Earnings Call Transcript - AP Q2 2025

Operator, Operator

Welcome to the Ampco-Pittsburgh Corporation's conference call for the Second Quarter 2025 earnings results. Please be aware that this event is being recorded. I will now hand over the call to Kim Knox, Corporate Secretary. Please proceed.

Kimberly P. Knox, Corporate Secretary

Thank you, Gary, and good morning to everyone joining us on today's second quarter 2025 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 its 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'd like to turn the call over to Brett McBrayer, Ampco-Pittsburgh's CEO. Brett?

J. Brett McBrayer, CEO

Thank you, Kim. Good morning, and thank you for joining our call. As reported in our press release issued yesterday afternoon, Ampco-Pittsburgh Corporation reported adjusted EBITDA of $8 million for the second quarter of 2025. The quarterly results were negatively impacted by a pause in customer orders as they await clarity on tariffs. As a result, our Forged and Cast Engineered Products group shut down production to adjust working capital through portions of the period. A major focus in the quarter was on our U.K. cash roll facility, where we continue to experience significant losses. Progress on the wind down of this facility has progressed well as we work to accelerate rightsizing our portfolio. Once this action is complete, we expect a minimum of a $5 million operating income improvement on an annualized basis. Our Air & Liquid Processing segment saw a 15% increase in adjusted EBITDA in the quarter versus prior year, and the highest year-to-date adjusted EBITDA in our segment's history. The growth in this business' performance continues to be impressive. For further details regarding our segment performance, I'll turn the call now over to Sam Lyon, President of our Forged Cast Engineered Products segment.

Samuel C. Lyon, President of Forged Cast Engineered Products

Thank you, Brett, and good morning. For the second quarter of 2025, FCEP reported net sales of $77.9 million, a 3% increase compared to Q2 of 2024, and a 7.8% increase compared to Q1 of 2025. Segment adjusted EBITDA for Q2 2025 was $6.8 million, down $1.5 million from Q1 of 2025. Our U.S. Forged plant utilization in the quarter was 10% lower than Q2 of 2024, and 14% lower than Q1 of 2025, primarily due to lower work roll demand caused by elevated customer inventory positions on Forged work rolls, partially resulting from a reduction of activity due to the fluid tariff environment. The decrease in plant utilization and lower revenue and margin from forged work rolls negatively affected earnings in Q2. FEP demand and shipments were a positive development from the tariffs. We were able to increase pricing on this product line as barriers Q2 revenue was consistent with prior year. However, the product mix was improved. Revenue for pumps was higher than prior year as we continue to see positive results from the military market. Heat exchanger shipments declined versus prior year due to the timing of fleet expansion plans. New manufacturing equipment from the Navy funding program is expected to arrive at our facility by the end of equipment funding from the U.S. Navy. This new funding was approved in May and was approximately $2 million that will be used to purchase additional equipment for our Buffalo manufacturing location. This equipment, along with the equipment we installed in 2024, will increase our production capacity. The mix shift from forged rolls to FEP reduced overall margins, yet strategically positions us to capture reshoring opportunities in tool steel, distribution bar, and block products. Looking at the flat-rolled market environment, demand in North America and Europe remains weak with many U.S. customers at elevated levels of base tariffs. For U.S. imports from our Sweden and Slovenia plants, the baseline tariff now stands at 15%, up from 10% in Q2. The cast roll market in North America exceeds domestic capacity. So long-term demand for our European cast rolls should not be affected by these tariffs. The tariff effect in the short term is reflected in our second half expectations as a temporary shortfall, particularly in North America. Notably, the long-term fundamentals remain strong. Construction spending, automotive production, and cansheet demand are all expected to grow at mid-single-digit rates over the next 5 years, supporting a return to more normal roll ordering patterns. As we previously indicated, we have issued formal notice to the union of our intention to wind down operations at our U.K. cast roll plant. We are engaging with multiple potential asset buyers. The current backlog takes us through Q1 of 2026, and we are reallocating products across the global UES network to ensure continued customer supply while working to wrap up operations as soon as possible. We've stopped taking new orders for the U.K. In summary, although tariff-related hesitation is reducing near-term North American demand for rolls, our pricing discipline, cost control measures, and expanding FEP volumes give us confidence going into 2026. As stated earlier, cast roll supply is limited in the U.S., allowing us to be competitive with other European suppliers. To date, we have passed on all tariffs costs to our customers. We anticipate a full order book for our 2026 at our cast roll plant in Sweden, and the closure of the U.K. operations will provide a meaningful improvement in operating income for the segment once complete. Brett, back to you.

J. Brett McBrayer, CEO

Thank you, Sam. Dave Anderson, President of Air & Liquid Systems will now cover his segment's results.

David G. Anderson, President of Air & Liquid Systems

Thank you, Brett. Good morning. 2025 continues to be a very positive year for Air & Liquid. In Q2, order activity continued to be very good. Our backlog at the end of Q2 was 8% higher than the start of the year. The nuclear, military and pharmaceutical markets continue to be strong, with some large orders expected to ship in Q3. Adjusted EBITDA in Q2 was $3.9 million versus $3.4 million in the prior year. The 15% increase versus prior year was primarily driven by better product mix. Year-to-date adjusted EBITDA of $7.7 million was the highest in Air & Liquid's history, and a 36% increase over the prior year. We continue to see positive activity in the nuclear market for our heat exchanger product line. Orders have already exceeded any prior full year, and we expect shipments to also be at record levels this year. From restarting legacy nuclear plants to the new small modular reactors, nuclear power has become the preferred power option, and our engineering and manufacturing capabilities position us well as this market grows. There continues to be strong demand from the U.S. Navy, and we expect this demand to continue as the Navy moves forward with plans for 2025. This includes approved funding in 2024 and additional equipment being delivered this year. We are pleased to announce that Air & Liquid has been approved for another funding which will position us to meet the expected growth in this market. Demand for custom air handlers remains strong. From upgrading existing facilities to increasing research and manufacturing capabilities in the United States, there continues to be tremendous demand in the pharmaceutical market for our custom air handling products. Tariffs continue to be a major subject in the last few months and the recent copper tariff will impact many products. Copper is a main component of our heat exchangers, and we have notified our customers that we will be passing on any tariff costs incurred. While there may be some short-term fluctuations as the supply chain adjusts, in the long term, anything that results in increased manufacturing in the United States will increase demand for our products. In summary, demand for our products remains strong, backlog is up 8% this year, and year-to-date adjusted EBITDA increased 36% versus the prior year.

J. Brett McBrayer, CEO

Thank you, Dave. At this time, Mike McAuley, our Chief Financial Officer, will now share more details regarding our financial performance for the quarter.

Michael G. McAuley, CFO

Thank you, Brett. As mentioned in our Form 10-Q and the press release we filed yesterday, the key item for the quarter was the U.K. exit charge. We recorded $6.8 million in expenses for employee severance, accelerated depreciation from the plant’s reduced operating life, and certain professional fees linked to the plant closure. These costs, detailed in Note 2 of our Form 10-Q, are reflected in the respective cost of goods sold, selling, general and administrative expenses, and depreciation and amortization line items on the consolidated P&L. I want to emphasize that we expect operating income to improve by at least $5 million on an annualized basis following the exit from this location. Ampco's net sales for the second quarter of 2025 reached $113.1 million, which is a 2% increase from the second quarter of 2024. This growth was mainly due to higher sales in Forged Engineered Products and favorable foreign exchange translation, which more than made up for the decline in roll demand. Adjusted EBITDA for the second quarter of 2025 was $8 million, down $2.1 million compared to the previous year, primarily because of reduced margins in the Forged and Cast Engineered Products segment for several key reasons. The current quarter faced unfavorable manufacturing costs relative to pricing and surcharge pass-throughs compared to the prior year, along with lower volume of roll shipments, although there was a higher volume of Forged Engineered Product shipments. This resulted in a less favorable margin mix in Q2 2025 compared to the same quarter last year. Lower production rates this quarter led to decreased absorption of manufacturing overhead costs. However, these effects were partially mitigated by improved profitability in the Air & Liquid Processing segment due to a better sales mix, as Dave mentioned. Year-to-date adjusted EBITDA stands at $16.8 million, which is an increase from the previous year. Total selling and administrative expenses saw a slight decline in the second quarter of 2025 compared to the previous year, but remain comparable year-to-date. Depreciation and amortization expense for both the quarter and year-to-date is higher than last year, driven by the accelerated depreciation of the U.K. exit charge, totaling $0.7 million. The severance costs of $5.9 million recorded in the Q2 P&L are the primary component of the total U.K. exit charge. Interest expense for the second quarter decreased slightly, mainly due to lower average interest rates on our revolving credit facility. The shift in other expense income net was largely influenced by changes in foreign exchange transaction gains and losses. The income tax provision for 2025 benefits from a lower statutory tax rate in one of our foreign paying tax jurisdictions. Consequently, the net loss attributable to Ampco-Pittsburgh for the three months ending June 30, 2025, was $7.3 million, or $0.36 per share, which includes $6.8 million, or $0.34 per share, for the U.K. exit charge. By the end of June, we amended and extended our credit agreement through 2030, restructuring the facility into a $100 million revolving credit line backed by eligible accounts receivable and inventory, along with a $13.5 million term loan secured by eligible machinery and equipment. This structure and added capacity offer us greater flexibility for our global working capital needs. We fully drew on the term loan at closing to pay down the revolver balance, significantly boosting the corporation's available liquidity. As of June 30, 2025, the corporation's liquidity position consisted of $9.9 million in cash and $34.2 million in undrawn availability on our revolving credit facility. Operator, we would now like to open the line for questions.

Operator, Operator

Our first question comes from Dennis Scannell with Rutabaga Capital.

Dennis J. Scannell, Analyst

I would like to hear more about the roll market from Sam. In your discussions with customers, and based on what you observed in July, is there any pent-up demand? Are you seeing actual orders for July, or indications of orders later in the year? Is this trend occurring in both the U.S. and Europe, or is it primarily happening in the U.S.? I'm trying to get a sense of what the latter half of the year may look like for your business.

Samuel C. Lyon, President of Forged Cast Engineered Products

Yes, Dennis, in the second half of the year, we will experience lighter shipments on rolls compared to the first half. This is due to having fewer days and more holidays, as well as overall demand. The lead time for our products varies based on shipping location; it's three months for domestic U.S. shipments and four to five months for overseas orders. In the latter part of the year, we could start taking orders for November and December, and we've noticed a slight increase in order activity from some of our larger clients. There was a pause in Q2 due to uncertainty about tariff rates, which were initially set at 10% but ultimately increased to 15% for our plant. Our plants in Slovenia and Sweden shipping to the U.S. are unaffected by shipments to Europe. However, our European customers were uncertain about potential retaliatory tariffs until recently, and now that there are none, we expect to be in a better position. The dollar has weakened somewhat, making U.S. shipments to Europe more advantageous, which improves our cost structure. Now that all tariffs are clarified, we believe activity will pick up again. The decline in orders was particularly noted from Europe to the U.S. and domestic U.S. orders, which caused a slowdown in our U.S. plant operations. In 2024, we experienced a high level of forged work rolls shipments, as our customers were anticipating an increase in overall steel demand. Tariffs impacted automotive production and also affected interest rates and the housing market, resulting in lower housing starts. On the other hand, nonresidential construction and data centers remained robust. There are still many questions regarding costs and the expense of infrastructure projects. With these uncertainties now resolved, we anticipate a return to normalcy.

Dennis J. Scannell, Analyst

So considering that the lack of demand or orders has primarily been an issue in the U.S., could we potentially see an increase in U.S. ordering activity that would impact the second half of 2025? You mentioned there's about a three-month lead time, correct? Do you expect that? As you engage with your customers, do they still have a significant inventory of rolls? I wonder if some orders anticipated for August or September might not come through. Could you provide any insights on that?

Samuel C. Lyon, President of Forged Cast Engineered Products

Due to the lead time for parts and materials, we expect to deliver any new incremental orders in November or December. We've noticed a slight increase in orders, but it varies since each customer has different needs. Some have ample cash and inventory, while others require immediate material delivery. So, the situation is quite variable.

Dennis J. Scannell, Analyst

Got it. And then any other color you can give on the closure of the U.K. facility in terms of the timing? Like is that something that will happen kind of in the second half of '25 and then we get that $5 million incremental operating income bump in '26? Or will this drag on longer?

Samuel C. Lyon, President of Forged Cast Engineered Products

Well, the longest potential endpoint is Q1 of '26, and we're working to pull that in. So sometime in Q4, most likely between October and December, the casting will stop then those costs will cease. That's the major energy consumer in the plant and accounts for about one-third of the employees. The rolls will progress through to the back-end machining. As the rolls get finished, employees will be attrited and costs will continue to decline. Meanwhile, as those costs diminish, we are still shipping products and will start receiving payments from customers. Thus, from a cash perspective, it starts high and then receipts come in as well.

Dennis J. Scannell, Analyst

Yes. Okay. Do we own the plant? And do you have an idea of the potential proceeds if we actually sell the facility?

Samuel C. Lyon, President of Forged Cast Engineered Products

We do own it, and that's being evaluated right now. It's in a fairly desirable area in Newcastle. However, we need to evaluate the demolition cost versus the redevelopment cost. The Gateshead Council may want it, but we are unsure. The government might be interested in its development, and there are private entities too. It's difficult to say at this point; we are not counting on any proceeds, but there could be potential upside.

Operator, Operator

The next question is from Robert Jensen, a Private Investor.

Unidentified Analyst, Analyst

Yes, I'm just wondering, you guys closing the U.K. operations. How is that going to impact your revenues?

Samuel C. Lyon, President of Forged Cast Engineered Products

Yes, this is Sam, Robert. It will be down by about $25 million to $30 million. However, there is some potential upside from converting certain rolls to forged rolls, which could add around $3 million or $4 million. So, I would estimate it will be in the range of $20 million to $25 million. The reason it may not be larger is that we are shifting some product to Sweden as well. Sweden will eventually be at full capacity, but they are currently operating at a lower utilization rate, which will provide some offset.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Brett McBrayer for any closing remarks.

J. Brett McBrayer, CEO

Thank you. In closing today, I want to recognize the great work by our employees. I particularly want to highlight the work of our team in the U.K. who are managing a very difficult situation. I also want to thank our shareholders and Board of Directors for their continued support. Despite the pause in our order book we've recently experienced, tariff clarity and the wind down of our U.K. operations will position us well as we move into 2026. I'm excited about our direction and the commitment of our team to demonstrate significantly improved earnings for our shareholders. Thank you again for joining our call this morning.

Operator, Operator

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