Ampco-Pittsburgh Corporation (AP) Q2 2020 Earnings Report, Transcript and Summary

Good day, and welcome to the Ampco-Pittsburg Corporation Second Quarter 2020 Earnings conference call. [Operator Instructions]. 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.

Thank you, Elissa, and good morning to everyone joining us on today's second quarter 2020 conference call. I'm joined today by 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 Terry Kenny, President of Air and 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 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. 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?

Thank you, Melanie. Good morning, and welcome to our call. I am very proud of our employees' performance in our second quarter of 2020. We faced tremendous obstacles during this unprecedented time. However, the team met these challenges head on and delivered positive results. The health and safety of our employees are at the forefront of everything we are doing. We have taken extraordinary steps to safeguard their well-being during this challenging period. At all times, we have continued to see guidance from our local, state and federal authorities where we operate to ensure we meet or exceed safety and health guidelines during this pandemic. From an injury perspective, we've reduced our recordable injury rate by over 30% compared to 2019. Unfortunately, our lost time rate increased by 15% during the same period. We are keenly focused on addressing this gap as we target zero injuries in the facilities where we operate. As the global economy took a pause, we initiated plant shutdowns and furloughs to meet the reduced customer demand experienced in the Forged and Cast Engineered Products segment. Our Air and Liquid Processing segment continued to operate without interruption during the quarter and continues to experience a strong order book. Despite the challenges we faced, we continue to progress in our efficiency and cost improvement efforts. I want to thank all of our employees for their dedication, diligence and hard work during this time. We reported a positive earnings per share of $0.05 per common share for the second quarter despite significant headwinds. As a result, our return to profitability extended through the second quarter with a positive trailing 12-month EPS for the first time in many years. Our liquidity position improved through effective measures taken during the quarter to respond to the pandemic, and we used our improved position to pay down debt. I was also pleased that we extended our credit agreement in Q2. Looking ahead to the third quarter, we are electing to take proactive outages in many of our facilities to perform planned maintenance to further improve our long-term performance. I'd now like Terry Kenny, President of Air and Liquid Systems; and Sam Lyon, President of Union Electric steel, to share the improvements in their segment's performance. Terry?

Thank you, Brett, and good morning. Second quarter sales for the Air and Liquid Processing segment increased slightly when compared to the same period last year, an increase by 9% when compared to the first quarter. Increases in sales of custom air handling equipment and centrifugal pumps were partially offset by a decrease in sales of heat exchangers. Segment operating income for the second quarter was modestly lower when compared to the second quarter last year and showed an increase when compared to the first quarter. On a year-to-date basis, sales and operating income displayed an increase when compared to the prior year. The favorable results reflect the impact of increased sales prices and improved product mix and the savings generated by the process improvement efforts at all three divisions. The Air and Liquid Processing segment backlog is $52.4 million; which compares favorably to the $50.5 million to start the year. As Brett mentioned earlier, the operations at all three businesses that make up the segment have continued to work without interruption through the pandemic. I'd like to thank all of the employees because this would not be possible without their hard work and dedication. In addition, I would like to thank our customers for their loyalty and support throughout these difficult times. The focus for all three businesses is to continue to keep our employees safe, service our customers and build on our process improvement successes.

Thank you, Terry. I will now turn the call over to Sam Lyon, Sam?

Good morning. Throughout the second quarter, our focus was on the well-being of our employees, the safe operation of our facilities, liquidity, maximizing cost savings and staying close to our customers to understand their needs. From a safety perspective, I would like to congratulate and recognize our Slovenia, U.K. and Valparaiso, Indiana operations for having zero lost time incidents year-to-date. Our recordable rates are also at a five-year low. The team has remained focused during this unprecedented time. From a liquidity perspective, we took every opportunity to conserve cash as in late March and early April, the future was quite uncertain. We shut down operations in the U.S., Europe and China for one to six weeks depending on the demand for each business and the government guidelines. Sweden did not shut down, however, but we reduced operations by 40% to 50%. In response to pandemic, we took the opportunity to optimize inventory and prioritize capital expenditures. Combined with expense reductions, we expect to reduce cash outlays significantly in fiscal year 2020. During our last call, I discussed the cost savings initiatives on maintenance and quality in the United States, the reorganization in Europe and the initiatives on raw material process improvements and the cost of quality in Sweden. All of these initiatives are progressing on or ahead of plan, helping to mitigate the effects of the pandemic. As we look to the third quarter, we are taking our seasonal European shutdowns of three to four weeks. In the U.S., we will adjust plant production based on demand. We will also use this time, as Brett mentioned, to perform planned maintenance to further improve our performance.

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

Thank you, Brad, and good morning, everyone. As Brett mentioned, with EPS of $0.05 per share for the second quarter of 2020, Ampco-Pittsburgh did extend its return to profitability with its trailing 12-month EPS now positive. Ampco's net sales from continuing operations for the second quarter of 2020 were $74.8 million, this compares to net sales from continuing operations for the second quarter of 2019 of $102.5 million. Net sales in the Forged and Cast Engineered Products segment of $50.5 million for the second quarter of 2020 declined approximately 36% compared to the prior year quarter, principally attributable to a lower volume of shipments due to customer deferral of deliveries in the flat-rolled steel and aluminum markets, primarily in response to the global pandemic and reduced demand for other forged engineered products. Net sales for the Air and Liquid Processing segment for the second quarter of 2020 of $24.3 million increased slightly compared to the prior year period. Gross profit as a percentage of net sales was 19.8% for the second quarter of 2020 versus 17.5% for the second quarter of 2019. The improvement is primarily attributable to the Forged and Cast Engineered products segment, which is benefiting principally from improved pricing and product mix, a lower cost structure due to the sale of the Avonmore facility last year and lower raw material costs. The improvement was partly offset by the impacts of lower shipment volumes and net unabsorbed costs from the temporary idling of capacity caused by the pandemic. For the Air and Liquid Processing segment, gross profit was comparable between the periods. Selling and administrative expenses of $10.2 million for the second quarter of 2020, declined $3.7 million compared to the prior year. The prior year quarter included a bad debt expense of $1.4 million for a Castrol customer who filed for bankruptcy. The remaining decline was driven principally by lower employee-related expense due to the completed reduction in force actions in 2019 at lower professional fees and employee severance costs associated with the corporation's restructuring efforts as well as ongoing cost containment initiatives. Depreciation and amortization expense of $4.7 million for the second quarter of 2020 was flat compared with the second quarter of 2019. The corporation recorded a nearly breakeven income for - from continuing operations for the quarter, which compared favorably to the $0.7 million loss from continuing operations in the prior year quarter. The prior year quarter included approximately $1.7 million in excess carrying costs of the Avonmore, PA facility - Castrol facility divested in 2019, the bad debt expense I previously mentioned of $1.4 million and some restructuring related costs. Although the current year quarter benefited from improved roll pricing, the elimination of the excess cost of Avonmore and the lower SG&A expense; these impacts could not completely offset the pandemic-driven effects of lower shipment volumes and net unfavorable absorption due to plant shutdowns in the Forged and Cast Engineered products segment. Other income expense net improved for the second quarter of 2020 when compared to the prior year quarter, which included dividend income of approximately $1.4 million from one of the corporation's Chinese joint ventures. Partial recovery of foreign exchange rates in equity markets during the quarter following the pandemic related market disruptions at the end of Q1 resulted in unrealized gains on FX and on rabbi trust assets in the current quarter, which contributed to the period-over-period improvement. At the bottom line, corporation reported net income attributable to Ampco-Pittsburgh of $0.7 million or $0.05 per share for the second quarter of 2020 compared to a net loss of $3.9 million or $0.31 per share for the second quarter of 2019, which included a net loss from discontinued operations of $0.27 per share. Regarding business segment results in the Forged and Cast Engineered product segment, Q2 2020 net sales of $50.5 million declined approximately 36% versus prior year due to a lower volume of shipments of mill rolls, both forged and cast as a result of customer deferral of orders in response to the pandemic and reduced demand for forged engineered products, which is offset, in part, by more favorable pricing and product mix. Operating results for the second quarter of 2020 were comparable to prior year. The segment was adversely impacted by the lower volume of shipments and net unabsorbed manufacturing costs due to the temporary plant idling's during the quarter. But these effects were largely mitigated by the elimination of the excess carrying costs of the now divested Avonmore plant, improved product pricing and lower SG&A expense, including the bad debt charge recorded in the prior year quarter. In the Air and Liquid Processing segment, net sales of $24.3 million in the second quarter of 2020 were slightly higher than the comparable prior year period as higher shipments of air handlers and centrifugal pumps more than offset a decline in shipments of heat exchangers, as Terry indicated. The Air and Liquid Processing segment's operating income for the second quarter of 2020 was comparable to prior year. Backlog at June 30, 2020, approximated $258 million; a decrease from $321 million at December 31, 2019. The decrease is principally attributable to lower backlog for forged and cast rolls and a decline in foreign exchange rates used to convert the backlog of the corporation's foreign subsidiaries into the U.S. dollar. Although Air and Liquid Processing's backlog improved slightly over this period due to higher order intake for centrifugal pumps. Next, here are a few balance sheet and cash related items for our continuing operations. Accounts receivable of $63 million at June 30, 2020, decreased by $18.8 million compared to December 31, 2019; primarily attributable to lower sales in the latter part of the quarter of 2020 compared to the latter part of the fourth quarter of 2019, improved collections and an increase in the corporation's allowance for doubtful accounts provision, which is linked to the bad debt charge from the prior year. Receivables decreased $12.3 million compared to March 31, 2020, due to lower sales in the quarter. Inventories of $76.7 million at June 30, 2020, decreased by $5.5 million compared to December 31, 2019, and decreased $5.6 million compared to March 31, 2020. Accounts payable of $27 million at June 30, 2020, decreased by $6.3 million compared to December 31, 2019, and decreased $9.2 million compared to March 31, 2020. Capital expenditures for the second quarter of 2020 were $1.4 million and are $3.3 million year-to-date, primarily in the Forged and Cast Engineered Products segment. Cash and cash equivalents for continuing operations of $15.9 million at June 30, 2020, increased $8.9 million compared to the December 31, 2019 balance. Net cash flows provided by operating activities was robust, approximately $19.3 million for Q2 2020 and approximately $31.4 million year-to-date. Drawings on the Ampco revolving credit facility were $15.8 million at June 30, 2020; which is down by $18.5 million compared to the $34.3 million balance at December 31, 2019. The decrease in revolver borrowings reflects improved operating results and a lower investment in trade working capital. Total debt at June 30, 2020, of $52.3 million decreased $18.6 million or 26% from December 31, 2019, which is in line with the revolver decrease and it decreased $15.9 million or 23% from March 31, 2020. At June 30, 2020, in addition to the cash balance, the corporation also has remaining availability on the revolver of approximately $34 million; an improvement of approximately $7 million compared to availability at December 31, 2019. I will now turn the call back over to Brett for some closing remarks.

Thank you, Mike. As I stated at the beginning of the call, I cannot be prouder of the way our employees have responded to the pandemic, while generating positive net income for Q2. We have taken extraordinary measures to maintain safe work environments and to protect our liquidity, including extended plant shutdowns and cost containment efforts in the quarter to mitigate reduced customer demand in our roll business. The restructuring of our portfolio, cost reduction measures and production efficiency improvements over the past two years have helped position us to achieve positive results and, to-date, minimize the effects of the pandemic. Thank you. We'll now take questions.

[Operator Instructions]. The first question today comes from Marco Rodriguez of Stonegate Capital Markets. Please, go ahead.

I was wondering if maybe you could talk a little bit more in detail on the Forged and Cast segment, specific to the deferrals you saw in the quarter. Was it a consistent flow of deferrals? Or can you kind of discuss the cadence? And then if there is any sort of color that you can provide in terms of - is there a typical timeframe where those deferrals have been pushed towards?

Yes, sure, Marco. This is Sam. We saw a decline from first quarter to second quarter, about 27% of our sales. And it was much more pronounced in April as Europe had shut down much of the steel mills to contain the virus. And then we saw sales improve in May and then further in June. So many things were just moved a quarter or two quarters to the right. One of the things about the business, the roll business, is they keep several months of inventory on hand. And so, one, they shut down their mills for a period of time and then, two, as they come back up and they're operating at a lower utilization rate, their inventory on hand instead of having two months or three months on hand, now they have three or four months on hand. So that takes a little while to absorb. But we're starting to see - if you listen to Ford's call or GM's call, automotive is coming back up. There's a shortage of products actually on the dealer lots, and we're starting to see some utilization rates come up in steel mills across the world. So we expect Q3 to be better than Q2 and Q4 to be better than Q3.

Understood. And then on the call in your prepared remarks, you had brought out a few different impacts to the quarter for the Forged and Cast in terms of, obviously, volumes being down, you had to idle some plants. But then you had some offsets in terms of just some improved pricing and the removal of excess cost. I wonder if maybe you can sort of put it into sort of buckets, if you can talk about the biggest impacts to the least impacts in the quarter? And then just kind of circling back on the removal of the costs, I'm just trying to confirm that if I heard correctly, that all the cost reduction initiatives that you guys had introduced in late Fiscal 2019. Those have all - they're all progressing on plan through this fiscal year?

Yes. I'll take a shot at a couple and then pass it off to Sam. Just in terms of magnitude of impacts in the Forged and Cast segment, Marco, it - I would - just looking at our - analyzing our numbers, the sales volume impact in the quarter versus prior year was about the same magnitude as the net unabsorbed cost impact roughly. So those two factors were about equal impacts to the reduction in operating income. And we had some positives, like we didn't have the - we had the - we didn't have the bad debt charge recur that we had in Q - we had in Q2 of last year. And then the cost benefits are really showing through because those are the things that help keep the operating income stable in such a down environment from a sales and absorption impact. And I'll let Sam talk about those, but it manifests itself not only in cost of sales, but also SG&A.

Yes. Just a couple of comments. From last year, just productivity improvements in the U.S. are a little north of $1.5 million, reduced repair and maintenance cost is another - a little bit north of $1.5 million year-to-date. And that's really driven by a switch from reactive to proactive maintenance. That increased to about 80% proactive in Q2. We did have the opportunity, as Brett said, while the plants were down to make sure that any critical maintenance items were actually taken care of while the plant was down. So we took advantage of that. Our cost of quality, both internal and returns is down year-over-year, and that's trending almost $1 million. And then we have the reduction in forces that we had, which is about $1.5 million. And those are pretty much the big ones.

And if I can just put one more in here real quick. Just on the Air and Liquid Processing, pretty strong growth sequentially. Just wondering if any sort of product that's delivered earlier than expected?

No. We had no delays, but we did not have any equipment that was asked to be delivered sooner.

The next question today comes from David Wright of Henry Investment Trust. Please, go ahead.

For Forged and Cast to be down 36% and kind of still breakeven, is really phenomenal. And so just a great job with Air and Liquid as well. I don't know, a lot of businesses that are flat year-over-year in this environment. Mike, a couple of questions for you. Did you - absent any extraordinary events? Do you have a target or at least a trend for net debt between now and the end of the year?

Yes, David, I would say, we're - on the cash side, just one of the things to note is that we're - our U.S. cash, we got sweeping against the line. So we keep U.S. cash very, fairly minimal. I target - we target to keep about $10 million to $12 million globally on cash on the balance sheet and for working fund needs. So that would be like a kind of a projection to keep in mind. And then on the debt, it all depends on the recovery. We will be using our credit line to support a rebound in trade working capital. That's what it's there for. So with sales stepping up as Sam indicated that he believed in Q3, and then again in Q4, we're going to see the revolver grow a little bit further, but I'm much - I am very pleased with our liquidity situation at the moment, relatively speaking, with borrowings down to $15.6 million on the revolver. We have plenty of capacity on the revolver. I don't see - the other thing is that in July, we had an industrial revenue bond of $4.2 million that we did retire. So that was due July 1. So it's not in these numbers, but it's a piece of debt that's now gone. And the revolver balance didn't really go up that much because we've paid some additional down since then. So if you look - if you're trying to project net debt, I would take out the industrial revenue bond and use the cash balance I kind of indicated there and then maybe a little something for working capital growth.

Right. So in terms of the trend, it can obviously fluctuate, but it sounds like based on current business trends that you've seen the high for the year in net debt; is that a fair statement?

Yes.

Okay. And then on SG&A, I know you have ongoing initiatives, and you're down in the last quarter to basically $10 million. Do you have any sense of what SG&A, absent, again, anything extraordinary would be for the next couple of quarters?

We expect it to be flat.

Okay. And then, Sam, just to put different words on something that you said to the previous questioner. In terms of roll shipments, you would anticipate the unit shipments would be higher in Q3 than they were in Q2 and then higher in Q4 than they would be in Q3?

Yes.

[Operator Instructions]. The next question comes from [indiscernible]. Please, go ahead.

I'm wondering if the successes of this quarter will be affecting the upcoming rights offering?

Well, thank you for your question. Regarding the company's rights offering, the company has filed a registration statement with the SEC. And we did recently put out a press release indicating our calendar with our proposed timing. So that's out there. We're going to be offering common stock with warrants to purchase additional shares of common stock, and we are expecting to try to raise gross proceeds of $20 million from the offering. But we'd like to refer you to our filings made with the SEC in regards to that, which will be updated with additional information once available.

If there are no further questions, this concludes our question-and-answer session. The conference has now also concluded. Thank you for attending today's presentation. You may now disconnect.