Ampco-Pittsburgh Corporation (NYSE:AP) Q4 2023 Earnings Call Transcript
Ampco-Pittsburgh Corporation (NYSE:AP) Q4 2023 Earnings Call Transcript March 26, 2024
Ampco-Pittsburgh Corporation isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to the Ampco-Pittsburgh Corporation Fourth Quarter 2023 Earnings Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Kim Knox, Corporate Secretary. Please go ahead.
Kim Knox: Thank you, Rocco. And good morning to everyone joining us on today's fourth quarter 2023 conference call. Joining me today are Brett McBrayer, our Chief Executive Officer, and Mike McAuley, Senior Vice President, Chief Financial Officer and Treasurer. Also joining us on the call today are Sam Lyon, President of Union Electric Steel Corporation, and Dave Anderson, President of Air & Liquid Systems Corporation. Before we begin, I would like to remind everyone that participants on this call may make statements or comments that are forward-looking and may include financial projections or other statements of the corporation's plans, objectives, expectations or intentions. These matters involve certain risks and uncertainties, many of which are outside the corporation's control.
The corporation's actual results may differ significantly from those projected or suggested in any forward-looking statements due to various risk factors, including those discussed in the corporation's most recently filed Form 10-K and its subsequent filings with the Securities and Exchange Commission. We do not undertake any obligation to update or otherwise release publicly any revision to our forward-looking statements. A replay of this call will be posted on our website. To access the earnings release or the webcast replay, please consult the Investors section of our website at ampcopgh.com. With that, I would like to now turn the call over to Brett McBrayer, Ampco-Pittsburgh's CEO. Brett?
Brett McBrayer: Thank you, Kim. Good morning. And thank you for joining our call. As reported in our press release and 10-K filing, Ampco-Pittsburgh saw a top-line growth versus the prior year quarter and prior year, with Air and Liquid Processing segment sales improving 35% and 31%, respectively. Our underlying business improved on a non-GAAP adjusted basis compared to prior year. Although our US forged roll business performed well in our Air and Liquid Processing segment, saw record backlog, record sales, and record adjusted operating income during the year, excess plant capacity coupled with high energy costs in our European cash roll businesses weighed heavily on our 2023 results. With the conclusion of our equipment modernization in our US forged roll business and the expansion of capacity in our Air and Liquid Processing segment, we are better positioned to selectively capture market opportunities.
The 2023 full-year loss of $34.6 million included a $40.9 million non-cash and undiscounted asbestos-related revaluation charge recorded in Q4 of 2023. I'm now going to turn the call over to Sam Lyon, President of our Forged and Cast Engineered product segment for further comments on his segment's performance. Sam?
Sam Lyon : Thank you, Brett. And good morning. Q4 of 2023 operating income was about breakeven versus a loss of $1.6 million in Q4 of 2022 on revenues of $75.8 million and $69.6 million, respectively. We focused on reducing working capital across all operations in Q4 and ended the year with 18% lower inventory on flat COGS. These production outages affected our operating income negatively, but improved our working capital in the quarter. In 2023, operating income was $7.6 million versus $0.4 million in 2022. 2023 revenue was $303.8 million versus 2022 revenue of $299.5 million. Forged roll revenues increased 20% yearly, driven by North American manufacturers' reliance on domestic production to ensure stable supply reliability.
Cast roll revenues were lower than in 2022, and softness in this market is expected to continue throughout 2024 due to the current steel production levels in Europe. Despite base price increases, revenues were negatively impacted by our pass-through to customers of lower energy and raw material costs through surcharges, combined with a decrease in FEP demand. FEP revenues decreased in 2023 due to excess distributor inventories at year-end 2022 and lower domestic oil and gas drilling in 2023. In 2023, escalating energy prices resulting from the Russia-Ukraine conflict retracted and stabilized due to government controls, lower activity in Europe, and a mild winter. In addition, as the post-COVID supply chain issues experienced in 2022 stabilized, so did inflation.
Core inflation for 2023 was approximately 4% versus 6% in 2022. 2023 operating results benefited from the tailwind associated with inflation, positive surcharge recovery as higher cost inventory was sold through, and a one-time foreign government energy reimbursement of $1.9 million, partially offset by higher medical costs. 2024 revenue looks to be roughly in line with 2023 as Europe is still depressed. We are starting commercial discussions for the 2025 business and will get a better look at the forward market in the coming months. Q1 of 2024 will be adversely affected by an unplanned three-week outage at our Sweden gas plant, resulting in an unfavorable $1.3 million to $1.6 million operating income impact in the quarter. All but $500,000 of this will be recovered in the coming quarters.
As stated on the last earnings call, the intermediate to long-term demand picture for flat rolled steel and aluminum remains strong, and we are well positioned to supply our customers as this demand increases. Our North American customers are all bullish on the next decade and are investing in new capacity. Over the next decade, the global aluminum market is expected to grow with estimates of approximately a 5.8% compounded annual growth rate through 2031, according to Allied Market Research, Next Market Research, Future Market Insights, and Skyquest. Our strategic capital project for the FCEP segment is essentially complete, and we are ramping up the new equipment. The equipment is expected to be in full-rate production in the third quarter of 2024.
As stated in previous calls, this investment will provide many years of increased productivity, capacity, and reduced maintenance spending.
Brett McBrayer : Thank you, Sam. Dave Anderson, President of Air & Liquid Systems, will now cover his segment's results. Dave?
David Anderson : Thank you, Brett. Good morning. 2023 was a record year for Air and Liquid, as sales increased 31% to a record high of $119 million. Even with the record sales, our backlog grew 12% in 2023 as we continue to see growth opportunities. All three businesses achieved at least 20% sales growth compared to prior year. I would like to thank all the Air and Liquid employees for their hard work and dedication to drive the business forward. Operating income for Air and Liquid declined in the fourth quarter and for the full year due to the non-cash asbestos-related charge in the fourth quarter. Excluding the asbestos impact, operating income in 2023 improved versus prior year due to the higher volume of shipments, offset in part by higher operating costs, including those associated with the sales growth and plant expansions, as well as unfavorable product mix.
The additive manufacturing project we are working on with the US Navy at Oak Ridge National Laboratory continues to make progress towards the goal of using additive technology to make parts for the pumps we provide to the US Navy. This research and design work will allow us to manufacture parts that do not need to go through the traditional foundries that continue to have long lead times and quality issues. While this project is focused on parts for US Navy pumps, the technology will also be applied to other pumps we sell. We expect to begin using additive parts in the second half of 2024. As I discussed on the last earnings call, Air and Liquid has received a $1.6 million funding grant from the US Navy for the purchase of new manufacturing equipment.
The new equipment is expected to arrive at our facility in the second quarter of this year and will be operational in the third quarter of this year. The equipment will increase manufacturing capacity in our Buffalo Pumps facility. Air and Liquid began our strategic growth plan in 2022. The first year of the plan saw our backlog grow substantially as our expanded sales force made an immediate impact on incoming orders. In 2023, we saw those orders turn into shipments as sales surged by more than 30%. We also increased our manufacturing capacity by adding an additional manufacturing location in Virginia and expanding our production workforce. Air and Liquid entered 2024 with an even higher backlog than a year ago, along with more production capacity than we have ever had in our history.
We have seen much success in the last two years, and it is just the beginning of what we are capable of doing.
Brett McBrayer : Thank you, Dave. At this time, Mike McAuley, our Chief Financial Officer, will now share more detail regarding our financial performance for the quarter. Mike?
Mike McAuley: Thank you, Brett. As indicated in our press release and in the corporation's Form 10-K filed yesterday, Ampco's net sales for the fourth quarter of 2023 were $108.1 million, an increase of approximately 16% compared to net sales for the fourth quarter of 2022. Full year sales of $422.3 million rose approximately 8%. The Air and Liquid Processing segment led the growth, increasing their sales by 35% for Q4 and 31% for full year compared to prior year. Forged and Cast Engineered Products segment sales grew nearly 9% for the quarter versus prior year, due mainly to higher mill roll shipment volumes. The segment sales were approximately flat for the full year, as higher forged roll shipment volumes and higher net roll pricing was offset by lower forged and engineered products and cast roll shipments.
The corporation reported a loss from operations for the fourth quarter of 2023 of $41.6 million, which was heavily impacted by a $40.9 million non-cash charge associated with a revaluation of the asbestos liability and related insurance receivables. This charge reflects the net difference between the change in the undiscounted asbestos liability, including estimated defense costs, and the change in undiscounted related insurance receivables, which both increased with the new valuation. The main drivers behind the higher valuations are unfavorable recent trends in claims experience, including higher average settlement values and a higher proportion of mesothelioma claims in the case mix, which typically have higher settlement values. As disclosed in the non-GAAP financial measures reconciliation tables presented in the press release and in our Form 10-K for 2023, non-GAAP adjusted loss from operations was $0.7 million for Q4 2023, as the Forged and Cast Engineered Products segment experienced unfavorable cost absorption from the plant downtime that Sam described during the quarter.
And the Air and Liquid sales volume growth impact was more than offset by higher operating costs and unfavorable sales margin mix in the quarter. Full year 2023 adjusted income from operations of $4.2 million improved by $4.5 million over full year 2022. The Forged and Cast Engineered Products segment led this improvement primarily as a result of improved net pricing and better product mix, overcoming lower shipment volumes of Forged Engineered Products and lower manufacturing cost absorption. Full year selling and administrative expenses were approximately 12% of net sales for 2023 compared to 11.2% for 2022. The increase in selling and administrative expense is primarily due to higher employee-related costs, inclusive of short and long term incentives, a rise in medical insurance, and includes the full year effect of staff added last year to support Air and Liquid's commercial growth.
In addition, the prior year benefited from a change in an employee benefit policy which reduced 2022 selling and administrative expense by $1.1 million. Interest expense for the quarter increased compared to prior year due to a rise in both interest rates and in total debt. This reflects interest on the sale and leaseback financing transaction and the equipment financing arrangement completed during the second half of 2022, the latter of which has been funding the equipment modernization project in the US forged business. It also reflects higher average borrowings under the revolving credit facility to support growth in working capital and other cash needs in 2023. Other net improved for Q4 2023 primarily due to lower foreign exchange losses, partly offset by lower pension income.
However, other net declined for the full year primarily due to fluctuations in foreign exchange and lower pension income, partly offset by unrealized gains in the Rabbi trust investments compared to prior year unrealized losses. The income tax provision for Q4 and full year 2023 includes a $1.3 million income tax benefit related to the asbestos-related charge as well as a $0.3 million valuation allowance against the net deferred income tax assets of the corporation's UK operations, which entered into a three-year cumulative loss position during the quarter, given the higher energy costs it experienced during that timeframe in the wake of the Russia-Ukraine conflict and the resulting shift in the majority of its production load to another facility.
Net income attributable to non-controlling interest rose for the quarter and full year due to higher operating results for our majority-owned Chinese joint venture. As a result, net loss attributable to Ampco-Pittsburgh for the 3 and 12-month ended December 31, 2023 was $41.8 million or $2.12 per share and $39.9 million or $2.04 per share respectively, which include approximately $2 per share and $2.02 per share respectively for the after-tax impact of the asbestos-related charge recorded in Q4 2023. Total backlog at December 31, 2023 of $378.9 million rose approximately 3% from December 31, 2022, with the Air and Liquid segment backlog up by $14.5 million or 12% based on record order intake for the year. And the Forged and Cast Engineered Products segment backlog was down by $4.6 million or approximately 2% with lower FEP product demand and lower cast roll orders, partly offset by higher forged rolls backlog and the impact of foreign exchange.
Net cash flows provided by operating activities was a positive $6.6 million for Q4 2023 and was a use of $3.7 million for full year 2023. Inflation and trade working capital stabilized in 2023 after a significant increase in 2022 in response to a higher level of business activity and higher costs associated with inflation and the impact of supply chain disruptions. Asbestos-related settlements funded by the company in 2023 were $10.6 million. We expect asbestos-related payments to approximate $9 million in 2024. Capital expenditures for the fourth quarter of 2023 were $6.3 million, primarily for the Forged and Cast Engineered Products segment, inclusive of the forged business' modernization capital program. Full-year CapEx of $20.4 million compared to $16.7 million in 2022.
At December 31, 2023, the corporation's liquidity position included cash on hand of $7.3 million and undrawn availability on our revolving credit facility of $25.1 million. In addition, the equipment financing facility has remaining capacity of $3.3 million as of December 31, 2023 and is sufficient to finance the remaining expenditures of the modernization program, spending on which is expected to be completed approximately by the end of Q1 2024. Operator, at this time, we would now like to open the line for questions.
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