Earnings Call Transcript - AP Q1 2022

Operator, Operator

Good morning, and welcome to Ampco-Pittsburgh's First Quarter 2022 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 would now like to turn the conference over to Melanie Sprowson, Director of Investor Relations. Please go ahead.

Melanie Sprowson, Director of Investor Relations

Thank you, Joe, and good morning to everyone joining us on today's first quarter 2022 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 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 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'll turn the call over to Brett McBrayer, Ampco-Pittsburgh's CEO. Brett?

Brett McBrayer, CEO

Thank you, Melanie. Good morning, and thank you for joining our call. As shared in today's press release, Ampco-Pittsburgh recorded a net income of $1.6 million in our first quarter of 2022. The execution of price increases and expanded surcharges in our Forged and Cast Engineered Products segment was instrumental in helping Ampco-Pittsburgh return to profitability. From a top line perspective, our sales increased by 9% from the prior year. Demand remained strong for our products. Our backlog increased 36% versus the prior year period and 12% versus the prior quarter. Despite the challenges we continue to face from an inflationary and supply chain standpoint, we will continue to focus on areas of the business we can control to further improve our performance. The transformation of our North American fixed assets in our Forged and Cast Engineered Products segment is on track. The installation of the first pieces of our new capital equipment begins late in the second half of this year. With an expected continued ramp-up in working capital and related ongoing inflationary pressure, we recently announced we are exploring options to obtain incremental capital to better enable us to capture top line growth opportunities and position ourselves for higher profitability while we manage through the heavier CapEx spending phase of the equipment modernization. From a safety and health perspective, we saw positive progress in our injury rates during the quarter. We will continue to drive further improvements as we remain focused on zero injuries in our workplace. I will now turn the call over to David Anderson, President of Air & Liquid Systems, for comments on segment's performance. Dave?

Dave Anderson, President of Air & Liquid Systems

Thank you, Brett. Good morning. Air & Liquid Systems' backlog ended the first quarter at a historic high with backlog levels increasing 50% over the past six months, achieving levels 27% higher than the prior quarter, and our Buffalo Air Handling business receiving its most significant order in decades. Sales declined for the quarter, primarily due to lower shipments of centrifugal pump and custom air handling units. We continue to experience supply chain-related issues, including extended lead times on materials and customer requested deferrals. While these supply chain issues have impacted our business, they are short term in nature and do not impact the long-term strategic direction of the business. Operating income increased compared to the prior year, primarily due to an employee benefit change. Lower sales were partially offset by favorable margins and product mix. As we move forward, all three business units continue to implement new growth strategies, and we are seeing positive momentum in sales quotes and orders in the majority of the markets we serve.

Brett McBrayer, CEO

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

Sam Lyon, President of Forged and Cast Engineered Products

Thank you, Brett, and good morning. The segment's backlog increased 7.5% in the first quarter of 2022 and is at our highest level since February of 2020. Backlog has increased approximately 30% from the pandemic trough in March of 2021. As stated on our last call, the first quarter was very strong for our non-rolled product line. We also anticipate an improved rural sales mix with increased large forged rural sales starting in Q3 of 2022 and continuing into 2023. Inflation continued to impact operations in Q1 of 2022. Materials and energy prices have remained elevated, and energy prices in Europe continued to be volatile. We have seen the natural gas day-ahead pricing in the U.K. fall from a high of $85 per Mcf in March to under $10 per Mcf today. This is compared to historic typical levels of $11 per Mcf in 2020 and $19 per Mcf in 2021. Futures for Q3 and Q4 are still elevated at near $30 per Mcf. In the United States, natural gas has remained elevated and more than double the previous levels from around the midpoint of 2021. While we have seen an increase in fuel costs in our plant in Sweden, the overall energy cost is still less than half of our U.K. plant. Key alloys and inputs such as ferrochrome, scrap and nickel have increased over 100% in the quarter due to the conflict between Ukraine and Russia. All other costs remain elevated. As I've discussed before, our surcharge mechanism has some lag compared to actual costs. Our modified surcharge mechanisms to address the energy and transportation costs are now in place for most of our customers. In addition to surcharge expansion, base pricing has been increased to address other general inflationary pressures with a typical increase ranging from 5% to 7% over 2021 base pricing. We continue to monitor developments in cost daily and react where possible to minimize the effects on our business. As Brett stated, our expansion and modernization programs for our U.S. plant assets continue on schedule. We are excited about these investments as they will provide a lower cost structure in our rural business and further growth in the non-rural business, which is currently at capacity. The oil patch continues to be strong, and we expect our shipments to remain solid in this market. We expect to complete our CapEx program by the middle of 2023. I'll now turn it back over to Brett.

Brett McBrayer, CEO

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

Mike McAuley, CFO

Thank you, Brett. Ampco's net sales for the first quarter of 2022 were $94.4 million, an increase of approximately 9% compared to net sales for the first quarter of 2021, primarily due to growth of 18% in the Forged and Cast Engineered Products segment. Net sales for the Air and Liquid Processing segment in the first quarter of 2022 were 16% lower than the prior year period, due to supply chain issues impacting the availability of components for production and customer delivery timing. Income from operations for the first quarter of 2022 was $1.2 million. This compares to income from operations in the prior year quarter of $0.9 million. The current quarter's results include a $1.4 million benefit from a change in certain employee benefits, most of which benefited SG&A expense. Forged and Cast Engineered Products segment's operating results declined slightly for the first quarter of 2022 compared to the prior year, primarily due to a lower volume of mill rolls shipments, though this was partly offset by the favorable impact of the employee benefit change in the current quarter. While the segment continues to experience inflationary pressures, a significant portion of cost increases was recovered by surcharges and higher pricing. Air and Liquid Processing segment's operating income improved slightly for the first quarter of 2022 compared to the prior year, despite the lower volume of shipments for the reasons Dave described. Other income expense net increased for the first quarter of 2022 when compared to the prior year quarter, primarily due to changes in foreign exchange. At the bottom line, the corporation reported net income attributable to Ampco-Pittsburgh of $1.6 million or $0.08 per diluted share for the first quarter of 2022 compared to net income of $0.2 million or $0.01 per diluted share for the first quarter of 2021. Backlog at March 31, 2022, of $327.5 million increased approximately 12% from December 31, 2021, and increased 36% from March 31, 2021. Backlog for the Forged and Cast Engineered Products segment improved 7% sequentially. This increase is principally a result of increased orders for forged rolls due to improved demand from the segment's flat-rolled steel and aluminum customers. Backlog for the Air and Liquid Processing segment is at a record high and increased 27% sequentially with backlog for each product line improving. Net cash flows used in operating activities was approximately $16.3 million for Q1 2022, due to an increase in trade working capital associated with the higher level of business activity and for inventories, higher costs associated with inflation and supply chain disruption. Capital expenditures for the first quarter of 2022 were $3.4 million, primarily for the Forged and Cast Engineered Products segment. At March 31, 2022, the corporation's balance sheet and liquidity position included cash on hand of $6.8 million and undrawn availability on our revolving credit facility of approximately $33 million.

Operator, Operator

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

Justin Bergner, Analyst

A couple of questions. You started off, I think in your opening comments, by saying that you were sold out in non-rolled product lines in forged and engineered products. Just I wanted to verify that. And what sort of sales level does that represent? And when do you expect to have the capacity to handle larger sales volumes in non-rolled product lines?

Mike McAuley, CFO

In the quarter, we had about $15 million in sales for our forged engineered products. What we mean by being sold out is that we are limited by the capacity of our heat-treat asset capability. This means there is a restriction on how much we can take and process over time due to the limitations in heat treat, but I’ll let Sam elaborate on that further.

Sam Lyon, President of Forged and Cast Engineered Products

No, that's accurate, Mike. And we expect the DEP approval for construction this summer. And then we will install and be on track for the middle of next year to increase that capacity.

Justin Bergner, Analyst

Okay. If I remember correctly, before expanding into non-rolled product lines, you were generating about $30 million annually. Does the $15 million in sales indicate that you've effectively doubled that annual pace?

Sam Lyon, President of Forged and Cast Engineered Products

It's a bit complicated because in terms of volume, we are meeting our expectations, but inflationary pressures with nickel, scrap, and other materials have significantly increased our surcharge mechanisms and prices. For instance, the cost of nickel, which is used for frac blocks, has risen from about $1.10 to $2.10 per pound. So while the volume is in line with our projections, the revenue is higher.

Justin Bergner, Analyst

Okay. Got you. All right. And then the $1.4 million offset on the employee benefit change, is that just sort of like a one-time item? Is it noncash? Or is it sustainable savings?

Dave Anderson, President of Air & Liquid Systems

It is a one-time item, Justin. It was noncash. It really has to do with the policy that we changed regarding vacation benefits, which, in the past, had been earned as soon as the clock turns to January 1 of the next year. And we amended our policy to make vacation be earned ratably throughout the year as the year progresses rather than have it fully earned as soon as the new year starts.

Justin Bergner, Analyst

Okay. Where do you stand on price and cost? I recall you mentioning in your opening comments that a significant portion of the increased costs in your forged and engineered products segment has been recovered. When do you anticipate achieving full dollar-for-dollar recovery in that business?

Sam Lyon, President of Forged and Cast Engineered Products

There is a two- to three-month delay, and during that time, the pricing of raw materials needs to stabilize. Once that happens, we will be aligned with the surcharge effects in our pricing mechanisms, reflecting the raw material costs. However, we need the prices to level off for this to occur.

Justin Bergner, Analyst

Okay. And then sort of any update on what you're thinking in terms of the financing efforts, in terms of what it would enable you to do assuming you go forward with some part of financing that you wouldn't otherwise be able to do with your balance sheet?

Dave Anderson, President of Air & Liquid Systems

Yes, I can address that, Justin. What we're considering is the increasing working capital needed to meet the rising demand for our products and the impact of inflation on the investment required for this growth. Currently, our capital expenditures have been relatively low, with only about $3 million spent in the first quarter, which will likely be similar in the second quarter. Our overall plan is about $20 million in capital expenditures for the entire year, and we expect these expenditures to increase in the third and fourth quarters. While we have sufficient space on our credit line for now, we remain cautious about how we manage our resources and orders. Given the situation in Ukraine and the growth in our order book across both segments, we recognize there are additional opportunities we want to seize.

Operator, Operator

This will conclude our question-and-answer session. I would now like to turn the conference back over to the Chief Executive Officer, Brett McBrayer, for any closing remarks.

Brett McBrayer, CEO

Thank you. I'm encouraged by our progress over the past quarter, and I want to thank our employees for their hard work and dedication. Our workforce continues to be the key to our success. I also want to thank our shareholders and our Board for your continued support. We are excited about the future prospects for Ampco-Pittsburgh, and we're committed to driving improved performance in 2022 and beyond. Again, thank you for joining our call this morning.

Operator, Operator

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