Q3 2022 Ampco-Pittsburgh Corp Earnings Call
Good day and welcome to the Ampco Pittsburgh Corporation third quarter 2022 earnings results call.
All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions. Please note. This event is being recorded I would now like to turn the conference over to Michael Mccauley CFO . Please go ahead.
Thank you, Jason and good morning to everyone joining us on today's third quarter 2022 conference call.
Joining me today are Brett Mcbrayer, our Chief Executive Officer also joining us on the call today are Sam Lyon President of Union Electric Steel Corporation, and Dave Anderson, 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 corporations 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 statements due to various risk 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 to access the earnings release or the webcast replay. Please consult the investor section of our website at Ampco P. G H dot com.
With that I will turn the call over to Brett Mcbrayer Ampco Pittsburgh's CEO . Thank you Mike Good morning, and thank you for joining our call.
As shared on our recent press release, Ampco, Pittsburgh and recorded a net income of $48 million in our third quarter of 2022, delivering an earnings per share four cents.
We experienced sales growth of 23% for the quarter and were up 14% year to date versus prior year.
The backlog for air and liquid systems.
Broke another record this quarter with no weakness inside.
In December we received we will receive our first piece of new equipment for our U S asset modernization.
Our positive performance for the quarter was achieved despite significant had negative headwinds from European energy prices that impacted volume in our facilities in Sweden, the U K in Slovenia.
We continue to see softening in the European market, which will continue as long as energy prices remain at historically high levels.
The North American market. However remained strong for both forged and cast engineered products and air and liquid systems.
From a safety perspective, I'm pleased to report that our performance for the quarter continues on a positive trajectory.
Now at this time I will turn the call over to David Anderson, President of Air and liquid systems for comments on each segment's performance.
Thank you Brad good morning.
At the end of the third quarter Air and liquid systems achieved another historic high in our backlog. This is the third consecutive quarter. Our backlog has reached a new record.
Backlog levels have increased 54% over the past nine months and 80% over the past 12 months.
We continue to see significant order activity as the changes we have made to our sales force continue to show positive results.
Sales in Q3 increased 20% compared to prior year, primarily due to higher shipments of heat exchangers and custom air handling units.
We continue to manage short term supply chain related issues, including extended lead times on materials and customer requested deferrals.
Operating income for Q3 was consistent with the prior year as higher shipments were offset by unfavorable product mix.
Year to date operating income was $12, 6% above prior year.
Air and liquid systems is now nine months into our multi year strategic growth plan Q.
Q3 sales were 22% higher than Q1 of this year and our backlog has continued to achieve record highs each quarter.
In the quarters ahead, we will continue forward with multiple growth initiatives as we build on the positive momentum we have already achieved thank you Dave I will now turn the call over to Sam Lyon, President of our forged and cast engineered products segment. Thank.
Thank you Brad.
The forged and cast segments backlog decreased 10% sequentially in the third quarter of 2022 and was up 2% since the beginning of the year. This is mainly due to choppy ordering patterns a reduction of activity in the oil and gas business and unfavorable currency translation.
Of our foreign backlogs the currency drag.
<unk> accounted for 30% of the decline sequentially in Q3 and year to date has reduced our backlog by approximately $16 million we.
We had a very strong booking month of $35 million in October which increased our backlog to 6%.
We are seeing strong activity in the U S real market as there's been a shift towards a more local supply chain euro.
Europe is soft due to high energy costs, there, we continue to flex costs and transfer products to our locations that can deliver the most value to our customers.
The intermediate term outlook for the U S is very strong with new projects being installed by Big River Steel Nucor. The vilest, most recently steel dynamics with their announced $2 5 billion dollar aluminum mill.
We traditionally have had a very strong position in aluminum mills.
We're also working toward a zero carbon footprint in Sweden and are targeting certification to this effect in 2026.
This play already has an extremely low carbon footprint and there's 100% as its electricity is a 100%.
Supplied by non C O two producing generation.
Inflation has began to moderate and in some cases has become deflationary.
Key inputs, such as scrap and Molly oxide, alright, a deflationary position when compared to the end of 2021.
Transportation has moderated as roughly flat when compared to January of 2022, Ferrochrome has remained stubbornly high due to the location of supply and energy intensive nature of producing this material.
Energy in the U S has moderated as well as in the U K, where we have experienced the largest headwinds.
The U K government has recently announced a price cap for natural gas and electricity, which has lowered the cost by more than 50%, which will last for the end of Q1 of 2023.
As stated previously we worked tirelessly to get these volatile costs incorporated into a surcharge to insulate our business.
And results from these types of swings we have been successful in this arena. In addition, we've been able to increase base pricing in 2022, and 2023, but not at a level of general inflation.
I'll be focused on increasing base pricing and future contracts to recover costs, such as general operating supplies to improve profitability.
As Brett stated our expansion and modernization programs for our U S plant assets continue forward.
The first machine will arrive in December with commissioning scheduled to be completed in Q1 of 2023, we.
We will be completing acceptance testing on the next two machines. This quarter machine two and three are scheduled to be fully operational in Q2 Q3 of 2023. We're excited about these investments as they will provide a lower cost structure and our rural business and further growth in lateral business I will now turn it back over to Brett.
Thank you Sam at this time, Mike Mcauley, our Chief Financial Officer will share more details regarding our financial performance for the quarter.
Thank you Brett.
We issued our Form 10-Q for the third quarter of 2022 yesterday. So I will just summarize some highlights for Q3 here.
<unk> net sales for the third quarter of 2022 were $99 $6 million, an increase of approximately 23% compared to net sales for the third quarter of 2021.
By 23% sales growth in the forged and cast engineered products segment, which.
Which was driven by higher pricing, including surcharge revenues and higher shipments.
Net sales for the air and liquid processing segment in the third quarter of 2022 were 20% higher than the prior year period due to higher shipment volumes and the heat exchanger and custom air handling businesses.
Loss from operations for the third quarter of 2021 was <unk> $1 million.
This compares to a loss from operations in the prior year quarter of $2.8 million.
The force and cast engineered products segment operating results improved for the third quarter of 2022 compared to prior year, primarily due to improved recovery of costs and higher shipments.
Air and liquid processing segments.
Operating results were comparable to the prior year period.
Despite the sales increase given a less favorable sales mix, which was due to supply chain issues.
Other income expense net improved overall for the third quarter of 2022, primarily due to higher foreign exchange transaction gains. In addition to the timing of dividend income from one of the Corporation's Chinese joint ventures.
This more than offset higher interest expense driven by both higher borrowings and higher interest rates.
At the bottom line. The Corporation reported net income attributable to ampco Pittsburgh of point $8 million or four cents per diluted share for the third quarter of 2022.
Compared to a net loss of $1 $6 million or <unk> <unk> per diluted share for the third quarter of 2021.
Capital expenditures for the third quarter of 2022 were $6 $7 million.
And our $13 million year to date, primarily in the forged and cast engineered products segment.
At September .
30th 2022 the corporation's balance sheet and liquidity position, including cash on hand of $12 $2 million and undrawn availability on our revolving credit facility of approximately $35 6 million.
Yes.
During the quarter the corporation closed on some key financing transactions that significantly improved our liquidity position.
And to provide future financing for the strategic modernization Capex plan and our U S Port operations.
On August 30 of 2022, our air and liquid segment completed a sale and leaseback transaction for its real estate at two plants.
In Virginia valued at $15 $5 million with a subsidiary of store capital a major real estate investment Trust.
This deal also included a supplemental disbursement agreement with UES of up to $2 $5 million for building improvements at the Carnegie P. A finishing plant for upgrades to be completed associated with UES modernization program.
In addition on September 29, 2022, UAS and entered into a master loan and security agreement with a leading equipment finance lender and with UES can borrow up to $20 million for specified equipment for its modernization Capex program.
During the quarter, we drew $4 million on this facility to reimburse past supplier progress payments.
These proceeds plus the proceeds from the air and liquid sale on leaseback were used to pay down the credit line, creating substantially more availability on the line, hence the transaction it did not increase total debt.
As a result as a subsequent event.
In October Air and liquid also completed the sale and leaseback of its North Tonawanda, New York property to store capital.
These important financing transactions significantly enhanced our liquidity and position us to execute on our strategic capital reinvestment plan and looking forward to support our sales growth initiatives ahead.
Operator at this time, we would now like to open the line for questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Yeah.
Okay.
Our first question comes from Justin Bergner from Gabelli funds. Please go ahead.
Good morning, Brad Good morning, Mike.
Good morning, gentlemen, and Joseph.
I just wanted to better understand some of the financing transactions in the quarter and after the quarter, maybe three quick clarification questions there.
The 2.2 million I didn't fully capture what that related to as a financing transaction that would be the first.
The second would be.
Just a little more clarity on the 4 million that was drawn on the equipment financing facility to reimburse some past payments.
And then the third you mentioned a sale.
Sale leaseback transaction October for air and liquid handling for your New York facility, but I'm not sure you mentioned the amount.
Okay.
Thanks for the question Justin.
So let's start from the top the.
As part of the.
Sale lease transaction sale leaseback transaction, we complete completed in September .
We had a.
An additional element that was included in the deal.
To fund up to two and a half million dollars a building improvements.
At at our Carnegie P a roll finishing facility.
Yes.
The the link here is that in.
In 2018, the company did a sale leaseback transaction.
<unk>, it's it's plant properties and Union electric steel or U S. <unk>.
Historic capital, So store capital as our landlord at that plant.
And it only seem to make sense that yeah.
If it.
If we were going to be upgrading the building with a lease hold improvement at <unk>.
Perhaps we could.
Store capital could fund that for US, it's all part of the $27 million Capex.
That we had baked into that into that.
And do they improve the total Capex upgrade program and Union electric and.
And when we had the opportunity to do that so that's what that two and a half Milligan is for we haven't we haven't received any reimbursements from it yet the projects still in process, but it's about expanding.
They use.
The Carnegie facility.
To open our new machining day.
Install other some other equipment and reinforced.
A portion of the building that previously hadn't been.
Used for such heavy work.
So that's the first thing is that clear.
Yes. So is that money that is part of the equipment financing facility and you said you haven't been reimbursed for it no separate things set store capital and sale leasebacks are separate I'm focusing on that right now I'll get into equipment Finance next.
This is part of sale leaseback and it's in it's an extra piece.
Two to get financing to do it.
And improve our lease hold improvement to a property that was previously sold.
Yeah.
Got it.
The only two and a half million. We haven't received we haven't received any cash for it yet it is for what's coming.
Okay got it.
Okay.
Now.
And maybe it will still stay on sale leaseback for a second.
Before getting into the equipment financing.
We we expanded our relationship with store by.
Bye.
Moving over into the air and liquid segment.
And we elected to.
To do a transaction. It was originally intended to be a $20 million total transaction broke we just broke it into two pieces.
There was some environmental testing that was this desire to it at the at the North Tonawanda, New York facility, which took a little while there were no findings. So it just it's got separated in time. So we closed on the Virginia facilities first the two Virginia facilities and the sale leaseback that was that was a <unk>.
$15 $5 million inflow.
Yeah.
And then as a subsequent event outside of the quarter.
In October just to finish that the threat here.
We did close on the <unk>.
North Tonawanda facility for $4 $5 million, so that makes up the total $20 million.
That debt.
That will be now.
New.
A new new booked at for us on the on the balance sheet.
Long term, but the proceeds were used to pay down the credit line in all instances. So theres no no total increase in debt, but yes, you will note on the debt footnote in our Form 10-Q from yesterday, you will see that spiked out.
Well youll see that balance for sale and leaseback.
Row are larger than it was.
Great. That's helpful. I guess in the third piece was the <unk>.
Portion of the equipment financing.
Yes, yes, yes.
No we.
We wanted to kind of have a more of a permanent or longer term financing put in place for that important and high cost equipment. So we.
We've been thinking you know rather than.
As we have been doing you know use our credit line to support.
Progress payments.
Are these large machine tools it was about time for us to.
Get some permanent financing for that.
We entered into an agreement.
To provide funding not only for progress payments, but for the term portion of each machine. So the.
For the further progress payments, we've got a term loan in place that are at 8%.
And then when each machine goes online.
With that those term loans turn into individual term notes.
Depending on when each machines installed because the machine access collateral for the for the line or for that for that loan.
Okay.
And we drew 4 million on it because.
We have incurred we've actually incurred more than that.
But we're trying to manage our our total interest cost.
And it's a nice way for us to manage liquidity going forward two to seek reimbursements on the past progress payments kind of to maintain and even liquidity.
And then eventually we'll be we'll be using that at that.
That line to finance the equipment long term.
Okay that was very helpful is the 4 million was for the progress payment on the first machine.
It's been a couple of machine it was on several machines Oh.
Of the bunch, but yes.
Okay, Great. That's very helpful for that detail and then on the credit line the revolving credit line.
None of these financing transactions limit you there right because that's more tied to working capital and this is tied to longer term.
It's actually a great boost to availability on our credit line, because we were using the credit line to <unk>.
We've been using a credit line to fund everything, including Capex and it was getting a heavy on the capex. So.
We released pressure on the credit line.
With these with these borrowings, but again I'll just say that these new agreements that we have in place have not increased our total debt because all proceeds that have been brought in have reduced the credit line.
And now the credit line has lots of space.
Got it yeah I was just trying to clarify that there was nothing based on these other financing transactions that limited your availability under the credit line.
Okay.
And then maybe lastly in the prepared remarks, you Brett you talked about.
Headwinds for sales did the planned downtime materially impact the third quarter sequential sales and profit in the forged and cast engineered products and then maybe some clarity on why the oil and gas piece.
Tapered a bit sequentially.
Yes.
Planned downtime did have material impacts in the quarter some significant outages across all of our businesses and then again as from a proactive perspective too.
To make sure we maintain the assets we have in place and be able to perform moving forward I'll, let Sam Justin.
Speak a little bit about the oil and gas industry and give a little bit more color on that.
Topic.
Yes, just on the oil and gas side.
Sure.
We moved from some second tier customers to some first tier customers on the frac blocks out of the business.
I won't get into any names one of them has started procuring.
Overseas again, and so we're diversifying and some other people.
We're anticipating that that will last very long and there are.
Some protections in place to have protections in place.
So I think that that's a temporary thing, but it will have a.
That impact.
A little bit in Q4 and into Q1.
As we backfill that that volume that we had with a particular customer.
Okay. Thank you.
Thanks, Justin.
Again, if you have a question. Please press Star then one.
And our next question comes from David Wright from Henry Investment Trust. Please go ahead.
Hi, good morning, everyone.
Morning, David David.
Okay start out with Dave.
So you mentioned that business is going Gangbusters, you mentioned, the new five year strategic plan.
How much can you breakdown, maybe how much of what you've seen this year is a result of just.
Strength in the economy existing things in the pipeline closing versus efforts to expand to new customers and new markets producing orders.
David the first.
Part I would say is it's predominantly the third one it's predominantly expanding our sales force.
We have dedicated resources internally and hiring some people.
In Q1 of this year that has paid off for us and we spent a lot of this year.
Adding to our independent sales Rep network, we have expanded that considerably. So that's the dominant answer not really so much the second one closing of older things.
Certainly there is some on your first point of the economy, but I would say in order. It's the third one is the expansion of our sales force then somewhat the economy and not really number two the closing of orders.
And then just to stay on that.
That's still some pretty good quick success.
Is that more a function of just getting into new markets or are the brand names, so well known and well thought of that it's been.
Easy for the easy is not the right word that it's been.
Helpful to the new reps.
Getting lawyers.
Some of both its been really helpful. We do have good reputations in the markets we compete in.
And our new reps have been a combination in some cases of swapping out ones that werent, particularly performing at the level we wanted.
And also pushing out geographically into some new markets. So it's the combination of those things and we have added.
Significant independent sales reps this year more than a dozen changes that we've made so that is a significant addition to our force.
Okay, well great. Thanks for thanks.
Thanks for talking about your average there and continued good luck.
Thank you Dan.
You mentioned machines, one two and three one in December two in Q1 and three in Q2.
Do those comprise comprised basically the the equipment program.
There is there will be one more so it was four four machines.
That were buying 123, sorry, five machines. So thats three of the five and then there is also.
Two furnaces that were putting in that will help us to melt more. So this is probably the first I'll say <unk>.
Of those three machines to be the first third of the total.
Okay.
I know, it's taken a long time to get these machines.
Do you feel pretty confident that the.
The.
The delivery schedule is going to hold.
Yeah, because we're actually the one machine the containers arrived here in the United States, a week or so ago.
So we'll be getting that to install the other two machines are actually fabricated.
We are going there to witness so what they do is they build the machine, we fly over and make sure. It runs right in performance the specifications than they just assemble and ship. It here. So the machines are actually assembled.
In Europe , right now and we'll be going there too to witness and make sure that they perform according to specifications.
Okay, and then you mentioned the strong bookings in the new projects.
The new mills being built I think that you cited four of them.
The Z.
The aggregate effect of.
Lewis do.
Abilities.
Will be felt by the company like over what periods.
Right.
The mill fills will happen in say 2003 in early 'twenty four 'twenty, three and 'twenty four and then the ramp the ramp them up so its future work, but the good news is it's in the United States and that's where we're strong and have strong presence.
So shipments would start in the latter part of 'twenty three.
First I would like yeah.
The Big River steel.
Is much further along the aluminum mill will be built till 'twenty. Four is still dynamics is building, but they'll we're already in discussions with all of them about.
Initial requirements.
Okay does point, okay in the 'twenty, three and 'twenty four.
Okay.
Okay.
So then just Brett I would say that.
It's been a tough time with all the different moving parts Covid supply chain.
Increased input costs.
And the company really hasn't had any bad quarters, you've had some a lot of kind of small last quarters and so that's got to make everybody feel good. It makes me feel good.
<unk>.
Oh.
Aside from the anticipated savings that the new <unk>.
Equipment will produce once it's all in what in your mind is the.
Other kind of large.
Largest moving part that you need to turn.
To really get to sustained profitability.
Well it really the big piece I would say David and thank you for your comments.
Beyond the investment in the capital.
In the U S assets here in the U S is really.
Accelerating further the growth in the air liquid systems side is a huge up for us.
And as Dave has talked about.
What's happening right now we believe we are on the cusp of something much bigger from a from a topline and a profitability standpoint.
And just going back to UBS is really pricing Sam noted that in his opening remarks that we've got to continue to push the prices in the market.
We're seeing from a demand perspective.
Customers value, our products and want to make sure that we cover.
Continuing increases of costs and.
We were able to take more money to the bottom line.
Alright, I don't want to leave Mike outside.
Consistent consistently amazed at your ability to pull financing rabbits out of the App. So.
Great job, there, particularly with all the sale leasebacks at at much lower capitalization rates, then I would imagine are available in the market today.
Yeah. Thank you David.
Okay. Good luck going forward, thanks for taking my questions.
Thank you David.
Our next question is a follow up from Justin Bergner from Gabelli funds. Please go ahead.
Thanks, guys a couple of follow ups.
For the Big River Steel mill and the steel dynamics aluminum mill you were I think.
Suggesting that the.
Orders and revenue would be in end of 2023 event for Big River steel in end of 2024 event for the steel dynamics aluminum mill is that the timing you're thinking yes, so to be clear I have to go I need to go back and check the timing on that we're just in discussions we're not even sure sometimes the mill builder buys the rules some.
<unk> the actual customer buys the roles where just the negotiations are not in negotiations we reviewed specifications right now so I don't want to really.
Quote when the timing of that is going to be in and how theyre going to ramp up and how theyre going to build so my only point was that.
It's.
If I can.
Capacity expansion in the United States and the two aluminum mills that Dallas and.
And steel dynamics are the first two new bills built in over 30 years here in the United States. So.
My only point was just to say that.
Our market that were strong and is growing but the timing is kind of I don't want to call. It a time at this point.
Okay and it seems like from your comments you said you expect to hopefully have.
Our business with the Novellus mill to I mean, what is characterized your strong position in the aluminum mills.
It's just performance so the amount of tons that they get per.
The cost of the roles that they buy so we've just had.
It would be Kaiser or Alcoa or novalis, we've had just good performance and strong market share with all of them in the past.
Five to 10 years or more.
Okay got it and then on the air and liquid processing side.
Who are you taking share from and in what parts of the business are you taking share.
You know, perhaps aided by the.
Improved sales force.
I'd say just that it's not one particular customer and it's really across all three of our businesses. Our backlog is up in all three of them.
Part of it is geographic moving out into new markets as we've added independent reps and.
But I don't think there's one particular customer.
One competitor, we're seeing it across the board.
Okay, but do you think this is a share dynamic it's not like a market dynamic where it's late cycle activity is favorable for orders and you and others are.
<unk> seen.
Environment, you'd think it's mainly share.
I think its majority share theres certainly some of the other but I think the dominant part is <unk>.
Sure Yes.
Thank you.
Okay.
There are no more questions in the queue. This concludes our question and answer session I would like to turn the conference back over to Brett Mcbrayer for any closing remarks.
Thank you, Jason we have and we will continue to take actions to mitigate the negative headwinds we are facing in Europe . The improvements we have made across our businesses has unfortunately been overshadowed from the impact of the war in Ukraine.
I'm excited to see the positive steps the organization has taken to position ourselves for improved profitability again want to thank our employees for their hard work focus and commitment to our success. Thank you for joining our call. This morning.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yes.
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Yes.
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