Ampco-Pittsburgh Corporation (NYSE:AP) Q4 2023 Earnings Call Transcript

Ampco-Pittsburgh Corporation (NYSE:AP) Q4 2023 Earnings Call Transcript March 26, 2024

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Operator: Welcome to the Ampco-Pittsburgh Corporation Fourth Quarter 2023 Earnings Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Kim Knox, Corporate Secretary. Please go ahead.

Kim Knox: Thank you, Rocco. And good morning to everyone joining us on today’s fourth quarter 2023 conference call. Joining me today are 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 Dave Anderson, President of Air & Liquid Systems Corporation. Before we begin, I would like to remind everyone that participants on this call may make statements or comments that are forward-looking and may include financial projections or other statements of the corporation’s plans, objectives, expectations or intentions. These matters involve certain risks and uncertainties, many of which are outside the corporation’s control.

The corporation’s actual results may differ significantly from those projected or suggested in any forward-looking statements due to various risk factors, including those discussed in the corporation’s most recently filed Form 10-K and its 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. To access the earnings release or the webcast replay, please consult the Investors section of our website at ampcopgh.com. With that, I would like to now turn the call over to Brett McBrayer, Ampco-Pittsburgh’s CEO. Brett?

Brett McBrayer: Thank you, Kim. Good morning. And thank you for joining our call. As reported in our press release and 10-K filing, Ampco-Pittsburgh saw a top-line growth versus the prior year quarter and prior year, with Air and Liquid Processing segment sales improving 35% and 31%, respectively. Our underlying business improved on a non-GAAP adjusted basis compared to prior year. Although our US forged roll business performed well in our Air and Liquid Processing segment, saw record backlog, record sales, and record adjusted operating income during the year, excess plant capacity coupled with high energy costs in our European cash roll businesses weighed heavily on our 2023 results. With the conclusion of our equipment modernization in our US forged roll business and the expansion of capacity in our Air and Liquid Processing segment, we are better positioned to selectively capture market opportunities.

The 2023 full-year loss of $34.6 million included a $40.9 million non-cash and undiscounted asbestos-related revaluation charge recorded in Q4 of 2023. I’m now going to turn the call over to Sam Lyon, President of our Forged and Cast Engineered product segment for further comments on his segment’s performance. Sam?

Sam Lyon : Thank you, Brett. And good morning. Q4 of 2023 operating income was about breakeven versus a loss of $1.6 million in Q4 of 2022 on revenues of $75.8 million and $69.6 million, respectively. We focused on reducing working capital across all operations in Q4 and ended the year with 18% lower inventory on flat COGS. These production outages affected our operating income negatively, but improved our working capital in the quarter. In 2023, operating income was $7.6 million versus $0.4 million in 2022. 2023 revenue was $303.8 million versus 2022 revenue of $299.5 million. Forged roll revenues increased 20% yearly, driven by North American manufacturers’ reliance on domestic production to ensure stable supply reliability.

Cast roll revenues were lower than in 2022, and softness in this market is expected to continue throughout 2024 due to the current steel production levels in Europe. Despite base price increases, revenues were negatively impacted by our pass-through to customers of lower energy and raw material costs through surcharges, combined with a decrease in FEP demand. FEP revenues decreased in 2023 due to excess distributor inventories at year-end 2022 and lower domestic oil and gas drilling in 2023. In 2023, escalating energy prices resulting from the Russia-Ukraine conflict retracted and stabilized due to government controls, lower activity in Europe, and a mild winter. In addition, as the post-COVID supply chain issues experienced in 2022 stabilized, so did inflation.

Core inflation for 2023 was approximately 4% versus 6% in 2022. 2023 operating results benefited from the tailwind associated with inflation, positive surcharge recovery as higher cost inventory was sold through, and a one-time foreign government energy reimbursement of $1.9 million, partially offset by higher medical costs. 2024 revenue looks to be roughly in line with 2023 as Europe is still depressed. We are starting commercial discussions for the 2025 business and will get a better look at the forward market in the coming months. Q1 of 2024 will be adversely affected by an unplanned three-week outage at our Sweden gas plant, resulting in an unfavorable $1.3 million to $1.6 million operating income impact in the quarter. All but $500,000 of this will be recovered in the coming quarters.

As stated on the last earnings call, the intermediate to long-term demand picture for flat rolled steel and aluminum remains strong, and we are well positioned to supply our customers as this demand increases. Our North American customers are all bullish on the next decade and are investing in new capacity. Over the next decade, the global aluminum market is expected to grow with estimates of approximately a 5.8% compounded annual growth rate through 2031, according to Allied Market Research, Next Market Research, Future Market Insights, and Skyquest. Our strategic capital project for the FCEP segment is essentially complete, and we are ramping up the new equipment. The equipment is expected to be in full-rate production in the third quarter of 2024.

As stated in previous calls, this investment will provide many years of increased productivity, capacity, and reduced maintenance spending.

Brett McBrayer : Thank you, Sam. Dave Anderson, President of Air & Liquid Systems, will now cover his segment’s results. Dave?

David Anderson : Thank you, Brett. Good morning. 2023 was a record year for Air and Liquid, as sales increased 31% to a record high of $119 million. Even with the record sales, our backlog grew 12% in 2023 as we continue to see growth opportunities. All three businesses achieved at least 20% sales growth compared to prior year. I would like to thank all the Air and Liquid employees for their hard work and dedication to drive the business forward. Operating income for Air and Liquid declined in the fourth quarter and for the full year due to the non-cash asbestos-related charge in the fourth quarter. Excluding the asbestos impact, operating income in 2023 improved versus prior year due to the higher volume of shipments, offset in part by higher operating costs, including those associated with the sales growth and plant expansions, as well as unfavorable product mix.

The additive manufacturing project we are working on with the US Navy at Oak Ridge National Laboratory continues to make progress towards the goal of using additive technology to make parts for the pumps we provide to the US Navy. This research and design work will allow us to manufacture parts that do not need to go through the traditional foundries that continue to have long lead times and quality issues. While this project is focused on parts for US Navy pumps, the technology will also be applied to other pumps we sell. We expect to begin using additive parts in the second half of 2024. As I discussed on the last earnings call, Air and Liquid has received a $1.6 million funding grant from the US Navy for the purchase of new manufacturing equipment.

The new equipment is expected to arrive at our facility in the second quarter of this year and will be operational in the third quarter of this year. The equipment will increase manufacturing capacity in our Buffalo Pumps facility. Air and Liquid began our strategic growth plan in 2022. The first year of the plan saw our backlog grow substantially as our expanded sales force made an immediate impact on incoming orders. In 2023, we saw those orders turn into shipments as sales surged by more than 30%. We also increased our manufacturing capacity by adding an additional manufacturing location in Virginia and expanding our production workforce. Air and Liquid entered 2024 with an even higher backlog than a year ago, along with more production capacity than we have ever had in our history.

We have seen much success in the last two years, and it is just the beginning of what we are capable of doing.

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

Mike McAuley: Thank you, Brett. As indicated in our press release and in the corporation’s Form 10-K filed yesterday, Ampco’s net sales for the fourth quarter of 2023 were $108.1 million, an increase of approximately 16% compared to net sales for the fourth quarter of 2022. Full year sales of $422.3 million rose approximately 8%. The Air and Liquid Processing segment led the growth, increasing their sales by 35% for Q4 and 31% for full year compared to prior year. Forged and Cast Engineered Products segment sales grew nearly 9% for the quarter versus prior year, due mainly to higher mill roll shipment volumes. The segment sales were approximately flat for the full year, as higher forged roll shipment volumes and higher net roll pricing was offset by lower forged and engineered products and cast roll shipments.

The corporation reported a loss from operations for the fourth quarter of 2023 of $41.6 million, which was heavily impacted by a $40.9 million non-cash charge associated with a revaluation of the asbestos liability and related insurance receivables. This charge reflects the net difference between the change in the undiscounted asbestos liability, including estimated defense costs, and the change in undiscounted related insurance receivables, which both increased with the new valuation. The main drivers behind the higher valuations are unfavorable recent trends in claims experience, including higher average settlement values and a higher proportion of mesothelioma claims in the case mix, which typically have higher settlement values. As disclosed in the non-GAAP financial measures reconciliation tables presented in the press release and in our Form 10-K for 2023, non-GAAP adjusted loss from operations was $0.7 million for Q4 2023, as the Forged and Cast Engineered Products segment experienced unfavorable cost absorption from the plant downtime that Sam described during the quarter.

And the Air and Liquid sales volume growth impact was more than offset by higher operating costs and unfavorable sales margin mix in the quarter. Full year 2023 adjusted income from operations of $4.2 million improved by $4.5 million over full year 2022. The Forged and Cast Engineered Products segment led this improvement primarily as a result of improved net pricing and better product mix, overcoming lower shipment volumes of Forged Engineered Products and lower manufacturing cost absorption. Full year selling and administrative expenses were approximately 12% of net sales for 2023 compared to 11.2% for 2022. The increase in selling and administrative expense is primarily due to higher employee-related costs, inclusive of short and long term incentives, a rise in medical insurance, and includes the full year effect of staff added last year to support Air and Liquid’s commercial growth.

In addition, the prior year benefited from a change in an employee benefit policy which reduced 2022 selling and administrative expense by $1.1 million. Interest expense for the quarter increased compared to prior year due to a rise in both interest rates and in total debt. This reflects interest on the sale and leaseback financing transaction and the equipment financing arrangement completed during the second half of 2022, the latter of which has been funding the equipment modernization project in the US forged business. It also reflects higher average borrowings under the revolving credit facility to support growth in working capital and other cash needs in 2023. Other net improved for Q4 2023 primarily due to lower foreign exchange losses, partly offset by lower pension income.

However, other net declined for the full year primarily due to fluctuations in foreign exchange and lower pension income, partly offset by unrealized gains in the Rabbi trust investments compared to prior year unrealized losses. The income tax provision for Q4 and full year 2023 includes a $1.3 million income tax benefit related to the asbestos-related charge as well as a $0.3 million valuation allowance against the net deferred income tax assets of the corporation’s UK operations, which entered into a three-year cumulative loss position during the quarter, given the higher energy costs it experienced during that timeframe in the wake of the Russia-Ukraine conflict and the resulting shift in the majority of its production load to another facility.

Net income attributable to non-controlling interest rose for the quarter and full year due to higher operating results for our majority-owned Chinese joint venture. As a result, net loss attributable to Ampco-Pittsburgh for the 3 and 12-month ended December 31, 2023 was $41.8 million or $2.12 per share and $39.9 million or $2.04 per share respectively, which include approximately $2 per share and $2.02 per share respectively for the after-tax impact of the asbestos-related charge recorded in Q4 2023. Total backlog at December 31, 2023 of $378.9 million rose approximately 3% from December 31, 2022, with the Air and Liquid segment backlog up by $14.5 million or 12% based on record order intake for the year. And the Forged and Cast Engineered Products segment backlog was down by $4.6 million or approximately 2% with lower FEP product demand and lower cast roll orders, partly offset by higher forged rolls backlog and the impact of foreign exchange.

Net cash flows provided by operating activities was a positive $6.6 million for Q4 2023 and was a use of $3.7 million for full year 2023. Inflation and trade working capital stabilized in 2023 after a significant increase in 2022 in response to a higher level of business activity and higher costs associated with inflation and the impact of supply chain disruptions. Asbestos-related settlements funded by the company in 2023 were $10.6 million. We expect asbestos-related payments to approximate $9 million in 2024. Capital expenditures for the fourth quarter of 2023 were $6.3 million, primarily for the Forged and Cast Engineered Products segment, inclusive of the forged business’ modernization capital program. Full-year CapEx of $20.4 million compared to $16.7 million in 2022.

At December 31, 2023, the corporation’s liquidity position included cash on hand of $7.3 million and undrawn availability on our revolving credit facility of $25.1 million. In addition, the equipment financing facility has remaining capacity of $3.3 million as of December 31, 2023 and is sufficient to finance the remaining expenditures of the modernization program, spending on which is expected to be completed approximately by the end of Q1 2024. Operator, at this time, we would now like to open the line for questions.

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Q&A Session

Operator: [Operator Instructions]. And today’s first question comes from Justin Bergner with Gabelli Funds.

Justin Bergner: My first question relates to CapEx. Given the modernization program coming to an end, what’s a reasonable number for CapEx in 2024 and should we kind of expect a further step down in 2025 when the modernization program is fully complete?

Mike McAuley: Justin, we’re going to spend a little bit more just to finish it out in Q1, but outside of that, when we think about the forward look for CapEx, we think that we’re going to be in the 20-type million-dollar range for the foreseeable future. And I think if you think about that, we’ve been saying, and I think it’s pretty consistent, that for our business, maintenance level of CapEx is somewhere in that $15 million to $20 million range. So that kind of is representative of pretty much maintenance CapEx going forward.

Justin Bergner: A follow-up there. You did $20 million in the year just completed with a fair amount of modernization. What is going to offset the modernization CapEx going away on the upside?

Mike McAuley: Jason, I misspoke. I was referring to projected depreciation expense. Excuse me. We’re more in the line of $10 million, $11 million over the next couple of years for CapEx. Sorry about that.

Justin Bergner: Is that the maintenance CapEx or is that the total CapEx?

Mike McAuley: That’s the total CapEx, and it’s also reflective of a step down reflecting primarily maintenance CapEx.

Justin Bergner: So there’s a few million above that $10 million to $11 million this year with the completion of the modernization program and then a full step down of the level. Okay. Secondly, the mix in Air and Liquid Processing, what drove the weaker mix in the fourth quarter and is the full year 2023, as a whole, reflective of a normalized mix for that business?

David Anderson: Primarily in the fourth quarter, Justin, it was related to some older orders going to shipyards. Those orders were taken a couple years ago, and inflation eroded some of the margin there. So our mix was not so great on that. Same thing during the year, but I would say, overall, yeah, the year’s mix was about $10 million out, correct. Slightly unfavorable due to the issue at pumps that I just described.

Justin Bergner: As we look at 2024, does that issue of older backlog dissipate and does that have the potential to allow for some margin expansion in that business?

David Anderson: In 2024, we’ll still have some of it, but my expectation is 2024 is the last of it. So yes, then going forward, you’ll begin to see that issue will be gone.

Justin Bergner: And I don’t know if you guys are able to share, but any idea how much your margins might have been weighed down in Air and Liquid Processing by that old backlog in 2023 or looking into 2024?

David Anderson: I don’t have those particular numbers, Justin, but I can look and see.

Justin Bergner: Lastly, with respect to Forged and Cast Engineered Products, the modernization program coming to an end in terms of the CapEx, should we expect a meaningful margin step up in that segment in 2024 as things ramp and come 2025 as the ramp is complete?

Sam Lyon: Justin, in the second half of 2024, as we’re completing training and the people, it’s really employee costs come out and some transportation costs go away between plants. So the total savings was in the neighborhood of $3 million. So in the second half of the year, we would expect to start seeing that in 2025 fully. The remaining savings that was quoted earlier was really expansion of business, so that’ll yet to be seen. So we have more capacity available to expand our business in the 2025 timeframe.

Justin Bergner: Is the $3 million a full year number, just to make sure I’m on the same page?

Sam Lyon: Yeah, it’s actually $2.9 million, I think is what we’ve been quoting. But yes, that’s a full year number.

Operator: [Operator Instructions]. Our next question comes from David Wright with Henry Reinvestment Trust.

David Wright: Dave, a follow-up there on Justin’s question. What kind of an overall operating margin is this kind of defined in the segment breakdown in the footnotes are you looking at for 2024? Is it kind of in the 11% to 12% range that we saw in the second and third quarter? Like what’s the overall target?

David Anderson: I think it’ll be similar, David, to what we saw in 2023 as we continue to work through some of the older backlog and then we’ll start seeing that number move up as we get into the more recent years in the backlog.

David Wright: So move up from 11% to 12%?

David Anderson: Yes, it’ll be in that neighborhood in the first part of the year, and then we’ll start edging our way upward from there.

David Wright: There had been some number of product for the Navy that was delayed because of delays in the whole submarine program. Are these the pumps that you’re referring to presently?

David Anderson: These would be delayed more for the surface ships, but, yes, that’s what we’re talking about is there’s been a lot of delays, and it’s pretty common in any of the work that you see the Navy releasing that they are quite a bit behind on their build schedule.