Good morning, and welcome to the Ampco-Pittsburgh Corporation Fourth Quarter 2018 Earnings Results Conference Call. [Operator Instructions] Please note that this event is being recorded. I would like to turn the conference over to Melanie Sprowson, Director of Investor Relations. Please go ahead.

Thank you, Chad, and good morning to everyone joining us on today's fourth quarter conference call. I'm joined today by Brett McBrayer, our Chief Executive Officer; and Mike McAuley, Senior 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 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 Corporation, CEO. Brett?

Good morning and welcome to our call. And I want to start with updating our investors on actions we are taking to restructure the corporation and return it to profitability. First in October 28, the Board of Directors of the Corporation approved a plan to sell our Canadian subsidiary ASW Steel Inc. Loss of significant US business due to a combination of tariffs imposed by the United States on imports of primary steel products and the loss of a key customer due to plant closure have resulted in significant losses in 2018. ASW has been accounted for as a discontinued operation, our Q4 and 2018 full-year financial statements and we've recorded a related $15 million impairment charge to write the business down to its currently and estimated fair value. Moving forward, we will continue to participate in the Forged Engineered Products market yet without the risk of a back integrated asset ownership position. Second, we are pursuing additional footprint reduction actions. We will announce these forthcoming changes to our business as the actions move closer to completion. Our objectives are to right-size our capacity and simplify our operating structure. Third, we've embarked on multiple cost reduction initiatives. In December, we offered an early retirement incentive to the employees of our US operations. And in February this year, we completed phase one of our overhead reduction plan. This phase one action is expected to deliver roughly $2.5 million per year in pre-tax savings. Our next steps in the consolidation of our assets are expected to facilitate further overhead reductions for our businesses. And finally, we are aggressively simplifying our manufacturing flow path. This simplification will deliver a step change in operational performance and free up working capital investment. The immediate need for change has been embraced by our employees, their skills…

Thank you, Brett, and good morning, everyone. I want to start today by reiterating a few points Brett described which had a significant impact on our financial statements for Q4 and total year 2018. First, pursuant to a plan approved in October 2018 by the Corporation's Board of Directors to divest our Canadian subsidiary ASW Steel, we have recorded ASW as an asset held for sale and as a discontinued operation for financial reporting purposes. Accordingly, we've recognized a $15 million impairment charge to record the assets of ASW to their estimated fair value net of costs to dispose. Second, included in our Q4 and total year 2018 financial results is a charge of $32.9 million representing the estimated costs for pending and future asbestos litigation net of additional insurance recoveries through 2052, the anticipated date by which the Corporation expects to have resolved all asbestos related claims? This asbestos charge impacts the reported Air and Liquid Processing segment results. Both the impairment charge and the asbestos charge we recorded are non-cash items in the fourth quarter and full year 2018. I will focus my discussion on our Q4, 2018 financial results from continuing operations compared to prior year and I refer you to this morning's press release for more commentary on discontinued operations and total year results. Ampco's net sales for continuing operations for the fourth quarter of 2018 were $95.8 million. This compares to net sales from continuing operations for the fourth quarter of 2017 of $103.6 million. Net sales in the Forged and Cast Engineered product segment decreased approximately 8% compared to prior year due to lower volume of shipments of forged engineered products for the oil and gas industry, as well as a lower volume of shipments of forged rolls caused in part by certain key…

Thanks Mike. We're making major shifts in the direction of our business. This change in direction involves asset restructuring and consolidation, cost reduction, debt reduction, some basic blocking and tackling. Over the years, we've unintentionally created complexity in our manufacturing processes. Through the simplification of our manufacturing footprint will improve efficiencies in our business and our operations. This is an exciting time for Ampco-Pittsburgh as we tackle the current challenges and opportunities that are ahead of us. In 2019, we will drive momentum and execution across our businesses to move Ampco-Pittsburgh to a more profitable future. In doing so, we'll remain focused on investing back into the areas of our business that drive bottom improvements. We've been focused on our actions to address these challenges, and I strongly believe that we're well positioned to deliver on our priorities. I want to thank you for joining us today. And we'll now take your questions.

[Operator Instructions] The first question will be from [Robert Stougho with RAS Investments]. Please go ahead.

I'm little surprised that you're selling your Canadian division. I know you were waiting for something coming from Trump to lift those tariffs. And our stock has really been a horrible performer over the years. Today, we're down to $3.80, we were once $25 and you guys are talking optimistically about the future. Maybe you don't see mergers in the steel industry, but you've got some substantial assets and our market cap today is only $48 million for the whole company. I mean what do you have to say about that? I mean as far as --is it the past has been a horror show. The future doesn't look that bright except you guys are saying it will be, but the market doesn't seem to believe it today.

Hi. This is Mike McAuley. Just to kind of respond I think the way we're looking at this. I mean we've got a turnaround plan and while as Brett described we're making or announcing some steps on that turnaround plan. And we currently think as we look at our share price. We're thinking that we're undervalued today. And we --you're right we have significant assets and we have challenges in the industry that we're serving especially particularly the steel industry as you point out. But as you start it off with your question about surprise of selling the ASW division. I mean we don't know that what the future holds for the trade regulation and where that's going to be going. But we do know that we don't have to be basic in the metal to participate in the forging industry for the products that we're manufacturing today. So this is it. This is a strategic move to exit. And I think it's in the company's really best interest to proceed and so that's the story behind that. Are there any other particular questions you'd like to ask?

Well. I mean the higher the stock is $11 for the year and we were right nearly not too far from the low. The price-- you're selling in a difficult market there in Canada with the outlook being uncertain. So I don't know what kind of price you're getting for that unit, but it seems to me like a bargain basket type of a price that somebody may be paying for it now. And I think you might regret it later on, but that's a call for the board.

This is Brett McBrayer. Just a couple of comments. I think it's important to notice as we're looking at our assets and our footprint structure that it's important that we right size our business. And not only to handle the peaks from a demand perspective but also we know that when the market does drop in certain segments, we got to be able to respond positive to that and have the flexibility within our structure to remain profitable in those down periods. If you look at our current structure today, we are not nimble and not able to move and respond appropriately and so this whole process we're going through is simply to right-size our business, and give ourselves the capacity to adjust as needed based on where the market goes. I think the other thing that I noted earlier in my comments was the complexity we've added to our manufacturing process. If you go through the flow paths in which we do both for the cast and forged rolls in the engineered product segment, we have made - we have created a high cost structure in the way in which we manufacture into some simplification in this process. We're going to see some benefits that are going to improve our ability to respond not just from a customer perspective, but also from a profit perspective.

Okay. We look forward to the next year to hearing that it and seeing it in fruition. Thank you.

Our next question will be from John Walthausen with Walthausen & Co. Please go ahead.

Yes. Good morning. I think there's probably for you Brett now because you referred to it several times in your commentary and again in this question about the complexity that has been built into the manufacturing system in the forged and cast roll et cetera business. Can you --I realize there is a lot of complexity in that but can you give us an example or two of some of the things that you think can be changed advantageously to address that issue? And then talk about the timeframe to making these fairly complex changes as I understand it that you're contemplating.

Our intention is to progress aggressively through 2019 with a significant portion of these changes. I have to be careful in what I say is obviously there's portions of our business it will be impacted by the changes moving forward. But it's simply through the way in which we move product through our business in a segment the multiple transportation points in which we go through, in some cases the repetition of activities in the process have added cost into our system that are not important or not needed or not necessary guess is the best word to say. Again, I want to be careful about how much I say and response to your question, but there's some simplicity and not only what we do in the facilities but how we do it between facilities that we can improve on relatively in short order through some of the restructuring that I mentioned beforehand. And so that has been a focus that we're engaged in. We're also questioning some of the things we have been doing that that we believe is really a truly non-value add to our customers. And we want to make sure that we're delivering what they need, but making sure we're doing in a fashion, if you will, that satisfies them without doing extras that at the end of the day do not add value to our business.

Thank you. That's helpful, yes, as I'm visualizing from what you're saying this is going to involve changes in the workflow perhaps moving equipment around things of that nature. So it sounds like fairly disruptive. Should we anticipate that this is going to suppress gross margins through most of this year?

No, John. I don't think so. I think what Brett's talking about here is there are a couple elements and if you listen to some of his comments earlier in the call, there are a couple of key pieces here. One is the implementation of a lean based operating system at a rather granular level which will improve production flow paths and increase productivity, ultimately effectively increased capacity as well. That's one piece of it. The other thing that he alluded to is restructuring our manufacturing footprint. That can be a little bit more on the disruptive side, but not necessarily depending on the plan of approach on that. That's the part that we're embarking on and that we don't need --we don't have definitive things that we can share today on that. But that's more transformative and I think those are the two key points to address your question.

And the rate at which you think you could improve responsiveness to clients. Do we expect to see demonstrable improvement during the year or is that more as some of this is accomplished?

I'm confident we'll see some improvements this year and more to come; again, we have some very aggressive goals for team. I believe they're all achievable and I feel very confident on the path we are at this point in time. So I think you'll see improvements as we move throughout 2019 and then I think 2020 and beyond is we will continue to progress in the right direction.

The next question will be from Justin Bergner with G Research. Please go ahead.

Good morning. How are you Brett? How are you Mike? A couple questions here just to follow up on the ASW question. Two parts to it. First of all, so it looks like if I back out the impairment you're looking sort of on the order of $0.60 to $0.70 of losses for ASW over the course of 2018. And I guess that's sort of a prelude to my second question which is any sort of update on the timing of that sale process. Obviously, you didn't pay a lot for that asset and was it sort of the loss of this key customer that changed through the calculus here, and pushing you to sell or was it mainly the tariffs?

Justin, hi. This really I think threefold. I think it's --the tariffs are a significant effect because the impact on the business means that the US trade sales which are a significant piece of the business have declined significantly. The loss of the key customer didn't help, but we've replaced most of that volume but for different applications, so margin is a factor. And then the other part of it is the impact of contraction in this --in the frac block supply chain reducing internal demand, putting a lower load on the facility is a third element. And I think the perfect storm of combination of all those factors is exposed not only the fact that we've got operating losses and we have uncertainty about what the future holds from a trade standpoint, but it also points out that the volatility in the earnings profile of the business is something that we don't necessarily have to be an owner of the business to still participate in the end market. So that led us to the conclusion that we should be moving in the direction that we're heading.

Okay, got it. And I guess you'll wait to update us on any sort of progress of the sale effort that's fine. Just on the balance sheet, I just wanted to clarify a couple things. You mentioned sort of a meaningful change in the accounts receivable. If you could reiterate that and then this reserve on the revolver, so that was used to pay the promissory note. So you still have that $35 million of unused capacity that you entered 2019 with. Is that the correct interpretation?

Yes.

Okay, got it. And then the accounts receivable change. What - how material was that?

It was - compared to a year ago, accounts receivable were down about $12 million.

Okay. Could that be sustained or was that sort of more of a one-time effort to harvest cash?

No. It goes in accounts receivable, no, that goes in hand-in-hand with the fact that the Q3 had lower sales in Q4 than a year ago. And at the frac block business is down compared to where it was a year ago. And also the fact that now we have one of our divisions need to divestiture a vertical steel it's no longer in the portfolio. So it's working capital that just comes out, came out.

Okay. So it wasn't all cash generation because some of it was just sold, okay, got it. And then any sort of idea given there was some under investment in the assets in the past what CapEx needs will be in 2019?

Yes. Well, I mean we've talked before it. We don't give our earnings guidance per se but we have before talked about CapEx in relation to a metric like our depreciation expense which we've been on maintenance CapEx spending. We've been spending less than depreciation expense. And while maintenance CapEx is on a go-forward basis likely to be a bit below, total depreciation expense. We will also have some non - some revenue generating or productivity improvement CapEx that should push it up to the depreciation level. So that you can think of it like that for 2019.

Justin, this is Brett. Just one thing to note and to add to this is that we talked earlier about some of the changes in the complexity of our manufacturing flow path. And through that work is obviously an analysis of the assets we have in our businesses and where I think you see we --if you look inside of our businesses, we've invested in multiple pieces of equipment for somewhat similar applications and we've created flow paths where they can go in multiple directions in our business. And we are keenly focused on declaring for lack of a better term the correct flow path for product and the single flow path for product with obviously backups when you run into issues with the product. But instead of looking at the entire list of assets and coming up with one number in terms of what do we need to do on these three pieces of an asset. We've been able to narrow it down to fewer assets that really require the capital that we would traditionally deploy in I think in a future in a past case. So this is common about critical and key assets we narrow the scope down on the range of what we need to be successful in the business and our investments is focused on, I would say a fewer set of pieces of equipment that are important for us not just today that moving forward from volume expansion as well as give us the flexibility that we need when we see downturns in certain segments.

Okay, understood. Lastly the asbestos charge going out to 2052 and you expect to have all claims resolved. Is this a different process versus the every two year updating process you were doing before? It seems like it's designed to go out farther in time and sort of what prompted that? If my reading is correct.

Yes. It's exactly right. Good, it's a very good observation. We - our-- we have a change in estimate for our future projected liability. And based on where we stand from a maturity standpoint as a defendant for this kind of product liability. The availability of improved information but mostly the maturity and the experience that we now have under our belt since this first emerged, we now feel that we can project out through the end of the time as far as the asbestos liability life goes. And towards that end, we have changed our estimate for the future liability to change from a moving 10-year horizon which was our methodology up to this point in the last number of years to a full horizon look, which should reduce the volatility of any kind of adjustments going forward. And also expresses to investors clarity on when we think that this issue will be completely behind us. And I would point out that especially to and you know that's very well, but for other listeners on the call too, we have substantial insurance recovery and which is reflected as part of this. So we're talking about a net change here. So we've increased the insurance receivable assets on our reported balance sheet and as well as the estimated liability based on taking it out to what we think will be that full horizon look.

Got it. Does this I mean now that you've done this do you have any more flexibility in any parts of the business or is this just sort of the normal accounting protocol once you have visibility to the total time horizon? I'm just trying to understand if there's anything more significant than an estimation process here as it relates to the business?

I'd be thinking about more of the latter. I think what we do know is that that there is - while there is substantial insurance coverage for this, we're very fortunate in that regard. We have very good coverage. There's still gap that we're funding on an out-of-pocket basis as a corporation for the gaps in coverage that do exist. But they have been fairly easily manageable over the course of the year, last several years and going forward we expect that the same in the near term kind of level of kind of a cash impact to the corporation. But then we do project that it will decline. We know we're on the down side of the bell curve. And so for the next couple of years, it'll probably be in the same range and I think going forward from there looking at the actuarial provided inputs from our specialists in this regard. We know that we expect it as part of our forward estimate that we expected to decline and become asymptotic to 0 by 2052.

Okay. That's helpful and just reminds me sort of what the annual cash outlay is?

It has been fluctuating in a range of $4 million to $7 million kind of a thing over the last couple of years including this year.

Ladies and gentlemen, this concludes our question-and-answer session. And this does conclude today's call. Thank you for attending Ampco-Pittsburgh Corporation's Fourth Quarter 2018 Earnings Conference Call. You may now disconnect your lines.