Ampco Pittsburgh : Second Quarter 2023 Results Conference Call Transcript (August 10, 2023)

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PRESENTATION

Operator

Good day. and welcome to the Ampco-Pittsburgh Corporation Second Quarter 2023 Earnings Conference Call.

All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the "*", key, followed by "0".

After today's presentation, there will be an opportunity to ask question. To ask a question, you may press "*", then "1" on a touchtone phone. To withdraw your question, please press "*", then "2". Please note, this event is being recorded.

I would now like to turn the conference over to Kim Knox. Please go ahead.

Kim Knox

Thank you, Marlise, and good morning to everyone joining us on today's second quarter 2023 conference call. Joining me today are Brett McBrayer, our Chief Executive Officer; and Mike McAuley, Senior Vice President, Chief Financial Officer and Treasurer. Also joining us on the call today are Sam Lyon, President of Union Electric Steel Corporation; and Dave Anderson, President of Air & Liquid Systems Corporation.

Before we begin, I would like to remind everyone that participants on this call may make statements or comments that are forward-looking and may include financial projections or other statements of the corporation's plans, objectives, expectations or intentions. These matters involve certain risks and uncertainties, many of which are outside the corporation's control.

The corporation's actual results may differ, significantly, from those projected or suggested in any forward-looking statements due to various risk factors, including those discussed in the corporation's most recently filed Form 10-K and subsequent filings with the Securities and Exchange Commission. We do not undertake any obligation to update or otherwise release, publicly, any revision to our forward-looking statements.

A replay of this call will be posted on our website later today. To access the earnings release or webcast replay, please consult the Investors section of our website at ampcopgh.com.

With that, I'd like to turn the call over to Brett McBrayer Ampco-Pittsburgh's CEO. Brett?

Brett McBrayer

Thank you, Kim. Good morning, and thank you for joining our call. As shared in yesterday's press release, we recorded an earnings per share of $0.02 for the second quarter and $0.06 per share, year-to-date.

Our operating income, year-to-date, is triple that of prior year with solid performances from both segments. Of particular note is the continuing growth of the Air & Liquid segment with another quarter of record-breaking backlog. I challenged Dave Anderson, our Air & Liquid Segment President, to more than double its revenue of 2022. Based on his recent performance, I believe he has taken that challenge to heart.

Much work is still ahead as we position ourselves for a strong 2024 and beyond. The completion of our capital improvements in our U.S. forged assets is critical, and I'm pleased with our progress

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to date. I also want to note our strong safety performance with recordable and lost time injury rates continuing to improve.

I'd now like to turn the call over to Dave Anderson, President of Air & Liquid Systems.

Dave Anderson

Thank you, Brett. Good morning. We continue to see the positive results of our strategic growth plan as sales in the first six months of this year are the highest in Air & Liquid's history. Sales in Q2 increased 29% versus prior year with year-to-date sales up 35% over prior year.

Year-to-date, all three businesses have achieved more than 20% sales growth, compared to prior year. Even with the higher sales level, our backlog grew once again to a new record this quarter as our expanded sales force continues to exceed expectations. This means we have now achieved a new record backlog for six consecutive quarters.

The new manufacturing space we leased in Lynchburg, Virginia, at the beginning of Q2 is now operational and will provide additional capacity for our businesses as we continue to grow.

We are also excited to share that we are working on a U.S. Navy additive manufacturing project at Oak Ridge National Laboratory. Over the next 12 months, we will be working on designing additive manufactured pump parts for the U.S. Navy. Additive manufacturing of these parts has great potential to shorten supply chain lead times and increase capacity.

Segment operating income for the first six months of 2023 was 13% above prior year, due to the increased sales. The prior year income included $0.7 million in income for a one-time employee benefit policy adjustment. Excluding the one-time adjustment shows operating income growth of 30% versus prior year.

Revenue and operating income have already increased. Our backlog is now 92% higher than it was 18 months ago. And with our new facility in Lynchburg, we have increased our manufacturing capabilities. All of this means we are in a strong position to continue forward with our growth plans in the quarters ahead.

Brett McBrayer

Thank you, Dave. I'll now turn the call over to Sam Lyon, President of our Forged and Cast Engineered Products segment.

Sam Lyon

Thank you, Brett, and good morning. Q2 of 2023 marked the third consecutive quarter of positive operating income. We finished the quarter with an operating income of $3.9 million, which included a one-time benefit of $1.9 million related to a foreign government energy reimbursement. Excluding this benefit, operating income was $2 million, roughly consistent with our Q1 results.

Q2 revenues were $77.6 million versus the prior year of $79.6 million. Lower top-line revenue reflects decreased variable surcharges due to lower energy and raw material costs and a weaker dollar.

The cast roll market is stable, while the forged roll market has strengthened and is approximately 25% higher versus 2022.

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Forged Engineered Product revenues continue to be depressed. We anticipate recovery for the FEP market starting in the back half of 2023 and continuing in 2024. For 2024, the World Steel Association estimates steel demand to increase by 2.5% in the U.S., with Europe also seeing modest growth, compared to this year.

Our customer base reports similar sentiments, expecting sustained healthy demand from the automotive industry, solar energy sector and U.S. infrastructure programs. This confidence is supported by investments in new steel and aluminum rolling mills, primarily in North America.

The forged roll market is strong, approximately up 25%, year-over-year, as North American manufacturers are leaning more heavily on domestic producers to ensure reliability of supply.

Our backlog remains strong into 2024. Negotiations are complete with most of our large roll customers, and our value proposition has allowed us to maintain or grow share with favorable pricing for 2024.

Energy and transportation surcharges remain in place for most of our customers, which will smooth our operating income and protect against unforeseen volatility.

As Brett mentioned, our capital improvement plan in the United States continues to progress with completion expected in the fourth quarter.

Four of the five new machining centers have been received and our various stages of installation and startup. We've completed over 30 rules in the first machine with efficiency improvements of over 20%. We are very encouraged by these results and look forward to many years ahead with minimal maintenance costs and unplanned downtime.

The imminent completion of this strategic project positions us well to support the growth in the North American steel and aluminum industries.

Brett McBrayer

Thank you, Sam. I'd now like to turn the call over to Mike McAuley, our Chief Financial Officer, who will now share more details regarding our financial performance. Mike?

Mike McAuley

Thank you, Brett. As expressed in our press release and in the corporation's Form 10-Q filed last night, Ampco-Pittsburgh consolidated net sales for the second quarter of 2023 were $107.2 million. That's an increase of 4.5%, compared to net sales for the second quarter of 2022.

Net sales in the Air & Liquid Processing segment grew 29%, year-over-year, driven by a higher volume of shipments in all three businesses, but most notably heat exchange coils.

Sales, net sales for the Forged and Cast Engineered Products segment in the second quarter of 2023 declined 2.5%, compared to the prior year period, as Sam explained, driven by lower demand for FEP products in the oil and gas and steel distribution markets, lower surcharge pass- throughs and unfavorable foreign exchange translation, offset in part by higher mill roll shipment volumes.

Income from operations for the second quarter of 2023 was $3.3 million. This compares to income from operations in the prior year quarter of $2.1 million. Higher overall shipment volumes, the

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foreign energy credit Sam referred to, and better manufacturing cost absorption were partly offset by higher costs and a less favorable sales mix.

Interest expense for the quarter increased compared to prior year, due to a rise in both interest rates and in total debt, in part, due to ongoing expenditures for the strategic capital investment program in the U.S. forge business.

"Other-net" declined for the quarter, primarily due to losses recorded on foreign exchange in the current year quarter compared to gains on foreign exchange recorded in the prior year quarter.

Backlog at June 30, 2023, of $370.2 million rose approximately 6% from a year ago, with Air & Liquids segment backlog at a record high, and with the Forged and Cast Engineered Products segment backlog reflecting the decrease in FEP demand and roll order timing differences.

Net cash flows used by operating activities was approximately $2.8 million for Q2 2023, and was a use of $7.1 million year-to-date June, primarily in support of working capital.

This represents a significant improvement from 2022, due to improved operating results and lower change in working capital in the current year periods. Capital expenditures for the second quarter of 2023 were $6.4 million, primarily for the Forged and Cast Engineered Products segment, inclusive of the forged business' strategic capital program.

We expect CapEx and usage of the equipment finance facility to step up in Q3 with the milestones expected for that capital expenditure program.

June 30, 2023, the corporation's balance sheet and liquidity position included cash on hand of $9.5 million and undrawn availability on our revolving credit facility of $22.4 million.

In addition, the equipment financing facility has remaining capacity of $9.4 million as of June 30, 2023.

Operator, at this time, we would now like to open the line for questions.

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QUESTION AND ANSWER

Operator

Thank you. We will now begin the question-and-answer session. To ask a question, you may press "*", then "1" on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been asked and you would like to withdraw your question, please press "*", then "2".

At this time, we will pause, momentarily to assemble our roster. And as a reminder, for a question, "*", "1".

Our first question comes from David Wright from Henry Investment Trust. David, please go ahead.

David Wright

Good morning. I apologize for any background noise. Reading from the press release, SG&A is up pretty noticeably, sequentially and year-over-year. Mike, can you give some commentary about that? And also what does SG&A look like for the next couple of quarters?

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