Ampco-Pittsburgh Corporation (AP) Q4 2017 Earnings Report, Transcript and Summary

Good morning and welcome to the Ampco-Pittsburgh fourth quarter 2017 results conference call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note today’s event is being recorded. I would now like to turn the conference over to Melanie Sprowson, Director of Investor Relations. Please go ahead.

Thank you, Andrea and good morning to everyone joining us on today's fourth quarter conference call. I am joined by John Stanik, our Chief Executive Officer; and Mike McAuley, Vice President, Chief Financial Officer and Treasurer. 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 statement due to a variety of 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 and remain available for two weeks following the conclusion of the call. To access the earnings release or the webcast reply, please consult the Investors section of our website at ampcopgh.com. Now let me turn this call over to Mike, who will provide an overview of the company's financial performance for the fourth quarter.

Thank you, Melanie. Good morning, everyone, and thank you for joining our call. Our earning release for the fourth quarter and full fiscal year 2017 was issued this morning and I hope you've all had a chance to read it. I will give the financial review for the quarter by taking you first through our consolidated P&L, then I'll provide more color at the segment level and then review some balance sheet and cash flow activity. Ampco's net sales for the fourth quarter of 2017 were $114.4 million. This compares the net sales for the fourth quarter of 2016 of $92.1 million. Net sales in the Forged and Cast Engineered Products segment grew nearly 30% compared to prior year, driven by higher sales of Forged Engineering products for the oil and gas industry, the full period effect of November of 2016 ASW Steel acquisition and higher sales of mill rolls. Net sales for the Air and Liquid Processing segment for the fourth quarter of 2017 gross 5% from the prior year. I'll comment more on that business segment results in just a moment. Gross profit as a percentage of net sales was 18.1% for the fourth quarter of 2017 versus 12.4% for the fourth quarter of 2016. The increase primarily reflects higher Q4, 2017 sales volumes and selling prices, plus a number of nonrecurring items last year which diluted to Q4, 2016 gross profit margin, including some inventory adjustments related to physical inventory losses reserves against certain inventory for two customers who filed bankruptcy and an unfavorable LIFO cost impact. Negatives effect in the fourth quarter gross margin for 2017 include higher raw material and operating cost including the impact of idling one of our foundries. Selling and administrative expenses were $16.9 million or 14.7% of net sales for the fourth quarter of 2017 compared to $14.4 million or 15.7% of net sales for the fourth quarter of 2016. The dollar increase is primarily related to higher connection charges associated with the higher volume of shipments. Higher corporate expenses associated with the company's increased scale, higher fringe benefits and professional fees. This is offset by a nonrecurring reserve in Q4 2016 of $1.5 million against repatriation accounts receivables from our customers who filed for Chapter 11 of bankruptcy protection last year. Depreciation and amortization expense of $5.4 million for the fourth quarter of 2017 was approximately flat with the prior year. The prior year included and then impairment charge of $26.7 million primarily for the write-off of goodwill in the Forged and Cast Engineered Products reporting unit. And that is best as charge of $4.6 million both of which we described that linked on last year's call in our 2016 10-K disclosures. Loss from operations for the fourth quarter of 2017 was $1.8 million. This compares to a loss from operations in the prior year of $39.8 million, which is inclusive of the prior year charges for impairment and is best it's litigation as well as the customer check through 11 receivable I just mentioned. I'll expand on operating income changes a bit further for even my segment level discussion momentarily. Other expense net for the fourth quarter of 2017 declined $1.1 million versus prior year, primarily due to a small foreign exchange gain in the current year versus FX losses in the prior year quarter. The income tax provision for the current year includes the effect of the new tax cuts and jobs act which among other things lower the U.S. corporate statutory income tax rate from 35% to 21%, implemented a modified territorial tax system and imposed a onetime tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform negatively impacted our income tax provision by approximately $1.6 million in the quarter, primarily related to the onetime repatriation transition tax, offset by income tax benefits resulting from 100% bonus depreciation. There was no cash outlay due to the Tax Reform, however it reduced our net operating loss carry back refund opportunity. Additionally, there was no significant impact from re-measuring our U.S. deferred income tax assets and liabilities at the new and acted statutory income tax rate, since these net deferred income tax assets are fully valued. We will continue to analyze the Tax Reform and refine our provisional amounts which could potentially impact the re-measurement -- the measurement of our tax balances in subsequent quarters. As a result, the corporation incurred a net loss of $3.2 million or $0.26 per share for the fourth quarter of 2017 compared to a net loss of $43.1 million or $3.51 per common share for the fourth quarter of 2016. Now here are some details on our operating segment results. Net sales for the Forged and Cast Engineered Products segment for the fourth quarter 2017 increased approximately 30% compared to prior year. This growth reflects a significantly higher volume of sales of franc block due to significantly higher demand in the oil and gas industry, the full period effect of the November 2016 acquisition of ASWs steel and higher sales of volume of mill rolls primarily cast roll volumes for hot strip mills, and also higher pricing. The segment recorded an operating income for the quarter, small operating income for the quarter which is a significant improvement over prior year on an underlying operational basis, which is evident if you would adjust for the non-recurring prior year charges for goodwill impairment and the customer Chapter 11 receivable reserve recorded in Q4 2016. The main drivers for the improvement with a higher sales volumes and higher pricing offset in part by higher operating and raw material costs in an unfavorable absorption effect from the idling of a cast roll foundry. Net sales for the Air and Liquid Processing Segment increased 5% for the fourth quarter of 2017 versus prior year, as higher shipment volumes of custom air handlers and heat exchange coils more than offset lower shipment volumes of centrifugal pumps. Given the $4.6 million is Asbestos Charge recorded last year. Air and Liquids' operating income were significantly for the quarter compared to prior year, it grew also on an underlying basis from the segment’s higher shipment volumes this year. Backlog at December 31, 2017, approximated $326 million, a 40% increase from the $234 million in backlog at December 31, 2016. This increase is primarily from higher order intake in the Forged and Cast Engineered Product segment particularly in franc block and both forged and cast mill rolls as well as higher order intake in air and liquid processing, primarily of centrifugal pumps for U.S. Navy shipbuilders. Now to review changes in the working capital accounts and some other cash related items. Accounts receivable at December 31, 2017 increased $14.4 million from December 31, 2016, primarily from higher sales. Inventories at December 31, 2017 increased $24 million from December 31, 2016. The inventory growth is primarily due to increased production levels in the Forged and Cast Engineered Product segment on higher order booking level for franc block and roll demand. Accounts payable at December 31, 2017 increased approximately $10.4 million from the balance as of December 31, 2016 reflecting higher raw material and operating expenditures associated with the higher production activity. Cash and cash equivalents of $20.7 million at December 31, 2017 declined $17.9 million compared to the December 31, 2016 balance of $38.6 million. Some key uses of cash for the year included trade working capital growth to support sales and production growth, which I just mentioned and capital expenditures of $14.6 million for the year. Drawings on the Ampco revolving credit facility are $20.3 million at December 31, 2017 reflecting the refinancing of higher interest debt assumed in the ASW Steel acquisition of approximately $7.7 million inclusive of early repayment fees and the balance to fund working capital growth. In addition to its cash balance the corporation also has remaining availability on the revolver of approximately $56 million at December 31, 2017. I will now turn the call over to John Stanik for his remarks. John?

Thank you, Mike. Good morning everyone. While I'm disappointed that we are reporting an operating profit for the fourth quarter I am pleased to report that major progress in many areas continues to improve or to occur. Excluding non-recurring non-cash adjustments that arose in December, operating profit was realized for two of the three months in the quarter. the exception was the month of November during which we experienced equipment failures in three of our plants. As a result of the associated downtime revenue was pushed out of the quarter, maintenance spending was above expectation and fixed cost absorption was reduced. November was the third month in 2017 during which we experienced extraordinary equipment failures. The November problems were result and operations have been running smoothly for the last three months however I'm not satisfied that we have a sustainable corporate wide maintenance process and capability in place. Therefore, we are actively looking to upgrade our proactive methods and procedures and will add new global maintenance leadership. The maintenance issues were the only negative of the quarter. we continue to book new business in both our roll business and in our open die Forged business in fact our backlog for business for 2018 on December 31, 2017, as Mike just said is approximately 40% higher than it was at December 31, 2016. This means that our markets continue to strengthen in both of these areas. Additionally, and very importantly we achieved new production and shipment records for rolls and franc blocks in October and December. You may recall during our last call we reported a global shortage of electrodes and refractories. The lack of availability has resulted in significant cost increases to procure them. Consequently, on November 3, 2017 we announced that we were going to impose pricing surcharges for both electrodes and refractories beginning January 1, 2018. As many of our customers have imposed similar surcharges and price increases to offset these costs for themselves, most have accepted our surcharge. Raw material costs continue to be at a higher level than they were in 2016. In fact, the total 2017 year-over-year purchase cost increase was in the range of $4 million globally, equaling more than 40% of our whole year operating loss. Our sales force has been working very hard since 2017 to institute pricing surcharges for raw materials on customers with the time did not have them in place. Now, approximately two-thirds of our customers have contractual surcharge coverage. However, this is still not our preferred level and we will continue to our efforts to negotiate them into new contracts. I am happy to say that our contractual product pricing for 2018 is considerably higher than in 2017. While the November manufacturing difficulties pushed some 2017 product to be produced and shift into January of 2018, 2018 contractual pricing is now in effect. Due to the rising cost of our raw materials, labor and benefits and the fact that not all of our customer contracts include raw material surcharges we expect to announce price increases in the very near future, prior to the 2019 customer contract negotiating period which will begin this May. As promised the first roll product of the new twin alloy product family was launched in December. We continue to be very excited about this series as these products are expected to improve the cost effectiveness of our customers’ rolling mills. Testing in actual service supports our claim. Assuming the recently announced tariffs had the impact that is hoped for which is increasing the utilization of capacity of our customers in the U.S. cost effectiveness improvements will become critically important to them and the higher prices we will charge for the twin alloy rolls should be easily justify. The first product in this series VICTURA is applied to the finished end of hot rolling mills. Future new product launches will be aimed specifically at other sections of rolling mill, the next twin alloy new product launch is tentatively scheduled for the second half of this year. We are a world leading roll technology company and I strongly believe that such a company should be responsible for regularly improving its product line and capability. The fact that we were able to fund and launch this significant breakthrough in less than two years is a testament to our R&D capability. Another important accomplishment in the fourth quarter is the progress we made in repurposing the Pennsylvania Castrol plant that was partially idled beginning in April 2017. It now plays an important role in the manufacture of overflow rolls and open die Forged products including franc blocks. We relocated and installed equipment in order to achieve this goal. As a result, the plant was an important contributor in achieving our production records in October and December. The overall future of that plant in the short term will continue to be based on this strategy. However, the steel and aluminum tariffs announced last week could have an impact on our plans should U.S. roll demand increase further. Let’s talk a little bit about the global tariffs. As you know, the newly announced tariffs of 25% and 10% respectively for steel and aluminum imports will be applied very soon. Being a global company, the tariff represents good news for our U.S. based business and could add very little impact on our European and Asian manufacturing as they are mostly region centric. However, some scheduling adjustment may be necessary. Currently, our European plants provide most of the Castrol’s that we shipped to U.S. customers. With the - in place the customer rolling mills are expected to operate at higher capacity utilization greater roll consumption and more spares maybe needed at our customer sites. The impact of this could be increased sales potential for hot mills and cold mill rolls. The recent weakening of the U.S. dollar along with higher rolling mill utilization rates could create more favorable circumstances to restart the down portion of this partially idle Pennsylvania plant if certain cost inefficiencies can be corrected. Since, the tariffs exclude Canada at least initially, they have no negative impact on our Canadian subsidiary ASW steel. We will follow all announcements closely regarding potential future changes to the tariff that may threaten the Canadian expectation and prepared proactively. I want to briefly mention the 2017 revenue growth of our equipment business. From an operating standpoint revenue grew by more than 4% that may not sound like a lot to you but consider the aerospace [ph.] major customer base for the coal-fired power market still has not recovered from its decline in 2015 and 2016, That used to be the number one vertical for that business. Further, during 2017, an important market for buffalo pumps, turbine power generation significantly contracted. This resulted in a few million-dollar reductions in sales compared to our expectations. Thus, our team managed to grow revenue even when faced with these substantial headwinds. The faithful execution of their strategic plan initiatives allows this to happen while maintaining their operating income contribution to the corporation. There were couples of developments late in the fourth quarter and in January about which we have received questions from a few shareholders. One was an S3 shelf registration statement filing made by the company. And the other was the 10B51 trading plan adopted by the Louis Beckman investment Company, a significant shareholder of Ampco. I would like to clarify both of these matters to hopefully eliminate any confusion. The filing of the shelf registrations statement was pursuant to a contractual obligation, we entered into at the time of the Akers acquisition, which was completed in March of 2016. In the acquisition, we issued unregistered shares of Ampco stock to the seller and agreed to register the shares at a later date, which we now have accomplished. While the registration statement is effective, we believe none of the shares registered have been sold by all towards the date. Alturas was the seller of the business by the way. The second term item, excuse me, the second item involves sales of Ampco’s stock by one of our significant shareholders, The Louis Beckman Investment Company pursuant to a 10B51 plan, a trading plan for which insiders of a publicly traded company can sell a predetermined amount of shares at a predetermined time regardless of whether there is an open window for insiders. This plan was adopted by The Louis Beckman Company to allow members of the Beckman family to satisfy liquidity and diversification objectives. I have a brief update on the identification of my successor. As I have said previously, the Board of Directors has created a CEO search committee and the committee has started its search, I don’t have any definitive information beyond that to provide to you at this time, I can continue in my capacity with all the focus and determination that I have had since my first day as CEO of Ampco-Pittsburgh in January 2015 and will continue to do so until the there is a smooth transition to a new CEO. I am involved in the process and I am both pleased and convinced that the committee is doing their very best to identify the appropriate candidate. I do not have any projection of a date for an announcement at this time. I'll end my comments with a look ahead, I have high expectations for 2018 in general, considering the vast amount of progress that we made in 2017. The surcharge coverage, we will get in place, the 2018 price increases already embodied in contracts and ongoing improvements in our operations capabilities will all help, and we will continue to improve beyond that. We are very focused on reducing manufacturing inefficiencies and reliability problems. I expect revenue increases, borrowing any currently unforeseen negative market occurrence. And gross margin should continue to increase, that has already been shown in January. As Mike reported, 2017 revenue grew by 30% over 2016. For a company that's had its revenue declined four of the five years’ consecutively due to market conditions, this is an exciting development. So, majority of this growth resulted from whole year contributions from our two major acquisitions made in 2016, but our growth goes beyond that. And we will demonstrate this again in 2018. Companies that are able to grow and have initiatives emplace to approve cost efficiencies and the market capability to increase prices to offset inflationary cost increases, have potential. Ampco-Pittsburgh Corporation now has that potential. As evidences, despite the downtime that occurred in 2017 in our manufacturing plans and the raw material cost increases, our gross margin in that year grew 600 bps. Other than ERP software implementation with some of our acquired facilities, the integration of the Acers Group and ASW Steel was completed. We launched the new product, the lag time embedded within our surcharge models will expire and we'll begin to capture surcharge protection for 2017 raw material cost increases. And finally, our price increases will have accumulative effect on our gross margins. I'm very pleased with where this company is right now, its future prospect is to continue to grow and with increasing margins. Thank you. We will now take your questions.

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Michael Gaugler of Janney. Please go ahead.

Good morning, everyone.

Good morning, Michael.

Good morning, Mike.

I got three questions John. Certainly, easy one. Wondering if you can give us just a brief overview of what you are seeing in the frac blocks as specific, is the market demand accelerating as it's flatting down?

Well, it's -- you read the reports that are published every week, it seems that United States well expansion is continuing at least by small numbers and the Canadian number of wells seems to have stabilized. There is business out there and I would say that it's continuing to grow. We continue to get more pressure to supply blocks to additional customers, there is difficult for us to do at this point, although the production records that we talk about in December and October certainly help give us confidence that we can sell more than we did at the end of the year. So, I think the short answer is that there is at least a stable level but probably it's growing a small amount.

Okay. Then on to a stickier question and I don't know if you can answer this or not. What kind of along the same lines with the national renegotiation pushing forward, if that goes importantly and you decided to move ASW operations into the U.S. Any idea of what kind of cost that could generate on your side to do something like that?

Well, I hit to same Mike, but it's, it would be sizable. The later metallurgy equipment that ASW has can be moved there’s no doubt about that, you can’t move experience, and these are this is equipment that is embedded in the ground with extensive foundations and concrete etcetera power requirements are very expensive, so it’s important for us to continue to get an exception. And as I mentioned in my comments, we are looking into proactively what type of case we can put together regardless of how the NAFTA investigations go being a U.S. company and ASW selling exclusively to a U.S. company. We hopefully that would be a way that we can accomplish that objective.

Okay. And then finally, I know you’re looking for, you’re hoping for some level of profitability for last year and certainly the tax reform and job the tax cut and job reform act didn’t help that out. Do you think it’s a first half 2018 event or a second half 2018 event?

I do think it’s a first half Mike will - if we were to cook all this stuff now.

Yeah.

Basically, we’re not getting enough price for what we’re doing. We’re not getting enough value for our products. It’s been a long painful process to get that price in place, the road block that we encountered last year with the sizable raw material cost increase of $4.2 million whatever the exact number was, the fact that we ideal the plant that cost does roughly another $8 million you take those two elements out and we have a pretty decent year maybe a $0.50 year and I'm really generalizing here when I make that comment. So, as these surcharge time lags expire as we get the price increase that has been negotiated months ago that began effectively on January 1, 2018 as we get more price increases for blocks because of the growing market case in that situation. We finally should be getting to numbers that our products merit. And yes, we have some other problems, we’ve got a pretty serious maintenance issue that we’ve got to resolve, but all of these things should come together, there has been so much improvement in all together areas of the running the corporation, it’s basically this one last agreement now things always happen and go bump in the night that’s the thing. But the stars are aligning at this point.

Good to hear. That’s all I've got, John. Thank you.

Thank you.

Our next question comes from John Walthausen of Walthausen & Co. Please go ahead.

Okay. I’ll try to limit myself to two questions, move in the right direction. Both about the fourth quarter, on the simpler one when I look at your notes about ASW grant $47 million in revenues for the year, but a bit less than $11 million am I looking at that the right way to say the things slowed down there and if so, so could you explain and then the second, well let’s do that question.

No, not at all I think it’s actually the opposite I think that ASW did better as the year progressed. Now we have encountered a loss of a major customer in our market for ASW who literally closed their factory that’s going to have some impact in the first quarter as we try and replace that hole that was created. But in terms of 2017 as the year progressed ASW continued to do better, and we’re quite confident that given a few months we’ll be able to fill the hole that was created in January when the one customer, I mentioned shut down. Mike, you have any?

Yeah John I’d like to say add to what John just said that ASW, we acquired the business in at the very beginning of November of last year. So, part of what I was describing in my remarks was just the full quarter or full period effect of ASW being one piece, but ASW sales have grown significantly from the timeframe when we acquired them. And another important key factor is that in addition to its trade sales of steel to customers, it’s a very valuable contributor on an inter-company basis to providing a significant load into union electric steel for the production of our Forged Engineered products primarily frac blocks and some other products so there’s a heavy internal sales not demand on that business and it’s a very important part of the supply chain we built for the oil and gas end market.

Good. That’s very helpful. I was wondering whether that wasn’t just external sales that you’re including there that’s good to hear. Second question is when I look at the fourth quarter versus the third quarter, you gained sales I think a bit more than $10 million, but only if I take out some of the extraordinary things only about a $1 million more operating income, it would strike to me that for your businesses the incremental margin should be more like a 30% type thing. So, I'm guessing part of that is the November issues that you talked about in some is the pricing the raw material versus its pricing squeeze but can you breakdown what the relative effects of those two things were in that lack of margin improvement?

Yeah, John on a sequential basis, Q4 versus Q3. First, the incremental margins aren’t quite at that level that you mentioned, number one. Number two, you’re right, the operating problems that we had especially as John indicated in his remarks that were especially evident in November cost some under-absorption much more so than in the prior quarter and that was a key factor. Raw materials just crept a bit into Q4 versus Q3, but most of the rise in the raw material effect for the full year had occurred around and kind of peaked out in Q3, there was a slight creep in Q4. So that was a part of it, but a lesser part of it.

Yeah, but if you think about -- if the cost increases formed and or so let’s assume that the run rate is around a million and then the added expenses went down with the maintenance repairs as I said in my comments we had made an operating profit for two to three months with November being the basically the sold negative factor that produced the $1.8 million operating loss.

Thank you.

[Operator Instructions] Our next question comes from Justin Bergner of Gabelli & Company. Please go ahead.

Thanks John. Thanks, Michael. First question would relate to just it’s could review again the timing of the price negotiations so what price increases are taking effect from prior negotiations what would be the next round of price increases to take effect from future negotiations, just the timing of that sort of events would be helpful?

Yeah. Typically, the contract negotiation period for the following year begins in April and ends sometime in August or early September. We’re experiencing customers wanting to negotiate for periods longer than one year, which I take as a sign that the market is stronger and they’re trying to fix their cost or beyond one year. That’s something that we’re being very careful about in this year. There is a portion however, Justin of our revenue that is not done in the way I just described and it’s more on a spot contract of basis where it’s not for the period of the year or more. I’d say that’s a relatively small a portion maybe 20% to 30% at most. But certainly, the big guys that we deal with maybe one to two exceptions for all full within that 3 or 4 months period. So, when I say that we’re going to be announcing a price increase we should be announcing that probably by a press release sometime in the next month or two.

Okay, great. That’s helpful. And then the price increases from last year’s negotiation took effects roughly around January 1

Yes.

Okay, so the pricing booked for this year is pretty much statics up for that 20% to 30%?

Yeah, except the – business is roughly a 3 or 4 months cycle, so, we’ll continue to price those, in fact that’s exclusively the case. So, it’s unlike the world business, we have opportunities to make adjustments a much more frequently there.

Okay. Switching to the raw materials, the 4 million year-on-year increase of raw material prices how does that relate to the one third, I mean does that include our exclude cost sort of recover by this surcharge mechanism.

It includes the -- it’s a gross number but if you remember from prior calls, we have a time lag of at least 6 months in our models. So, in the third quarter during my call I had mentioned, I think I did, that I mentioned that we were still paying customer credits in 2017 through the month of October for raw material cost decreases that occurred in 2015 to 2016. So, we were actually, how do I say this, actually doubling the negative impact. That’s over now, and since November we have flipped and we’re beginning to receive positive contributions related to the surcharge coverage. In fact, that we only have two-thirds of our customers now, and that’s been a progressing thing, it was less than that, prior to the end of the year. Concerning that we only have two-thirds of those customers that’s still not a good situation for us and ourselves, of course we’re trying hard to increase that number somewhere hopefully into the 80s. But to answer your question I think, it’s in positive territory and should stay there and should increase for the next few months.

Okay, that’s helpful backdrop. Just finally on the – you presented sort of a relatively sanguine case for effective U.S. tariffs on European and Asian world business, if you could just elaborate on that a bit more in sort of what’s the bare case for the effective tariffs on your international business?

There’s really only one negative potentially, forget Canada for a moment, I think that's going to be safe for a while and none of us know how long. But going back to the fact that a lot of our hot mill rolls are produced, the metal for those are produced in Europe that is the negative. So, how can this company respond competitively to eliminate the tariff in some way improve its financial performance. And the obvious answer maybe the Pennsylvania plant that's idled which we could reactivate, restart and take a bunch of new business. It would have somewhat of a negative impact on the plans in one of the plants in Europe, but it would certainly help the financial situation that we had in 2017 with respect to that plant. The problem that we have there is this really damaging union contract that's been in place since we bought the facility and the reluctance of the rank involved to adjust. So, it becomes a question of economics what can, what is the best operating scenario for the company, where can we make the most money is that with the Pennsylvania plant restarting its melting facility and producing the rolls or is it with the European facility continuing to make the metal us paying the tariff and generating operating income.

Got it. And then are you worried about decreased demand for Forged and Cast rolls from international customers if the production of steel in those international markets is affected by U.S. tariffs?

Well, roughly one-third of the rolls that are consumed in the United States come from Europe excluding us. Where they are coming from two or three countries over there, so the tariff will make it more difficult for them to be competitive. And that should be a positive for us. I would just pass a note Justin that we are not certain that the tariffs will apply to finished parts, so the roll being new is still subject to interpretation and we don’t have a final judgment yet, but if what I just said is accurate than the answer I provided on our European competitors would also not apply and the competitive situation would be pretty similar to what it is today.

Got it, so that’s very helpful, so basically you think you have a more U.S. centric footprint than the bulk of your competitive set as it relates U.S. demand.

Absolutely, we believe that we have the greatest capacity to supply in this country than our competitors.

Okay, thanks for taking all my questions.

You're welcome.

Our next question is a follow-up from John Walthausen of Walthausen & Co. Please go ahead.

Yes, thank you, I wanted to switch over to the new model of rolls that you introduced, and I was wondering how many rolling mills are those actually operating in now and what the expectations for the new operators of those rolls?

Well, typically most customers will go through a trial period before they commit such an important high cost of operation to something new, but we have more than a dozen mills running on those rolls already and they have only been commercialize to short period of time ago, so that tells me that there is a great interest in our claims and proving that those claims are correct which were of course convinced they are.

And those claims are basically a longer lasting primarily or is it also getting a more precise thickness?

Well, I think they are one in the same longevity without surface marks on the steel product is what the key is, but I think there are also advantages to taking the roll out of service for refinishing less frequently, so there are not only the roll lasting longer overall, but it's lasting longer from refinishing to refinishing, did you understand what I'm trying to say?

Yeah, exactly I understand precisely I group invest after all. So, how long it will take before we know whether those dozen mills that are running are getting the results that have been promised?

Well, first of all we have a bunch of data from the trials that have been ongoing, or I want to say more than a year, but it would probably I can’t really give you a good answer John, it would probably be different for customer to customer. This is the finishing end, it would depend on how what the specific customers experience was with the rolls they used previously in terms of the time between refinishing the roll. And I don’t really know off of top of my head what the longest service of those 15 or so mills is.

Okay. That’s helpful. And then in making these rolls is a complicated and absolute that it will take us a while to get us full of this to see in producing those so that we can get our cost down to where we want to or is that a correct assumption and can you put some timeframe around that?

No, I think we are pretty adapted making those rolls now, unless you’re just talking about the general issue that we’re having with maintenance. Is that what you -?

No, no, specifically just the set of learning curve and the - making product.

I think the learning curve is behind us.

Good. That answers my question. Thanks.

Our next question comes from Timothy Chatard of Quantum Capital Management. Please go ahead.

Hi. I think in prior calls there were some discussions about the effort to develop some new products within the Forged segment outside of the frac block I'm just trying to get any update there with anything?

Well, there are two areas there one is the ongoing R&D efforts to which are twin alloy efforts for Forged rolls that’s one area and those are in the backseat so to speak when compared to hot mill cast rolls. The second is the diversification into the open die Forged product area and the only thing that I can really say right now is that we continue to put more product into different industries, these are generally small numbers so we’re talking probably somewhere in the area for ’17 of less than $10 million of sales excluding blocks of course. And we expect that number to grow. We have some prospects that we may be close to announcing here within the next couple of weeks but it’s a process and it does take some time and every quarter I will continue to update that situation if we have any breakthrough orders you’ll see press releases on those that will publicize us getting into new markets et cetera.

Thanks. One question on a big picture level looking at the business broadly going back to the prior cycle, prior to financial crisis, so last time we had strong steel markets the business was operating high 20s low 30s gross margins. Obviously, the business has an approaches levels in recent years, but wondering especially with the new product introduction with VICTURA and other follow on products that might come from that. I think have been implied to be better gross margins in the existing portfolio, is there a reason structurally why this business is a 20% gross margin business today and it’s because oppose to high 20s to low 30s kind of approach those levels that you had in the past or is there any reason to change those ranges?

Not today to answer your last comment. I think that we are this business and our competitors are all struggling with a multiple year six or seven-year decline in consumption overall effect that our customer base was and financial distress during that period of time and we were compel to lower prices, and lower prices, and lower prices and more. So, we are trying to heal and recover that margin that price. I think that the companies and I eventually to say all of our competitors also have done a great job with getting blood out of the stone from the cost standpoint, but there eventually runs out that those types of methods eventually run out. So, it's going to take a little bit of time when you release a product like Victoria, we expect our margins to be beginning of cycle if you know what I mean from a new product standpoint. So, we would expect to be earning margins higher than the ones you mentioned going back to the first decade in the century, the higher than 30%, that's my aspirations for the new product. And to rollout three of those in the next 18 months and hopefully behind that Forged flow I think gives us a really strong potential for the future.

Thank you.

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

Thank you. Just a few -- I won't repeat the comments that I provided during my presentation of course, other than to say Ampco-Pittsburgh Corporation is growing. Our bench is deepening, our strategic plan is working, our margins are increasing and it's an exciting time for the employees and the corporation. I continue to feel very good about what we've accomplished in the past three years and I look forward to this company continuing to realize its four potential with respect to sustaining growth and profitability. I would like to thank everyone for your time and wish you a great remainder of your day. Good bye.

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