Good morning, ladies and gentlemen, and welcome to the Ampco-Pittsburgh Corporation Third Quarter 2018 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. At this time, I would like to turn the conference over to Melanie Sprowson, Director of Investor Relations. Please go ahead..

Thank you, Denise, and good morning to everyone joining us on today’s third quarter conference call. I’m joined this morning by Brett McBrayer, our Chief Executive Officer; and Mike McAuley, Senior Vice President, Chief Financial Officer and Treasurer.

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 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 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 ampcopgh.com. With that, I’ll turn the call over to Brett McBrayer.

Brett?.

the United States tariff impact on our Canadian subsidiary, ASW; lower frac block sales and production; and higher operating costs. Mike McAuley, our CFO, will explain these results in more detail in a few moments.

An important question is, what will Ampco-Pittsburgh be doing differently, and what is our focus going forward? As I shared in our last earnings call, I wanted to gain a clear understanding of our current condition and the leverage points for success as I stepped into my role four months ago.

I’ve visited several of our key customers and their facilities, both in North America and Europe as well as 13 of our manufacturing locations, both domestically and overseas. Following these exploratory visits, we began a deeper analysis of our portfolio and levers for improvement.

Based on this analysis, we announced last week the commencement of our restructuring with a divestiture of a noncore asset, the Vertical Seal Company, a division of Akers National Roll Company. This action was one of several currently in process. We anticipate our first round of actions will conclude in the second half of 2019.

We expect our future business construct will yield a much improved cost structure and be better positioned to serve our customers now and in the future. Our actions will include improving the utilization and efficiencies of many of our key assets, as well as the elimination of assets that are not deemed critical for our success.

Due to the sensitive nature of many of these actions, I cannot share the full details at this time. In my recent face-to-face shift crew meetings, which are continuing through this month, I can say without hesitation that we have a talented and engaged workforce that is fully capable of delivering our required business transformation.

With our significantly improved liquidity position, we’re also focused on wisely reinvesting back into our business in areas that will drive bottom line improvements. I will now turn the call over to Mike McAuley for a more detailed review of our Q3 financial results.

Mike?.

Thank you, Brett. Good morning, everyone, and thank you for joining our call today. I will start off by giving a financial review for the third quarter by taking you through the consolidated P&L, followed by providing more color at the business segment level, and then I’ll review some of the key cash flow activities in the quarter.

Ampco’s net sales for the third quarter of 2018 were $112.2 million, this compares to net sales for the third quarter of 2017 of $103.9 million. Net sales in the Forged and Cast Engineered Products segment increased approximately 8% compared to prior year, benefiting from higher sales of mill rolls and forged engineered products.

Sales for the Air and Liquid Processing segment for the third quarter of 2018 increased approximately 9% from the prior year quarter, primarily due to higher sales of centrifugal pumps to U.S. Navy shipbuilders. I’ll comment more on the segment results in a moment.

Gross profit as a percentage of net sales was 12.3% for the third quarter of 2018 versus 15.9% for the third quarter of 2017. The decrease is primarily due to unabsorbed costs of our Canadian operations, which is being adversely affected by tariffs, and lower segment margins due to product mix and higher operating costs.

These impacts were partly offset by a higher volume of shipments and improved product pricing. Selling and administrative expenses were comparable at $14.5 million for the third quarter of 2018, versus $14.2 million for the third quarter of 2017.

Depreciation and amortization expense of $5.7 million for the third quarter of 2018 was comparable to the $5.5 million for the third quarter of 2017. Loss from operations for the third quarter of 2018 was $6.7 million. This compares to a loss from operations in the prior year quarter of $3.2 million.

The higher overall volume of shipments and higher product pricing were more than offset by the full quarter effect of tariffs, lower contribution margin and higher unabsorbed costs, given a contraction in demand for frac blocks and equipment maintenance issues.

I will expand on operating income changes a bit further in my segment-level discussion momentarily. Other income expense net improved for the third quarter of 2018 when compared to the prior year quarter due primarily to higher pension and other postretirement benefit income.

The income tax provision for the current year quarter includes income taxes associated with our profitable operations. An income tax benefit is not able to be recognized on losses for certain entities since they remain in a three-year cumulative loss position.

As a result, the corporation reported a net loss of $7.0 million or $0.56 per common share for the third quarter of 2018, compared to a net loss of $2.2 million or $0.18 per common share for the third quarter of 2017. And here’s a bit more detail at the business segment level.

As I previously mentioned, net sales for Forged and Cast Engineered Products segment for the third quarter of 2018 increased approximately 8%, compared to prior year. The current year period benefited from higher sales of mill rolls and forged engineered products.

While sales of frac blocks have declined for the period, sales of other forged engineered products, primarily within Canada, more than compensated.

Despite the increase in net sales, the segment’s operating results declined versus prior year due to higher operating costs, including the impact of equipment reliability issues, the full quarter effective tariffs imposed by the United States on imports of steel products from Canada and lower contribution margin and higher unabsorbed costs, given the contraction in demand for frac blocks.

Net sales for the Air and Liquid Processing segment increased approximately 9% for the third quarter of 2018 versus prior year. Higher sales of customer handlers and centrifugal pumps to the U.S. Navy shipbuilders were offset by a lower volume of heat exchange coil shipments to the fossil fueled power generation market.

Segment operating income increased compared to prior year due to the higher volume of shipments and favorable product mix. Backlog at September 30, 2018 approximated $356 million, an increase of approximately 9% from the $326 million in backlog at December 31, 2017 and an increase of approximately 7% from the prior year backlog at September 30, 2017.

The backlog increase compared to December 31, 2017 reflects improved demand, particularly for mill roll and higher order intake. Approximately $218 million of the current backlog is expected to ship after 2018. Now I will review a few selected significant cash-related items.

Cash and cash equivalents of $14.8 million at September 30, 2018 decreased compared to the December 31, 2017 balance. Some key uses of cash for the year, thus far, included asbestos payments of $5.5 million and capital expenditures of $8.8 million.

Drawings on the Ampco revolving credit facility are $13.8 million at September 30, 2018, which reflects a decrease compared to $20.3 million at December 31, 2017.

At September 30, 2018, in addition to the cash balance, the corporation also has remaining availability on the revolver of approximately $45 million, net of an availability reserve associated with proceeds from a sale and leaseback financing transaction, which will be used towards the settlement of the promissory notes and interest due in March 2019.

I will now turn the call back over to Brett for some closing remarks.

Brett?.

Thanks Mike. As mentioned previously, we have commenced our first round of business restructuring activities. The entire organization will be engaged in this change process. We have multiple actions at different stages of maturity, with more to be initiated in the coming months.

I look forward to sharing the conclusion of each of these actions and our improvements through 2019. Thank you. We will now take any questions..

Thank you sir. We will now being the question-and-answer session. [Operator Instructions] And your first question will come from Justin Bergner of Gabelli & Company. Please go ahead..

Hi, Brett. Hi, Mike..

Hi, Justin..

Good morning..

Good morning. I just wanted to address liquidity.

First off, is it sort of safe to assume that the proceeds from the sale leaseback transaction and the recent asset sale, which hasn’t been explicitly quantified, will sort of be used, more or less, in equal amounts to pay the promissory notes when they become due?.

Yes, Justin, it’s Mike. Yes, the – those two forms of capital raised weren’t intended to cover the promissory notes due in 2019. So we’ve got more than enough liquidity now with those actions plus availability on the revolver to handle that maturity coming due..

Okay. And then just a follow-on question on liquidity just to make sure I understand.

The $45 million availability on the revolver, is that effectively the availability before you would be exposed to the interest coverage? I believe it’s interest coverage covenant under the revolver’s terms? Or is it a smaller amount before you would be exposed to that covenant?.

Well, the covenants in there, in our credit agreement are a fixed charge coverage ratio. And it’s a covenant-like credit agreement because it’s an AVL. And the fixed charge coverage ratio doesn’t become required or it springs to life only if liquidity falls below a certain level. And we’ve got more than enough cushion there.

So I don’t expect it to be an issue. So that $45 million is availability, true availability on the revolver plus we – there’s a reserve in there that in is – covers the value of the sale leaseback that will be put towards the retirement of the notes.

So you might be thinking that we’ve got $45 million plus the proceeds that we’re raising in the form of reserves, which are dedicated towards the retirement of the subordinated promissory notes..

Okay.

So you actually do have availability that’s – of the – so the sale leaseback, even though it’s being used to retire the promissory notes does increase availability under the revolver?.

Essentially, yes..

Okay. Alright. Thanks. I will see if there are any other questions in the queue..

Thanks..

[Operator Instructions] And our next question will be from David Wright of Henry Investment Trust. Please go ahead..

Good morning, Brett, reference the restructuring, you’ve said you want to focus on core business, improve the cost structure, eliminate other assets. Can you put some context around that, what you see as Ampco’s core business maybe? I mean, it sounds like the company’s going to be smaller as a result of this.

But can you give us any vision of what the result is going to look like?.

Well, I would say this, we are – we haven’t – we’ll continue to be a roll manufacturer. That will continue be a focus for us. The Air and Liquid system segment of the business we still see as a critical portion of what we do as Ampco-Pittsburgh.

A lot of this restructuring will be looking at improving our efficiencies or our flow paths, the way we go to market in improved condition. And as I go through this process with the team, it’s about taking out waste and steps in the business that we see as obstacles for us to improve our bottom line..

So it sounds like less of a focus on asset sales and more of a focus on process..

It’ll be both. It’ll – we’ll look at both. As I stated earlier, we’ll look at assets that are underutilized that we can improve the efficiencies of, which will allow us to eliminate other assets in our portfolio. And so through these improvements, I think, we will see opportunities to remove assets from the corporation..

Okay. And Mike, can you give us any update on the tariff situation? Or perhaps, quantify how it’s affected you.

And what kind of a benefit the company would get if the tariff situation was solved?.

Yes, I think the tariffs is one of the key drivers for the results in the quarter. It’s really a couple of combined factors that have hurt our Canadian operations. Certainly, the tariff impact having a full quarter effect on that, and we brought that up on the last earnings call that we were facing new headwinds.

That and we foresaw a decline in frac block demand relating to contraction in demands due to supply chain. And sure enough, in the third quarter, we’re feeling both of those impacts. And in fact, both of those impacts are weighing heavily on our Canadian subsidiary.

The tariffs, for obvious reasons, the trade – their trade activity is selling into the U.S. has been – made them more expensive compared to competition. And that’s really resulted in problems with trade sales, lower production absorption, et cetera.

But the other factor that’s there as well is this contraction in frac block demand, which is our forged engineered products offering, into oil and gas. Our Canadian operation provides the feedstock material, stainless material, which is a primary product and is subject to the tariff as well. But the demand is also down.

So it’s a coincident of – two coincidental timing issues related to both factors that have negatively impacted the results of our Canadian operation..

Okay. Well, thanks very much. Good luck as you work through these things..

Thank you..

Thanks David..

And the next question will be a follow-up from Justin Bergner of Gabelli & Company. Please go ahead.

Thank you. I just wanted to address a couple of questions around some of the comments you made so far. On ASW, just remind us if you’ve applied for exemption and if there are any developments there? And then secondly, you mentioned some equipment reliability issues.

Can you sort of address those? How much they weighed on utilization of profitability? And what steps you’re taking to get those behind you?.

Okay. Yes. Justin, with respect to the tariffs, for certain technical reasons, which we believe are valid, we have indeed applied for exclusion relief through the proper channels. And we’ve continued that process. And it’s just – it’s – with all of the applications for relief, it’s a timing issue with – in terms of response.

There’s an open period for challenges from industry participants. But we’ve been working through that and waiting for definitive responses. So we have definitely pursued the tariff relief avenue. We’ve also engaged in a process of engaging our congressional leaders with appeals for assistance.

So we’ve done as much as we think we can with regard to seeking relief. I think it’s up to speculation. But now that we’re through the midterm elections, that could have an impact. Where the tariffs go from here is also up for speculation. I don’t want to speculate where it’s going to go from here.

But then to answer your second question on equipment reliability, we did have some of the equipment failure in one of our businesses. It did cause some fairly significant downtime. It affected product mix in the sense that certain product lines, which tend to carry higher margins than other product lines, were directly affected.

And as a result, we had shipment delays, higher maintenance cost and then the absorption effect of not being able to inventory the production. We used to have a lack of production from equipment downtime. So that’s something that we’re working on and in fact, addressing as fast as we can.

And now that we – with the improved liquidity position, it’s not really an issue of capital availability so much as it is ability to affect the repairs with getting – with long lead items for spares.

Any thoughts, Brett?.

Well, I would just add to that just as I noted before, we’re going through this restructuring phase of the business. Out of that, we’ll be a clear definition of key assets. And we’ll reinvest wisely the money we raise as a business. So we are very focused on putting the money where it needs to be to help move the bottom line in the right direction..

Okay.

Just a quick follow-up there if you were to eliminate the reliability issues and the ASW losses, I mean, would sort of the core business be close to breakeven run rate? And I guess, on a related topic if the ASW issue persists, could you just – if the – let’s just say, the steel tariffs are here for a while, and you don’t get exemption, could you just – is closing that an opportunity – closing that down an opportunity to, sort of, cut the losses? Or would that have, sort of, ramifications on your U.S.

business sourcing some of those labs?.

Well, those are some good questions, Justin. We haven’t disclosed profitability of individual divisions below the segment level. However, I can’t say that year-on-year that particular subsidiary was responsible for the largest change in the operating income for the segment.

So I mean, it is a factor, and that’s the reason we highlighted it in our press release, in our disclosures on the call today. So yes, it’s a significant swing factor. And if you’re looking strictly at the Forged and Cast Engineered Products segment, had we not been – I think you’re on the right track with thinking about that.

I just don’t want to get too many disclosures below the segment-level detail. With respect to – what was the other part of the question? The....

Oh, sorry, I may have misspoken. The ASW, as it continues to lose money, you don’t get tariff exception, can you effectively close it or temporarily close it? Would there be implications on the slabs or the U.S.

businesses that source those slabs? Is that an option of the tariffs, say, or next year to the next five years?.

This is Brett, Justin. We’re looking at all options in terms of ASW and the impact of the tariffs. Obviously, we are not taking a victim stance in this. We are being proactive. We are reaching out and looking at other potential avenues from a customer-supplier relationship in terms of ASW.

Some new discussions have evolved since the tariffs have come into effect, which are encouraging. However, we’ll continue to look at the business and the impact of that business and make determinations in the future.

But we will aggressively, as I said before, make sure that we’re doing everything we can to keep all avenues open for ASW in terms of – in light of a situation where the tariffs remained intact in the future..

Okay. Understood, thank you..

[Operator Instructions] And our next question will come from Greg Bennett [ph] an investor. Please go ahead..

Good morning. On ASW, is there any way that from a standpoint of just trade, do we know is Canada a net importer of billets or what ASW produces? And does ASW mainly export to the United States for you to use internally? Or do you – did you have other U.S.

customers for your product? What percentage of ASW’s products are used internally? And then what percentage of ASW goes Canada versus America – versus the United States?.

Greg, it’s Mike..

Hi, Mike, I don’t know if you can share that information or not but....

I can give you a little. I would say, Canada, from a global – from a total trade standpoint, I would say, Canada is a net importer overall..

Of what ASW produces?.

Of the kind – of primary steels, yes..

Okay..

Like ingots and billets and things like that. But ASW, traditionally, the majority of their sales have been exports into the U.S. So with the tariffs, that’s obviously a negative development because there are alternatives for customers in the U.S. that they can seek. And that’s been an issue.

But as Brett mentioned, we’re not sitting still and watching this happen to us. We’re reacting. And how we’re reacting is we’re looking and building more of an order book in Canada. And in the quarter, in fact, we had higher sales of products in Canada.

And so we’ve been moving in that direction, and we’ve expanded the Canadian order book for ASW Steel, which is a good thing because it’s an expansion of business, and it prepares us for even better balance even when the tariffs come off. So that’s the, kind of, how that’s playing.

And then with respect to the split of sales from ASW as a facility with respect to intercompany versus trade, presently, with the decline in frac blocks demand, which has been a primary, kind of, an internal – ASW is the internal source for the stainless material. That’s down. I mean, it’s down significantly from where it was.

But it had constituted a significant portion of total facility sales. In the recent quarter with that demand being down, company demand being down, trade sales are the – are – of the business are the largest majority of the sales. So it moves up and down..

Okay.

Is ASW – when the frac block sales were going well, was ASW operating at optimal capacity, or was there excess capacity that you could produce even more if you had other customers, let’s say, in Canada?.

I think it’s fair to say that the capacity at ASW and the size of the business has capacity to do more..

Okay..

If we go back to 2017 levels of production, when intercompany transfers and we had a higher level or the early portion of this year or the end of 2017, when we had a higher demand for material flow for the – supporting the frac block business..

You may have already mentioned this. But this will be my last question.

The reliability issues, the maintenance CapEx or the downtime, that sort of thing, was any of that at ASW? Or was that kind of spread throughout a number of different facilities? Was it concentrated at any one facility, I guess?.

There was a – it was not ASW. There’s another facility in the – here in the U.S. in the third quarter, the one we’re referring to..

And that’s something that is you can control? So is that – do you anticipate, through your maintenance CapEx spending that you can use a revolver on now? Will that be done in the first quarter, second quarter – or fourth quarter, actually?.

Well, I mean obviously, what we’re trying to do with this improved liquidity position is as I said before is target the maintenance spends, the capital improvements on the critical assets for our success. So I mean there’s some that are pretty obvious to us in the business that we’re attacking now.

Those will progress through this quarter and into 2019. And I’m sure new ones will be identified as we go on this path. But it’s going to be an ongoing improvement process, as you know, from a maintenance and reliability perspective. It really never ceases.

We’ve brought in some, I think, some key resources in the organization that’s helped us have a better focus on how to attack this in a much wiser, I would say, fashion. But we will continue to focus on making sure that the assets respond as they need to, to make sure we improve the business..

Okay. Thank you all for your hard work..

Thanks..

Thanks Brett..

And ladies and gentlemen, this will conclude our question-and-answer session, and it will also conclude our conference call for today. We thank you for attending today’s presentation. And at this time, you may disconnect your lines..