Welcome to the Ampco-Pittsburgh Corporation First Quarter 2023 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'd now like to turn the conference over to Kim Knox, Corporate Secretary. Please go ahead.

Thank you, and good morning to everyone joining us on today's first quarter 2023 conference call. Joining me today are Brett McBrayer, our Chief Executive Officer; and Mike McAuley, Senior Vice President and Chief Financial Officer. 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 regarding 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 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 Investors Section of our website at ampcopgh.com. With that, I will turn the call over to Brett McBrayer, Ampco-Pittsburgh's CEO. Brett?

Thank you, Kim. Good morning, and thank you for joining our call. As shared in yesterday's press release, Ampco-Pittsburgh achieved a net income of $0.7 million or $0.03 per share in the first quarter of 2023. Sales were up 11% versus the prior year and 12% over the prior quarter. We experienced backlog growth in both our Forged and Cast Engineered Products and Air & Liquid Processing segments with total backlog up 16% versus the prior year and 3% over the prior quarter. Our Air & Liquid Processing segment has now seen five consecutive quarters of record backlog. We continue to see strong demand for our products in North America with softness continuing in Europe. The recently announced blast furnace restarts in Europe indicate that demand may be recovering. Our pricing actions and expanded surcharges continue to improve the performance of our Forged and Cast Engineered Products segment. Our U.S. equipment modernization program remains on track, with completion expected in the fourth quarter of this year. From a health and safety perspective, our company had a solid quarter as we continue to focus on our goal of zero injuries in the workplace. David Anderson, President of Air & Liquid Systems, will now discuss his segment's performance in more detail.

Thank you, Brett. Good morning. In the first quarter of 2023, we continued to see the positive results of our strategic growth plan. One of our initiatives was to strengthen our sales force, both internally and for our third-party representative network. The results of this quarter show the tremendous progress we have made with our sales teams. Sales increased 42% versus the prior year as all three divisions achieved double-digit sales growth. Q1 sales of $28 million was the highest for any quarter in the last 10 years. Even with the higher sales level, our backlog grew once again to a new record this quarter as order activity continues to be very strong. This means we have now achieved a new record backlog for five consecutive quarters. As our sales have continued to grow, we have also addressed our manufacturing capacity to make sure our production capabilities allow our sales growth plans to continue forward. On April 1, we leased 61,000 square feet of additional manufacturing space in Lynchburg, Virginia that was needed as a direct result of the sales growth we are seeing at both our Aerofin and Buffalo Air Handling businesses. Operating income for Q1 was $3 million versus an income of $2.7 million in the prior year. The prior year income included $0.7 million in income for a one-time employee benefit policy adjustment. Excluding the one-time adjustment shows operating income growth of 50% versus prior year. With a record backlog, quarterly revenue at the highest level in more than a decade, and increased manufacturing capabilities, Air & Liquid is well positioned to continue forward with our growth plans in the quarters ahead.

Thank you, Dave. I will now turn the call over to Sam Lyon, President of Forged & Cast Engineered Products segment.

Thanks, Brett, and good morning. We had a strong first quarter with an operating income of $2.2 million versus a loss of $0.4 million in Q1 of 2022. The significant improvement in operating results year-over-year primarily reflects our pricing strategy implemented in January of '22, which included surcharges for energy and transportation and base price increases. In 2022, the world faced unprecedented inflationary headwinds fueled by post-pandemic demand issues, supply chain restrictions, the Russian-Ukraine conflict, and the ensuing energy crisis in Europe. In Q1 of 2022, sales pricing initiatives lagged our increased costs, particularly for raw materials, energy, transportation, and supplies. By June of 2022, inflation had reached a 41-year high of approximately 9% before moderating. Counter to the instability of 2022, the first quarter of 2023 benefited from the tailwind associated with deflation and positive surcharge recovery as higher-cost inventory was sold through. In the forged engineered products area, particularly in the U.S., a softening of the energy market lowered overall demand. Lower demand for oil and gas, high year-end inventory levels at our customers, and increased imports have resulted in approximately a 70% decrease in the backlog for the forged engineered product year-over-year. In the last month, we are seeing an increase in quoting activity for both oil and gas distribution and anticipate improved shipments in the second half of 2023. The World Steel Association estimates that the global steel demand, excluding China, will increase by 2.3% in 2023. Our customer base states similar sentiments as evidenced by the restart of seven blast furnaces, the modernization of two additional blast furnaces, and investments in new aluminum rolling mills in the United States. Our forged roll backlog is robust, showing a 26% year-over-year increase, reflective of a positive North American steel industry outlook driven by increased demand from the automotive industry. Our total backlog was $258 million at the end of Q1, the third quarter of sequential growth and the highest of the last eight quarters. For 2024, the World Steel Association estimates the demand to increase by another 2.5% in the U.S., with Europe growing by a robust 5.6%. Pricing negotiations are complete for 2024 for many of our larger roll customers. We are continuing to see robust demand for our forged rolls and steady demand for our cast rolls made in Europe. In our manufacturing facility, we have installed the first of five new machining centers as part of our capital expansion program in the U.S. We are currently in the testing phase of the equipment, and the preliminary results are in line with our expectations. We are excited about the forthcoming positive impact on our operating results as we achieve the commissioning of the first machine tool. The remaining four machine centers and the new furnaces are scheduled to be commissioned by year-end.

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. As shared in the press release and shown in the corporation's Form 10-Q filed last week, Ampco-Pittsburgh recorded net income in the first quarter of 2023 of $0.7 million or $0.03 per diluted share. This compares to an approximate breakeven position in the prior year. Ampco's net sales for the first quarter of 2023 were $104.8 million, an increase of approximately 11% compared to net sales for the first quarter of 2022. Net sales in the Air & Liquid Processing segment grew 42% year-over-year, driven primarily by higher shipments of heat exchange coils and air handling units. Net sales for the Forged and Cast Engineered Products segment in the first quarter of 2023 were approximately 3% higher than the prior year period, primarily due to higher roll pricing and shipment volume, offset in part by a decline in shipments of other forged engineered products and an unfavorable foreign exchange translation effect. Income from operations for the first quarter of 2023 was $2 million, compared to a loss from operations in the prior year quarter of $0.5 million. Higher pricing and overall shipment volumes were the primary drivers for the improvement, despite the impact of lower manufacturing overhead cost absorption due to higher plant downtime this year in the Forged and Cast Engineered Products segment. In addition, the prior year quarter included a $1.4 million benefit for a change in an employee benefit policy, which reduced SG&A as well as cost of sales in Q1 of last year. Therefore, the underlying improvement in operating results versus prior year was even larger on a non-GAAP basis. Interest expense for the quarter increased compared to prior year due to a rise in both total debt and interest rates. Backlog at March 31, 2023, of $380.6 million increased approximately 3% sequentially and rose 16% from a year ago. Backlog for the Forged and Cast Engineered Products segment increased approximately 2% sequentially and approximately 7% year-over-year, while backlog for the Air & Liquid Processing segment continues to be at record highs, up 5% sequentially and up 40% versus the prior year. Net cash flows used in operating activities was approximately $4.3 million for Q1 2023, primarily in support of working capital. This represents a significant improvement from Q1 of 2022 due to improved operating results and lower overall working capital investment in the current year quarter. Capital expenditures for the first quarter of 2023 were $3.7 million, primarily for the Forged and Cast Engineered Products segment. At March 31, 2023, the corporation's balance sheet and liquidity position included cash on hand of $6.1 million and undrawn availability on our revolving credit facility of approximately $31 million.

At this time, we would now like to open the line for questions.

Hi, Brett, Mike and the rest of the team.

Hey, Justin. A couple of just clarifying questions. So I guess to start, I thought I heard you talking about 2024 pricing contracts on the forged and engineered product side of the business. Did I hear that correctly that you're entering into contracts for 2024? Or was that just the consummation of 2023 contracts?

Hi, Justin, this is Sam. Yes. So all the big customers are Arcelor Mittal, U.S. Steel, Cleveland-Cliffs, people like that. So we are currently in negotiations for 2024, and many of those allocations and pricing are established.

And is that earlier than normal to begin at this stage in the year?

No, it's actually a little earlier than last year just because lead times are going out. But it's typically done around this time of the year, even a little earlier sometimes.

Okay. Great. And then the comment, I think you made about the projected demand increase in the U.S. and Europe. Those were 2024 numbers as well?

Correct.

Okay. Switching to sort of more general financial questions. The CapEx number, did I hear it was $23 million or did I hear too high of a number? And what is the project sort of anticipation for the 2023 year?

For the current quarter, we reported $3.7 million for Q1.

Okay. Thank you.

Yeah, that was total CapEx. And then for the full year, we are projecting in the range of $22 million or so.

Okay.

But we're going to be stepping up in the next couple of quarters, coincident with the delivery of the machining assets that Sam described.

Okay. Yeah. And I want to turn my attention to those. If all the machining assets are delivered by year-end, how many quarters thereafter should one expect those assets to be operating at normal efficiencies or run rate efficiencies?

Probably six weeks to three months, kind of roughly a quarter to get them up and running fully.

So the full operating efficiency benefit should be sort of in the numbers by the second quarter or the mid part of 2024?

Yes.

Okay. Great. Thank you.

Thanks, Justin.

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

Hi, good morning. One for Dave. On the additional space in Lynchburg, will you have much CapEx to get that up and going?

David, no. There's not a lot of CapEx involved in it basically putting in a crane is all we need to do. Everything else is really minor. So there's not a lot of CapEx for it.

And how about labor to staff? Is that going to be much of an issue?

No. We already have a good bit of the labor. They've been training in recent weeks. So we expect we'll hit the ground running pretty quickly.

That's great. Sam, I wanted to ask about Forged and Engineered Products. The drop in revenue in the first quarter is noticeable, and I appreciate your insights on the causes. I'm curious about what we might expect for the entire year. Could we reach the numbers from 2022 or even 2021, or might it stay at a lower level?

Let me just look into the file here. One second, David. We think that for the full year 2023, we should probably be exceeding 2022 sales for the Forged and Cast Engineered Products segment for full year '23 versus 2022, David. Yes.

Right. But I was asking about FEP, which was like last year like $5 million in the first quarter of this year.

We expect an increase in the second half, although that remains to be confirmed. The frac spreads are on the rise and inventory levels are decreasing. We're beginning to see more activity. Therefore, we are confident that next year will definitely surpass the 2022 figures, but we will have to wait and see.

Right. So if we went back three or four quarters, this was kind of an important part of the turnaround in that excess capacity could be used, and you're going to step up the marketing efforts. I'm wondering, as we are today with new equipment starting to come in and the rolled business being stronger and more profitable, are these forged engineered products still important at the margin?

Yeah, they're still in our plans because it's, number one, it diversifies us and allows for different market opportunities when the rolls may be down a little bit, that would be up a bit. So it's still important to us. We're still going after it. But you are right, the increase in the forged roll, particularly, the forged roll in the United States is offsetting the drop in the FEP at this point in time. But we're not stopping our efforts to grow that side of the business.

But David, we are staging our receipts of equipment and prioritizing our machine tools or machining assets first and the furnaces later. So we acknowledge that there's been a market factor going on in oil and gas. And so what's coming in and what's going in first are the large layers, and the furnaces are coming later.

And then two for you, Mike. SG&A costs in the first quarter, is that going to be a run rate for the year?

I don't think that we have an unusual quarter in that regard. I think the only major variable would probably be any movement in foreign exchange or if we have higher commissions depending on where forged engineered products might go based on the last conversation we just had about that question. Those would be the variables in SG&A.

Okay. And then lastly, any sense of when the debt might peak, the absolute balance?

I expect the debt to peak probably by Q4 of this year based on the CapEx and the timing of that. And I think it will probably be reaching a peak of $119–118 million, something like that.

Okay. That's great. Thanks for answering these questions. And hey, that is great. And the progress you're making, the plan that's starting to show up, so continued good luck there.

Thanks, David.

Next, we have a follow-up from Justin Bergner with Gabelli Funds.

Thank you. Given the improved profitability of your Forged and Engineered Products segment this quarter, would it be safe to say that your pricing mechanisms have caught up with your cost as it relates to some of these lagged surcharges or other pricing mechanisms that you might have put through? Or should we see further improvement on that price-cost dynamic as we get into the later quarters of this year?

I'd say it's caught up. The energy market has been pretty stable, as have been the raw materials with some movement. But right now, it should be, I think, fairly well caught up, I agree.

Okay, thank you.

Thanks, Justin.

As we have no further questions, I would like to turn the conference back over to Brett McBrayer for any closing remarks.

Thank you. Our focus on improving financial performance continues with actions underway to accelerate growth and expand margins. The completion of our equipment modernization anticipated at the end of this year is a significant component of this strategy, with full benefits expected to be realized in 2024. I want to thank our employees for their continued hard work and dedication; their relentless focus on improving our business has been impressive. I also want to thank you, our shareholders, for your continued support. Thank you for joining our call this morning.

The conference has now concluded. Thank you for your participation. You may now disconnect.