Good day and welcome to the Ampco-Pittsburgh Corporation First Quarter 2021 Earnings Results Conference Call. All participants are in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please also 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, ma'am.

Thank you, Rocco and good morning to everyone joining us on today's first quarter 2021 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 Terry Kenny, President of Air & Liquid Systems Corporation.

Thank you, Melanie. Good morning and welcome to our call. I'm proud of the work Ampco-Pittsburgh employees accomplished during the quarter. Although, we continue to fill the negative impacts of the global pandemic, the team has been resilient and unwavering in its efforts toward achieving our near-term goal of double-digit EBITDA margins. Despite the lingering headwinds, we delivered another positive quarter of earnings and our liquidity position remains strong. Our Air and Liquid Processing segment continues to enjoy steady demand for their products. Activity in our Forged and Cast Engineered product segment is progressively picking up speed. We anticipate bookings to return to pre-pandemic levels during the second half of 2021 resulting in a full recovery in 2022. We continue to be encouraged by the positive receptivity of our new customers in our non-roll engineered products. This engineered products revenue stream is a complementary source of growth for our business and fits well with our current and expanding capabilities. I'm excited to see the new capital equipment investment activities accelerate. We anticipate the final phase of our new equipment implementation to complete in 2023. Our safety performance continues to be a focus for our team as we drive towards zero injuries in our workplace. The hard work and dedication of our employees continues to be impressive. Thank you for your excellent work.

Thank you, Brett. As Brett mentioned, the safety of our employees is one of our key priorities. I am pleased to report that Air and Liquid Systems Processing segment successfully reduced our accident recordable rate from 2.87 in the fourth quarter of 2020 to 2.01 for the first quarter of this year. In addition, I would like to recognize the employees at both Aerofin and Buffalo Air Handling divisions for having zero recordable injuries during the first quarter of 2021. Their commitment to working safely and looking out for one another has proven to be effective. Congratulations and thank you to all of the employees of both divisions. Orders for centrifugal pumps and custom air handlers were steady for the first quarter. Orders for custom heat exchange coils were slow as the year began, but closed the quarter strong and activity remains solid as we head into the second quarter. First quarter revenue for the Air and Liquid Processing segment increased 5.2% compared to the prior year on increased demand for centrifugal pumps. Operating income for the segment decreased compared to the prior year due to a slight shift in product mix. The cost of most materials, have increased over the past several months. However to-date, the availability of required material has not been an issue. However, we continue to monitor all critical commodities for changes in price and availability. We have been increasing sales prices when possible to minimize the negative impact on our future earnings. We remain optimistic that the demand for the segment's products will provide steady growth opportunities for the foreseeable future.

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

Thank you, Brett. Good morning. I'd like to begin with our safety performance. Our recordable rate increased from 3.3% to 5.3% year-over-year. Driven by two locations, this increase was a disappointing start to the year. We have focused on the root causes and put improvement plans in place. On a positive note our Slovenia operations continued to be recordable-free and our Carnegie plant was recordable-free for the quarter. On the last call, I commented on the rising cost of raw materials and scrap as a significant headwind we were facing in Q1. While most of our business is protected by surcharge mechanisms that address these increases, there is a one to two quarter lag in realizing the price increases tied to raw materials. This lag was approximately a $400,000 net hit to the statement's results -- segment's results.

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

Thank you, Brett. Despite continued pandemic related headwinds impacting end market demand in the roll business, Ampco-Pittsburgh reported diluted EPS of $0.01 per share for the first quarter of 2021. The corporation's balance sheet and liquidity position remained strong with cash on hand at March 31, 2021 of $18.3 million and undrawn availability on our credit facility of approximately $47 million. Total debt is down 47% compared to March 31, 2020, while total shareholders' equity has risen. As a result, debt to total capitalization at March 31, 2021 was 29.2% or nearly half the level we saw at the end of the March quarter a year ago.

Thank you, Mike. Actually, now we're going to open the line for questions.

Yes sir, no problem. We will now begin the question-and-answer session. And our first question today comes from Justin Bergner with G. Research. Please go ahead.

Good morning.

Good morning.

Hey Brett, hey Mike

Good. Thank you.

So, first question just help me understand the mix dynamic in the Air and Liquid Processing. What part of the mix is becoming a headwind or what's the headwind there? Will it sort of continue? That's I guess the question.

Each market -- hi Justin this Terry.

Hi Terry.

Each market that the Air and Liquid Processing serves has different gross margins. And the demand for the -- in the first quarter was shifted slightly to a few markets that have lower margins but it is not -- we do not feel it as a headwind or something that is going to be continuing.

Okay. Second question is in regards to the Forged and Cast Engineered Products business. I was trying to gather from your comments Brett if you were suggesting that you could see a return to sort of 2019 levels as soon as 2022. Or was it just more common that you expect to get back there in the coming years?

Yes. We're seeing -- based on the activity we're seeing right now Justin we're starting to pick up which we anticipated. We stated on the last call that we expected the activity to pick up in the second half and we're already starting to see some momentum in that direction As we said before, there's somewhat of a lag between the demand from -- or the growth from our customers and when it actually trickles down to us. I think our customers have taken some positions where inventory levels are lower than traditionally have been and obviously out of concern about what may happen in the future. And so a little bit if you will a new normal, but activity is picking up. And we're anticipating based on that that hitting in 2022 we'll be back to the 2019 levels.

Okay. Got it. And then lastly are you underproducing -- I mean was your comment about lower production rates meant to suggest that you were underproducing shipments in the first quarter and that weighed on absorption?

Yes. We took -- well I'll let Sam add to this but we've taken some elective outages in the quarter just want to make sure we're matching up demand with what we're actually doing in the production areas.

Yes. And Justin we've also -- we've taken about 20 days out of our large roll lead-time or flow back. So, yes, we made less than we shipped that's accurate.

Okay. So that's just temporary in 1Q.

Yes, we don't anticipate taking any more time out.

Okay. Thank you for taking my questions.

Thank you, Justin.

And our next question today comes from John Walthausen with Walthausen & Co. Please go ahead.

Yes, good morning guys.

Good morning John.

But want to say -- scratching my head. With steel prices up so strong to me that would make everybody's mill viable and profitable. Why is production down?

Well, steel prices are up because the recovery happened much faster than anybody anticipated. And as I stated in my comments the -- in North America and Europe they're still down which are our two largest areas that we ship into. They're still not back producing at levels that they were prior to the pandemic. So, they're charging tremendously more because the market will bear it for hot-rolled and cold-rolled steel double what it was prior -- or even more prior to the pandemic. Now, just recently the largest blast furnace in ArcelorMittal's portfolio just came back online after a reline. So they're back to full capacity now. US deal's ramping up. So people are getting there. And that's why again we anticipate that based on talking to all of our customers that 2022 will be back to pre-pandemic levels. But we had a lag. And the other comment I'll make is that you see it come back first on the hot-rolled rolls which we did. Now, we're starting to see it come back on the cold side. And then after that it will come back on the backup rolls. So there's a lag as they ramp up to when we actually see our production volumes ramp up.

Right. So -- and in this time where the others bragging about all their cash flows, are they reducing their inventory or backup rolls?

I think that they lowered it and they intend to leave it there is what we're hearing. Now, this is only from a couple of customers. So all of them are different. But they were controlling -- just as everybody was they're controlling cash extremely tightly during the first six to nine months of the pandemic. But yes you're correct that some of them have been making quite a lot of cash recently. So that will help going forward.

So is it reasonable to anticipate the sort of quarter-by-quarter that we get past the -- you're reducing your lead times there. And we start quarter-by-quarter seeing better production overall or better sales or growth?

That's what we would anticipate, yes.

Okay. Okay. That's helpful. And then the other question I had if I may. In the open-die, you're putting a major emphasis on increasing capacity there. Have you opened up significant other marketplaces in the oil and gas marketplace? And are there some that you can talk about?

Yes. There's two areas that we ship into. One is material that goes into making plastic injection molds and the other is material that goes into making automotive tooling. So our goal -- our end game -- well it's not the end but in a couple of years is that oil and gas will be -- is less than 50% of what we're going to be targeting in those -- in that product line.

Okay. Great. That’s very helpful.

Our next question today comes from David Wright with Henry Investment Trust. Please go ahead.

Good morning everyone.

Good morning, David.

Mike, the press release mentions foreign exchange impact. Can you talk about -- can you quantify the effect from that in the quarter? And then maybe elaborate a little bit on the extent if any to which you can hedge that the cost of hedging et cetera?

David yes, foreign exchange, we're talking about -- when we're referring to that we're talking about realized and unrealized foreign exchange gain or loss on the P&L, which is an element of other income expense. And during the quarter, that number was about $1.2 million of loss in the current year. And in the prior year, it was $1.7 million of loss. So that appears in other income expense below operating income. And that's a measure of the difference in exchange rates for when we register a receivable or a payable and the rate in which it settles. It's also a measure of the change in exchange rates on balances in our foreign subs that are in currencies other than their functional currency. For example US dollar intercompany loans and things like that. So our objective is to try to minimize those balances. We have not been hedging their balance sheet. We do some hedging on our earnings. We have not taken a large position on hedging our balance sheet for these balances because it's a cash risk item. And we have -- for the last several years, we've been trying to preserve cash and it exposes you to a significant cash settlement loss potentially in the event of a shock. So it's a bit more risky than like hedging cash flows and projected cash flows. So, it's something that we just elected not to focus on hedging, until perhaps we can consider it downstream. But those were the numbers. And I think one of the ways to manage that is the -- on the intercompany balances and so forth is to settle a number of these balances between the subsidiaries to reduce that in terms of international cash management and repatriation opportunities to consider that in the mix because that's always something that I'm focused on to just get the balances down so the risk is lower.

So you look at this as kind of a $1 million to $2 million a quarter item?

No. This is -- no. It often goes the other way and sometimes it's very small or nothing. So it's just -- it depends on the movement in rates and it depends on the balances in our foreign subs.

Okay. Listen that was great savings that you made from changing auditors. I know you don't have a gigantic audit staff -- excuse me accounting staff. And it's a lot of work to change auditors, but that was a great saving that you produced for the company.

Thank you, David.

A question for Sam. Using a baseball as an analogy and just talking about the things you're trying to do with the operations both in the US and in Europe and leaving aside, what you hope to get from the new equipment, what inning are you in in each market in terms of where you want to get to with the ninth inning being you're happy?

Geez, I don't know third? Probably third. We came a long way on savings just getting the organization where it needed to be getting the right leadership in place the right amount of people in the facilities. And so now, what's left is really the implementation of the capital. Right now, we're ramping up our European assets to meet future customer demand. So that's key in front of us. And then we still have just ongoing year-over-year cost savings projects scrap reduction on-time delivery that kind of normal stuff. So I don't know third I guess. Maybe the bottom end of the third top of the third. I don't know.

Would you say that both operations are kind of at the same place one is not further along than the other?

Yes, I'd say that. There's more opportunity I think in Sweden, UK is very stable. Slovenia is very stable and our equipment modernization here is really important.

Okay. And then when you say that you're hopeful that 2022 will get back into 2019 levels in terms of mill roll business are you talking revenue, or are you talking units?

Revenue. It's fairly similar. I mean, we've been able to get some pricing but both really.

All right. Thanks very much.

You’re welcome.

Today's next question comes from Greg Bennett with Morgan Stanley. Please go ahead.

Hi. Is labor an issue right now? I've been hearing that people having a hard time getting people back to work. Does that impact any of your operations?

I'll talk on the steel side. We're -- it's difficult to find qualified people but we've been really reducing people through productivity. So we haven't really had a need for a lot of people. And then in the UK and Sweden there's not -- overseas there's not much of an issue at all. So it's not really affecting the steel side of the business.

On the Air and Liquid Processing side it is a challenge. It's not only a challenge to get people -- new people in but get them trained and then retain them. But we're able to overcome most of the issues that are presented to us as a result of productivity improvements. But yes, it is -- we are seeing difficulty in hiring at times in the Air and Liquid Processing segment.

The modernization program and the CapEx for that is broken down it sounds like into two categories. One is the modernization and the other is actually in the non-roll business that you're going to be entering new markets. Is any -- either one of those going to take effect or begin this year and may have an impact -- positive impact for this year?

And the lead time on the equipment is a year plus. So we're thinking probably Q4 of '22 we'll start seeing some benefit.

The -- you mentioned something that in the non-roll, it would increase your capacity by 80%. Is that -- you're going to take market share away from other competitors in that area, or these are new markets? And are there -- is that from foreign sources? The competition, or is that domestic?

This almost -- almost all of this would ship domestically. And so certainly the 232 -- Section 232 has increased the need for domestic sources of material. So -- and we're not a very big player. So it's not -- we're not taking a huge share away from anybody we don't believe.

So, the customers the auto or plastics are they buying from foreign sources, correct? Is that what's happening right now?

One of our larger customers we shipped to was buying. And this was actually from - I believe it was Brazil and they had a quota system. So they got put on a quota system so they can only ship 70% of what they used to ship into the US So therefore that opens up an opportunity for the other 30%. And then I think they enjoy the short lead time we provide. The customer is not very far away from us. And they don't have to order stuff six weeks out and project. And so, I think once we got in there, we're having success.

The size of that market, if we were to look out two years from now three years from now what kind of sales for the investment that you're going to make what kind of sales do you think you could generate?

We're -- we would -- last year, we had about $11 million or $12 million and it could be $60 million to $70 million.

That’s pretty impressive. Okay. Thank you very much. Appreciate all your work.

Thank you.

Ladies and gentlemen this concludes the question-and-answer session. I'd like to turn the conference back over to Brett McBrayer for any closing remarks.

Yes. Thanks Rocco. Just a few comments. Again, I want to thank the employees of Ampco-Pittsburgh for their continued hard work and dedication to the success of our businesses. I also want to thank those who joined us on our call today. We are excited about our future and look forward to demonstrating the full capabilities of Ampco-Pittsburgh. Thank you very much.

Thank you, sir. This concludes today's conference call. You may now disconnect your lines and have a wonderful day.