Q2 2023 Ampco-Pittsburgh Corporation Earnings Call
Okay.
Good day.
Welcome to the Ampco Pittsburgh Corporation second quarter, 2023 earnings conference call.
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I would now like to turn the conference over to Tim Knox. Please go ahead.
Thank you Marlene and good morning to everyone. Joining us on today's second quarter 2023 Conference call. Joining me today are Brett Mcbrayer, our Chief Executive Officer, and Mike Mcauley, Senior Vice President and Chief Financial Officer, and Treasurer also joining us on the call today are Sam Lyon President.
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.
Access to the earnings release or webcast replay. Please consult the investors section of our website at Ampco P. G H dot com.
With that I'd like to turn the call over to Brett Mcbrayer Ampco, Pittsburgh's CEO Brett. Thank you Cam good morning, and thank you for joining our call. This shared in yesterday's press release recorded in earnings per share of two cents for the second quarter and six cents per share year to date.
Our operating income year to date has tripled that of prior year with solid performances from both segments or particular noticed the continuing growth of the air and liquid segment with another quarter of record breaking backlogs challenge, Dave Anderson, our air and liquid systems president to more than double this revenue of 2022.
Based on these recent performance I believe he is taking that challenge to heart. Much work is still ahead as we position ourselves for a strong 2024 and beyond the completion of our capital improvements in our U S Forest assets is critical and I'm pleased with our progress to date.
I also want to note our strong safety performance with recordable and lost time injury rates continue to improve I'd now like to turn the call over to David Anderson President of Air and liquid systems.
Brett good morning.
We continue to see the positive results of our strategic growth plan as sales in the first six months of this year are the highest dinner and liquids history.
Sales in Q2 increased 29% versus prior year with year to date sales up 35% over prior year.
Year to date, all three businesses have achieved more than 20% sales growth compared to prior year.
Even with the higher sales level, our backlog grew once again to a new record this quarter as our expanded sales force continues to exceed expectations.
This means we have now achieved a new record backlog for six consecutive quarters.
The new manufacturing space, we leased in Lynchburg, Virginia at the beginning of Q2 is now operational and will provide additional capacity for our businesses as we continue to grow.
We are also excited to share that we were working on a U S. Navy additive manufacturing project in Oak Ridge National Laboratory.
Over the next 12 months, we will be working on designing additive manufactured pump parts for the U S. Navy.
Additive manufacturing of these parts has great potential to shorten supply chain lead times and increase capacity.
Segment operating income for the first six months of 2023 was 13% above prior year due to the increased sales.
The prior year income included 0.7 million they didn't come for a one time employee benefit policy adjustment.
Excluding the one time adjustment shows operating income growth of 30% versus prior year.
Revenue and operating income have already increased our backlog is now 92% higher than it was 18 months ago and with our new facility in Lynchburg, we have increased our manufacturing capabilities.
All of this means we are in a strong position to continue forward with our growth plans in the quarters ahead.
Dave I'll now turn the call over to Sam Lyon, President of our forged and cast engineered products segment.
Thank you Brett and good morning.
Q2 of 2023 marked the third consecutive quarter of positive operating income.
Finished the quarter with an operating income of $3 9 million, which included a onetime benefit of $1 9 million related to a foreign government energy reimbursement. Excluding this benefit operating income was $2 million roughly consistent with our Q1 results.
Q2 revenues were $77 6 million versus prior year of $79 6 million.
Lower topline revenue reflects decreased variable surcharges due to lower energy and raw material costs and a weaker dollar.
The gastro market as stable, while the affordable market has strengthened and is approximately 25% higher versus 2022.
Forged engineered product revenues continued to be depressed, we anticipate recovery for the FPP market starting in the back half of 2023 and continuing into 2024.
For 2020 for the World Steel Association estimate steel demand to increase by two 5% in the U S. With Europe also seeing modest growth compared to this year.
Our customer base report similar sentiments expecting sustained healthy demand from the automotive industry solar energy sector.
And U S infrastructure programs. This confidence is supported by investments in new steel and aluminum Rolling Mills, primarily in North America.
The forged roll market is strong approximately up 25% year over year as North American manufacturers are leaning more heavily on domestic producers to ensure reliability of supply. Our backlog remained strong into 2024 negotiations are complete with most of our large rural customers and our value proposition has allowed us to maintain.
Rain or grow share with favorable pricing for 2024.
Energy and transportation surcharges remain in place for most of our customers, which will smooth our operating income and protect against unforeseen volatility.
As Brent mentioned, our capital improvement plan in the United States continues to progress with completion expected in the fourth quarter.
Four of the five new machining centers have been received and are at various stages of installation and startup. We've completed over 30 rules in the first machine with efficiency improvements of over 20%. We were very encouraged by these results and look forward to many years ahead with minimal maintenance costs and unplanned downtime.
The imminent completion of the strategic project project positions us well to support the growth in North America, and aluminum steel alert North America steel and aluminum industries. Thank you Sam.
Now like to turn the call over to Mike Mcauley, Our Chief Financial Officer, who will now share more details regarding our financial performance Mike.
Thank you Brett as expressed in our press release and in the Corporation's Form 10-Q filed last night Ampco Pittsburgh consolidated net sales for the second quarter of 2023 were $107.2 million.
That's an increase of four 5% compared to net sales for the second quarter of 2022.
Net sales on the air and liquid processing segment grew 29% year over year, driven by a higher volume of shipments and all three businesses, but most notably heat exchange coils.
Sales net sales for the force and cast engineered products segment in the second quarter of 2023 declined two 5% compared to the prior year period as Sam explained.
Driven by lower demand for F. N P products in the oil and gas and steel distribution markets lower surcharge pass throughs and unfavorable foreign exchange translation.
Offset in part by higher mill roll shipment volumes.
Income from operations for the second quarter of 2023 was $3 $3 million. This compares to income from operations in the prior year quarter up $2 $1 million.
Higher overall shipment volumes.
Foreign energy credit Sam referred to.
And better manufacturing cost absorption were partly offset by higher costs and a less favorable sales mix.
Interest expense for the quarter increased compared to prior year due to a rise in both interest rates and in total debt and.
In part due to ongoing expenditure expenditures for the cat strategic capital investment program in the U S sports business.
Other net decline for the quarter, primarily due to losses recorded on foreign exchange in the current year quarter compared to gains on foreign exchange recorded in the prior year quarter.
Backlog at June 30 of 2023 of $372 million rose approximately 6% from a year ago with air and liquid segment backlog at a record high and unfortunately cast engineered product segment backlog, reflecting the decrease in S. E P demand and roll order timing differences.
Net cash flows used by operating activities was approximately $2 $8 million for Q2, 2023, and it was a use of $7 $1 million year to date June .
Primarily in support of working capital.
This represents a significant improvement from 2022 due to improved operating results and lower change in working capital in the current year periods.
Capital expenditures for the second quarter of 2023 were $6 $4 million, primarily for the forest and cast engineered products segment inclusive of the <unk> business is strategic capital program.
We expect Capex and usage of the equipment finance facilities, a step up in Q3 with the milestones expected for that capital expenditure program.
June 30 of 'twenty twenty-three corporation's balance sheet and liquidity position included cash on hand of $9 $5 million and undrawn availability on our revolving credit facility of $22 $4 million.
In addition, the equipment financing facility has has remaining capacity of $9 $4 million as of June 30 of 2023.
Yeah.
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.
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At this time, we will pause momentarily to assemble our roster and as a reminder for a question star one.
Yeah.
Our first question comes from David Wright.
From Henry Investment Trust.
Please go ahead.
Good morning apologize for any background noise.
From the press release.
SG&A is a pretty noticeably sequentially and year over year Mike.
Mike can you give some commentary about that and also what is SG&A looked like for the next couple of quarters.
Yeah David.
Thank you for the question.
SG&A is elevated compared to prior.
Prior year or a couple of reasons.
One is with the higher income variable compensation accruals are higher than they were last year, when we have lower income.
We are also experiencing like a lot of public companies that you may be listening to or you may own.
A higher level of self insured health care costs.
That's quite noticeable when we think and based on discussions with our.
With our insurers and our specialists that you know a lot of it is.
Related to the pandemic and people deferring a health care for.
A few years and now it's starting to catch up with most companies and we're no stranger to that either so we are seeing elevated our self insured health care costs and.
In addition to things like typical wage inflation and so forth.
The other thing is that you know we did start a new facility in an era in liquid.
And there are some additional costs associated with that until we get to a more ramped up scenario.
So should we look at $14 million a quarter for the next couple of quarters as well.
I think that SG&A for a 2023.
Consolidated will.
We'll be about 13 million in Q3 and Q4.
Okay, great. Thanks very much.
I appreciate you taking the questions.
Thanks, David.
And our next question.
Comes from Justin Bergner from Gabelli funds Justin Please go ahead.
Hi, Good morning, Brian Good morning, Mike Good morning rest of the team.
Good morning.
I guess my first question would be on cash flow and working capital so.
Your sales of forged and cast rolls are kind of.
More on the flattish territory the inventories are remaining high.
What's the outlook for inventories in the second half.
Should we expect an inflection to positive.
Operating cash flow as working capital gets worked down.
Justin This is Sam Mike might have some specific numbers in front of them, but in general we expect inventory to come down.
We had our outage that occurred at the very very end of Q2 and into Q3 for North American assets and we take two weeks out. So we build inventory ahead of that to flow through the rest of the operations to support the customer base and that will flow out over the next two quarters.
Yeah, and I might add to that.
As Mike I might add to that a little bit I. In addition to the.
Kind of the reduction in inventory that's expected.
In the second half.
We we think that you know cash flow from operating activities should be.
Almost neutral for the full year as we catch up with the drop in inventories.
But but but the one thing to keep in mind is while that's cash flow from operating activities.
Based on higher income offset by working capital and other things with the cash add backs.
The other thing to keep in mind as Capex is going to continue to be a bit elevated while we complete the a.
The investments in the U S forage business. So we do think that Capex is going to be higher so if youre thinking the next step like free cash flow.
Can be difficult for that to turn positive win with the Capex that we have on deck.
Got it that's helpful. And then what's the sort of Capex guide for the year and does the equipment finance facilities sort of cover all your.
There or do you have just sort of.
Kind of go into the revolver.
The equipment finance facility was a $20 million facility.
It covers the vast majority of the strategic Capex in fact that that those particular that particular equipment serves as the collateral for the facility.
So it's largely covers it is not 100% covers but our credit agreement has a 20 million dollar allowance for such incremental or supplemental financing outside of the of the bank group.
We expect to use most of that.
And so you know available.
I'm not concerned about funding for the Capex at all like we've got it covered pretty much. We are funding part of it out of pocket for things like foundation that utilities some engineering.
The you know the bulk of the cost is covered by the equipment financing facility and in terms of kind of giving you some kind of guidance or outlook on capex Q3 should be our highest capex quarter of the year and then we should drop back down into a lower probably our lowest quarter and Q4.
And we're thinking something in the range of 22 million total capex for full year of 2023.
Oh is that okay.
Yeah. So as we go forward at the end of 'twenty, four and 'twenty five we're going to be obviously stepping down.
Quite significantly and back into more historical levels.
The levels of total Capex.
In the out years.
Okay, and then more historical would be.
Yeah.
Sure I will.
I would if I were.
15, south of 15.
Yeah Okay.
Alright.
And then lastly.
Would you say that you know.
Pricing is sort of caught up to cost now based on the forged and cast engineered products results.
Our results in the second quarter.
You made a comment Brad about 2020 for pricing.
I didn't realize most of that.
So early in 2023 would you expect a further improvement relative or are you sort of trending towards better conditions for 2020 core pricing and you're experiencing in the second quarter and looking into the third quarter.
Hi, This is Sam Justin.
The pricing, yes, most of our major contracts.
Are done.
In the second quarter ish for next year, and then we got a real allocations and so that was my comment the pricing.
And we're able to to attain is in excess of inflation.
Most of our major cost raw materials energy transportation.
Raw materials are all pass throughs and then we know we know what our wage inflation is going to be on all the union contracts and so we're confident that we were able to to cover more than cover.
<unk>.
Okay.
The last piece the pricing for Q3 and Q4 of this year are done they were done.
A lot of last year.
So the pricing would be similar.
The pricing, we will experience in Q3, and Q4 would be similar to Q2 of this year.
Okay, and so the pricing for this year is more or less.
Caught up with inflation as of Q2 and looking into the back half in the next year, you're expecting to get some pricing beyond your whole set of inflationary pressures.
Yes, that's correct yeah, the pricing I would say, it's like is in line with the materials and raw materials and energy and transportation costs.
This year potentially not completely caught up with.
Other inflation inflationary items, hence the need to.
Our focus on pricing in 2024.
And in and get the pricing raised in 2024 as Sam described.
Okay. That's good perspective, thank you I'll get back in the queue.
Thanks.
If you would like to get in the question queue. Please press star one.
Yeah.
Yes.
And our next question comes from.
Greg.
Then it.
From.
Who is a shareholder.
Greg. Please go ahead.
Good morning.
So I guess my question for margin expansion for next year you have these calls.
<unk> negotiated the contracts.
And you have these cost paths are you. So I guess, our variable costs go down and then you you pass that through to your customer.
For margin expansion next year, it really comes down to this modernization program yes.
I was wondering if you could give us more.
Color on.
I think you mentioned that you have for the five pieces of equipment in place and the first one with.
It was generating savings.
But.
About two years ago. When you embarked on this you were talking about quite a significant savings or productivity improvement. If you could tell us more about that more color is that turning out the way you want.
Yes.
What the.
Greg the numbers that we're looking at are roughly in the two and a half to $3 million savings range in that expansion.
Theres two furnaces that were putting in that allow us to increase our forged throughput and expand our non non rural business.
And depending on volume.
That'll be another three to say $5 million worth of.
<unk>.
So we would start to see this beginning in 'twenty four.
Yes sure.
Mike.
During the third quarter or fourth quarter any chance of seeing any improvement there or it's really more next year.
It's really more next year, because we have some training costs and ramp up costs that we have and then next year by the end of Q4, everything will be up and running and along with that there is a little bit of a product shift.
More product to be run in our Carnegie plant, which cuts on transportation costs between intercompany transportation that's another pieces.
So I would say.
More Q1 of next year.
Okay.
Are the calls I've heard recently.
Customers were looking for you know used to look for just in time delivery than they were doing just in case an over ordering.
I'm wondering.
Are you finding that some of your customers are destocking now and don't want to take delivery of.
Our roles are are you able to turn those rolls back to your customer.
As soon as you've manufacturer.
And there's been very little of that I mean, there's always some push outs or pull ins, but.
It's not any different different than normal.
So yeah, we're not we're not seeing any any significant push outs of any kind.
And one other thanks guys.
Unique to our businesses starting I don't know is unique but we get estimates for next year, what they want but then before we start manufacturing we get approval from them to start and once we start.
We have a very high success rate of them, taking the product.
Yeah.
Yeah.
One final question I think you touched it was very quick but you touched on.
With air and liquid.
This contract with the Navy.
You referred to it as additive manufacturing, but.
A lot of people refer to as three D manufacturing where.
New technology for creating.
Bart.
What's the is there a capex program for that or is the navy funding that or how is that working.
Greg It's Dave and thank you for the call for the question.
Right now this is a navy funded program with Oak Ridge and Youre right. Its three D are additive they use either term for it.
The Navy's intent is to go towards more of this additive because they see that as an answer to a lot of the supply chain issues that they've been having in recent years with the shipbuilders.
So for US right now we're committed to learning how to manufacture these parts and we would expect to look at things like Navy funding in the future. If we were to invest in the equipment. So right now it's a 12 month program to learn how to design them and work with them and then we'd make some <unk>.
Terminations on what investments may or may not be needed at that point.
So if you go ahead with this there will be a capex program, but that won't be until 2025 is that the way it would probably be around that and there's really a couple of approaches that we could take upon developing these parts.
We could obviously invest on our own equipment, we could request funding from the Navy to help pay for that equipment or we could use other parties and contract out to use their equipment. So that third option would not really require capex.
So it really depends and we may end up using a variety of all three of those options.
Do you know if you are the only one.
With this program with the Navy or are they are there multiple companies that are participating in that.
There are multiple companies participating.
This is an initiative that the navy wants to really move towards.
Yeah.
And as this technology transferable to outside of <unk>.
The Navy contract.
Is it possible for you to produce other.
Part is.
It absolutely is transferable, yes.
Yeah. The first time that I've heard talking about additive manufacturing, which I think is the future but.
Thank you.
Yeah. Thank you and I think you're right I think it is part of the future too.
And this concludes our question and answer session.
I'd like to turn the conference back over to Brett Mcbrayer for closing remarks. Thank you.
Thank you as I noted previously the second half of 2023 will Mark an important step forward in our transformation of Ampco Pittsburgh.
With the completion of our youth sports equipment modernization and are expanding production capacity in Virginia, We will position our company for a strong 2024 and beyond I want to thank our employees for their outstanding work also wanted to thank our shareholders and our board of directors for their continued support.
For joining our call this morning.
Yeah.
And the conference has now concluded. Thank you for attending today's presentation you may now disconnect.