Ampco-Pittsburgh Q2 2023 Earnings Call Transcript

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August 10, 2023

There are 8 speakers on the call.

Operator

Good day, and welcome to the Ampco Pittsburgh Corporation Second Quarter 2023 Earnings 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 would now like to turn the conference over to Kim Knox, please go ahead.

Speaker 1

Thank you, Marlise, and good morning to everyone joining us on today's Q2 2020 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 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 The corporation's most recently filed Form 10 ks and subsequent filings with the Securities and Exchange Commission.

Speaker 1

Please consult the Investors section of our website at ampcopgh.com. With that, I'd like to turn the call over to Brent McBrayer, Camco Pittsburgh's CEO. Brett?

Speaker 2

Thank you, Cam. Good morning and thank you for joining our call. As shared in yesterday's press release, we Quarter in earnings per share of $0.02 for the 2nd 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 and Liquids segment with another quarter of record breaking backlog.

Speaker 2

I challenged Dave Anderson, our Air and Liquid Systems President to more than double his 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.

Speaker 2

Forged assets is critical and I'm pleased with our progress to date. I also want to note our strong safety performance with recordable and lost time injury rates continuing I'd now like to turn the call over to David Anderson, President of Air and Liquid Systems.

Speaker 3

Thank you, Brett. Good morning. We continue to see the positive results of our strategic growth plan as sales in the 1st 6 months of this year are the highest in Air Liquids' 3. 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.

Speaker 3

Even with the higher sales level, our backlog 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.

Speaker 3

Navy. Additive manufacturing of these parts has great potential to shorten supply chain lead times and increase capacity. Segment operating income for the 1st 6 months of 2023 was 13% above prior year due to the The prior year income included $700,000 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.

Speaker 3

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.

Speaker 4

Thank you, Dave.

Speaker 5

I'll now turn the

Speaker 2

call over to Sam Lyon, President of our Forest and Cast Engineered Products segment.

Speaker 4

Thank you, Brett, and good morning. Q2 of 2023 marked the 3rd consecutive quarter of positive operating income. We finished the quarter with Excluding this benefit, operating income was $2,000,000 roughly consistent with our Q1 results. Q2 revenues were 77 $600,000 versus the prior year of $79,600,000 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 Forged Engineered product revenues continue to be depressed.

Speaker 4

We anticipate recovery for the FEP markets starting in the back half of twenty twenty three 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.

Speaker 4

S. This confidence is supported by investments in new steel and aluminum rolling mills, primarily in North America. On domestic producers to ensure reliability of supply. Our backlog remains strong into 2024. Negotiations are complete with most of our large And our value proposition has allowed us to maintain or grow share with favorable pricing for 2024.

Speaker 4

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 4th quarter. 4 of the 5 new machining centers have been received in our various stages of installation and start up. We've completed over 30 rules in the first With efficiency improvements of over 20%. We are very encouraged by these results and look forward to many years ahead with minimal maintenance And unplanned downtime.

Speaker 4

The imminent completion of this strategic project positions us well to support the growth in North America And Aluminum Steel North America Steel and Aluminum Industries.

Speaker 2

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

Speaker 5

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 2nd Net sales on the Air and 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 Q2 of 2023 declined 2.5% compared to the prior year period, 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 Q2 of 2023 was $3,300,000 This compares to income from operations in the prior 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.

Speaker 5

S. Forged 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 $370,200,000 rose The decrease in FEP demand and roll order timing differences. Net cash flows used by operating activities Approximately $2,800,000 for Q2 2023 and was a use of $7,100,000 year to date June, primarily in support This represents a significant improvement from 2022 due to improved operating results and lower change Capital expenditures for the Q2 of 2023 were $6,400,000 primarily for the Forged and Cast Engineered Products segment, inclusive of the Forged Businesses Strategic Capital Program.

Speaker 5

We expect CapEx and usage of the equipment finance facility to step up in Q3 with the milestones expected for that capital expenditure In addition, the equipment financing facility has remaining capacity of $9,400,000 as of June 30, 2020 Operator, at this time, we would now like to open the line for questions.

Operator

Thank you. We will now begin the question and answer session. Our first question comes from David Wright from Hernie Investment Trust. David, please go ahead.

Speaker 5

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

Speaker 5

Yes, David. Good morning. Thank you for the question. SG and A is elevated compared to prior year for a couple of reasons. One is with the higher income variable compensation accruals are higher than they were last year when we had lower income.

Speaker 5

We're also experiencing like a lot of public companies that you may be listening to or you may own a higher level of self insured health care costs. It's quite noticeable. We think and Based on discussions with our insurers and our specialists that a lot of it is Related to the pandemic and people deferring at healthcare for a few years and now it's starting Catch up with most companies and we're no stranger to that either. So we are seeing elevated self insured health care costs In addition to things like typical wage inflation and so forth. The other thing is that we did start a new Facility in Air and Liquid and there's some additional costs associated with that until we get to a more ramped up

Speaker 6

So should we look at $14,000,000 a quarter for the next couple of quarters as well?

Speaker 5

I think that SG and A for 2023 Consolidated will be about $13,000,000 in Q3 and Q4.

Speaker 6

Okay, great. Thanks very much. Appreciate you taking the question.

Speaker 2

Thanks, David.

Operator

And our next question comes from Justin Bergner from Gabelli Funds. Justin, please go ahead.

Speaker 6

Hi. Good morning, Brett. Good morning, Mike. Good morning, rest of the team.

Speaker 2

Good morning.

Speaker 6

I guess my first question would be on cash flow and working capital. So Your sales in your forged and cast roles are kind of more in the flattish territory. The inventories are remaining high. What's the outlook for inventories in the second half? And should we expect

Speaker 4

Justin, this is Sam. Mike might have some specific numbers in front of him. But in general, we expect inventory to come down. We had our outage that occurred at the very end of Q2 and into Q3 for our North American assets and we take 2 weeks out. So we build inventory ahead of that to flow through the rest of the operations to support the customer base and then that will flow out over the next two quarters.

Speaker 5

Yes. I might add to that. This is Justin, it's Mike. I might add to that a little bit. In addition To the kind of the reduction in inventory that's expected in the second half, We think that cash flow from operating activities should be almost neutral for the full year As we catch up with the drop in inventories, but the one thing to keep in mind is while that's cash flow from operating activities Based on higher income offset by working capital and other things with the cash add backs.

Speaker 5

The other thing to keep in mind is CapEx is going to continue to be a bit elevated while we complete the investments in the U. S. Forage business. So we do think that CapEx is going to be higher. So if you're thinking the next step like free cash flow, it's going to be difficult

Speaker 6

guide for the year and does the equipment finance facility sort of cover all your needs there? Or do you have to sort of Kind of go into the revolver.

Speaker 5

The equipment finance facility is a $20,000,000 facility. It covers the vast majority of the strategic CapEx. In fact, that those particular That particular equipment serves as the collateral for the facility. So it largely It is not 100% covers, but our credit agreement has a $20,000,000 allowance for such incremental supplemental financing outside of the bank group. We expect to use most of that.

Speaker 5

And so I'm not concerned about funding for the CapEx We've got it covered pretty much. We are funding part of it out of pocket for things like foundations, utilities, some engineering. But the bulk of the cost is covered by the equipment financing facility. And in terms of kind of giving you some kind of guidance or outlook on CapEx, Q3 should be our highest CapEx quarter of the year and then we should drop back down into a lower Probably our lowest quarter in Q4. And we're thinking something in the range of $22,000,000 total CapEx for full year of 2023.

Speaker 5

Yes. As we go forward into 2020 We're going to be obviously stepping down quite significantly and back into more historical levels Total CapEx in the out years.

Speaker 6

Okay. And then more historical would be sort of 15 ish or

Speaker 5

I would say 15, south of 15. Okay.

Speaker 6

All right. Thank you. And then lastly, would you say that pricing has sort of caught up to Costs now based on the Fortune Cash Engineered Products results in the second quarter. And then you made a Comments, Brett, about 2024 pricing. I didn't realize sort of most of that gets decided so early in 2023.

Speaker 6

Would you expect a further improvement relative or are you sort of trending towards better conditions for 2024 pricing than you're Experiencing in the 2nd quarter and looking into the 3rd quarter?

Speaker 4

Yes. This is Sam, Justin.

Speaker 5

Most of our major

Speaker 4

contracts are done in the second quarter ish for next year And then we got our roll allocations. And so that was my comment. The pricing that we're able to obtain is in excess Of inflation. Most of our major costs raw materials, energy, transportation, Raw materials are all pass throughs and then we know what our wage inflation is going to be on all the union contracts. So we're confident that we were able to cover more than cover inflation.

Speaker 6

Okay. So I understand.

Speaker 4

The last the pricing for Q3 and Q4 of this year are done. They were done Last year, so pricing would be similar more that we the pricing we will experience in Q3 and Q4 will be similar to Q2 of this

Speaker 6

Okay. And so the pricing for this year is more or less caught up with inflation as of Q2 and looking into the back half and then next year, you're expecting to get some pricing beyond your full set of inflationary

Speaker 5

Yes. That's correct. Yes. The pricing, I would say, is like is in line with the materials And raw materials and energy and transportation costs this year, but potentially not We're completely caught up with other inflationary items, hence the need to focus on pricing in 2024 And get that pricing raised in 2024 as Sam described.

Speaker 6

Okay. That's good perspective. Thank you. I'll get back in the queue.

Speaker 4

Thanks.

Operator

And our next question comes from Greg Bennett from who is a shareholder. So, Greg, please go ahead.

Speaker 7

Good morning. So I guess my question For next year, you have these costs you've negotiated the contracts and you have these costs pass throughs, which I guess are variable. Costs go down and you pass that through to your customer. For margin expansion It really comes down to this modernization program. I was wondering if you could give us more color on, I think you mentioned that you have 4 of the 5 pieces of equipment in place and the first one was generating savings.

Speaker 7

But about 2 years ago when you embarked on this, you were talking about quite a significant savings Or productivity improvement, if you could tell us more about that, more color. Is that turning out the way you want?

Speaker 4

Yes. This is Sam. Thanks. Greg, the numbers that we're looking at are roughly in the $2,500,000 to $3,000,000 savings range and that Expansion, there's 2 furnaces that we're putting in that allow us to increase our forge throughput and expand our non rule business. And depending on volume, that will be another $3,000,000 to say $5,000,000 worth of improvement.

Speaker 7

So we would start to see this beginning in 2024? Yes. Or do you think we might see Is there any Q3 or Q4, any chance of seeing any improvement there or it's really more next year?

Speaker 4

It's really more next year Yes. We have some training costs and ramp up costs that we have. And then next year by the end of Q4 everything will be up Running. And along with that, there's a little bit of a product shift, more product to be run-in our Carnegie plant, which cuts on transportation costs between intercompany transportation. That's another piece of the savings.

Speaker 4

So I would say More Q1 of next year.

Speaker 7

Okay. Most of the calls I've heard recently, Customers were looking for used to look for just in time delivery, then they were doing just in case and over ordering. I'm wondering, Are you finding that some of your customers are destocking now and don't want to take delivery of rolls? Or Are you able to turn those rolls back to your customer as soon as you've manufactured them?

Speaker 4

There's been very little of that. I mean, there's always some push outs or pull ins, but it's not any different The normal so yes, we're not seeing any significant push outs of any kind. And one other thing that's unique to our businesses, Kurt. I don't know if it's unique, but we get estimates for next But then before we start manufacturing, we get approval from them to start. And once we start, we have very

Speaker 7

One final question. I think you touched it was very quick, but you touched on with Air and Liquids This contract with the Navy, and I think you referred to it as additive manufacturing, but a lot of people refer to it as 3 d That's program for that or is the Navy funding that or how is that working?

Speaker 3

Greg, it's Dave. And thank you for the call or for the question. Right now, this is a Navy funded program with Oak Ridge and you're right, it's 3 d or additive, they use either term for it. The Navy's intent is to go towards more of this additive because they see that as an answer To a lot of the supply chain issues that they've been having in recent years with the shipbuilders. So for us right now, we're committed to Learning how to manufacture these parts and we would expect to look at things like Navy funding in the Future, if we were to invest in the equipment.

Speaker 3

So right now, it's a 12 month program to learn how to design them and work And then we make some determinations on what investments may or may not be needed at that point.

Speaker 7

So if you go ahead with this, there will be a CapEx program, but that won't be until 2025. Is

Speaker 3

It would probably be around that and there's really a couple approaches that we could take upon developing these parts. We could obviously invest on our own in equipment. We could request funding from the Navy to help pay for that equipment Or we could use other parties and contract out to use their equipment. So that third option would not really require CapEx. So it really depends and we may end up using a variety of all three of those options.

Speaker 7

Do you know if you're the only one with this program with the Navy or are there multiple companies that are participating in this?

Speaker 3

There are multiple companies participating. This is an initiative that the Navy wants to really move towards.

Speaker 7

And is this technology transferable to outside of the Navy contract? Is it possible for you to produce other parts?

Speaker 3

It absolutely is transferable, yes.

Speaker 7

You're the first company I've heard talking about additive manufacturing, which I think is the future, but Thank you.

Speaker 3

Yes. Thank you. And I think you're right. I think it is part of the future too.

Operator

And this concludes our question and answer session. I would like to turn the conference back over to Brad McBrayer for closing remarks. Thank you.

Speaker 2

Thank you. As I noted previously, the second half of twenty twenty three will mark an important step forward in our formation of Ampco Pittsburgh. With the completion of our U. S. Forged equipment modernization and our expanding production capacity in Virginia, We will position our company for a strong 2024 and beyond.

Speaker 2

I want to thank our employees for their outstanding work. Also want to thank our

Operator

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

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Key Takeaways

  • EPS & operating income: Q2 EPS was $0.02 ($0.06 YTD) and year-to-date operating income is triple last year’s level, driven by solid segment performance and a record backlog in Air & Liquid Systems.
  • Air & Liquid Systems growth: Q2 sales rose 29% (YTD +35%) with backlog up 92% over 18 months; segment operating income increased 13% (30% excluding a one-time adjustment), and the division is supporting a U.S. Navy additive manufacturing project at Oak Ridge.
  • Forged & Cast Engineered Products: Marked a third straight profitable quarter with stable cast roll demand and forged roll pricing up ~25%; lower pass-through surcharges trimmed revenue, but 2024 pricing contracts and a strong backlog bode well for margins.
  • Capital investment and modernization: U.S. forging asset upgrades are on track for Q4 completion, with four of five new machining centers installed and early efficiency gains of over 20% on 30 rolls already achieved.
  • Liquidity & outlook: Q2 used $2.8M of operating cash (YTD $7.1M), backlog is $370M, and full-year CapEx is forecast at ~$22M (peaking in Q3), largely financed through a $20M equipment facility with $9.4M of capacity remaining.
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Earnings Conference Call
Ampco-Pittsburgh Q2 2023
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