Good day and welcome to the Ampco-Pittsburg Corporation Third Quarter 2020 Earnings Results Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

I would like now to turn the conference over to Melanie Sprowson, Investor Relations. Please go ahead..

Thank you, Matt, and good morning to everyone joining us on today’s third quarter 2020 conference call. I’m joined by 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 Terry Kenny, President of Air and Liquid Systems Corporation..

Thank you, Melanie. Good morning and welcome to our call. I’m proud our team and the work they’ve accomplished over the past quarter as each of our businesses continue to execute on our strategic initiatives.

Their work is even more impressive when you take into account the challenging obstacles each of our businesses have faced with the global pandemic. As I stated previously, the health and safety of our employees are at the forefront of everything we’re doing. The onset of COVID-19 has introduced the new risk into our businesses.

We’re taking extraordinary steps to safeguard the wellbeing of our employees and their families, our customers and suppliers, and those in the communities where we operate. We continue to make positive improvements toward our goal of an injury-free workplace as we achieved our lowest lost workday rate for the year in the third quarter.

As we did in the second quarter this year, we initiated plant shutdowns and furloughs to meet the reduced customer demand experienced in the Forged and Cast Engineered Products segment. Our Air and Liquid Processing segment also completed outages during the quarter to perform proactive maintenance.

We remain relentless in our efforts to improve our efficiency and cost structure to further grow our business. Our team members continue to identify and attack new opportunities to accelerate our progress. I want to thank all of our employees for their outstanding work during this challenging period.

We report a positive earnings per share of $0.07 per diluted share for the third quarter, despite the impact of the COVID-19 pandemic on end-market demand..

Thank you, Brett. As we have mentioned before, the health and safety of our employees remains a major focus. I would like to recognize the employees at the Aerofin division and at Buffalo Pumps division for having zero OSHA recordable injuries during the third quarter. Thank you for your efforts.

Unfortunately, we had 4 OSHA recordable injuries at our Buffalo Air Handling division in the third quarter. I am pleased that all 4 employees returned to work immediately after receiving minor medical treatment.

As always, we conducted detailed investigations of these accidents and have put in place procedures and process changes to reduce the possibility of these injuries occurring in the future. The Air and Liquid Processing segment’s third quarter sales were below the prior year.

However, operating income approximated that of the prior year as a result of a favorable product mix and successful process improvement efforts at all 3 divisions. On a year to date basis, sales for this segment are 2.6% below prior year, while income from operations are 4.3% ahead of 2019.

Orders received for the third quarter were strong for custom air handling equipment and specialty centrifugal pumps. While orders for custom heat exchangers were negatively impacted by the effect of COVID-19 on commercial and industrial building utilization.

The backlog is good for Buffalo Air Handling and Buffalo Pumps, with some softness experienced in the Aerofin division. We continue to concentrate our efforts on improving our efficiency in all aspects of our businesses, while providing quality products to our customers.

I would like to take this opportunity to thank all of our dedicated employees for their hard work during these trying times..

Thank you, Terry. I will now turn the call over to Sam Lyon.

Sam?.

Good morning. Our focus has remained consistent for the last 2 quarters. First, I would like to recognize our Slovenia, our Valparaiso, Indiana operations for achieving zero lost time accidents year to date. Our overall recordable rate picked up in the third quarter, but remains lower than 2019.

Our number one focus will always be the wellbeing of our team members. We continue to be highly focused on our liquidity and have had great success here which Mike McAuley will cover in more detail shortly. We have challenged our teams and reduced our inventory to levels not seen in many years.

Our weekly team meetings review our inventory positions, receivables and payables. I personally sit on biweekly calls with each sales associate to review past-due receivables and drive actions for collection. We’ve improved in this area year to date by over $12 million.

We also deferred capital spending by over $7 million without jeopardizing performance, through improved proactive maintenance and by shifting production to our most efficient and reliable equipment. These actions have resulted in strong cash flow for the business.

Our operations continue to run on a reduced schedule with the ability to be flexible when demand increases. Government programs in the UK and Sweden have been aimed at keeping people employed, so that when demand returns, production can be ramped up easily with little training.

In the U.S., we adjust our work schedule to align with demand by taking out whole weeks of production, rather than reducing staff and operating a lower daily output. Our Slovenian plant is currently running on a 4-day schedule. This operating philosophy allows us to rapidly flex our production and costs with demand.

Looking ahead, we anticipate an additional 2 weeks of shutdown in our U.S. plants in Q4 when compared to the prior quarter. Our 2020 cost reduction plans for Sweden are complete. We’re tackling our plans for 2021. Our number one focus in the U.S. plants continues to be on equipment reliability.

The team has delivered over $2 million in savings and reduced maintenance spend when compared to prior year. We have improved our proactive maintenance from about 50% in 2019 to over 75% in Q3 of 2020. This improvement is also apparent in our reduced operating costs as the outages are planned and manpower can be scheduled accordingly.

Switching to sales, I would like to highlight a few key successes. We won and will be shipping the initial provisioning for the new Steel Dynamics Sinton, Texas cold mill in Q4. We are proud to be a part of the state-of-the-art complex..

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

Mike?.

Thank you, Brett, and good morning to everyone on the call today. I’d like to focus my comments on the current quarter results today. Commentary on year-to-date results is available in our earnings press release issued yesterday, as well as in our Form 10-Q just filed.

As Brett indicated, the 2 main themes this quarter are sustained positive net income, despite the magnitude of the sales contraction we experienced related to the pandemic, and the completion of our successful equity offering, which significantly improved our balance sheet and enhanced our overall liquidity position.

We thank our shareholders for their participation. With EPS of $0.07 per share for the third quarter of 2020, Ampco-Pittsburgh continued to remain profitable on a net basis for the 4th consecutive quarter and sequentially higher than Q2 2020 EPS, despite the negative impact of the COVID-19 pandemic on our end markets.

Ampco’s net sales from continuing operations for the third quarter of 2020 were $75.7 million. This compares to net sales from continuing operations for the third quarter of 2019 of $90.9 million.

Net sales in the Forged and Cast Engineered Product segment of $54.5 million for the third quarter of 2020 declined approximately 19% compared to prior year.

Principally attributable to a lower volume of shipments due to customer deferral of deliveries in the flat-rolled steel and aluminum markets, primarily in response to the global pandemic, along with reduced demand for other forged engineered products due principally to depressed conditions in the oil and gas industry.

Net sales for the Air and Liquid Processing Segment for the third quarter of 2020 of $21.2 million decreased marginally compared to the prior year. Gross profit as a percentage of net sales was 21.4% for the third quarter of 2020 versus 16.9% for the third quarter of 2019..

Thank you, Mike. I am extremely proud of our employees and how they in the face of very difficult obstacles to deliver positive results for the third quarter. We will continue to take aggressive steps to further improve our profitability. I’m excited about Ampco-Pittsburgh’s future. Thank you. We’ll now take your questions..

We will now begin the question-and-answer session. At this time, we will pause momentarily to assemble our roster. Our first question comes from Justin Bergner with G.research. Please go ahead..

Hey, good morning, Brett. Good morning, Mike..

Good morning..

Good morning, Justin..

Two questions.

Sort of what are your expectations for CapEx in 2020 and on a more normalized basis?.

Hi, Justin. It’s Mike. Yeah, we are running a bit lower than usual. We would normally spend in a typical year or if we look back to our business plan for 2020, something in the range of $12 million, most of which would be sustaining CapEx.

But as Sam indicated, and maybe he’s got some thoughts, but as Sam indicated, we’ve been really focused on cash flow. And we’ve been finding ways to operate equipment and kind of channel production to the most efficient equipment, and thereby kind of reducing our needs.

So we’ve been very creative, up to now, especially through the period in which prior to the conclusion of the equity offering. But as we move forward, we have more flexibility now..

Great, that’s helpful. And I’m sorry, where’s – I don’t know….

I was going to add, Justin, that obviously we talked about this in our equity raise, a very key step for us that we’re focused on in the process of is the continued consolidation of our manufacturing footprint here in the U.S. And with that, we’ve initiated some activities to move us further down the path.

We’re looking exactly how that spin will play out right now. But that’s something we are keenly focused on and excited about..

Okay, great. That actually answered my second question, your additional comment there. So thanks for taking my question..

Our next question comes from David Wright with Henry Investment Trust. Please go ahead..

Yeah, sorry. Good morning. I have to commend the corporation, the way you’ve turned the balance sheet around, and the debt to equity ratio improvement and the availability. It really helps the foundation for the next step, so good job there..

Yeah, thanks, David..

Thank you, David..

Do you have any comments on how the proposed combination of Cleveland-Cliffs and ArcelorMittal’s North American steel operations, what impact, if any, that has on your roll business?.

Yeah, David, this is Sam. We don’t think it’ll have any impact. And we have very good relationships with the purchasing group at ArcelorMittal as well as AK Steel, which as you know, Cleveland-Cliffs bought AK Steel prior. So, we don’t really see – we haven’t seen anything, nor do we really expect to see any impact, positive or negative..

Okay. And staying on that vein, the backlog is down on order deferrals and lack of booking of new orders, because of the pandemic. Some steel lines have been shut down, some new capacities being built.

Is it possible for you to characterize how much of the backlog shortfall is from sort of just COVID timing things versus potentially permanently lost business..

Majority of it is timing, and I hate to use the word uncertainty, but uncertainty. I mean, as a matter of fact, we’re going to get the orders from 2 of our largest – while our 2 largest customers in the United States for Q2 and Q3 of next year, this week, which normally we would have had the entire next year understood.

But they’re holding orders until the very last minute. What is happening though is that the automotive businesses in the U.S. are running at over 90% of pre-COVID in Europe. They’re running at that same or higher. So there’s been extremely strong rebound.

And barring a second total shutdown in Europe or the U.S., we’re hearing favorable things to the order book versus what we have in our plan for next year. So we’re seeing more upside and downside, depending on what happens with the virus..

Okay. And that kind of rolls into my next question, which is, obviously, the roll business is long lead time, we’ve had quite an increase in HRC prices since the beginning of the quarter, weekly capacity utilization for steel production goes up a little bit each week.

Is there any correlation, you mentioned, you’ve got next year’s orders coming in next week? Is there any correlation between kind of short-term what’s happening in this market coming back from where it was, and its impact on you’re getting more orders and have you seen more business this quarter as a result of that, more bookings?.

Not more bookings, but more favorable comments from the purchasing community that they will need, we’re seeing some short-term fast order items that we would not normally have seen.

And I’d say the biggest difference when you look at the beginning of next year, the very – the larger rolls, the back-up rolls, and more capital intensive rolls, those orders are down, while the work rolls are up. So that can only go on for so long, though, because you have to have a back-up roll to actually run the mill.

So there’s been a deferral or a push out of the higher capital intensive items, but the – we’re seeing a rebound in the actual working roll items..

Okay. Let me squeeze one more in here. One of the objectives of the capital raise was to try to get 1 or 2 new pieces of equipment. And some of those, I guess, have long lead times.

But is there any update on what you might be doing with that having completed the capital raise?.

We’re doing a kind of a capital study, looking at what we would buy and where we would actually place it. But we are working with machine builders and looking at lead times. And so we have a place in order yet, but we’re going down that path..

Okay. Thanks very much..

Thanks, David..

Our next question comes from Brian Powers with Crawford United. Please go ahead..

Thanks. Hi, Brett. Hi, Mike. Back to capital expenditures. The current research on the company indicates that CapEx spending will run at about $15 million per year over the next 5 years. Just wanted to get some color on whether that is correct, and how that money will be spent if it’s in your current businesses, and they’ve got a quick follow-up..

Yeah, Brian, thank you. I think, you’re looking back at historical CapEx. And I think part of that is, we strip off focus that we have on some use of the equity raise proceeds to make some very specific machine tool acquisitions.

And just look at like kind of a sustaining level of CapEx, yeah, you’re right about 12, 15 – it bounced around, but maybe averaged 15. We did kind of have in our business plan something like 12 for this year, before we knew about COVID. So we’re in that ballpark. So you’re right about that.

But we – as Brett indicated, we did have an ambition to not only handle our sustaining CapEx needs, but also to focus on additional investments to kind of modernize them and add new multipurpose machine tools, which would be an extra layer going forward looking on top of that.

And then, if we depending on the course of that that would then alleviate some of the sustaining CapEx requirements beneath it..

Okay, that’s helpful. Because I was looking at the equity research that looks like going up to $15 million going forward as opposed to looking backwards, but – so if that’s somewhere between say $60 million to $75 million over the next 5 years.

If any color on where that will be spent and whether it will limit the company’s ability to make acquisitions?.

This is Brett. The majority of the capital is going to be focused towards the Forged and Cast Engineered Products group, although, we have some clearly defined opportunities in the Air and Liquid Systems group that we’re going to go after.

So, again, the majority will be in the Forged and Cast Engineered Products, just back to the sustained capital piece into something I want to reiterate, that really kind of changes the – creates a new normal for Ampco-Pittsburgh is that through the work, the team has done on significant improvements from efficiency and productivity standpoint.

We have now part to machines that we heavily relied on in the past to manufacturer goods and products. And so we were able to focus on the higher efficiency machines, running those better than we have before in the past. And that’s really changed our needs from a capital perspective. And so we’re reinventing what baseline looks like as we speak.

And the team continues to push and make positive progress on continue to change that equation for us. So the goal is to run only what you need to run to be successful. And then, we have the opportunity for backup machines now that are sitting idle, that we can pull back into services necessary.

But a tremendous amount of focuses on the modernization, the consolidation, take that next big leap from a cost structure perspective to allow us to grow at a much more rapid pace..

That’s helpful.

I guess then the last piece of it is, if – with that level of cash going to ongoing capital expenditures, if there’s room in the plans for any future acquisitions?.

The opportunities right now we see within our current asset base are so great, that we’re heavily focused on pursuing those at this point in time potentially, we will look at opportunities, but there are so much opportunities still exist in this business.

And we believe, we would not even close to maximizing what we can do with our current asset base..

Great. Thank you very much for taking my questions..

Our next question comes from Marco Rodriguez with Stonegate Capital Markets. Please go ahead..

Good morning, everyone. Thank you for taking my questions.

Brett, I was wondering if maybe you could talk a little bit more with what you can on the plan for – again, circling back around the capital raise and the expectations of the manufacturing footprint, and making it a little more effective and then equipment purchases? Can you perhaps just put down a on when some of these timing issues will come to fruition? Or where you’re expecting these things to kind of come through? And were there any other if you could refresh our memories, any other specific projects or initiatives that you expect to kind of accelerate some restructuring aspects and then from the capital raise itself?.

Can you repeat the last part of that question again?.

Yeah.

Other initiatives can you remind us from the capital raise aside from, obviously, the new equipment in the shrinking of the manufacturing footprint, where are those sort of initiatives, are you to kind of implement here in the next 12 months or 18 months, try to accelerate your restructuring efforts and improve profitability?.

Sure. So the question and part of the reason why we’ve not pulled the trigger on the final orders for multipurpose machines to facilitate the consolidations, that the lead times are not acceptable right now. And so, Sam talked about, we’re looking at some different iterations of capital investment to allow us to accelerate faster.

So these negotiations with machine manufacturers are a critical part of determining the timing. We’ve targeted a 3-year time period to achieve the consolidation, but again, it’s going to be dependent on the – what these machine builders is going to be able to do support the timeline.

In terms of other initiatives, obviously, beyond the continuous work we’re doing, Marco, on improving the current assets we have in place, figuring out different and new ways to run the business. One of the examples Sam talked about is our inventory levels shrinking to a level we’ve not had before in the past.

We’re able to now accelerate flow-time through our businesses, able to capture upside – or shorter sell, that we wouldn’t be able to capture before, just because of the time it takes for our products to move through our process.

And taking out equipment and steps in the operations has allowed us to develop a product that’s just as good, if not, better, and but actually goes to the plant much quicker. The other piece of that is around the FEP side of the business. We mentioned before that we want to grow that side, the open-die forging opportunities.

We’ve engaged with some new customers and are excited about orders that are coming in now. And we have some more opportunities in that open-die forging segment that are going to be important for us moving forward.

And then, in the Air Liquid Systems business, we continue to see some opportunities in that market to – as we are restructuring, our costs in that segment, to be able to grow and be able to win projects that otherwise we might not been able to win just because of our current – our past cost position.

So those are some of the, I guess, ones that are upfront right now..

Understood. And can you help us understand the lead time issues right now, just in terms of what is normal? And then, you mentioned that they are pretty extended right now.

Can you kind of give us an idea as far as what those look like?.

Yeah, this is Sam. I mean, these custom machines, there’s a lot of engineering upfront. And that’s really the actual constraint and then the machine-building on top of that. So, I mean, they’re out 2, 2.5 years for delivery of a custom machine..

And that’s the extended lead time or that’s the normal lead time?.

That’s the extended lead time. And when we were initially looking at this, we were thinking more 18 to 24 months, so probably, almost a year longer than what we had originally looked at..

Got it. And then in terms of your Ford’s backlog, obviously understand the headwinds of COVID and its impact on your particular customers and their inventory levels. But I was wondering if you could perhaps give us a sense here, again, what the inventory of rolls might look like at your customers. And I understand there are some timing issues.

You mentioned on the call that you’re expecting some orders coming here from the 2 largest customers.

But if you could also give us a sense, what your expectation of backlog might look like, at the end of this fiscal, if you think that, you see growth versus at least Q3 and then maybe Q1 of this fiscal year? Any sort of color around that would be helpful..

Well, these obviously are forward-looking comments, because I don’t know. But I would expect it to be higher. They don’t like to buy rolls if they’re trying to conserve money, because it’s an expensive item. So while they were shut down for 2 months, automotive kind of people, where they’re shut down, they’re not consuming any rolls.

And then they come back in a lower utilization rate. But if you’ve listened to Steel Dynamics, or Nucor, they’re running an excess of 85%. So even though the U.S. is down to 70%, and guys are running at a much higher utilization, and they’re seeing higher demand than what they expected.

And that’s true of the European – our larger European customers as well, is that they’re saying, if things continue, then we should be ready for more, as opposed to less orders..

Got it. Thanks much guys. Appreciate your time..

Thank you..

Thanks, Marco..

This concludes our question-and-answer session, which will also conclude today’s conference call. Thank you for attending today’s presentation. You may disconnect..