Ampco Pittsburgh : Third Quarter 2022 Results Conference Call Transcript (November 17, 2022)

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PRESENTATION

Operator

Good day and welcome to the Ampco-Pittsburgh Corporation Third Quarter 2022 Earnings Results Call.

All participants will be in a 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 questions.

Please note this event is being recorded.

I would now like to turn the conference over to Michael McAuley, CFO. Please go ahead.

Michael McAuley

Thank you, Jason, and good morning to everyone joining us on today's third quarter 2022 conference call. Joining me today are Brett McBrayer, our Chief Executive Officer. 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 the webcast replay, please consult the Investors section of our website at ampcopgh.com.

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

Brett McBrayer

Thank you, Mike. Good morning and thank you for joining our call. As shared in our recent press release, Ampco-Pittsburgh recorded a net income of $0.8 million in our third quarter of 2022, delivering an earnings per share of $0.04.

We experienced a sales growth of 23% for the quarter and were up 14% year-to-date, versus prior year. The backlog for Air & Liquid Systems broke another record this quarter with no weakness in site.

In December, we will receive our first piece of new equipment for our U.S. asset modernization.

Our positive performance for the quarter was achieved, despite significant negative headwinds from European energy prices, they impacted volume in our facilities in Sweden, the U.K. and Slovenia.

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We continue to see softening in the European market, which will continue, as long as energy prices remain at historically high levels. The North American market, however, remains strong for both Forged and Cast Engineered Products and Air & Liquid Systems.

From a safety perspective, I'm pleased to report that our performance for the quarter continues on a positive trajectory.

Now at this time, I will turn the call over to David Anderson, President of Air & Liquid Systems for comments on his segment's performance.

Dave Anderson

Thank you, Brett. Good morning. At the end of the third quarter, Air & Liquid Systems achieved another historic high in our backlog. This is the third consecutive quarter our backlog has reached a new record.

Backlog levels have increased 54% over the past nine months and 80% over the past 12 months.

We continue to see significant order activity, as the changes we have made to our sales force continue to show positive results. .

Sales in Q3 increased 20%, compared to prior year, primarily due to higher shipments of heat exchangers and custom air handling units. We continue to manage short-term supply chain- related issues, including extended lead times on materials and customer requested deferrals.

Operating income for Q3 was consistent with the prior year, as higher shipments were offset by unfavorable product mix. Year-to-date, operating income was 12.6%, above prior year.

Air & Liquid Systems is now 9 months into our multiyear strategic growth plan. Q3 sales were 22% higher than Q1 of this year, and our backlog has continued to achieve record highs, each quarter. In the quarters ahead, we will continue forward with multiple growth initiatives, as we build on the positive momentum we have already achieved.

Brett McBrayer

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

Sam Lyon

Thank you, Brett. The Forged and Cast segment's backlog decreased 10%, sequentially, in the third quarter of 2022 and was up 2% since the beginning of the year. This is mainly due to choppy ordering patterns, a reduction of activity in the oil and gas business and unfavorable currency translation of our foreign backlogs.

The currency translation accounted for 30% of the decline, sequentially in Q3 and year-to-date, has reduced our backlog by approximately $16 million.

We had a very strong booking month of $35 million in October, which increased our backlog 6%.

We are seeing strong activity in the U.S. rural market, as there has been a shift towards a more local supply chain. Europe is soft, due to high energy costs there. We continue to flex costs and transfer products to our locations that can deliver the most value to our customers.

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The intermediate term outlook for the U.S. is very strong with new projects being installed by Big River Steel, Nucor, Novelis and most recently, Steel Dynamics with their announced $2.5 billion aluminum mill. We traditionally have had a very strong position in aluminum mills.

We're also working toward a zero-carbon footprint in Sweden and are targeting certification to this effect, in 2026. This plant already has an extremely low carbon footprint and is 100--electricity is 100% supplied by non-CO2 producing generation.

Inflation has begun to moderate and, in some cases, has become deflationary. Key inputs such as scrap and moly oxide are in a deflationary position, when compared to the end of 2021. Transportation has moderated and is roughly flat, when compared to January of 2022.

Ferrochrome has remained stubbornly high due to the location of supply and energy-intensive nature of producing this material. Energy in the U.S. has moderated, as well as in the U.K., where we have experienced the largest headwinds.

The U.K. government has recently announced a price cap for natural gas and electricity, which has lowered the cost by more than 50%, which will last to the end of Q1 of 2023.

As stated previously, we worked tirelessly to get these volatile costs incorporated into a surcharge to insulate our business and results from these types of swings. We have been successful in this arena.

In addition, we have been able to increase base pricing in 2022 and 2023, but not at a level of general inflation. We will be focused on increasing base pricing and future contracts to recover costs such as general operating supplies to improve profitability. As Brett stated, our expansion and modernization programs for our U.S. plant assets continue forward.

The first machine will arrive in December with commissioning scheduled to be completed in Q1 of 2023. We will be completing acceptance testing on the next two machines, this quarter. Machine two and three are scheduled to be fully operational in Q2 and Q3 of 2023.

We are excited about these investments as they will provide a lower cost structure in our rural business and further growth in the nonrural business.

I will now turn it back over to Brett.

Brett McBrayer

Thank you, Sam. At this time, Mike McAuley, our Chief Financial Officer, will share more details regarding our financial performance for the quarter.

Michael McAuley

Thank you, Brett. We issued our Form 10-Q for the third quarter of 2022, yesterday, so I will just summarize some highlights for Q3, here.

Ampco's net sales for the third quarter of 2022 were $99.6 million, an increase of approximately 23%, compared to net sales for the third quarter of 2021, led by 23% sales growth in the Forged and Cast Engineered Products segment, which was driven by higher pricing, including surcharge revenues and higher shipments.

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Net sales for the Air & Liquid Processing segment in the third quarter of 2022 were 20% higher than the prior year period, due to higher shipment volumes in the heat exchanger and custom air handling businesses.

Loss from operations for the third quarter of 2021 was $0.1 million. This compares to a loss from operations in the prior year quarter of $2.8 million.

The Forged and Cast Engineered Products segment operating results improved for the third quarter of 2022, compared to prior year primarily due to improved recovery of costs and higher shipments.

Air & Liquid Processing segment's operating results were comparable to the prior year period, despite the sales increase, given the less favorable sales mix, which was due to supply chain issues.

Other income expense net improved overall for the third quarter of 2022, primarily due to higher foreign exchange transaction gains, in addition to the timing of dividend income from one of the corporation's Chinese joint ventures.

This more than offset higher interest expense, driven by both higher borrowings and higher interest rates.

At the bottom line, the corporation reported net income attributable to Ampco-Pittsburgh of $0.8 million or $0.04 per diluted share for the third quarter of 2022, compared to a net loss of $1.6 million or $0.08 per diluted share for the third quarter of 2021.

Capital expenditures for the third quarter of 2022 were $6.7 million and are $13 million year-to- date, primarily in the Forged and Cast Engineered Products segment.

At September 30, 2022, the corporation's balance sheet and liquidity position included cash on hand of $12.2 million and undrawn availability on our revolving credit facility of approximately $35.6 million.

During the quarter, the corporation closed on some key financing transactions that, significantly, improved our liquidity position and to provide future financing for the strategic modernization CapEx plan in our U.S. Forged operations.

On August 30, 2022, our Air & Liquid segment completed a sale and leaseback transaction for its real estate at two plants in Virginia valued at $15.5 million, with a subsidiary of Store Capital, a major real estate investment trust.

This deal also included a supplemental disbursement agreement with UES of up to $2.5 million for building improvements at the Carnegie, PA, finishing plant for upgrades to be completed associated with the UES modernization program.

In addition, on September 29, 2022, UES entered into a master loan and security agreement with a leading equipment finance lender in which UES can borrow up to $20 million for specified equipment for its modernization CapEx program.

During the quarter, we drew $4 million on this facility to reimburse past supplier progress payments. These proceeds, plus the proceeds from the air and liquid sale on leaseback were

Ampco-Pittsburgh Corporation

Tuesday, November 15, 2022