Ampco-Pittsburgh Q3 2023 Earnings Call Transcript

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November 14, 2023

There are 7 speakers on the call.

Operator

Welcome to the Ampco Pittsburgh Corporation Third Quarter 2023 Earnings Results Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I'd now like to turn the conference over to Kim Knox, Corporate Secretary.

Operator

Please go ahead.

Speaker 1

Thank you, Tony, and good morning to everyone joining us on today's 3rd 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 and Liquid Systems Corporation. Before we begin, I would like to remind everyone that participants on this call may make 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 ks and subsequent filings with the Securities and Exchange Commission.

Speaker 1

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'd like to now turn the call over to Brett McBrayer, Ampco Pittsburgh's CEO. Brett?

Speaker 2

Thank you, Kim. Good morning and thank you for joining our call. As reported in our press release and 10 Q filing, Ampco Pittsburgh delivered a positive earnings per share for the Q3 of 2023 With improved performance from both business segments, our operating income of $1,700,000 for the quarter $7,000,000 year to date It's up significantly compared to last year. This improved performance was realized despite the significant Negative headwinds we continue to experience in Europe. The growth we are seeing in our Air and Liquid Systems segment is encouraging, And we again experienced record backlog in that segment for the quarter.

Speaker 2

We are excited about our capital equipment investments In the Forged and Cast Engineered Products segment, which is on track for completion at the end of this year. I'm now going to turn the call over to Sam Lyon, President of our Forged and Cast Engineered Products Segment for further comment on His Group's performance. Sam?

Speaker 3

Thank you, Brett, and good morning. Q3 of 2023 marked the 4th consecutive quarter Quarter of positive operating income for the FCEP segment. Despite the annual summer outages at our Europe plants And the planned maintenance outages for the U. S.-based Melt and Forge Operations, we finished the quarter with a segment operating income of $1,400,000 improvement of $1,200,000 over Q3 of 2022. Q3 revenues were $73,600,000 And a decreased demand for FEP.

Speaker 3

The cast drill market is soft but stable, while the forged drill market has strengthened and is approximately 13% higher than 2022. FEP revenues continue to be depressed. However, we are starting to see increased activity for this non rule business and anticipate some recovery in 2024. In October, the World Steel Association modified its short range outlook for global steel demand in 2023 2024 from its April projections. It cited a weakening in steel consumption and investment, reacting to high inflation, increasing interest rates and ongoing global conflicts and uncertainties.

Speaker 3

In kind, our customer base has voiced expectations of a Flat to declining North American market and continued softness in Europe. This decrease in demand has resulted in some of our customers having a higher position relative to 2024 demand impacting the overall market for cash and forged rules in the short term. Our customer Project rules our customers project rule demand to be down from the first half of twenty twenty four and recover in the second half as inventories correct and demand increase. Offsetting this decline, we have successfully increased base pricing and grown share with many of our larger customers. The intermediate to long term US Steel and others are all bullish on the next decade in North America and are all investing in new capacity.

Speaker 3

ArcelorMittal Projects non China demand to increase approximately 35% in the coming decade with an increase of 15% in the U. S. And Europe where our share has increased. They believe India will double and Brazil will grow by approximately 30%. In addition, the global aluminum market is expected to grow with Estimates of a 5.8 percent compounded annual growth rate through 2,031 according to Allied Market Research.

Speaker 3

Similar numbers were quoted by Market Research, Future Market Insights and SkyQuest. In 2022, the construction of 3 new aluminum rolling mills was announced in the U. S. This domestic expansion opens new opportunities to broaden our footprint in the sector of the metals industry for which our Rural Products are well suited. As Brett stated, our capital equipment improvement plan in the U.

Speaker 3

S. Continues to progress. 2 of the 5 machine centers were commissioned in Q3 and are performing as expected. The 3 remaining machining centers have been installed or in the process of being commissioned. We are very encouraged by these results and look forward to many years ahead with

Speaker 2

Thank you, Sam. Dave Anderson, President of Air and Liquid Systems will now cover his segment's results. Dave?

Speaker 4

Thank you, Brett. Good morning. Air and Liquid continues to see the positive results of our strategic plan with record level sales through the 1st 9 months of this year. Sales in Q3 increased 18% versus prior year with year to date sales up 29% over prior year. Year to date, all three businesses have achieved more than 20% sales growth compared to prior year.

Speaker 4

Even with the higher sales level, our backlog grew once again Segment operating income for the 1st 9 months of 2023 was 15% above prior year, primarily due to the increased sales. The prior year income included $700,000 in income recognized for a change in an employee benefit policy. Excluding this one time item shows adjusted operating income growth of approximately 23% versus prior year. The additive manufacturing project we are working on with the U. S.

Speaker 4

Navy at Oak Ridge National Laboratory continues to make progress Funding grant from the U. S. Navy for the purchase of new manufacturing equipment. The $1,600,000 funding grant allows us to purchase new machining in mid-twenty 24.

Speaker 2

Thank you, Dave. At this time, Mac McAuley, our Chief Financial Officer, will now share More details regarding our financial performance for the quarter. Mike?

Speaker 5

Thank you, Brett. Good morning. As indicated in our press Release issued last night and in the corporation's Form 10 Q filed this morning, Ampco's net sales for the Q3 of 2023 were $102,200,000 an increase of 2.6% compared to net sales for the Q3 of 2022. Net sales on the Air and Liquid Processing segment grew 18% year over year, driven by a higher volume of shipments in all three businesses. Net sales for the Forged and Cast Engineered Products segment in the Q3 of 2023 Declined 2.5% compared to the prior year period, as Sam explained, driven primarily by lower demand for FEP products in the oil and gas Steel distribution markets and lower surcharge pass throughs, offset in part by higher mill roll shipment volumes.

Speaker 5

Income from operations for the Q3 of 2023 was $1,700,000 This compares to income from operations in the prior year quarter of $200,000 The improvement was principally led by higher pricing, net of surcharges outpacing manufacturing costs In the Forged and Cast Engineered Products segment and the impact of higher shipment volumes in the Air and Liquid Processing segment. Investment related income declined for the quarter due to a lower dividend this year from one of our Chinese Roll joint ventures. Interest expense for the quarter increased compared to prior year due to a rise in both interest rates and in total debt. This reflects interest on the sale and leaseback financing transaction and the equipment financing arrangement completed during the second half of twenty twenty two, The latter of which is funding the equipment modernization project in the U. S.

Speaker 5

Forage business. It also reflects higher average borrowings under the Revolving credit facility to support the growth in working capital in 2023. Other income net declined for the quarter, primarily due to lower foreign exchange transaction gains in the current year quarter compared to the prior year quarter. The income tax provision decreased for the quarter compared to prior year, in part due to a $300,000 Discrete item recorded in the prior year quarter for the revaluation of certain deferred tax assets of the Air and Liquid Processing segment Following new legislation enacted in 2022, which will decrease the Pennsylvania state income tax rate by 2,031. Net income attributable to non controlling interest rose for the quarter due to higher operating results for our majority owned Chinese joint venture.

Speaker 5

As a result, net income attributable to Ampco Pittsburgh was $800,000 or $0.04 per share for the quarter. Total backlog at September 30, 2023 of $403,200,000 rose approximately 9% From the beginning of the year, with the Air and Liquid segment backlog at a new record high and the Forged and Cast Engineered Products segment reflecting higher forged roll orders driven by U. S. Demand and better pricing, offset in part by a decrease in orders for cast rolls and FEP products. Net cash flows used by operating activities was approximately $3,200,000 for Q3 2023 and with the use of $10,300,000 year to date September 2023, primarily in support of working capital investment.

Speaker 5

This represents an improvement from 2022 due to improved operating results and lower change in working capital in the current year periods. Capital expenditures for the Q2 of 2023 were $4,100,000 primarily for the Forged and Cast Engineered Products segment, inclusive of the Ford's Business' modernization capital program. We expect CapEx and usage of the equipment finance will lead to increase in Q4 2023 with the completion of milestones expected for the machinery that are part of that key capital expenditure program. At September 30, 2023, the corporation's liquidity position included cash on hand of $6,100,000 and undrawn availability on our revolving credit facility of $21,700,000 In addition, the equipment financing facility has remaining capacity of $6,800,000 as of September 30, 2023, and is sufficient to finance the remaining expenditures of the modernization program. Operator, at this time, we would now like to open the line for questions.

Operator

We will now begin the question and answer session. Our first question will come from Justin Bergner with Gabelli Funds. You may now go ahead.

Speaker 6

Hi, Brett, Mike, Sam and Dave, how are you?

Speaker 2

Good. Good morning.

Speaker 6

Good morning. With respect to forging cast engineered products, this customer Downtime that led you to take some downtime, does that pull forward, I guess, from what I'm expecting would be downtime that's more concentrated towards the Q4 and the holiday season? Or is that additional downtime in the sort of annual view?

Speaker 3

Maybe I wasn't clear. That's just our normal and Europe's normal downtime that happens in the Q3. Now on top of that, There are many blast furnaces that have been idled to pull down supply and Raise prices in the market in Europe, but the downtime wasn't necessarily poor. That was just our downtime that we normally Taken the Q3 to align with the European vacations.

Speaker 6

Got you. Okay. And with respect to cash flow, obviously, you used last year And this year, in the first half of next year, when you expect volumes to be down, will that lead to some harvest should that lead to some harvesting of Capital?

Speaker 5

Whatever we expect kind of a softness In production, for example, as Sam indicated, like first half versus second half on the roll business, Yes. That will release working capital and then as production ramps up, Working capital tends to ramp up with that, so with demand and hence production.

Speaker 6

Okay. And then just in terms of the modernization project, I think the details came out a little bit fast in So how many have been commissioned? How many have yet to be commissioned? And when do you expect the EBITDA Benefit from the modernization to start showing up in the financials?

Speaker 3

Justin, 2 of the machines are Commissioned and those are the roughing machines that are in our Harmon Creek plant, Bergistown Harmon Creek. The 3 remaining machines are Our finishing plant at Carnegie, there will be finished commissioning this quarter. And then we have an overlap of training That will continue through probably the Q1 of next year.

Speaker 6

Okay. So I mean after the Q1, should we sort of begin to see a step up of EBITDA, everything else being equal on account?

Speaker 3

Not yet. Yes. Okay. That's correct.

Speaker 6

All right. Thank you.

Speaker 3

Thanks, Chuck. Thank you.

Operator

It appears there are no further questions. This concludes our question and answer session. I would like to turn the conference back over to Brett McBrayer for any closing remarks.

Speaker 2

Thank you. I'm encouraged by our strengthening operational performance and the positive momentum we've seen across both business segments. I want to thank the hard work of our employees and the positive change they are delivering each and every day. I also want to thank our shareholders for your continued support. Thank you for joining our call this morning.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Ampco-Pittsburgh Q3 2023
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