Park-Ohio Holdings' (PKOH) CEO Ed Crawford on Q2 2016 Results - Earnings Call Transcript

| About: Park-Ohio Holdings (PKOH)

Park-Ohio Holdings Corp. (NASDAQ:PKOH)

Q2 2016 Earnings Conference Call

August 9, 2016 10:00 am ET

Executives

Ed Crawford - Chairman & CEO

Matt Crawford - President & COO

Pat Fogarty - VP, CFO & Director, Corporate Development

Analysts

Steve Barger - KeyBanc Capital Markets

Dan Drawbaugh - FBR & Company

Marco Rodriguez - Stonegate Capital Market

Jay Harris - Axiom Capital

Operator

Good morning and welcome to the ParkOhio Second Quarter 2016 Results Conference Call. At this time, all participants are in a listen-only mode. After the presentation, the company will conduct a question-and-answer session. Today's conference is also being recorded. If you have any objections, you may disconnect at this time. [Operator Instructions]

Before we get started, I want to remind everybody that certain statements made on today's call maybe 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 maybe found in the earnings press release as well as the company's 2015 10-K, which was filed on March 14, 2016 with the SEC.

Additionally, the company may discuss as adjusted earnings and EBITDA as defined. As adjusted earnings and EBITDA as defined are not measures of performance under Generally Accepted Accounting Principles. For a reconciliation of net income to adjusted earnings 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'd now like to turn the conference over to Mr. Edward Crawford, Chairman and CEO. Please proceed, Mr. Crawford.

Ed Crawford

Good morning, ladies and gentlemen. Welcome to the second quarter 2016 ParkOhio conference call. I would like to introduce Matthew Crawford, who is the President and COO of the company and also have with us today Pat Fogarty, the Chief Financial Officer of the company. Matthew?

Matt Crawford

Thank you very much and good morning.

In the second quarter of 2016, we delivered significantly improved profitability from last quarter as our adjusted earnings of $0.76 per diluted share were up 65% compared to the first quarter of 2016.

In addition, our attention to working capital and capital spending result in operating cash flow is well ahead of plan in the first half of the year.

Second quarter net sales of $329 million were comparable to last quarter. The gross profit margin was higher by almost 200 basis points. This increase was driven by the benefits of the cost reduction actions taken primarily in the first quarter of this year, which included reducing headcount, response to lower customer demand in certain businesses, cutting the discretionary spending and streamlining manufacturing processes were possible. While these were challenging actions, we are focused on lowering our overall cost structure and the resulting boost of profitability when revenues return to more normalized levels.

During the second quarter, we continued to face weak economic -- macro economic conditions in several of our key end markets, including heavy duty truck, power motor sports, oil and gas and steel. And of course, the loss of volumes from the accelerated line down of the Dodge Dart Chrysler 200 programs that we announced on our last call. But, these challenges were partially offset by significant benefits from cost reduction actions and strong performance in certain of our businesses including faster manufacturing, gasoline direct injection fuel systems and rubber products.

In addition to improved earnings, we are able to deliver significant operating cash flows in the second quarter resulting in a year-to-date operating cash flows of $27.5 million. Our strong performance has enabled us to repay debt and reinvest in our businesses.

For the full year of 2016, we are forecasting operating cash flow is approximately $55 million to $60 million and a full year pay down of our bank debt by approximately $20 million.

Digging deeper into the numbers, our second quarter net sales and adjusted earnings were $329 million and $0.76 per diluted share respectively. Our adjusted earnings were up significantly over last year's $0.46, when compared to $1.04 in the second quarter of 2015. Gross margin in the second quarter of 2016 was 16.5% compared to 16% in the second quarter of 2015 and 14.6% in the first quarter.

As mentioned above, the significant improvement over last year and last quarter of almost 200 basis points was due primarily to the benefits of aggressive cost reduction actions taken by our management teams.

SG&A expenses decreased $800,000 to $34 million compared to $34.8 million from the prior year. Interest expense was approximately $7 million in the second quarter of 2015 and in the second quarter of 2016. Our effective tax rate for the second quarter of 2016 was 32.3%; we expect the full year effective tax to be lower than that of 2015.

I will now look at the segment results. First, let's review Supply Technologies segment performance. Revenues of $133 million were down $17 million or 11% from the 2015 second quarter or up 2% compared to the first quarter. The decline from last year was driven by lower customer demand in heavy duty truck, power sports equipment, semiconductor and agricultural end markets. These declines were partially offset by higher demand in our military, aerospace and electrical end markets. Notably, our aerospace and defense business which has been a strategic focus was up 15% year-over-year.

Additionally, our faster manufacturing business continues to post near record results as the demand for highly engineered patented products grows on a global basis. Segment operating income of $10.9 million was lower than last year's $13 million due to lower sales volumes while compared to Q1 income was higher by $700,000 due to improved sales and cost reductions.

Segment operating margin of 8.2% was lower than last year's 8.7%, but up from the 7.9% in the first quarter. In the second half of 2016, we expect customer demand to remain sluggish in several of our industrial end markets, but we continue to take steps to improve results and grow the business including new customer and new program implementations, to offset some of the market weakness and cost reduction actions to continue to improve operating margins.

Next, I will cover results of our Assembly Component segment. Net sales decreased $6 million or 4% to approximately $134 million in the second quarter of 2016 versus 2015. On a sequential basis sales in the second quarter were up 2% compared to Q1.

On a year-over-year basis sales in our aluminum products business were down $12 million primarily due to Fiat Chrysler's decision on the Dodge Dart and Chrysler 200 that we discussed in detail on last quarter's call. So, net of this adjustment, sales were actually higher year-over-year.

This increase was due to strong sales growth in our gasoline direct injection business due to higher market demand for products which reduced auto emissions and an increase in sales of our rubber molded products. We will continue to work with our customers to develop market leading solutions in this area.

Regarding general aluminum, we have implemented several actions of response to the canceled programs including headcount reductions, reductions in discretionary spending and accelerated implementation of production savings initiatives. By taking swift action that would provide some immediate benefits, we achieved higher profit margins in this business in the second quarter than the prior year. Thanks to the team at General Aluminum, we look forward to implementing new awarded business.

In the second quarter of 2016, segment operating income in the Assembly Components was $14.2 million was up $600,000 compared to a year ago and up $4 million compared to the first quarter. These increases reflect the benefit of cost reduction actions in the growing customer demand in our fuel related molded products and aluminum businesses.

Segment operating margin was at it's highest level in recent quarters coming in at 10.6% compared to 9.7% last year and 7.7% in the prior quarter.

Moving now to Engineered Products, net sales in this segment were down $25 million compared to last year and $4 million compared to the first quarter. We expect to see continued margin improvement in the second half compared to the first half resulting from our aggressive cost reductions and an improvement in revenues in our industrial equipment business.

The year-over-year decline in sales in Q2 was primarily in our induction and pipe threading business, which serves the oil and gas and steel end markets.

New equipment and after market sales were down 35% and 14% respectively compared to the second quarter of last year.

Our forging revenues were approximately the same year-over-year, but down significantly to our plan as build rates for railcars declined over last year. We expect railcar build rates to improve slightly during the second half of the year in each of these businesses we have taken actions to reduce costs including headcount reductions, elimination of non-core operations and department consolidations.

Segment operating income for Engineered Products up $3.2 million, in Q2 was down from $5.2 million a year ago, principally due to lower sales volumes. However, on a sequential basis income was up almost $2 million compared to the first quarter, in spite of a 6% decline in sales due to the benefits of our cost reduction actions.

Segment operating margin was 5.1% in the current quarter versus 6% a year ago driven by lower sales. While compared to last quarter, operating margins were up 300 basis points.

Overall, our improved results for the second quarter were inline with our expectations and a nice rebound from the weaker start to the year that we saw in Q1.

Looking ahead into the second half of 2016, we expect that continued cost reduction benefits and modest sales improvements will both contribute to sequentially higher earnings in both Q3 and Q4 compared to Q2. Specifically with regard to the expected sales improvement, we are anticipating higher revenues in the second half of 2016 as the production of new products in our fuel rail business increases and as demand improved slightly in our Engineered Product segment. As a result, we are reaffirming our previously announced full year 2016 adjusted earnings guidance of $3.10 up to $3.30 per diluted share.

In conclusion, we are confident in our ability to navigate through this challenging operating environment taking aggressive actions to improve profitability in the short-term without jeopardizing the long-term health of our businesses. Investing in growth initiatives that will yield high returns, managing working and fixed capital to optimize cash flow and positioning the company for long-term success and greater profitability when the markets recover. Thank you very much.

Ed Crawford

Thank you, Matthew.

The management of the company was pleased to post improved results for the second quarter of 2016. Hopefully, in the near future, we will have some wind in our back resulting in a successful 2016.

I would now like to open the lines for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Steve Barger of KeyBanc Capital Markets. Please proceed with your question.

Steve Barger

Hi, good morning guys.

Ed Crawford

Good morning, Steve. How are you today?

Steve Barger

Doing great. So, revenue in the first half came in around $660 million, would you -- you said you expect that to be up in the back half, but are you thinking low single-digit, mid single-digit, just how are you modeling that and where does the confidence coming from?

Pat Fogarty

Steve, this is Pat Fogarty. As we mentioned on the last call, we expect our full year sales amount to be about $1.04 billion. And the increases that we are seeing in the second half of the year come from a couple of spots, but the assembly components segment where we have strong sales in our fuel rail business and we are implementing new awarded business as well as in our engineered products group where we are seeing a slight up tick in both the forging businesses as well as in our induction heating business.

Steve Barger

Got it. Thanks. Looking at revenue in the quarter in the first half, it was down around 12%, but inventory on the balance sheet is about the same level as last year. So, you expect you can continue to bring that down and is that a big driver of free cash flow in the back half as those reduced inventory levels?

Pat Fogarty

Steve, when you look at our total working capital, whether it's quarter-over-quarter or year-over-year, you will see a slight improvement in our working capital which we continue to focus on. We have certain businesses that we see some growth in the second half of the year, so we will have some growth in our working capital. But, overall, we see strong operating cash flows in the second half of the year as a result of an improvement in our working capital ratios as well as controlled spending in our capital areas.

Matt Crawford

Steve, I would also comment. This is Matt, sort of generally about supply technologies which is a big driver of our inventory number. We had -- I think we discussed our entire call it's a little bit of a bloated number there. There is a variety of reasons, some was implementation of new business also notably was working through excess inventory related to the West Coast strike -- the port strikes.

So I think that the seasonality of that number is a little bit skewed this year, meaning, I think it kind of peaked at the beginning of the year and it's being worked down. Obviously, with the relatively soft sales environment that provide some opportunity too versus our original expectations.

Steve Barger

Sure. And I would say that with the revenue decline that you see in supply tech so far this year, you have been able to hold margin fairly well. Is that -- do you think you can maintain generally these margin levels in the back half for that actually improves a little bit for supply tech?

Matt Crawford

Yes. We absolutely -- I mean, we -- I kind of said more than I would have liked obviously and focused on cost reduction initiatives and it literally occurred across the business, some pockets of the business were spared because they are performing at such a high level. But, supply tech was no exception. And I think that we continue to see throughout the year the results of lower operating costs. One of the things that we are excited about as we see some normalization of some of those customer volumes is to see kind of where that profitability mapping will take us.

Steve Barger

Right. And just in general for supply tech, when things slowed down the markets are a little more challenging, does it become easier to sell that value proposition to new customers because companies want to reduce costs, or do they tend to retrench and keep things inside when things slow down?

Matt Crawford

That's a great question Steve and I -- with [indiscernible] here, the CEO of that business to answer. But I'm going to speak for him and tell you that the answer is yes to both. What we have seen is, in some of the larger account opportunities weakness in their businesses and the larger opportunities has caused them to create a lower priority for awarding or moving blocks of business.

So the initiative for those accounts that are -- that we've been chasing of large size probably has slowed down a little bit. Where the opportunity exist on a more accelerated basis are in the smaller accounts. So, we have a wonderful effort going on and what I call our mid-market area, which is using leveraging our branch managers and their knowledge of the marketplaces they work in. And while we talk a lot about servicing multinationals globally there is massive opportunity in the smaller account sales that exists geographically around some of our branches. So, those we see opportunity, those are more likely to move more quickly, those are the once also that we provide greater potential cost savings too. So, the answer depends on the kind of customer we're pursuing.

Steve Barger

That's a really interesting comment. Have you changed the incentive structure for those branch managers to really get them out there to drive that business?

Matt Crawford

I won't say that we've changed it. But, we have a very thoughtful incentive compensation structure without -- throughout the business, but particularly in Supply Technologies and branch profitability is very much at the heart of the interest of the people that work in those branches. So, blocks of business that may look rather small in this call, but can be very profitable to a branch manager is -- into their bonus scheme is very exciting.

Steve Barger

Understood. I will ask one more and then I'll hop back in line. It's early to talk about next year, I know that. But in general, if revenue were to stay flattish into next year would you expect that you could continue to drive EBITDA margin by continuing to pursue cost actions and do you think that free cash flow would increase if that were the environment that we live through in 2017?

Matt Crawford

I'll let Pat clean this up because I know you prefer to have numbers for your model. So I'm not going to be able to give you that. What I'm going to tell you is, we are breakeven in almost every business we own are lower today than they were three months ago. And we are continuing to take action while not as aggressive as we once were. So, no we're a more profitable business today and we've made decisions, I think that will continue to reward us.

Our forecast obviously includes a better second half from a profitability standpoint that's not solely on cost reductions, but it's a piece of it. So yes, I think we will hopefully continue to trend in the right direction and with the revenue environment so cloudy that's kind of what we need to focus on here principally at the side. So I would expect continued improvement, but this was a very, very solid effort by all of our teams in the second quarter.

Ed Crawford

Steve, just a thought on this. This company has a long history of anticipating and working their way through some rigid time, for example 2008 and 2009. [Technical Difficult] we have a plan set in place to right to ship an essence and proven by the results -- financial results for the second quarter. So but somewhere here, we do expect hopefully that will get a pickup in the revenue side and we have to be prepared for that. So, when revenue comes, it comes very, very quickly on the other side when it declines, it comes very, very slowly sometimes. So we are really, be looking at this year at a quarter-by-quarter basis in controlling our costs as tightly as we can, but soon or later we have to get ready to break out and respond to it t through anticipated volume of our operating units.

Matt Crawford

Steve, this Matt. I want to jump back on that question for a second because we talk about cost sort of as this big basket of opportunity. One of the nice things about having the cash flows we have is, and I emphasize that in my comment. We are continuing to invest in this business, we are continuing to invest and we are aggressively discussed efficiency, productivity, opportunities in investments with each of our businesses. And we are very anxious to become more efficient business. So, we talk about cost. We're not talking just about headcount here or discretionary spending. We're talking about becoming a more efficient business.

We are anxious to hear and yesterday I sat in one of our businesses and someone developed an idea that had a nine month payback and we hear that periodically. And we just can't get enough of that. So, this free cash flow that we're generating, we anticipate to help us continue invest in the business on the productivity side, but also on the business side.

Let me just talk at a high-level about some of the things that we're doing right now that we're investing in that have no -- don't show up in the second quarter results. And I'm going to miss a couple. But we're expanding our presence in the forging business by bringing online a second significant forging line.

Our Assembly Components group is leveraging their machines technology and expanding in Mexico and China. We've talked a lot about the 10-speed transmission order that we're ramping up ever so slowly. These are all the fastener business that is moving into a larger facility in buying equipment to fill global orders that are in demand for now. So, there are initiatives both on the productivity side and on the new business side that we are pursuing here and those are stories that may not be -- your question was to the third quarter and the fourth quarter, they'll have some small impacts particularly some of the productivity ones but that's really what encourages us about the future and to be nice to get involved in the next couple of more trucks and [indiscernible] make some of those.

Steve Barger

That is really great color. I appreciate all the detail. I've got a couple of more, but I'll jump back in line and see if anybody else has some.

Ed Crawford

Thank you.

Operator

Our next question comes from the line of Christopher van Horn of FBR & Company. Please proceed with your question.

Dan Drawbaugh

Hi, guys. This is Dan Drawbaugh on the line for Chris, how are you doing?

Ed Crawford

Fine. Thank you for being on the line today.

Dan Drawbaugh

Of course, so I wanted to just touch on a couple of things that were unlike the call last quarter. You mentioned and I know you guys have made pretty significant progress here on the cost lines, but you mentioned about $15 million in comp savings, I think on the last call, could you give us a sense of the progress there?

Pat Fogarty

Sure, Dan. This is Pat Fogarty, again. We continue to be on track and slightly ahead of those numbers in each of our business segments. So I mean not only is it with headcount reductions but across the board whether its efficiencies due to the manufacturing process that Matt mentioned earlier or the outsourcing of certain functions. So, all in all, we're well on our way to exceed the number that was mentioned in the first quarter call.

Dan Drawbaugh

Okay. Thank you. Then going to the FCA decision, I think you said on last call, it was worth about $40 million to $50 million life time in revenue, what exactly, if you guys maybe able to backfill that, how does the coding environment look for the aluminum business?

Matt Crawford

This is Matt. Unfortunately, I'll have to correct you and say that that was $50 million annually over the next couple of years.

Dan Drawbaugh

Okay. Okay.

Matt Crawford

Yes, which is not pleasant to remind ourselves. And we are actively quoting that those that capacity, it doesn't -- I mean, that's very hard to find things that fall in the exact size and shape. But so, I'll talk more broadly about the coding opportunities that existed at General Aluminum are robust. And while we do not see necessarily an impact to the -- a significant impact on any of that work to be felt in 2016 or even the first part of 2017. We're confident that by the end of 2017, or maybe more 2018 that we're going to begin to return to more reasonable volumes.

And once again, our priority in the meantime and I don't want to get lost in our -- in my comments, there are profitability in the second quarter was better than last year, now that's not same much because last year wasn't very good. But we're focused on making money while we wait for that business to come online.

And let me also remind you we are launching business right now that's awarded, it's going to help us towards increased volumes towards the end of 2017 and 2018. So, we've got some awarded business that will help fill it. We're working on new business with the excess capacity. I don't know that we're going to see meaningful top-line progress until late 2017 and 2018.

Ed Crawford

Dan, something I want to point out, when you think in terms of the aluminum that's just part of the assembly components unit or silo, but when we look at it, we think in terms of not only aluminum components in the automobiles, our triple charging success in the hose business along with the gas injunction, which has really been very powerful and growing every moment and the tube filler systems.

So there is four platforms there, our view of the worldwide auto by of 90 million tires plus, we look at as many different applications and the cars not on just one aluminum. So we will think of the aluminum that's one segment of that component or that silo. And quite frankly, this particular silo is going to be really over the next two, three years enjoying the benefit of the launches we are underway in China supplying to people like General Motors and Ford Motor there components which we sell in North America.

So, the aluminum is a big part of that story, but the sleepy part of this story is, how well we're doing in the other areas. So again, more platforms international, it's not all about aluminum anymore that's, the investment is made to diversify assembly components along those lines.

Dan Drawbaugh

All right. Thank you. I really appreciate that color. On the China and Mexico opportunities, can you give us a sense of timing there sort of when those might really show up on the P&L?

Ed Crawford

For P&L, let's take assembly components, the two platforms that are immediately are going to be affected that would be assembly components and gas injunction. Aluminum is not a platform that will be fully utilized in China, but triple charging. So, it will really yield -- get the impact it is over a 24-month period from today the equipment is there being assembled, we have the orders, we don't decide to go to Shanghai or go compares to someone because we like the vacation. We go there because our customers go there. The customers want us Ford and General Motors want us there on those particular platforms. But it's like, Matt mentioned this 10-speed transmission, which is over $55 million or $50 million of sales, we've been talking about this and investing in it, in late 2014, all of 2015, we put out millions of dollars to get ready, but it's key path, it's in the launch process and it will start ramping up, but that is a late 2017 but we've been talking about it for a long time.

Dan Drawbaugh

Great. Thank you. That's very helpful.

Matt Crawford

Let me just clarify because we have number of initiatives going on in both of those locations right now. We have already expanded capabilities significantly in our Mexican location and our China location. In fact, I'll be over there in October visiting a new plan in China and have recently been to the one in Mexico.

So we are absolutely -- have built capacity or in the process of building capacity, so while that -- so we're very much in the right places and while I don't think they will significant impact to 2016 impact they are operational and they are going to be impactful to 2017.

Dan Drawbaugh

Great. Thank you. That's very helpful. That's interesting side of the business. Then last one from me, and then, I'll hop back in queue. In terms of capital allocation do you guys -- are you guys really prioritizing leverage or is there any potential for a buyback program here just given where the stock is, I know you said about $20 million in pay downs during the year?

Matt Crawford

This is Matt. We all obviously weigh these things a little bit differently even among the executives here. But I think that our first commitment is to our growth initiatives in this business. Our expectations are higher than ever because the overall environment, but that our commitment growth exists. Our commitment to productivity enhancements particularly with short paybacks is also sort of tied for first, we will call it. So that's where our emphasis is. I think after that I think it really becomes opportunistic relative to we have lost back in the past when the opportunity has been compelling and certainly reduction of debt. We understand is a priority force of our shareholders. So depending on the day I can reorder some of those, but I can assure you that growth and productivity really aren't one and two.

Dan Drawbaugh

All right. Great. Thank you guys and I appreciate the help. I'll step back in queue.

Ed Crawford

Thank you.

Operator

Our next question comes from the line of Marco Rodriguez of Stonegate Capital Market. Please proceed with your question.

Marco Rodriguez

Good morning guys. Thank you for taking my questions.

Ed Crawford

Good morning, Marco. How are you today?

Marco Rodriguez

I'm doing very well thanks. Most of my questions have actually been asked and answer. But I've a couple of follow-ups on prior questions. First, in terms of the gross margin improvement that you saw sequentially that 200 basis point improvement, you called about the headcount the discretionary spending and improving processes, can you kind of rank in order which was the better of the three, I guess or could you just kind of give us a sense of the magnitude for that change?

Matt Crawford

This is Matt. I'll frame that and then I'll stick Pat with the opportunity to clean it up a little bit. Unquestionably and unfortunately, the initial action that had the greatest impact particularly after the cancellation of orders that General Aluminum but other players around the businesses too was headcount reduction. So, when I look back to the tail end of the first quarter and the initiatives we were taking in that environment it was very focused on headcount. Headcount reduction is down from the beginning of the year on the order of 10%. So that unfortunately would have to rank number one in terms of the immediate COD impact. Have having said that the others are true as well, Pat would you have any comments on that?

Pat Fogarty

No. I would agree, Marco. I would say that when we look at each of our manufacturing businesses, which saw a drop in volume, we had to reduce headcount and what came with that was also not only the variable cost that come along with labor, but also the fixed cost as well. And so that was number one on the priority list to adjust our headcount volumes and once that was accomplished then our focus was on what other things can we do to improve profitability, process improvement initiatives, additional fixed cost reductions and things like that. But I would agree with Matt that number one was employee-related costs, headcount reductions and then reduced cost associated with that healthcare et cetera.

Marco Rodriguez

Got you. Very helpful. And you mentioned that you continue to obviously look at the business and potentially taking some more cost out. I'm just trying to get a little bit better handle of how much more you could possibly take out to bring up that gross profit line or if you really kind of done the majority of what you've set out to do?

Matt Crawford

Yes. I'll jump in once again, I'll let may be Pat clean it up. But, I think that we are now focused on -- absent any additional changes in the environment, I think we are now focused on productivity enhancements. I think we are now focused on implementing new business and supporting new business awards. So no, I do think that the opportunity to do it the way we did it in the end of the first quarter as largely change -- we've largely moved past that. I think modest demand and improvements in some of our markets will be very accretive even if they're not super notable at the top-line a little bit of new business in the right places is going to be very exciting as well.

I'm beginning to see volumes go through some of the new investments that we've made, once again, will be very accretive. Some of the productivity investments we've made, so no, we're on to really a different phase of our margin enhancement. Having said that we are looking at all hires very carefully, but we are making in the right places to support the right initiatives with the appropriate hires.

Marco Rodriguez

Got it. And if I understood you correctly in one of your answers to one of the prior questions, you seem to kind of set the stage for when demand starts to pick back up you obviously need to start hiring some additional people, or bring some more cost into the P&L, just trying to get a sense as far as if that demand starts to pick up a little bit more than just modest as you guys were discussing. How quickly can you kind of ramp that up to meet that demand if it should materialize?

Ed Crawford

Well, we wait for it to materialize everyday, what's important -- what's happened here in the first -- in the last quarter and began in each of the year, let's not leave anymore impression that we have cut any -- what we consider future long-term employment. I can't think of any more than we've really lost it, we can't go forward with. So, it's a -- we haven't sacrificed any bit of the future, we're still very much in a growth mode over here. We didn't make an acquisition in 2015 because it was a bad market any acquisitions. We're being -- we're running the business very tightly, but we have not given up on growth, 2016 will probably be the first year since we've been here for 23 or 24 years in which we won't have increased sales and earnings that doesn't mean we haven't given up growth and we are all prepared -- very, very well prepared for our customers to pick up and we have the first now. We haven't sacrificed any part of the future by making the changes and then addressing and changing the cash flow and the profitability in the second quarter.

So do not leave the phone today thinking that we have given up on the future and given up on growth, we have not, it's [indiscernible] in our mind and we have the customers and when we get a general increase not only as we go in successfully in North America but in the Euro zone. So we like the Euro zone, we've made acquisitions there. We like that for the future, of course, the tax benefits are at this point are in a favor of the company. So, no give up on the growth, no cut back in material people for the future, we haven't sold that out.

Marco Rodriguez

Got it. Thanks a lot guys. I appreciate your time.

Ed Crawford

Thank you.

Operator

Our next question comes from the line of Jay Harris of Axiom Capital. Please proceed with your question.

Jay Harris

I'd like to follow up on the last question a little. Sometimes when companies become more efficient they reduce, they identify redundancies and become more efficient. And sometimes they cut out people that were dedicated to projects that might not mature for five years and I wondered if you've done any of the latter and if so, could you give us a little color?

Matt Crawford

Jay, its Matt. That's obviously a very tough question. I think -- I not naive enough to think that the latter hasn't happened. I think that's just the way things work when you make the changes we've made. But, I want to emphasize again, when we continue to invest in projects and people that support those projects that are important to the future of this business. And I'd give you an example, this -- we talk a lot about productivity and sales growth, we're implementing a new cloud-based ERP system at General Aluminum. So that's the initiative, we thought were important, it does not have a near term pay back. But, we felt it was valuable to the management team to be able to run that business better. So no, I think that we have continued to identify projects that are strategically important to this business. We like when they have those IRR. We like when they have a short pay back. We like when they are about implementing or growing the business. But, I think we have been careful about those things that are still strategic and while I can't suggest that some things have not been lost. I think plus the implementation of this ERP system is an example that we -- we don't just look at things as dollars and cents or current year performance.

Jay Harris

So, the ERP system will enable you to become more internally efficient when fully implemented, change of subject briefly, you may have mentioned this on the call, I may have missed it, but what is your capital spending range for this year?

Pat Fogarty

Jay, this is Pat Fogarty. We expect our CapEx for the year to be in the range of $26 million to $30 million. And then, on the timing of some of the projects that Matt talked about earlier, that may spill over to next year.

Jay Harris

If you are expectations or assumption in growth are realized, would the numbers be significantly higher next year?

Pat Fogarty

In terms of CapEx higher?

Jay Harris

Yes.

Pat Fogarty

I would not think so.

Jay Harris

Okay. Thank you.

Pat Fogarty

We will go through our planning stage, but I would not think so.

Jay Harris

Yes. I must congratulate you guys on the detail and the clarity of this presentation. It's been excellent.

Ed Crawford

Thank you.

Operator

[Operator Instructions] We have a follow up question from the line of Steve Barger of KeyBanc Capital Markets. Please proceed with your follow up question.

Steve Barger

All right. Thanks. Eddie, ParkOhio has been quieter on the M&A front for reasons, you have talked about over the last couple of calls. But, can you give us more of a real-term update in terms of what you are seeing on deal availability and what's going on with multiples here and in Europe, now that probably most companies are seeing trailing EBITDA decline?

Ed Crawford

Look Steve, I have always said money has been buying things, just we can't pay too much and that would prevent us from moving in 2015, here we are at 2016, we still have the same plan in mind, although quite frankly because of the banking cramps in the Euro zone, we still like that market. But again, we are always there that we are looking for transactions. We would like to do transactions but it had to be in our terms. But, the market is still very difficult with private equity being out there trying to pay 8x to 9x EBITDA, I don't know how you can do that, unless you pick the company with substantial growth opportunity.

So, we just are going to have to be very patient here. Keep in mind; we think we have a lot of great customers currently. We think that both can come from our companies just responding. Steel is still out there. Gas and oil is out there. Recreation will be goals that are out there. These are some prime-in. Volvo is out there with the trucking. I mean these are prime markets of ours and Caterpillar and John Deere. So we are accomplishing this because we are diversified. And it's not we don't have dramatic opportunity within our customers returning to this historical volume.

So we have to be prepared there. So we can't just concentrate totally on acquisition. We will do transaction. We are looking at transactions. We continue to look at them. But, they will have to be very strategic and priced at a right level. If not, we are just going to operate the company like we did in the second quarter.

So we are prepared, we will do it. We are anxious. But, not at the prices that are currently in the marketplace because I think that's not the best investment of our capital.

Steve Barger

Understood. So, when you look at whatever is sitting on your desk from a deal standpoint, is it unlikely that we would see something in 2016 or is that, or there things that could still drop in the share?

Ed Crawford

Well, we are in the same position. You asked me that question I think in the second quarter 2014, Steve. What was going to happen in 2014, and I said well, there is transactions, but then that was in April. And then, you asked me, why [should it be] [ph] in the third quarter. In the end of the third quarter, I said, well, we are looking around and we made two acquisitions late in the fourth quarter of 2014 because they could sell with the prices they wanted we sat around stayed in the queue and somebody comes home and gives us the -- we are there. The question is, it's only about the dollars and how much is, and what's the future. So, if I have to bet, it's going to be the same story. What we will do is, we will come late, but it will be at the right price and we will over pay, it will be accretive; it will have probably lock down to something we already have. We probably not going to go outside anything other than the bolt-on for the rest. But, I will look forward to this question at the end of the third quarter and hopefully, I will have more to say Steve. I'm sorry.

Steve Barger

All right. Last one for me, Matt, I think in your prepared comments, you said you expect railcar build rates to improve in the back half, just curious are you seeing that based on the backlog or you actually seeing that it's hard to come through in the order book?

Matt Crawford

Well, so, I'm just reflecting on those comments right now. So, in general let me begin by saying railcar builds have dropped precipitously from last year. I think that long-term average in that industry is about 55,000 of railcars, we have been way-way above that for the last few years. I think the first part of the year, first half of the year kind of was in that range and we believe based on the order book that it will be a little bit better in the second half.

I want to call it out, because I think that is such a big drop, I mean that was a -- I don't have the numbers in front of me but a 50% job drop from last year. So I look at that more as a leveling off maybe a little bit of modest strength than I really see overturn the success we have had in the past.

Steve Barger

Understood. Thanks for the color. Appreciate it.

Operator

We have a follow-up question from the line of Christopher van Horn of FBR & Company. Please proceed with your question.

Dan Drawbaugh

Hi, guys. This is Dan. Just wanted to follow-up with one question on the material side. What exactly is your exposure there? Are you able to pass most of that through and what are you seeing sort of going into 2017 maybe back half of 2016?

Matt Crawford

In general, we pass it through. And it depends on the business but in general are able to respond fairly well to fluctuations in raw material. Whether that's through LTAs that include indexing, whether that includes the norm of doing business with -- for example, a general aluminum where they change the price monthly based on the aluminum index. So in general, we are insulated from some of those changes. Now, I said that, I want to back up and say in general, a deflationary environment though is not a long -- is not a healthy long-term for margins. It is -- creates a little bit more competitiveness in the marketplace. It creates a little bit more aggressiveness on the part of customers.

So, the deflationary environment we are in probably incrementally puts a little more pressure on us than otherwise in a high level. Once again, I think largely we are insulated. We are in highly engineered components. We are in long-term agreements with index. We are in the right places. But, I just want to tell you that a little bit of inflation, it creates a business environment that is more attractive for margins than the tenure of a deflationary environment, which we have kind of been in the last couple of years.

Dan Drawbaugh

Got it. Thanks gentlemen. Yes, that works. That's pretty much what I was wondering. Great. I will jump back in queue.

Operator

There are no further questions at this time over the audio portion of the conference. I would like to turn the conference back over to management for closing remarks.

Ed Crawford

Well, ladies and gentlemen, thank you very much for your continued interest in ParkOhio and have a great day.

Operator

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.

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