Ampco-Pittsburgh Corporation

Good day and welcome to the AMCO Pittsburgh Corporation third quarter 2021 earnings results conference call. Today, all participants will be in a listen-only mode. Should you need assistance during today's call, please signal for 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 touchtone phone. To withdraw your question, please press star, then two. Additionally, during the Q&A, please limit your initial questions to one plus one follow-up. If you do have additional questions, please re-enter the question queue. Please note that today's event is being recorded. I would now like to turn the conference over to Melanie Sproulson, Director of Investor Relations. Please go ahead.

Thank you, Chris, and good morning to everyone joining us on today's third quarter 2021 conference call. Joining me today are 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 various 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 statement. 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 amcopgh.com. With that, I'll turn the call over to Brett McBrayer, AMCO Pittsburgh CEO.

Thank you, Melanie. Good morning, and thank you for joining our call. As shared in today's press release, AMCO Pittsburgh recorded our first quarterly loss since the third quarter of 2019. This loss is a net result of our planned extended equipment outages as well as two unplanned outages due to equipment failures during the summer and under recovery of inflationary costs in our forged and cast engineered product segment. To address these continuing cost pressures on our business, the forged and cast engineered product segment has commenced price increases across all products. The broad range of increases is necessary to address the varying impact of input costs in our North American, European, and Asian operations. The extended maintenance outages taken during the quarter have us well positioned to meet the growing demand for our products. Our backlog has increased 16% since Q2 in the Forged and Cashed Injured product segment, and our backlog in the Air and Liquid Systems segment remains strong. Although we have been challenged with supply chain issues and vendor labor shortages, our capital improvement work is well underway, with targeted completion in the first half of 2023. Finalizing this work will significantly improve our cost structure and facilitate substantial top-line growth for our businesses. As always, safety and health of our employees and being good stewards in the communities where we operate continue to be priorities as we work to improve the performance of Amco Pittsburgh. The efforts of our employees to improve in these areas continues to be impressive. As we look to the fourth quarter, we will continue to see headwinds from an inflationary cost standpoint. Our price increases during the quarter will not deliver their full effect until the first quarter of 2022. With a growing backlog and the strong demand for our products, we are optimistic as we move into 2022 and beyond. For further comments on our businesses, I'd now like Terry Kinney, President of Air and Liquid Systems, and Sam Lyon, President of Union Electric Steel, to share some of the highlights in our segment's performance. Terry.

Thank you, Brett, and good morning. As with most manufacturing businesses in the country, all three divisions that make up the segment have been experiencing supply chain challenges, including inflationary pressures on virtually all purchased materials, supplies, and services, availability shortages, and rationing of certain key materials, Extended lead times, which have historically been measured in several weeks, are now quoted in months. Daily missed delivery commitments and reschedules from our suppliers, as well as trucking shortages and delays at customs. The teams at all three businesses have been working tirelessly to overcome all obstacles and have, to date, successfully navigated the majority of these hurdles while delivering third-quarter operating results that exceeded the prior year third quarter results and trailed year-to-date results by 5%. I want to thank all air and liquid processing segment employees for their hard work and dedication through these challenging times. We've been able to pass through much of the cost increases in the form of price increases throughout the year. Our backlog remains strong at $56.4 million and we remain focused on sustainable growth at each of the three divisions.

Thank you, Terry. I'll now turn the call over to Sam Lyon. Sam. Thanks, Brett, and good morning.

Operating conditions in the UK and Sweden in the wake of the Delta variant of COVID have proven challenging. Absenteeism is running two to three times normal rates. This is attributed to societal reopening, the lifting of restrictions, and the return to schools. As more of the population gets vaccinated and the initial spread through the school age children exhaust, this absenteeism has started to improve. From a sales perspective, our backlog is up 21% from the low point of the pandemic and 16% since the end of quarter two. This is the segment's highest level backlog since May of 2020. Our first quarter is very strong. with non-forged engineered product in the non-forged engineered product segment. We're anticipating increased large roll sales starting in Q2 of 2022 and continuing into 2023. Our melt shop at our Burgatstown facility in Pennsylvania is at capacity through Q1 of 2022, and we are adding forged personnel to increase output as early as January once training is complete. So a few months ago, our view was that material and natural gas prices would moderate, but the reality has proven much different. In the United States, natural gas is more than doubled. Key alloys such as ferrochrome and molyoxide are up 40% and 70% respectively. In the UK, natural gas has increased over 300%. All costs, including refractory, transportation, and labor, are up. As I stated previously, our surcharge mechanism has some lag when compared to actual costs. Our surcharges, in most cases, only cover raw materials, leaving us exposed to these other inflationary costs. This has necessitated a recently announced price increase in our non-role-forged engineered products for new orders placed after October 25th. In the past, we offered firm pricing at the time of order. We also implemented an alloy and energy surcharge on all orders shipping after December 31st. Extended lead times in the volatile energy prices have necessitated the implementation of the surcharge to capture costs at time of melt. Yesterday, we also announced a price increase for our rural products effective November 3rd. These increases will vary by customer depending on individual surcharge mechanisms in place. Our previously discussed expansion and modernization programs for our U.S. assets continues to make progress. These investments will support further growth in the non-rural business and a lower cost structure in our rural business. Approximately 85% of the project has been scoped and approved, and we expect to reach full completion by the middle of 2023. And I'll turn it back over to Brett.

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

Thank you, Brett. Good morning. AMCO's net sales for the third quarter of 2021 were $81.2 million. an increase of 7% compared to net sales for the third quarter of 2020 of $75.7 million. In the forged and cast engineered product segment, Q3 2021 net sales increased approximately 12% versus prior year, primarily due to higher shipments of forged engineered products to the steel distribution and energy markets and higher shipment of cast rolls for hot strip mills. Net sales for the air and liquid processing segment in the third quarter of 2021 were approximately 6% lower than the prior year period due to delays in availability of trucking and certain parts due to supply chain issues. Gross profit as a percentage of net sales was 16.3% for the third quarter of 21 versus 21.4% for the third quarter of 2020. The decline is mainly attributable to the forced and cast engineered product segment which was impacted by higher net raw material and energy costs and higher repairs and maintenance spend, as well as unfavorable changes in product mix. Selling and administrative expenses of $10.9 million, or 13.4% of net sales for the third quarter of 2021, were down compared to $11.4 million, or 15.1% of net sales for the third quarter of 2020. Lower employee-related costs and lower spend on research and development were partly offset by the impact of higher exchange rates and additional sales commissions on higher forged engineered product sales during the current year. Depreciation and amortization expense of $4.3 million for the third quarter of 2021 was approximately comparable to prior year. Loss from operations for the third quarter of 2021 was $2.4 million, This compares to income from operations in the prior year quarter of $0.2 million. Forced and cast engineered product segments operating results declined for the third quarter of 2021 compared to prior year, primarily due to under-recovery of the inflationary effects of production costs, as well as higher repair and maintenance spend associated with extended machine outages, which more than offset the effect of higher sales and improved cost absorption from higher production levels this year. The air and liquid processing segment's operating results improved for the third quarter of 2021 compared to prior year due to higher pricing and productivity improvements. Investment-related income declined for the third quarter of 2021 when compared to the prior year quarter, primarily due to the timing of dividend income from one of the corporation's Chinese joint ventures recorded one quarter earlier this year and hence remains comparable on a year-to-date basis. Interest expense for the third quarter of 2021 decreased principally as a result of lower average borrowings on the revolving credit facility, while other net improved primarily due to higher pension income and foreign exchange transaction gains in the current quarter. Period over period change in the income tax provision was driven by the effects of changes in the pre-tax income of the corporation's profitable operations. At the bottom line, The corporation reported a net loss attributable to Amco Pittsburgh of $1.6 million, or $0.08 per share, for the third quarter of 2021, which compares to net income of $1 million, or $0.07 per share, for the third quarter of 2020. Backlog at September 30th, 2021 of $278 million increased approximately 10% from June 30th, 2021. Backlog for the forged and cast engineered product segment improved approximately 16% sequentially. The increase is principally due to higher order intake for forged rolls and for forged engineered products due to improved demand. Although the backlog for air and liquid processing segment declined approximately 9% sequentially because of reduced order intake for heat exchange coils and air handlers, it still remains at an historically high level. Net cash flows used in operating activities was approximately $1.4 million for Q3 2021, the result of an increase in trade working capital associated with a higher level of business activity. Capital expenditures for the third quarter of 2021 were $5.5 million and are now $12.2 million year-to-date, primarily expended in the forged and cast engineered product segment. The corporation's balance sheet and liquidity position continues to remain strong, with cash on hand at September 30, 2021 of $12.3 million and undrawn availability on a revolving credit facility of approximately $42 million. Operator, at this time, we would now like to open the line for questions.

we will now begin the question and answer session to ask a question you may press star then one on your touchtone phone if you are using a speakerphone please pick up your handset before pressing the keys if at any time your question has been addressed and you would like to withdraw it please press star then two as a reminder we ask that you limit your initial questions to one plus an additional follow-up please re-enter the question queue if you do have additional questions At this time, we will pause momentarily to assemble our roster. Today's first question comes from David Wright with Henry Investment Trust. Please proceed.

David Wright Good morning, everyone. Henry Investment Trust Good morning. Does anybody have non-role engineered products revenue for Q3 and new to date? We do, David. Just give us a minute. Sure. And in the meantime, then, a question for Sam, and then I'll have one for Terry. In past calls, you've talked about from time to time the annual order patterns for mill rolls. I'm wondering, do you have any update there on how that has gone or have the ordering patterns of the steelmakers changed such that that kind of order pattern is not carrying forward?

Yeah, David, it's still – they're not ordering as far in advance, but we have seen an increase in finalizing contracts for – or allocations, I should say, for 2022, which is the reason why our backlog has increased in the last quarter. So it's sitting at roughly $220 million now against a total – You know, it's a pretty decent percentage of our plan for next year. So it has improved, but it's still closer to real time than it was in the past.

Okay.

And that's related to the fact that the lead times are shorter across the entire industry, so there's not as much of a need for them to order as far out.

Got it. Right. Okay.

And, David, to answer your question about non-role force-engineered products, sales for the year-to-date period through September, $17.6 million.

And do you have the Q3 number?

And for Q3, $7.4 million.

Okay, super. Thank you. And then a quick one for Terry. Terry, in terms of new construction business that – you would be asked to bid on. Can you characterize the level of activity versus six or nine months ago?

Hi, David. Yes. The new construction activity and bid activity is down very slightly from what we saw at the beginning of the year. But the quality of bids remains high.

Okay. Thanks, everyone.

As a reminder, if you do have a question, please press star, then one. Our next question comes from Justin Bergner with Gabelli Funds. Please proceed. Oh, good morning, everyone.

Good morning, Justin. Good morning, Justin.

In terms of the sort of profit bridge, either on a year-on-year or sort of sequential basis for forged and cast engineered products, are you able to sort of share how much of that decline is due to price cost versus some of this maintenance activity? And I think you mentioned a mixed component. I don't know if you've just sort of disaggregated that or you know, have and can share that with the investment community?

Yeah, we can talk about that. For the current quarter, you know, we're going to get into the MD&A when the queue comes out next week, but roughly speaking... What we're talking about mainly is the FortuneCast engineered products that has the larger change in income. And if we look at that area, we saw that for the change in sales from pricing, I mean, we're talking about maybe a million dollars price mix kind of effect, Q3 versus 2020. prior year.

Okay, that's helpful. And then, I mean, with the, so if one million is price-mixed, does that mean the sort of remainder of the decline year-on-year is mainly due to these unplanned outages?

Yeah, I mean, we had some The higher maintenance expense for this year versus prior year, for a couple reasons. We had some unplanned outages that Brett described, but we also this year during our annual maintenance turnarounds, we focused more on preventive and predictive maintenance and spent more this year. When last year we were shut down, our plans were shut down just because of lack of demand and it was all about the COVID situation. situation and preserving liquidity, so we weren't really spending much maintenance spend during shutdowns last year. It was more about shutting down to manage supply and demand. This year, we caught up on that maintenance, and we wanted to make sure that we were prepared for heavier production expectations going forward.

That makes sense. Are there any other factors that you would highlight in that profit bridge for forged and cast engineered products that were material besides planned and unplanned maintenance and price cost?

No, we got improved contribution from higher sales, a bit on the mixed side that we talked about, higher maintenance expense, and then the under-recovery. I mean, the major driver was the under-recovery of cost inflation. That was by far the largest driver in the quarter. Okay. And that's what we're addressing with our pricing actions. And we're also going to be looking at our cost structure going forward and things that we're going to be doing there. But the price actions are the main focus right now at the moment.

Okay. Just to make sure I understand, I mean, the profit in FortuneCast Engineer Products was down close to $4 million, but I think you said the price-cost component was only about $1 million, or did I miss something?

That's selling price mix. It's primarily kind of a mix issue whereby we're seeing a lower sales of larger rolls this year. And so the mix of sales on the roll side is less favorable than average. So that's really a driver there. But when we talk about the cost inflation, that's net of surcharges. So, yes, we're passing through higher raw material costs and surcharges, and that does drive revenues. But if you compare the cost changes in raw materials, energy, and other factors against the surcharge recovery, we are under-recovering. And that's the reason for trying to address that through the pricing actions that we've talked about.

Okay, I think I get it now. So the $1 million was price mix, and the actual cost inflation element was separate from that in terms of the year-on-year bridge. Okay. And then an air and liquid process – sorry, were you going to add one thing?

The under-recovery effect is multiples larger than the price mix effect for the quarter.

Okay. In air and liquid processing, you guys talked about a number of supply chain headwinds, but it looks like profitability was actually up sequentially in air and liquid processing. Was there anything idiosyncratic about that? Or is that sort of representative of margins that you're realizing the business on an ongoing basis?

Justin, it's representative of the margins that we're able to achieve in these certain businesses. Mix was favorable in the quarter, and the price increases throughout the year have assisted in that effort.

Great, thanks.

The next question is from George Malaz-Curiozzi. with MKH Management Company, LLC. Please proceed.

Thank you. Good morning, gentlemen. On the backlog for the Fortune Cash engineering products, is all of that contracted with the cost recoveries and the surcharges, or is some of it still sort of under older contract terms?

Well, the price increases are on top of the contract terms. So they're outside, I guess, outside of the contract. That's what I said. So we have base pricing plus surcharge that mainly covers raw materials in the current situation. And we're just going out with an inflationary cost increase to cover the other costs.

Okay. But I think... I'm not sure I understand if that covers the entire $222 million of backlog. What's the question?

Can you repeat that?

The backlog right now is roughly $220 million at the end of the quarter. The surcharges, for example, that you're putting in in November, does that impact the contract, the backlog that was there prior to that?

It does. The only small delay would be just talking with the customers to get the administration side of it so that the PO and the invoice actually match so that we don't have a problem getting paid. But other than that, it applies to all existing backlogs.

Okay. Okay. Very good. Thank you.

At this time, we are showing no further questions in the queue, and this concludes our question and answer session. I would now like to turn the conference back over to Brett McBrayer, CEO, for any closing remarks.

Thank you, Chris. Despite the challenging quarter, I'm encouraged by our growing backlog as well as the progress in our capital improvements for our forest and cast engine and product segments. We will continue to take whatever actions are necessary to offset the inflationary pressures all businesses are facing both now and in the future. I again want to thank our employees for their hard work and dedication as we continue to transform Amco Pittsburgh. Also want to thank our shareholders and our board for your continued support of our turnaround efforts. Although the global pandemic, supply chain issues, and inflationary costs have muted our efforts over the last 18 months, We continue to take actions that we expect to result in much improved performance for our businesses going forward. Our near-term target of $450 million of revenue and double-digit EBITDA margins remains a realistic objective as our capital improvement work concludes in 2023. Thank you again for joining our call this morning.

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