluding these factors, second quarter sales and operating income would have exceeded first quarter levels. In our Assembly Components segment, sales were $110 million compared to $126 million in the first quarter. Sales in the current quarter were negatively impacted by the semiconductor chip shortage, which resulted in lower sales of approximately $20 million in this segment. Weekly demand fluctuations and OEM plant shutdowns and delays had a material impact on certain plant production schedules and sales during the quarter. We expect the shortage will most likely remain a challenge for our auto-related businesses throughout the second half of the year. Although it is difficult to project the full year impact at this time, we estimate that the sales impact in the third quarter will be approximately $15 million to $20 million based on current customer schedules. As we have mentioned on previous calls, we continue to launch new business in this segment, which we expect to positively impact sales in the second half of the year. We incurred an operating loss of $6.1 million in this segment compared to operating income of $6.4 million in the first quarter, driven by several factors. First, the chip shortage continues to impact automotive demand and many of our operations, causing extreme fluctuations in production and significantly higher plant operating costs. Second, rising raw material prices, especially in our aluminum and rubber business, where prices have increased in excess of 20%, unfavorably impacted our profitability. We expect to begin to recover these higher material costs throughout the second half of the year as customer pricing adjusts to the market. And finally, increased labor costs caused by local labor shortages continue to impact our operations in this segment. In response to the labor shortages affecting certain plants, we increased wages and other benefits to help retain our direct labor workforce and increased the use of temporary labor. As a result, the second quarter was impacted by the increased wages, training and recruiting costs, production inefficiencies, and higher scrap levels. In response to these operational challenges, we have realigned capacity levels and shifted certain processes to facilities with open capacity and lower labor costs. Also during the quarter, we incurred nearly $1 million of charges related to plant restructuring closure and consolidation activities. We expect these actions will positively impact the segment's performance in the second half of the year. In our Engineered Products segment, sales were $86 million compared to $76 million in the first quarter and $79 million a year ago. Sequentially, sales increased 13%, driven by increased customer demand in our capital equipment business. In this business, sales were at their highest level since the first quarter of 2020. More importantly, new capital equipment order levels continue to improve. During the first half of this year, our new equipment order levels increased 65% compared to the second half of 2020. New orders, which totaled over $45 million during the second quarter came from customers throughout every region globally and in various product lines, including induction hardening applications and melting systems for the steel and foundry end markets. We continue to see strong bookings of new capital equipment orders during the month of July and believe sales and profitability in this segment will increase in the second half of this year based on the strength of our backlog. In addition, our aftermarket sales and services business in both the United States and Europe has increased each quarter since June of last year. We expect that the trend will continue. In our forged and machined products business, sales continue to be impacted by low demand from several key end markets, including oil and gas, commercial and military aerospace, rail, and agriculture. Profitability was negatively impacted by the lower sales levels as well as higher production costs and downtime at our forging plant in Arkansas and additional costs to complete certain legacy forging equipment orders, which were delayed during the pandemic. The operating loss in this segment, which totaled $700,000 in the current quarter was primarily driven by the lower sales and operating losses in our forged and machined products business and $600,000 of costs related to plant closure and consolidation activities. And finally, corporate expenses totaled $6.8 million during the quarter. On a year-to-date basis, corporate costs totaled $12 million in the first half of the year compared to $14 million in the second half of 2020. With respect to our previously communicated 2021 financial outlook, we continue to expect year-over-year organic sales growth to be within the range of 8% to 12% and capital expenditures to be in the range of $28 million to $32 million. With respect to our outlook regarding EBITDA, as defined, we now expect margins to improve by 100 to 150 basis points over the 2020 EBITDA as defined margin of 5.6%. And finally, due primarily to the working capital required in our businesses, we expect to use up to $15 million in free cash flow for 2021. Now I'll turn the call back over to Matt.
Matthew Crawford, CEO
Thank you, Pat. Before we open the line for questions, I want to reiterate our frustration around these results. We believe strongly, as a management team, they do not reflect the progress on executing what we expect to be a fundamentally reshaped business after we complete the restructuring. I want to remind people of three things we've worked tirelessly on and discussed on each call. First is the restructuring. We continue to be involved. You see from the results, we have some restructuring add-backs. Our priority is to emerge in the next 12 months as a leaner, more focused business that can be more nimble in these more challenging times. So when we started this restructuring, one of the things that we didn't focus on as much, and now we're laser-focused on is the availability of labor. And Pat mentioned that in his comments. So as we continue to restructure the business and make ourselves leaner and more nimble and in a position to garner more operating leverage, we're now also focused on where we can find labor. So that's changed some of our thoughts around the business, but it has not changed our appetite to continue the restructuring towards this goal. Secondly, our initiatives around investing in our best and highest return products and services. We have innovation happening across the business and across the segments. We have a number of new product launches and ideas that continue to drive new business sales at high margins. And we're not walking away from those. Those are great ideas across the business, and we continue to focus on innovation in our company. And also, we're focused on deleveraging while growing the business. We've had to utilize more cash than we thought to secure our supply chain. In many cases, we're in long-term agreements, and we need to focus on fulfilling the customer's needs. So we've had to protect our supply chain by using more cash than we would have expected at this point. It doesn't change our goal about deleveraging while growing new business, as I mentioned, ahead of schedule. Also, pricing has taken center stage. So pricing now is a key prong in our growth strategy as well on our margin enhancement strategy. We made a ton of progress on that in the second quarter. Some of it is delayed; whether it be contractually, we negotiated increases that don't kick in until during the third quarter or in some cases, like in our aluminum group, we have indexed pricing that trails the market by three months. It's quarter-over-quarter pricing. So the good news is it's contractual. We'll see the increases. The bad news is in a rising raw material environment, particularly the spike we've seen in aluminum, those increases trail the market. So again, those are three things that we continue to be focused on. We're continuing to be focused on them and observing the new environment, and we're staying committed to all three. So with that, I will turn it over to questions.
Operator, Operator
Our first question is from Steve Barger with KeyBanc Capital Markets Inc.
Steve Barger, Analyst
Matt, you maintained the sales guide. So it sounds like this isn't a demand problem. It's more timing. So just going back to the inventory comments, are you running any of the plants on a more normalized basis now and just holding the inventory to ship when needed? And can that help with labor and absorption?
Matthew Crawford, CEO
Yes, I’ll start with that. We continue to make significant progress, and Supply Technologies has performed well in this environment. Engineered Products is gradually improving, although at a slower rate than we anticipated. Our current focus is on the automotive segment. In response to your question, we have built inventory in that area. We are working to normalize it, but it’s challenging as we have never experienced an environment quite like this. Just yesterday, GM announced that they would be shutting down their three truck plants for next week. They mentioned chips, which I assume is related to the inventory situation they are facing. It seems they must have been aware of their chip inventory levels. Additionally, there are other supply chain challenges to consider. While we aim to build inventory, we recognize that we must be cautious. The market environment makes it difficult to predict where SAAR will be and how the Original Equipment Manufacturers (OEMs) will navigate their supply chain issues regarding chips and other components. We are willing to manage inventory levels when conditions allow us to do so competitively and profitably. However, there are established programs at the OEMs that suggest they will only purchase around one-third or 40% of what they initially expected for the year. Thus, we need to be careful about increasing inventory, as the losses could be more permanent for certain models.
Steve Barger, Analyst
Yes. And I think Pat mentioned some of this in his script. So as you think about that with your labor issues, does it make sense to have less rooftops or more product line diversity in specific plants? Just kind of how are you addressing that longer term?
Matthew Crawford, CEO
It's a great question. Pat touched on it, and so did I. Our expectations regarding this restructuring before this quarter focused on having fewer locations, emphasizing where we are best positioned for long-term competitiveness. Previously, this was primarily about cost, but now it also involves labor availability and consistency. Our approach has evolved in how we consider this. The restructuring will continue to have fewer locations while investing in our top-tier facilities, which will also apply to the automotive group. We need to not only focus on cost during the restructuring but also on agility. This is crucial for adapting to a market over the next decade that may experience fluctuations in build rates for specific models. In the past, a 10% variance in a year's production was considered significant, often managed through rebates. Now, we are witnessing volatility that necessitates suppliers to be significantly more agile. We were moving in this direction anyway, but we are accelerating that process. It’s frustrating for us at Park-Ohio and in our automotive group because we believe we are making substantial progress, but it is not reflected in the numbers, and we recognize that is inadequate.
Steve Barger, Analyst
And just given how fast things are changing, how do you think this plays out in the back half? I guess, why do you think it gets better? And are you seeing other areas of material availability problems?
Matthew Crawford, CEO
I'll just say, I don't know how it could get worse. I'm joking a little bit. But let me ask Pat to answer that more explicitly.
Patrick Fogarty, CFO
Yes, Steve, I think a couple of things are expected to happen in the second half of the year. Clearly, on raw material prices, we expect to recover some of those large increases that we saw in the second quarter. I mentioned raw material prices were up 20%, which is obviously a huge increase in a given quarter. For the full year, aluminum prices are up 30%. Rubber compounds, we expect to continue to be somewhat volatile, although our customer price increases, we hope will cover some of the increases. In the quarter, we moved a significant amount of operations to different plants to free up labor. We expect the benefit of that to happen in the third and fourth quarters. In addition, we're launching some and have launched some pretty large programs in the automotive group, including fuel rail products for the Gen 5 engine, which we expect to significantly impact absorption levels in certain plants. Our business that has been expanding in Mexico, in Acuna, continues to perform very well. With recovered volumes and the new business that we're launching, we expect a nice flow-through of profitability on the increase in revenues. So those are some of the things happening in Assembly Components. I think maybe a more exciting story that we're seeing within our Engineered Products segment, where our backlogs are at a level now that we feel should enhance our profitability in the second half of the year. Having a quarter with $45 million of new capital equipment bookings is a level that we haven't seen in a long time. The timing of production of those new projects will take hold in the second half of the year. So we're very optimistic there. The aftermarket parts and services business continues to trend in the right direction. All that being said, in a segment where we still see low volumes from oil and gas. We still see some low volumes in some of our forging products. But overall, that's a real positive story that we expect to take hold in the second half of the year. Supply Tech continues to perform as expected and above our beginning of the year operating plans. We expect end market strength to continue. It was nice to see the civilian aerospace market pick up in the second quarter. We expect that to continue throughout the second half. So a lot of real good things happening. And some of the challenges faced in the second quarter, we expect to improve on in the third and fourth quarter.
Matthew Crawford, CEO
Steve, I want to clarify what Pat mentioned. It will take some time for our human resources strategy to take effect. We are experiencing ongoing cost increases in our operations that we need to address. Our disappointing results in the second quarter were due to labor availability issues, which included the need to operate seven days a week, leading to even higher costs, increased scrap rates, and various challenges in meeting our contractual obligations. I believe we will start to see stabilization, but we also need to focus on pricing to recover the extra operational costs. In the second quarter, we faced the worst of both sides, and it may take some time to navigate both issues, but we should begin to see some stabilization. Our current objective is to be flexible enough to ensure we are operating profitably five days a week on our ongoing programs.
Steve Barger, Analyst
Really appreciate all that detail. I'm going to ask one more, and I'll get back in line. I know you didn't have full guidance out there, but I just have to ask. Why not pre-announce or just give some heads up to let people know that results were going to come in well below expectations as you saw the quarter unfolding?
Patrick Fogarty, CFO
Yes, Steve, I'll address that. Our guidance is quite limited regarding revenues and EBITDA margins. Our quarterly figures can vary considerably. We do not provide EPS guidance. We believe that an advanced release wouldn't include the context and details necessary to explain the reasons behind any changes, which is why this call is important for us to communicate those reasons effectively.
Sarkis Sherbetchyan, Analyst
Yes. So just want to pick away at the revised guidance here. I think if I look at the top line, even if we take the low end of that, right, for the first half sales performance, for example, and then just kind of back out what we're expecting for the second half, I think it's, let's say, a round number of $690 million in top line in the back half. You gave the reasons on why you feel that that's comfortable or appropriate. I think the area that I'm having a little bit of trouble with is the margin improvement on EBITDA. It's kind of a 100 basis point year-over-year improvement would imply at least second half EBITDA of, let's say, $25 million a quarter. Just kind of help me reconcile that given $12 million of EBITDA posted here in 2Q.
Patrick Fogarty, CFO
Right. Well, I think, Sarkis, we expect quite a bit of improvement coming out of our Assembly Components segment. Based on the information that we've indicated, new business being launched. The flow-through activities in our Engineered Products Group in the second half of the year based on the increase in the volume is significant. That business has historically been our highest-margin business. So we expect much higher margins coming out of that business segment. In Supply Technologies, for another good example where we were hit hard in the second quarter by some of the increase in freight, both ocean freight as well as expedited freight. We expect much of that to ease in the second half of the year, which will enhance our margins. So those are some of the things that have been built into this revised margin outlook that we believe are very positive.
Sarkis Sherbetchyan, Analyst
Got you. And from some of the tech players out there, we're actually hearing chip shortages lasting through 2022. I guess can you reconcile kind of what you're seeing real-time on the ground versus what some of the tech players are saying? I just want to get a sense for how long this lasts? And obviously, how it impacts you and your customers perhaps into '22?
Matthew Crawford, CEO
Yes, that’s an interesting question, and we don’t have complete visibility on it. No one does. We believe this will continue to be a challenge at least for the remainder of the year. Honestly, I was both pleased and surprised by some of the guidance from the original equipment manufacturers regarding revenue and profits for the rest of the year. I think the process will hopefully become more transparent as the year progresses, allowing us to be more efficient in our operations. I suspect there might be some alleviation, and we have planned our business to improve efficiency and responsiveness at a more profitable level. While the worst may be behind us, I expect this issue to persist for the rest of the year and potentially into early 2022 before operations can return to some normalcy in the automotive supply chain. So, while the worst may be behind us, I agree with your thoughts, and we can only hope for more transparency and better scheduling moving forward. I am encouraged, though surprised, by the positive comments from the original equipment manufacturers over the past few days.
Sarkis Sherbetchyan, Analyst
Got it. That's helpful. And I guess, if I can just kind of go back and two things kind of stuck out in the press release. One is the $0.55 impact on the $24 million in, I think it was the sales call out. And then I think in the prepared remarks, you mentioned the rubber compound price and aluminum alloys impacting the quarter by $0.15 a share. I guess if we were to kind of step back and look at the $0.15 per share impact you just called out relative to the pricing you're taking, how quickly do you think in the back half of the year this $0.15 a share kind of comes back into the P&L?
Patrick Fogarty, CFO
Yes. Most of that price increase is in the aluminum products business. As long as we see the price per pound stabilize in the second half of the year, we will recover all of that impact. We did see a slight increase in aluminum prices in July, which is a positive sign. If prices stabilize, we will recover that impact through customer price increases.
Marco Rodriguez, Analyst
I was wondering if maybe you could put a little bit more color around some of the headwinds as it relates to the revenues and the automotive impact. You talked about Q3 having another $15 million to $20 million hit. But at the same time, you've got some really nice new business launches that are expected to kind of positively impact second half sales. Can you kind of walk us through how you're thinking about that from a revenue standpoint?
Patrick Fogarty, CFO
Yes, Marco. Yes. The impact of the chip shortage was solely relating to that. We believe, based on new business being launched, that much of that will be offset by the new programs being launched and the expected production in the second half of the year.
Marco Rodriguez, Analyst
Got it. Okay. And then in terms of the labor shortages that you're seeing, can you maybe just put a little bit more color surrounding that? Is that just kind of what your experience and what most individuals are seeing? Or is it just difficult to find employees because of either stimulus checks or because of the unemployment rates? Or are there other factors that are sort of impacting you when it comes to regular labor?
Matthew Crawford, CEO
No. This is Matt. Marco, I would say this is primarily a regional issue with varying impacts across different locations. Therefore, there isn't a universal answer to your question. In the regions most affected, I can affirm that there is significant pressure on rates and competition for workers who are willing to be employed. People may show up for work but then quickly find other jobs. This leads to considerable time and money spent on onboarding new employees who ultimately do not stay. Many express interest in joining us but fail to show up, which I believe is partly linked to their eligibility for unemployment under the current more lenient standards. It’s challenging to pinpoint the exact reasons, but it encompasses all of these factors in the hardest-hit areas. Some locations are considerably more affected than others, which informs our restructuring strategy to focus on areas with stable labor pools in the long term.
Marco Rodriguez, Analyst
Understood. Then kind of shifting here to your Engineered Products segment. It sounds like things are definitely moving in the right direction. Based on what you kind of see right now, do you expect to kind of get back to that pre-pandemic revenue levels in the $100 million to $150 million revenue run rate by the end of this year? Or is that more of a fiscal '22 type event?
Patrick Fogarty, CFO
I think we're going to see a gradual improvement in our revenues in that segment. But I would not expect it to get to that $100 million to $150 million quarterly revenue in the current year, but we're heading in the right direction. Having backlogs that exceed $45 million to $50 million is a good start to get us back to historic levels.
Marco Rodriguez, Analyst
Understood. And then your comments in regard to the oil and gas segment, kind of a little bit of underperformance there in the EP group. A little surprised by that, just kind of given where oil prices are currently. Can you maybe provide a little bit more information in terms of what you guys are seeing there? What's kind of holding that back?
Matthew Crawford, CEO
Yes. This is Matt. We touch that business in a few different ways. But I would tell you that by and large, our activities are more upstream. And I think that it's been clear and whether it be in the rig count numbers or the comments from some of the big drivers of the upstream business that their strategic goal is to return more money to shareholders and drill less. So I think that what that means to us is we still have a good business. These are good high-margin products where, in many cases, selling innovation or something that it generally we're the best source for. But we also see, I think, both reduced drilling and a desire by the large players that defer spending. So I think that's got to play out a little bit until we see a return to normalization. And I know your next question is going to be when does that happen? Because this business will come back, maybe never to where it was, but it will come back to be a meaningful contributor. And my guess is we're talking mid-2022 before we expect it to be up to kind of contributor in any measure that it's been historically. Or let's put it this way: to not be a drag.
Marco Rodriguez, Analyst
Got it. And last quick question for me. Maybe, Matt, if you can kind of update us on your M&A pipeline. I know you guys just closed an acquisition of Supply Tech, but just kind of walk us through what the pipeline looks like today? What valuations are looking like?
Matthew Crawford, CEO
Yes, there's a lot happening. We're actively pursuing opportunities that we believe are a good fit. We have a few discussions underway. I don't believe that sellers' expectations regarding valuations have softened. Therefore, you can expect us to remain active while being very cautious, as we have been over the past year.
Operator, Operator
Our next question comes from Jim Dowling with Jefferies.
James Dowling, Analyst
I could be off on the timing. So give me a little benefit of the doubt. But maybe two years ago, or two-plus years ago, you gave a thought as to what the long term would hold. And my memory says, you said we can get to a $2 billion revenue level and 10% plus EBITDA margin. If those numbers are reasonably accurate from my memory, given all of the changes that you've seen in your aftermarkets today and also the restructuring that I presume you didn't foresee two years ago, what would you say is a reasonable EBITDA margin that's achievable once normalcy ever returns?
Matthew Crawford, CEO
Yes. First, I want to highlight that we believe our current business, along with some modest acquisitions, possesses the customers, relationships, and internal growth opportunities needed to achieve our goals, especially regarding revenue. We're currently around $1.4 billion to $1.5 billion in revenue, despite facing significant pressure in some key markets. Although we haven't fully returned to pre-pandemic levels, we are optimistic that new business over the next couple of years will contribute positively. We did take a substantial step back during COVID, and the pressures in certain markets persist. Nonetheless, I still believe we can achieve our targets as described. Our profitability goal remains intact, but we have more work to do on restructuring and pricing than we did before COVID. We did not anticipate the current level of inflation when we created that plan. The positive aspect is that more than half of our business has the ability to reprice through the economic cycle, with about two-thirds potentially doing so. While some repricing may result in zero margins initially, we hope to recover some margin over time. However, the inflationary market presents challenges that weren't considered when we set our goals. The bright side is that, from a competitive standpoint, our offerings are more valuable in this environment. Our inventory, expertise, customer relationships, sourcing, and manufacturing capabilities make us increasingly essential to clients. Still, we need to put in the effort to meet our margin goals, which were not anticipated. I remain confident that achieving a $2 billion revenue target within the next three to four years is possible. We face obstacles on the margin front, but we can make considerable progress, especially as we see a return to normalcy in our Engineered Products Group. This area has lagged, and as it improves, I believe we will gain momentum toward our target. Nonetheless, the challenges we face are greater than we expected when we set these goals, particularly regarding restructuring and pricing. This is simply the reality we are navigating now.
Operator, Operator
Our next question comes from John Baum.
Unidentified Analyst, Analyst
First of all, I have a comment and then a question. The comment is that in previous quarters, there was an issue specific to Park-Ohio. However, the current chip shortage is affecting all OEMs and suppliers, which you are currently managing. It seems like many of your suppliers and OEMs are in a similar situation, and I know you are addressing that. Now, my question is…
Matthew Crawford, CEO
John, I want to highlight something related to that comment. We have not yet seen the entire earnings cycle play out, but it's not surprising that some of our customers, primarily original equipment manufacturers, are performing well. When we drive by our customers, we notice their inventories are low, whether it's cars, trucks, or snowmobiles. They have sold out during the second quarter. I'm glad to see our customers doing well, and we support their success. However, it's important to recognize that it was the suppliers that faced challenges in the second quarter, not the OEs. It will be interesting to see how they manage to replenish their stock moving forward. Our focus will be on the volumes; we need to see those, and the key question is whether we can execute effectively. To Jim's earlier question, can we meet our margin expectations? Your point about our position in the supply chain and what we can anticipate in the future is very valid.
Unidentified Analyst, Analyst
Sure. I recall you mentioned previously that a little inflation can be beneficial. However, now we are experiencing significant inflation. You addressed the issue of keeping pace with rising raw material costs, but I want to delve deeper into whether we view inflation as temporary or lasting. When it comes to hiring and dealing with unreliable new employees, we face the necessity of raising starting wages, which impacts existing pay structures. My questions are, what increase are you anticipating for starting wages, and how do you plan to implement this and factor it into pricing in the long run?
Matthew Crawford, CEO
That's a great question. I agree that the inflationary nature of the labor market is not temporary. We need to approach this issue strategically when considering our long-term business footprint. Cost and availability are significant factors. We can't just give up; we must address these challenges and plan how we want to operate over the next 10 to 15 years. This responsibility falls on us. To add to that, since we know this situation isn't temporary, availability is more crucial than cost. Our value-add largely comes from our services and manufacturing, and typically, our direct labor costs are under 10%. This is something we can manage. We've already felt the impact in the second quarter due to difficulties in hiring and getting people to work. If the labor market stabilizes, we can manage labor costs effectively. Most manufacturing companies have direct labor costs below 10%, so we can handle this. However, attracting workers remains a challenge that we need to address. We hope that as hourly wages rise, more people will return to work, and that’s just one of the factors we are considering.
Patrick Fogarty, CFO
And yes, John, as operators, we can't believe that the increase in cost is temporary. We need to focus on automation, not just to relocate our production to low-cost areas, but also to lower our labor costs through automation and innovative practices on the plant floor.
Unidentified Analyst, Analyst
Absolutely. Well, in closing, you've got your three silos right now, and it used to be when you were Tier 2 automotive. The events like this could be a cardiac arrest moment. But with the three silos and you're in multiple industries right now, this could be a blip. It will be solved. That's what management does and that's your work cut out for you at the balance of the year. So good luck with that, and I'm with you guys.
Matthew Crawford, CEO
Thank you, John. I appreciate your insights. As I mentioned earlier, this situation emphasizes the urgency of our existing plan. We have significant liquidity, and our primary focus will be on supporting our operations by addressing some of these challenges through investments in automation and restructuring. This is our top priority. Thank you for your comments.
Operator, Operator
Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back over to Mr. Crawford for closing remarks.
Matthew Crawford, CEO
Great. Well, thank you for your questions this morning. I hope you sense our frustration and our urgency. Remember, more so, I think, than many of the people you guys are invested in, we are a management team that's highly invested in this company as well. So we are side-by-side, and we're going to resolve this, and this just brings to us a new level of urgency. So I appreciate your time today and your questions, and we'll see you next quarter.
Operator, Operator
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.