Good day. and welcome to the Ampco-Pittsburgh Corporation Second Quarter 2023 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Kim Knox. Please go ahead.

Thank you, Marliese, 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, 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 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 webcast replay, please consult the Investors section of our website at ampcopgh.com. With that, I'd like to 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, we recorded an earnings per share of $0.02 for the second quarter and $0.06 per share year-to-date. Our operating income year-to-date is triple that of the prior year, with solid performances from both segments. Of particular note is the continuing growth of the Air & Liquids segment with another quarter of record-breaking backlog. I challenged Dave Anderson, our Air & Liquid Systems President to more than double its revenue of 2022. Based on his recent performance, I believe he has taken 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. forged 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 continuing to improve. I'd now like to turn the call over to Dave Anderson, President of Air & Liquid Systems.

Thank you, Brett. Good morning. We continue to see the positive results of our strategic growth plan as sales in the first 6 months of this year are the highest in our Air & Liquid's history. Sales in Q2 increased 29% versus prior year with year-to-date sales up 35% over prior year. Year-to-date, all 3 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 6 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 are working on a U.S. Navy additive manufacturing project at 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 6 months of 2023 was 13% above prior year due to the increased sales. 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 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.

Thanks, 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. We finished the quarter with an operating income of $3.9 million, which included a one-time 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 the prior year of $79.6 million. Lower top-line revenue reflects decreased variable surcharges due to lower energy and raw material costs and a weaker dollar. The cast roll market is stable, while the forged roll market has strengthened and is approximately 25% higher versus 2022. Forged Engineered product revenues continue to be depressed. We anticipate recovery for the FEP market starting in the back half of 2023 and continuing in 2024. For 2024, the World Steel Association estimates steel demand to increase by 2.5% in the U.S., with Europe also seeing modest growth compared to this year. Our customer base reports 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 growth remains strong into 2024. Negotiations are complete with most of our large rural customers, and our value proposition has allowed us to maintain 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 Brett 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 in our various stages of installation and startup. We've completed over 30 rules in the first machine with efficiency improvements of over 20%. We are 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 positions us well to support the growth in North America and the aluminum and steel industries.

Thank you, Sam. I'd 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, an increase of 4.5% compared to net sales for the second quarter of 2022. Net sales in the Air & Liquid Processing segment grew 29% year-over-year, driven by a higher volume of shipments in all 3 businesses, but most notably heat exchange coils. Net sales for the Forged and Cast Engineered Products segment in the second quarter of 2023 declined 2.5% compared to the prior year period, as Sam explained, driven by lower demand for FEP 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's quarter of $2.1 million. Higher overall shipment volumes, the 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 the prior year due to a rise in both interest rates and total debt, in part due to ongoing expenditures for the strategic capital investment program in the U.S. forge business. Other net decline for the quarter was 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, 2023, of $370.2 million rose approximately 6% from a year ago, with Air & Liquids segment backlog at a record high, and the Forged and Cast Engineered Products segment backlog reflecting the decrease in FEP demand and roll order timing differences. Net cash flows used by operating activities were approximately $2.8 million for Q2 2023, 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 changes in working capital in the current year periods. Capital expenditures for the second quarter of 2023 were $6.4 million, primarily for the Forged and Cast Engineered Products segment, inclusive of the Forge business's strategic capital program. We expect CapEx and the usage of the equipment finance facility to step up in Q3 with the milestones expected for that capital expenditure program. As of June 30, 2023, the 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 remaining capacity of $9.4 million as of June 30, 2023.

At this time, we would now like to open the line for questions. Our first question comes from David Wright from Henry Investment Trust.

I apologize for any background noise. Reading from the press release, SG&A is up pretty noticeably sequentially and year-over-year. Mike, can you give some commentary about that? And also what does SG&A look like for the next couple of quarters?

Yes, David, thank you for the question. SG&A is elevated compared to prior year for a couple of reasons. One is with the higher income, variable compensation accruals are higher than they were last year when we had lower income. We're also experiencing, like a lot of public companies, higher levels of self-insured healthcare costs. It's quite noticeable when we think, based on discussions with our insurers and our specialists, that a lot of it is related to the pandemic and people deferring 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 self-insured healthcare costs in addition to typical wage inflation and so forth. The other thing is that we did start a new facility in Air & 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 2023 consolidated will be about $13 million in Q3 and Q4.

And our next question comes from Justin Bergner from Gabelli Funds.

I guess my first question would be on cash flow and working capital. So your sales and Forged and Cast rolls are kind of more in the flattish territory. The inventories are remaining high. So what's the outlook for inventories in the second half? And 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 him. But in general, we expect inventory to come down. We had our outage that occurred at the very end of Q2 and into Q3 for our North American assets, and we take 2 weeks out. So we built inventory ahead of that to flow through the rest of the operations to support the customer base, and then that will flow out over the next 2 quarters.

Yes, it's Mike. I’d like to add that in addition to the expected reduction in inventory for the second half of the year, we believe that cash flow from operating activities will be nearly neutral for the full year as we adjust to the decline in inventories. It's important to remember that while this reflects cash flow from operations based on increased income, it is also impacted by working capital and other factors with cash adjustments. Additionally, we anticipate that capital expenditures will remain elevated as we finalize our investments in the U.S. Forge business. Therefore, if you're considering the next step with free cash flow, it may be challenging for that to turn positive given the capital expenditures we have planned.

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 needs there? Or do you have to sort of go into the revolver?

The equipment finance facility amounts to $20 million and primarily addresses most of our strategic capital expenditures. The specific equipment financed will act as collateral for this facility. While it does not provide complete coverage, our credit agreement permits an additional $20 million for extra financing outside of the bank group, which we plan to utilize significantly. Therefore, I have no concerns regarding funding for the capital expenditures. We will manage part of the expenses out-of-pocket for items like foundations, utilities, and some engineering, but the majority will be funded through the equipment financing facility. Regarding our capital expenditure outlook, we anticipate that Q3 will be our peak quarter for spending this year, followed by Q4 being our lowest quarter. We estimate a total capital expenditure of around $22 million for the year 2023. Looking ahead to 2024 and 2025, we expect a substantial decrease, returning to more typical capital expenditure levels in the coming years.

Okay. And then more historical would be sort of 15-ish team or...

I would say 15 south of 15.

Yes. Okay. All right. And then lastly, would you say that pricing has sort of caught up to costs now based on the Forged and Cast Engineered Products results in the second quarter? And then you made a comment, Brett, about 2024 pricing. I didn't realize sort of most of that gets decided so early in 2023. Would you expect a further improvement relative? Or are you sort of trending towards better conditions for 2024 pricing than you experienced in the second quarter and looking into the third quarter?

This is Sam, Justin. Most of our major contracts are finalized in the second quarter for the following year, and we're aware of our raw material allocations. The pricing we're achieving exceeds inflation. Our main costs, including raw materials, energy, and transportation, are all pass-throughs. We're also aware of the wage inflation associated with our union contracts. Therefore, we are confident that we can cover inflation adequately. The pricing for the third and fourth quarters of this year has already been set, as it was determined last year. Thus, the pricing we will see in Q3 and Q4 will be similar to that of Q2 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 and then next year, you're expecting to get some pricing beyond your full set of inflationary pressures?

Yes, that's correct.

Yes. The pricing, I would say, is in line with the materials and raw materials and energy and transportation costs this year but potentially not completely caught up with other inflationary items. Hence, the need to focus on pricing in 2024 and get that pricing raised in 2024 as Sam described.

And our next question comes from Greg Bennet, a shareholder.

So my question regarding margin expansion for next year concerns the costs you've negotiated in the contracts and the cost pass-throughs, which seem to be variable. If costs decrease, you will pass those savings on to your customer. The key to margin expansion appears to be this modernization program. Could you provide more details? I believe you mentioned that you have four out of the five pieces of equipment installed, and the first one is already generating savings. However, about two years ago when you started this initiative, you mentioned expectations for significant savings or productivity improvements. Can you elaborate on that and let us know if it is progressing as you anticipated?

Yes, Greg. The savings we're looking at are approximately between $2.5 million and $3 million. Additionally, we are installing two furnaces that will enhance our forge throughput and broaden our non-roll business. Depending on the volume, this could lead to an additional improvement of $3 million to $5 million.

So we would start to see this beginning in '24 or do you think we might see any 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's a little bit of a product shift more product to be run in our Carnegie plant, which cuts down on intercompany transportation costs. That's another piece of the savings. I would say be more Q1 of next year.

Okay. Most of the calls I've heard recently, customers were looking for just-in-time delivery rather than overordering. I'm wondering if you are finding that some of your customers are destocking now and don’t want to take delivery of rolls, or are you able to return those rolls to your customer as soon as you've manufactured them?

There's been very little of that. I mean there's always some pushouts or pull-ins, but it's not any different than normal. So yes, we're not seeing any significant pushouts of any kind. And one other thing unique to our business is 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.

One final question. You briefly mentioned the contract with the Navy related to Air & Liquids. You referred to it as additive manufacturing, but many people call it 3D manufacturing, which is a new technology for creating parts. Is there a CapEx program for that, or is the Navy funding it, or how is that working?

Greg, it's Dave, and thank you for the call or for the question. Right now, this is a Navy funded program with Oak Ridge. And you're right, it's 3D or 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 make some determinations 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 wouldn't be until 2025. Is that the way to think about it?

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 in 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 that you're the only one with this program with the Navy? Or are there multiple companies that are participating in this?

There are multiple companies participating. This is an initiative that the Navy wants to really move towards.

And is this technology transferable to outside of the Navy contract? Is it possible for you to produce other parts?

It's absolutely transferable, yes.

You’re the first company I’ve heard talking about additive manufacturing, which I think is the future, but thank you.

Yes. 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 would 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 U.S. Forge equipment modernization and our 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. I also want to thank our shareholders and our Board of Directors for their continued support. Thank you for joining our call this morning.

And the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.