Ampco-Pittsburgh Corporation

Good day, and welcome to the Amco Pittsburgh Corporation first quarter 2019 earnings results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would like to now turn the conference over to Melanie Sproulson. Please go ahead.

Thank you, Alyssa, and good morning to everyone joining us on today's first quarter conference call. I'm joined today by Brett McBrayer, our Chief Executive Officer, and Mike McCauley, 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 Terry Kenney, President of Air and 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 of the corporation's control. The corporation's actual results may differ significantly from those projected or suggested in any forward-looking statement due to a variety of factors. including those discussed in the corporation's most recently filed Form 10-K and subsequent filing through 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 and remain available for two weeks following the conclusion of the call. To access the earnings release or the webcast replay, please consult the Investors section of our website at ampopgh.com. With that, I'll turn the call over to Brett McBrayer, AMCO Pittsburgh CEO. Brett?

Thank you, Melanie. Good morning. Welcome to our call. As Melanie mentioned, with us today are Sam Lyon and Terry Kinney. Sam joined AMCO Pittsburgh as Union Electric Steel Corporation president in February this year, and he runs our forged and capped engineered product segment. He brings over 18 years of experience in lean manufacturing, operations, and process improvement leadership to the organization. and we're pleased to have him as part of the AMCO Pittsburgh leadership team. Sam and his team have been instrumental in driving the improvements we're beginning to see in our UES business. Terry has been with AMCO Pittsburgh for 35 years. Terry has held his current position as president of Air and Liquid Systems Corporation for 10 years. His knowledge and leadership are invaluable in the execution of our strategic plan. Terry has challenged his business leaders and is engaged with his team to further improve the profitability of this group. This morning we issued our earnings press release for AMCO Pittsburgh's first quarter of 2019. There are a couple of key items I'd like to speak to first and foremost. We announced today our plan to sell our U.S. Castrol manufacturing facility located in Evanmore, Pennsylvania to an affiliate of WIMCO Incorporated. We expect the transition will close in the second half of this year once remaining customer commitments have been fulfilled. Excess capacity and high operating costs in our cash flow system have made operation of the Admore facility untenable. The annualized impact on operating results following the sale is currently expected to improve income from continuing operations by approximately $9 to $10 million. Also during the quarter, we implemented a first phase reduction in force. These actions are key steps in the corporation's continued overall restructuring, helping to further reduce our overhead costs and right-size our business to meet current and future customer demand. We expect both actions to improve our operating results from continuing operations by approximately $1 million per month on a full run rate basis once the sale is complete. We are beginning to see the benefits of our operational improvement initiatives and are currently engaged in additional asset restructuring opportunities, which should facilitate further overhead reduction actions and increase efficiencies in our business. Mike McCauley will review our financial results in more detail later in the call. I will now turn the call over to Sam Lyon, who will discuss the forged and cast engineered product segment activities for the first quarter. Sam? Thanks, Brad.

Throughout my first 90 days with the company, we have focused on a few key initiatives. The first is the ramp down of our Avonmore site. We are moving products to our assets in the U.K. and Sweden where there is capability and capacity and managing the remainder through our North American assets. As previously stated, this action alone is expected to improve income from continuing operations in the range of $9 to $10 million per year once complete. Secondly, we are focused on taking costs out of the system, We are continuing to implement a tiered daily management process based on the Toyota production system. This is a simple yet effective way to understand what is happening on the shop floor daily and allows management to apply resources to the most pressing issues. It also provides a goal that is measurable on a real-time basis. We are seeing very good results from this process. Q1-19 versus Q1 of 18, we have improved efficiencies 10% across our U.S. forage plants, and we are just in early innings. At our Harmon Creek facility, we have reduced the total time to process a heat or melt by 8% year over year. In addition, we've improved the cost of our melts through raw material management by 3% to 4%. This has been accomplished through opportunistic scrap purchases and diligent scrap management. From a market perspective, our forged engineered product sales to the oil and gas industry are down 60% from the prior year, almost entirely offset by higher sales of both forged and cast rules. In spite of the slowdown in our non-rural product sales, which generally carry a higher margin than our rural product, Q1 of 19 was one of our best quarters for the U.S. Forge Products Division in years. The cost improvements that I discussed have allowed us to improve our operating income compared to Q1 2018. We will aggressively leverage these improvements to the remainder of our processes and facilities to the balance of the calendar year.

Thanks, Sam. I'll now turn the call over to Terry Kinney. air and liquid processing segment president.

Thank you, Brett, and good morning. Net sales for the air and liquid processing segment for the first quarter ended March 31, 2019, increased when compared to the same period last year. Sales of air handling units benefited from a higher opening backlog and increased market penetration, while sales of centrifugal pumps improved as a result of increased demand from the U.S. Navy. Sales of heat exchangers continue to be negatively impacted by declines in the nuclear and fossil-fueled power generation markets. The segment's backlog as of March 31, 2019, approximated $53.7 million, which compares favorably to approximately $44.4 million at December 31, 2018, and approximately $46.3 million at March 31, 2018. This is the highest the segment's backlog has been in 10 years. The increase over prior periods is primarily attributable to increases of orders for centrifugal pumps for the U.S. Navy. The segment is focused on several key objectives. We are improving the manufacturing process in each operation to increase productivity in order to maximize capacity of the segment's existing resources. Each operation is in the process of conducting in-depth reviews of our current processes and identifying opportunities for improvement. We are also focused on improving the segment share of key markets currently serviced while entering new markets for our products.

Thank you, Terry. With that, I'd like to hand the call over to our CFO, Mike McCauley, to review our financial results in more detail. Mike?

Thank you, Brett, and good morning to everyone listening on the call today. Today's conference call commentary contains the use of certain non-GAAP measures. I refer you to our disclosures regarding non-GAAP measures and related non-GAAP financial measures reconciliation schedule included in this morning's earnings release. I will start off today by highlighting a few key items which had an impact on our financial statements for Q1 2019. In connection with today's announcement of the anticipated divestiture of our Avonmore, Pennsylvania, Castrol manufacturing facility, we recognized a $10.1 million non-cash impairment charge, which represents the write-down of certain assets of the facility to their estimated net realizable value associated with the asset sale. Second, included in our Q1 2019 financial statements are costs of $0.9 million representing professional fees associated with the corporation's overall restructuring plan and employee severance costs due to a reduction in force. AMCO's net sales from continuing operations for the first quarter of 2019 were $107.5 million. This compares to net sales from continuing operations for the first quarter of 2018 of $106.4 million. Net sales in the forged and cast engineered product segment were comparable to prior year. Forged and cast roll sales increased. However, sales of forged engineered products to the oil and gas industry offset the improvement. Net sales for the air and liquid processing segment for the first quarter of 2019 increased approximately 5% compared to prior year, led by higher sales of air handling units and centrifugal pumps. I'll comment more on segment results in a moment. Gross profit as a percentage of net sales was 16.1 percent for the first quarter of 2019 versus 17.6 percent for the first quarter of 2018. The decline is primarily due to lower production volumes for forged engineered products, particularly to the oil and gas industry, and product mix for our cast roll operations. Improved pricing helped offset these impacts. Selling and administrative expenses were $13.9 million, or 12.9% of net sales, for the first quarter of 2019, which is down compared to $14.9 million, or 14% of net sales, for the first quarter of 2018, due to lower employee-related costs, lower commission expense, and lower R&D spending. Depreciation and amortization expense of $5.3 million in the first quarter of 2019 was down slightly compared to $5.6 million for the first quarter of 2018. Loss from continuing operations on an as reported gap basis for the first quarter of 2019 was $12 million. This compares to a loss from operations in the prior year of $1.8 million the decline being driven primarily by the $10.1 million impairment charge and the $.9 million restructuring-related costs. However, the corporation incurred approximately $2.2 million in estimated excess costs from the Avonmore Castrol facility, which will be exited in the second half of this year. Therefore, excluding the impairment charge, the restructuring-related costs, and the estimated excess costs of the Avanmar facility, the corporation had positive adjusted income from continuing operations of $1.8 million in the first quarter of 2019. This reflects an improvement of $.7 million compared to the prior year quarter on the same basis and is reflective of the operational improvement initiatives Sam described to you earlier. Other expense net decreased for the first quarter of 2019 when compared to prior year quarter due primarily to a favorable contract settlement with a third party which occurred in the first quarter of 2018 of $2.4 million. The income tax provision for the current year quarter includes income taxes associated with our profitable operations whereas we continue to record valuation allowances against the deferred tax assets of the majority of the corporation's operations. By comparison, in the prior year quarter, we recorded an income tax benefit driven by several factors. The release of a valuation allowance previously established against the deferred tax assets of one of our foreign subsidiaries on the basis that it was more likely than not that the deferred tax assets would be realized. the benefit of certain carrybacks and refunds recorded last year, and this was partially offset by the impacts of the recognition of a one-time tax on deemed repatriation of previously untaxed foreign earnings associated with tax reform in the prior year quarter. As a result, the corporation reported a gap net loss from continuing operations of $12.6 million or $1 per common share for the first quarter of 2019, compared to a net income of $1.6 million, or 12 cents per common share, for the first quarter of 2018. The net loss from continuing operations for the first quarter of 2019 includes the $10.1 million impairment charge and the $0.9 million in restructuring-related costs I previously described. The corporation also reported net loss from discontinuing operations, reflecting the operations of ASW of $2.2 million, or 18 cents for a common share, for the first quarter of 2019, compared to a net loss of 1 cent per common share for the first quarter of 2018. The higher loss compared to prior year is due to lower sales volumes as a result of tariffs imposed by the U.S. on imports of primary steel and and lower ingot demand used as feedstock for the production of forged engineered products for the oil and gas industry. Here's a bit more color for you on our business segment results. As I mentioned earlier, net sales for forged and cast engineered product segment for the first quarter of 2019 were flat compared to prior year. While shipments of forged and cast rolls improved, sales of forged engineered products decreased. Specifically, sales of frac blocks to the oil and gas industry decreased from a year ago as the market decline continued through the first quarter of 2019. The segment recorded an operating loss for the quarter ended March 31, 2019, driven by the $10.1 million impairment charge. Otherwise, results for the segment were generally comparable to prior year. Net sales for air and liquid processing increased for the first quarter of 2019 versus prior year. Sales of air handling units benefited from improved demand, while sales of centrifugal pumps improved due to higher volume of shipments to U.S. Navy shipbuilders. The segment's operating income for the first quarter of 2019 was approximately flat with prior year, as the higher shipment volumes were approximately offset by unfavorable product mix. Backlog at March 31, 2019 shows approximated $349 million, which was slightly higher than backlog at December 31st, 2018 and at March 31st, 2018. The impact from ongoing softening of demand for our Ford's engineered products in the oil and gas industry was offset by improved order intake for rolls and additional orders for U.S. Navy shipbuilders. Approximately $74 million of the current backlog is expected to ship after 2019. Now I will review some cash-related items. Please note that this discussion excludes discontinued operations. Accounts receivable at March 31, 2019 increased by $17.1 million compared to December 31, 2018. primarily attributable to higher first quarter 2019 sales when compared to the fourth quarter of 2018. Inventories were approximately stable overall with December 31st, 2018 levels. Accounts payable at March 31st, 2019 increased by $6.9 million compared to December 31st, 2018. Capital expenditures for the first quarter of 2019 were $1.4 million for continuing operations. Cash and cash equivalents for continuing operations of $10.4 million at March 31, 2019 decreased compared to the December 31, 2018 balance of $19.7 million for a specific reason. During the quarter, and following the payoff of the notes, we instituted a springing lockbox feature whereby domestic customer remittances are swept regularly against the credit line to minimize borrowings. As a result, we are maintaining minimal domestic cash and the reported cash balance reflects primarily foreign cash. The balance sheet reported cash balances for the near-term future are therefore expected to remain approximately in the range of the March 31, 2019 balance while we keep this practice in place. Drawings on the AMCO revolving credit facility are $40 million at March 31, 2019. This reflects an increase compared to the $14.3 million at December 31, 2018. As we had planned, the increase was due to additional borrowings being used to repay the promissory notes and interest, which was retired on March 4, 2019. At March 31, 2019, in addition to the cash balance, the corporation also has remaining availability on the revolver of approximately $39 million. I will now turn the call back over to Brett for some closing remarks. Brett? Thank you, Mike.

As discussed on the call today, we have taken several actions over the course of the first quarter that are key steps in the corporation's overall restructuring, and we are just getting started. We will stay the course with our restructuring plan with a pace and urgency to fully demonstrate our earnings power. I am confident that the steps we are taking today will lead to the generation of sustainable profitability and improved performance. Thank you for joining us for AMCO Pittsburgh's conference call this morning. At this time, we'll open up the line for your questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. Just as a reminder, in the interest of equal access to all participants, please limit yourself to one question and one follow-up. If you have any additional questions, feel free to jump back in the queue. At this time, we will pause momentarily to assemble our roster. The first question today comes from David Wright with Henry Investment Trust. Please go ahead.

Good morning, everyone. Good morning, Mike Davis. Hi. On the Avonmore sale, what are the gating issues that determine when you close that transaction?

This is Brad David. Basically, we are working through the completion of customer commitments, and that's what is the timing from a closure standpoint. We've made a commitment to finish up what we've said we'd do for the customers as soon as that is complete. we will be done with that operation.

Do you internally have any vision of when in the second half you'd like the thing to close or think the thing can close?

Yeah, this is Sam. We're targeting the end of September.

Okay. On the ASW pending sale, any update there?

There is, Mike. On the sale of ASW, we are currently in due diligence with parties, and that's about all I can say about that.

Okay, I'll get back in line. Thanks very much. Thank you.

Our next question comes from Justin Bergner with G Research. Please go ahead.

Oh, hi, good morning. Good morning, Mike.

Good morning, Justin.

On the sale of Avonmore, should I assume that the cash proceeds will be de minimis, and are there any cash outlays that you will need to undertake outside of winding down the operations to get, I guess, to completion?

We did not disclose the proceeds from the sale. I will say it's not a large amount. But with regard to future cash outlays associated with winding down the facility, there will be some unusual one-time costs that will will accrue that will become cash costs as they're incurred associated with labor issues. And we will also see some non-cash items that will be hitting P&L associated with pension and retiree health care adjustments to the to the pension and the OPEB that will flow through P&L. So there will be some unusual items in addition to some continuing lagging excess operating costs until the facility ultimately does, the transaction does close.

Okay, that makes sense. With respect to the buyer, do they currently have a cast rolls business, and will they be sort of operating the plant as a cast roll operation after the completion of the sale?

They do have a cast roll business. Basically, what we can say is that we will close the facility, and at that point, it's really Wimco Inc.' 's responsibility Their view of what they'll do going forward is really up to them to communicate. We're focused on the closure and the ramp down as expeditiously as possible. We're working on ways to make that timeline even faster, but I think I'll leave it to WMCO to express their intentions going forward.

Okay. And just to clarify the improved profitability from the actions you're undertaking, the $1 million improvement per month in profitability, is that just associated with Avonmore, that is the operating impact and the reduction in the excess costs, or does that include the restructuring benefits? And if so, where are those benefiting the operation on top of Avonmore?

Justin, in estimating the benefit of closing the facility, we looked at the impact on the total segment, but it's principally focused on getting costs out of Avonmore, which are essentially unabsorbed costs. So that's the basis. And then what was the other part of the question? Restructuring. Restructuring? Yes.

Yes, the restructuring, I guess, improvements that are on top of that $9 million to $10 million to get to the $12 million and don't relate at all to Avonmore. They're independent benefits.

Those are independent, correct. And I would go back to the question that you had regarding, you know, are we going to see any other cash costs coming associated, you know, down the line? And I did indicate that there are some labor-related benefits I will say that we are currently estimating those to be not very significant and less than the proceeds from the sale.

Okay, that's helpful. And then lastly, it seemed like it was a good quarter for forged and cash rolls. You know, maybe we could just delve into a bit as to what made the quarter positive. Was it demand or sort of efficiency of operations or other factors?

Yeah, this is Sam. Demand was strong, particularly for our larger-sized rolls. As stated, we did have a negative on the non-roll product that offset that demand, but it's really the improvements that were made in the operations, particularly in the U.S. We've seen a 10% efficiency improvement, and that's really just going right to the bottom line. It's a two-fold improvement. It helps us ship more, and it also lowers the cost.

Great, thank you.

Our next question is a follow-up from David Wright with Henry Investment Trust.

Please go ahead. Sam has talked about some of these improvements in forged and cast in the U.S., and can he talk about, you know, are you doing anything in Europe? Do you need to improve efficiencies there?

Yeah, well, we have not started in Europe yet. We're focused here right now. But certainly that will come in the near future. So that would infer the greater urgency was in the U.S.? We had demand. We have backlog for our large role product that goes out fairly far. So the biggest bang for the buck was to start here. Okay.

And can anyone put any details around the first quarter reduction in force?

Yeah, it was focused on primarily the U.S. population, David. And it was not massive, but it was the first step of cost cutting. You know, as we indicated, we had about $900,000 of costs associated with restructuring activities for professional fees plus the reduction in forced reserve. I would say that the reserve was the smaller portion of that number.

Okay. And when are you planning to file the 10-Q? Today. Okay. Thanks very much. Thanks, David.

Again, if you have a question, please press star, then 1. As there are no further questions, this concludes our question and answer session. The conference has now also concluded. Thank you for attending today's presentation. You may now disconnect.