Ampco-Pittsburgh Corporation (NYSE:AP) Q1 2023 Earnings Call Transcript

Ampco-Pittsburgh Corporation (NYSE:AP) Q1 2023 Earnings Call Transcript May 16, 2023

Operator: Welcome to the Ampco-Pittsburgh Corporation First Quarter 2023 Earnings Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I’d now like to turn the conference over to Kim Knox, Corporate Secretary. Please go ahead.

Kim Knox: Thank you, Vaishnavi, and good morning to everyone joining us on today’s first quarter 2023 conference call. Joining me today are Brett McBrayer, our Chief Executive Officer; and Mike McAuley, Senior Vice President and Chief Financial 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?

Brett McBrayer: Thank you, Kim. Good morning, and thank you for joining our call. As shared in yesterday’s press release, Amco-Pittsburgh achieved a net income of $0.7 million or $0.03 per share in quarter one of 2023. Sales were up 11% versus the prior year and 12% over the prior quarter. We experienced backlog growth in both our Forged and Cast Engineered Products and Air & Liquid Processing segments with total backlog up 16% versus the prior year and 3% over the prior quarter. Our Air & Liquid Processing segment has now seen five consecutive quarters of record backlog. We continue to see strong demand for our products in North America with softness continuing in Europe. The recent announced blast furnace restarts, however, in Europe indicate demand may be recovering.

Our pricing actions and expanded surcharges continue to improve the performance of our Forged and Cast Engineered Products segment. Our U.S. equipment modernization program remains on track, with completion expected in the fourth quarter of this year. From a health and safety perspective, our company had a solid quarter as we continue to focus on our goal of zero injuries in the workplace. David Anderson, President of Air & Liquid Systems will now discuss his segment’s performance in more detail.

David Anderson : Thank you, Brett. Good morning. In the first quarter of 2023, we continue to see the positive results of our strategic growth plan. One of our initiatives was to strengthen our sales force, both internally and for our third-party representative network. The results of this quarter show the tremendous progress we have made with our sales teams. Sales increased 42% versus prior year as all three divisions achieved double-digit sales growth. Q1 sales of $28 million was the highest for any quarter in the last 10 years. Even with the higher sales level, our backlog grew once again to a new record this quarter as order activity continues to be very strong. This means we have now achieved a new record backlog for five consecutive quarters.

As our sales have continued to grow, we have also addressed our manufacturing capacity to make sure our production capabilities allow our sales growth plans to continue forward. On April 1, we leased 61,000 square feet of additional manufacturing space in Lynchburg, Virginia that was needed as a direct result of the sales growth we are seeing at both our Aerofin and Buffalo Air Handling businesses. Operating income for Q1 was $3 million versus an income of $2.7 million in the prior year. The prior year income included $0.7 million in income for a onetime employee benefit policy adjustment. Excluding the onetime adjustment shows operating income growth of 50% versus prior year. With a record backlog, quarterly revenue at the highest level in more than a decade and increased manufacturing capabilities, Air & Liquid is well positioned to continue forward with our growth plans in the quarters ahead.

Brett McBrayer: Thank you, Dave. I will now turn the call over to Sam Lyon, President of Forged & Cast Engineered Products segment.

Sam Lyon : Thanks, Brett, and good morning. We had a strong first quarter with an operating income of $2.2 million versus a loss of $0.4 million in Q1 of 2022. The significant improvement in operating results year-over-year primarily reflects our pricing strategy initiated in January of ’22, implementing surcharges for energy and transportation and base price increases. In 2022, the world faced unprecedented inflationary headwinds fueled by post-pandemic demand issues, supply chain restrictions, the Russian-Ukraine conflict and the ensuing Europe energy crisis. In Q1 of 2022, sales pricing initiatives lagged our increased costs, particularly for raw materials, energy, transportation and supplies. By June of 2022, inflation had a 41-year high of approximately 9% before moderating.

Counter to the instability of 2022, the first quarter of 2023 benefited from the tailwind associated with deflation and positive surcharge recovery as higher cost inventory was sold through. In the forged engineered products area, referred to as FEP, a softening of the energy market, particularly in the U.S., lowered overall demand. Lower demand for oil and gas, high year-end inventory levels at our customers and increased imports have resulted in an approximately 70% decrease in the backlog for the FEP product year-over-year. In the last month, we are seeing an increase in quoting activity for both oil and gas and distribution bar and anticipate improved shipments in the second half of 2023. The World Steel Association estimates that the global steel demand, excluding China, will increase by 2.3% in 2023.

Our customer base states similar sentiments as evidenced by the restart of seven blast furnaces, the modernization of two additional blast furnaces, and investments in new aluminum rolling mills in the United States. Our forged roll backlog is robust, showing a 26% year-over-year increase, reflective of a positive North American steel industry outlook driven by increased demand from the automotive industry. Our total backlog was $258 million at the end of Q1, the third quarter of sequential growth and the highest of the last eight quarters. For 2024, the World Steel Association estimates the demand to increase by another 2.5% in the U.S., with Europe growing by a robust 5.6%. Pricing negotiations are complete, for 2024 for many of our larger role customers.

We are continuing to see a robust demand for our forged rules and steady demand for our cast rules made in Europe. The ability to increase pricing has remained strong as the market recovers and our customers desire to purchase locally to protect their supply security. In our [Indiscernible] facility, we have installed the first of five new machining centers as part of our capital expansion and improvement program in the U.S. We are currently in the testing phase of the equipment and the preliminary results are in line with our expectations. We are excited about the forthcoming positive impact on our operating results as we achieve the commissioning of the first machine tool. The remaining four machine centers and the new furnaces are scheduled to be commissioned by year-end.

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

Mike McAuley : Thank you, Brett. As shared in the press release and shown in the corporation’s Form 10-Q filed last week, Ampco-Pittsburgh recorded net income in the first quarter of 2023 of $0.7 million or $0.03 per diluted share. This compares to an approximate breakeven position in the prior year. Ampco’s net sales for the first quarter of 2023 were $104.8 million, an increase of approximately 11% to net sales for the first quarter of 2022. Net sales in the Air & Liquid Processing segment grew 42% year-over-year, driven primarily by higher shipments of heat exchange coils and air handling units. Net sales for the Fortune Cast Engineered Products segment in the first quarter of 2023 were approximately 3% higher than the prior year period, primarily due to higher roll pricing and shipment volume, offset in part by a decline in shipments of other forged engineered products and an unfavorable foreign exchange translation effect.

Income from operations for the first quarter of 2023 was $2 million, this compares to a loss from operations in the prior year quarter of $0.5 million. Higher pricing and overall shipment volumes were the primary drivers for the improvement. Despite the lower — the impact of lower manufacturing overhead cost absorption due to higher plant downtime this year in the Forged and Cast Engineered Products segment. In addition, the prior year quarter included a $1.4 million benefit for a change in an employee benefit policy, which reduced SG&A as well as cost of sales in Q1 of last year. Therefore, the underlying improvement in operating results versus prior year was even larger on a non-GAAP basis. Interest expense for the quarter increased compared to prior year due to a rise in both total debt and interest rates.

Backlog at March 31, 2023, of $380.6 million increased approximately 3% sequentially and rose 16% from a year ago. Backlog for the Forged and Cast Engineered Products segment increased approximately 2% sequentially and approximately 7% year-over-year, while backlog for the Air & Liquid Processing segment continues to be at record highs, up 5% sequentially and up 40% versus prior year. Net cash flows used in operating activities was approximately $4.3 million for Q1 2023, primarily in support of working capital. This represents a significant improvement from Q1 of 2022 due to improved operating results and lower investment and overall working capital in the current year quarter. Capital expenditures for the first quarter of 2023 were $3.7 million, primarily for the Forged and Cast Engineered Products segment.

At March 31, 2023, the corporation’s balance sheet and liquidity position included cash on hand of $6.1 million and undrawn availability on our revolving credit facility of approximately $31 million. Operator, at this time, we would now like to open the line for questions.

Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Justin Bergner with Gabelli Funds. Please go ahead.

Operator: [Operator Instructions] The next question comes from David Wright with Henry Investment Trust. Please go ahead.

Operator: Next, we have a follow-up from Justin Bergner with Gabelli Funds.

Operator: As we have no further questions, I would like to turn the conference back over to Brett McBrayer for any closing remarks.

Brett McBrayer: Thank you. Our focus on improving financial performance continues with actions underway to accelerate growth and expand margins. The completion of our equipment modernization anticipated at the end of this year is a significant component of this strategy with full benefits expected to be realized in 2024. I want to thank our employees for their continued hard work and dedication, their relentless focus on improving our business has been impressive. I also want to thank you, our shareholders, for your continued support. Thank you for joining our call this morning.

Operator: The conference has now concluded. Thank you for your participation. You may now disconnect.