Good day and welcome to the Ampco-Pittsburgh Corporation First Quarter 2021 Earnings Results Conference Call. All participants are in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please also note this event is being recorded. I would now like to turn the conference over to Melanie Sprowson, Director of Investor Relations. Please go ahead, ma'am.

Thank you, Rocco and good morning to everyone joining us on today's first quarter 2021 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 Terry Kenny, President of Air & Liquid Systems Corporation.

Thank you, Melanie. Good morning and welcome to our call. I'm proud of the work Ampco-Pittsburgh employees accomplished during the quarter. Although we continue to feel the negative impacts of the global pandemic, the team has been resilient and unwavering in its efforts toward achieving our near-term goal of double-digit EBITDA margins. Despite the lingering headwinds, we delivered another positive quarter of earnings and our liquidity position remains strong. Our Air and Liquid Processing segment continues to enjoy steady demand for their products. Activity in our Forged and Cast Engineered product segment is progressively picking up speed. We anticipate bookings to return to pre-pandemic levels during the second half of 2021 resulting in a full recovery in 2022. We continue to be encouraged by the positive receptivity of our new customers in our non-roll engineered products. This engineered products revenue stream is a complementary source of growth for our business and fits well with our current and expanding capabilities. I'm excited to see the new capital equipment investment activities accelerate. We anticipate the final phase of our new equipment implementation to complete in 2023. Our safety performance continues to be a focus for our team as we drive towards zero injuries in our workplace. The hard work and dedication of our employees continues to be impressive. Thank you for your excellent work.

Thank you, Brett. As Brett mentioned, the safety of our employees is one of our key priorities. I am pleased to report that our Air and Liquid Systems Processing segment successfully reduced our accident recordable rate from 2.87 in the fourth quarter of 2020 to 2.01 for the first quarter of this year. In addition, I would like to recognize the employees at both Aerofin and Buffalo Air Handling divisions for having zero recordable injuries during the first quarter of 2021. Their commitment to working safely and looking out for one another has proven to be effective. Congratulations and thank you to all of the employees of both divisions. Orders for centrifugal pumps and custom air handlers were steady for the first quarter. Orders for custom heat exchange coils were slow as the year began, but closed the quarter strong and activity remains solid as we head into the second quarter. First quarter revenue for the Air and Liquid Processing segment increased 5.2% compared to the prior year on increased demand for centrifugal pumps. Operating income for the segment decreased compared to the prior year due to a slight shift in product mix. The cost of most materials has increased over the past several months. However, to date, the availability of required material has not been an issue. However, we continue to monitor all critical commodities for changes in price and availability. We have been increasing sales prices when possible to minimize the negative impact on our future earnings. We remain optimistic that the demand for the segment's products will provide steady growth opportunities for the foreseeable future.

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

Thank you, Brett. Good morning. I'd like to begin with our safety performance. Our recordable rate increased from 3.3% to 5.3% year-over-year. Driven by two locations, this increase was a disappointing start to the year. We have focused on the root causes and put improvement plans in place. On a positive note, our Slovenia operations continued to be recordable-free and our Carnegie plant was recordable-free for the quarter. On the last call, I commented on the rising cost of raw materials and scrap as a significant headwind we were facing in Q1. While most of our business is protected by surcharge mechanisms that address these increases, there is a one to two quarter lag in realizing the price increases tied to raw materials. This lag was approximately a $400,000 net hit to the segment's results.

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

Thank you, Brett. Despite continued pandemic-related headwinds impacting end market demand in the roll business, Ampco-Pittsburgh reported diluted EPS of $0.01 per share for the first quarter of 2021. The corporation's balance sheet and liquidity position remained strong with cash on hand at March 31, 2021 of $18.3 million and undrawn availability on our credit facility of approximately $47 million. Total debt is down 47% compared to March 31, 2020, while total shareholders' equity has risen. As a result, debt to total capitalization at March 31, 2021 was 29.2%, or nearly half the level we saw at the end of the March quarter a year ago.

Thank you, Mike. Actually, now we're going to open the line for questions.

Yes sir, no problem. We will now begin the question-and-answer session. And our first question today comes from Justin Bergner with G. Research. Please go ahead.

Good morning.

Good morning.

Hey Brett, hey Mike.

Good. Thank you.

So, first question just help me understand the mix dynamic in the Air and Liquid Processing. What part of the mix is becoming a headwind or what's the headwind there? Will it sort of continue? That's I guess the question.

Each market, hi Justin this Terry.

Hi Terry.

Each market that the Air and Liquid Processing serves has different gross margins. The demand in the first quarter shifted slightly to a few markets with lower margins, but we do not perceive this as a significant challenge or something that will persist.

Okay. Second question is in regards to the Forged and Cast Engineered Products business. I was trying to gather from your comments Brett if you were suggesting that you could see a return to sort of 2019 levels as soon as 2022. Or was it just more common that you expect to get back there in the coming years?

Yes. We're observing that activity is beginning to increase, which we anticipated. In our last call, we mentioned that we expected activity to grow in the second half, and we are already seeing some momentum in that regard. There tends to be a delay between our customers' demand or growth and when it affects us directly. Our customers seem to have reduced their inventory levels due to concerns about future conditions, creating a somewhat new normal, but activity is indeed picking up. Based on this, we anticipate that by 2022, we will return to 2019 levels.

Okay. Got it. And then lastly, was your comment about lower production rates meant to suggest that you were underproducing shipments in the first quarter and that affected absorption?

Yes. We've taken some elective outages this quarter to ensure that our production aligns with demand. I'll let Sam elaborate on this.

Yes. We have reduced our large roll lead-time by about 20 days. So, it’s true that we produced less than we shipped.

Okay. So that's just temporary in 1Q.

Yes, we don't anticipate taking any more time out.

Okay. Thank you for taking my questions.

Thank you, Justin.

And our next question today comes from John Walthausen with Walthausen & Co. Please go ahead.

Yes, good morning guys.

Good morning John.

I find it puzzling that with steel prices being so high, it should make everyone’s mill viable and profitable. So why is production down?

Steel prices have increased because the recovery occurred much more quickly than expected. In North America and Europe, our two largest shipping regions, prices remain lower, and production hasn't yet returned to pre-pandemic levels. As a result, prices for hot-rolled and cold-rolled steel have surged significantly, even doubling compared to before the pandemic. Recently, the largest blast furnace in ArcelorMittal's portfolio resumed operations after a reline, and they are now operating at full capacity. US Steel is also ramping up production. Based on discussions with our customers, we expect that by 2022, production will return to pre-pandemic levels, although there has been a delay. It's worth noting that the recovery has been more evident in hot-rolled products, and we are now beginning to see improvements in cold-rolled products as well. There will be a lag before we see a rise in production volumes as ramp-up progresses.

Right. So, in a time when others are boasting about their cash flows, are they cutting back on their inventory or backup rolls?

I think that they lowered it and plan to keep it there based on what we've heard. This information comes from a few customers, and each has its own situation. During the first six to nine months of the pandemic, they were all managing cash very carefully. However, you're right that some of them have been generating significant cash lately, which will be beneficial moving forward.

Is it reasonable to expect that as you reduce your lead times, we will see improvements in production, sales, or growth on a quarter-by-quarter basis?

That's what we would anticipate, yes.

Okay. Okay. That's helpful. And then the other question I had if I may. In the open-die, you're putting a major emphasis on increasing capacity there. Have you opened up significant other marketplaces in the oil and gas marketplace? And are there some that you can talk about?

Yes. We operate in two areas: materials used for plastic injection molds and materials for automotive tooling. Our objective over the next few years is to have oil and gas represent less than 50% of our focus in that product line.

Okay. Great. That’s very helpful.

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

Good morning everyone.

Good morning, David.

Mike, the press release mentions the impact of foreign exchange. Can you quantify that effect for the quarter? Additionally, could you explain the extent to which you can hedge that, including the costs associated with hedging?

Yes, when we discuss foreign exchange, we are referring to the realized and unrealized foreign exchange gains or losses that appear on the profit and loss statement as part of other income and expense. In the current quarter, we recognized a foreign exchange loss of approximately $1.2 million, compared to a loss of $1.7 million in the previous year. This appears below operating income in the other income expense section. It reflects the changes in exchange rates at the time we record a receivable or payable, as well as changes in rates affecting the balances of our foreign subsidiaries that operate in currencies different from their functional currency, such as U.S. dollar intercompany loans. Our goal is to minimize these balances and, while we do some hedging on our earnings, we haven’t taken substantial positions to hedge our balance sheet because it's a cash risk item. We've focused on preserving cash for the past several years, which increases the potential for significant cash settlement losses in the event of market shocks. This makes it riskier compared to hedging projected cash flows. Therefore, we have chosen not to concentrate on hedging this aspect for now, but we may consider it in the future. One effective strategy to manage these intercompany balances is to settle them among subsidiaries, which aids in international cash management and repatriation, and this is a priority for me to reduce those balances and lower the associated risks.

So you look at this as kind of a $1 million to $2 million a quarter item?

No, it usually goes the other way, and sometimes it's very small or nothing. It depends on the movement in rates and the balances in our foreign subsidiaries.

Okay. That was a significant saving you achieved by changing auditors. I understand that you don't have a large accounting staff. Transitioning auditors is a lot of work, but you generated impressive savings for the company.

Thank you, David.

A question for Sam. Using a baseball as an analogy and just talking about the things you're trying to do with the operations both in the US and in Europe and leaving aside what you hope to get from the new equipment, what inning are you in in each market in terms of where you want to get to with the ninth inning being you're happy?

Geez, I don't know, third? Probably third. We came a long way on savings just getting the organization where it needed to be getting the right leadership in place the right amount of people in the facilities. And so now, what's left is really the implementation of the capital. Right now, we're ramping up our European assets to meet future customer demand. So that's key in front of us. And then we still have just ongoing year-over-year cost savings projects scrap reduction, on-time delivery, that kind of normal stuff. So I don't know, third, I guess. Maybe the bottom end of the third top of the third. I don't know.

Would you say that both operations are kind of at the same place one is not further along than the other?

Yes, I'd say that. There's more opportunity I think in Sweden, UK is very stable. Slovenia is very stable and our equipment modernization here is really important.

Okay. And then when you say that you're hopeful that 2022 will get back into 2019 levels in terms of mill roll business are you talking revenue, or are you talking units?

Revenue. It's fairly similar. I mean, we've been able to get some pricing but both really.

All right. Thanks very much.

You’re welcome.

Today's next question comes from Greg Bennett with Morgan Stanley. Please go ahead.

Hi. Is labor an issue right now? I've been hearing that people are having a hard time getting people back to work. Does that impact any of your operations?

I'll address the steel sector. Finding qualified personnel is challenging, but we've made significant improvements in productivity, which means we haven't needed many additional workers. In the UK and Sweden, there are no major issues, and overall, this is not impacting the steel side of our business.

On the Air and Liquid Processing side, it is a challenge. It's not only difficult to find new people but also to train and retain them. However, we are managing to address most of the issues due to productivity improvements. Still, we are experiencing challenges in hiring at times in the Air and Liquid Processing segment.

The modernization program and the capital expenditures for that are divided into two categories. One focuses on modernization, while the other targets entering new markets in the non-roll business. Will either of these initiatives start this year and potentially have a positive impact?

And the lead time on the equipment is a year plus. So we're thinking probably Q4 of '22 we'll start seeing some benefit.

You mentioned that in the non-roll segment, it would increase your capacity by 80%. Will you be taking market share away from competitors in that area, or are these new markets? Is the competition coming from foreign sources or is it domestic?

Most of this would be shipped domestically. The Section 232 regulation has certainly heightened the demand for domestic material sources. We are not a very big player, so we don’t believe we are taking a significant share from anyone else.

So, the customers the auto or plastics are they buying from foreign sources, correct? Is that what's happening right now?

One of our larger customers we shipped to was buying. And this was actually from - I believe it was Brazil and they had a quota system. So they got put on a quota system so they can only ship 70% of what they used to ship into the US. So therefore that opens up an opportunity for the other 30%. And then I think they enjoy the short lead time we provide. The customer is not very far away from us. And they don't have to order stuff six weeks out and project. And so, I think once we got in there, we're having success.

The size of that market, if we were to look out two years from now three years from now what kind of sales for the investment that you're going to make what kind of sales do you think you could generate?

Last year, we generated around $11 million to $12 million, and it could increase to $60 million to $70 million.

That’s pretty impressive. Okay. Thank you very much. Appreciate all your work.

Thank you.

Ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to Brett McBrayer for any closing remarks.

Yes. Thanks, Rocco. Just a few comments. Again, I want to thank the employees of Ampco-Pittsburgh for their continued hard work and dedication to the success of our businesses. I also want to thank those who joined us on our call today. We are excited about our future and look forward to demonstrating the full capabilities of Ampco-Pittsburgh. Thank you very much.

Thank you, sir. This concludes today's conference call. You may now disconnect your lines and have a wonderful day.