Ampco-Pittsburgh Corporation
Q4 2020 Earnings Call Transcript

Published: 18 Mar 2021

[Operator:]

Good day, and welcome to the Ampco-Pittsburgh Corporation Fourth Quarter and Full Year 2020 Earnings Results Conference Call. . I would now like to turn the conference over to Melanie Sprowson, Director of Investor Relations. Please go ahead.

[Melanie Sprowson:]

Thank you, Carrie, and good morning to everyone joining us on today's fourth quarter and full year 2020 conference call. Joining me today are Brett McBrayer, our Chief Executive Officer; and Michael 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.

[Brett McBrayer:]

Thank you, Melanie. Good morning, and welcome to our call. While we have aggressively pursued our goal of improved shareholder return, there's been nothing more important than protecting our employees' health, safety and wellbeing and protecting the environment where we operate. We are intently focused on eliminating injuries and incidents in the workplace. Identifying and correcting potential hazards before an incident occurs is everyone's responsibility in all Ampco-Pittsburgh locations worldwide. With the onset of the global pandemic, we found ourselves confronted with new and unexpected threats. The response of our employees to these new challenges was and continues to be outstanding. We have successfully altered how we conduct business in our facilities and how we engage with our suppliers and customers. I am proud of our employees' hard work to protect their teammates, themselves and their communities where we interact and live. All this was achieved while still honoring our commitments to our customers, which I'm very proud of. Despite the challenges we faced, our employees continue to demonstrate their dedication to continued improvement by reducing our lost work day rate by 6% in 2020 versus the prior year and our recordable injury rate by 26%.

[Terrence Kenny:]

Thank you, Brett. I would like to start off with acknowledging the Aerofin division for having 0 OSHA recordable injuries in 2020. Every employee at Aerofin deserves recognition for their efforts. Thank you for your a job. The segment experienced a decrease in the recordable rate from 4.16 to 2.87 in the fourth quarter. The health and safety of our employees remains our priority as we continue to take every safeguard to limit their exposure to COVID-19. During the pandemic, all 3 businesses that make up the segment continue to operate 3 shifts per day, 6 days per week without interruption. This would not have been possible without the personal sacrifices and dedication of all of our employees. A sincere thank you to all.

[Brett McBrayer:]

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

[Samuel Lyon:]

Good morning. First, I'd like to recognize our Slovenia and Valparaiso, Indiana operations for achieving 0 lost time incidents in 2020. These locations also had our lowest recordable rates in the Forged and Cast Engineered Products segment with 0 and 2.38, respectively. Compounded with the additional requirements that COVID-19 demanded, this is quite an achievement. Our overall recordable rate for the fourth quarter reduced from 4.16 to 2.2 when compared to the prior quarter. Our #1 focus will always be the safety and well-being of our team members. Liquidity continues to be a strong focus for us, and we have had great success here. Mike McAuley will cover this in more detail shortly. We have challenged our team to reduced our inventory to levels not seen in many years. Working hard to maintain these gains has resulted in shorter lead times and the ability to react to order sooner. We continue our weekly team meetings to review our inventory positions, receivables and payables. All of these actions have resulted in the segment generating strong cash flow in 2020. In Q4, our operations continued to run on a reduced schedule. Government programs in the U.K. have been extended again through September, allowing us to be flexible with our workforce. Currently, we are bringing people back in the U.K. to support increasing customer demand in the Q3 and Q4 time frame of this year.

[Brett McBrayer:]

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

[Michael McAuley:]

Thank you, Brett, and good morning. I'd like to focus my comments on the current quarter's results today. Commentary on our full year results is available in our earnings press release issued this morning and will also be included in our forthcoming Form 10-K. With EPS of $0.12 per share for the fourth quarter of 2020, Ampco-Pittsburgh continued to remain profitable on a net basis for the fifth consecutive quarter and sequentially higher than Q3 2020 EPS despite the continued negative impact of the COVID-19 pandemic on our end markets. I would also like to point out that the corporation's capitalization has significantly improved versus a year ago. At December 31, 2020, Ampco's total debt was nearly half the amount we opened the year with. Given the free cash flow generation of the business in 2020 and the initial use of the proceeds from the equity offering completed in Q3 2020, Ampco's $87 million of net sales from continuing operations for the fourth quarter 2020 declined 10% from $97 million in the fourth quarter of 2019 as a direct result of the pandemic.

[Brett McBrayer:]

Thank you, Mike. I am incredibly proud of the results our team achieved in 2020, and I want to personally thank every employee for their hard work, dedication and resilience as we face the many challenges and opportunities that the year presented. We are not satisfied with where we are and we have much more work to do, but I am confident our efforts will be reflected in continuing improved performance as we move forward. Thank you. We will now take questions.

[Operator:]

. The first question will be from Justin Bergner of G. Research.

[Justin Bergner:]

Two quick ones and then two more substantive ones. The quick ones, I'm not sure I heard the gross cash balance at December 31. And then the second quick one would be, any comment on sort of pension sensitivity to a move in the discount rates given what's transpired since year-end?

[Michael McAuley:]

Yes. Justin, I can handle that. The cash balance at December 31, 2020, was $16.8 million consolidated. And then this will be in our 10-K, but from a pension sensitivity standpoint, a 25 basis point change and the discount rate will move the calculated liability for pension and OPEB plans by $10.9 million for Ampco in total.

[Justin Bergner:]

Great. Then on the more substantive side, how much temporary cost reduction should we see as returning back into the business in 2021? And were temporary cost reductions outside of, I guess, those directly related to manufacturing utilization still in play in the fourth quarter? Or were they -- those mainly out of the system?

[Samuel Lyon:]

Well, this is Sam, Justin. I can say that we're able to flex down our cost. The majority of the cost takeout were hourly people or blue collar workers. And so we flex those regularly with the business. So as we ramp up, they come back; and as we ramp down, they go down. The only difference in that would be in the U.K. and Sweden where it's more difficult to do that. But we're still able to do that this year up through September, as I had mentioned, in the U.K. through government support. So the other, I guess, substantial -- not substantial, but the other cost savings that we've seen is nobody is traveling, of course. But I would expect us to start traveling again, but not to the same amount that we were before as we've learned to do things differently in a new world. So some of that will stay, probably. I don't want to put a number on it, but I could imagine us having 1/3 less travel going forward or something like that.

[Justin Bergner:]

Okay. I guess my final question would relate to the Forged and Cast Engineered Products and sort of the nonrural opportunity. I guess Ampco-Pittsburgh has fairly ambitious goals there over a multiyear period. Any sort of update on how you're seeing that progress or the trajectory of orders, interest, whatever metrics might be meaningful?

[Samuel Lyon:]

Sure. I mean the big changes there are on the oil and gas side of the business, there was really no business up until last year. This year, we've seen that come back, and we're selling to a higher tier than we were. We were selling to lower-tier customers. So that should be more stable going forward. But I stated that we've already shipped and booked product equal to what we shipped in all of last year, and so we see a pretty good growth rate as much as double what we shipped last year potentially for this year.

[Justin Bergner:]

Okay. All right. That's helpful. I wasn't sure I followed the ship comments. You're saying in 2.5 months, you've shipped what you shipped...

[Samuel Lyon:]

So shipped plus backlogs. What we've shipped and what we're going to ship over the next few months is equal to what we shipped all of last year. So we -- it's more of a transactional business. We don't have orders out in Q3 and Q4 at this point in time, but the order activity in the first half of this year is significantly higher than last year.

[Justin Bergner:]

Okay. So it refers to shipped and sort of planned to be shipped orders equivalency?

[Samuel Lyon:]

Yes.

[Operator:]

The next question will be from David Wright of Henry Investment Trust.

[David Wright:]

A question for Terry. At Buffalo Pumps, how much of your improvement was the U.S. Navy end user business?

[Terrence Kenny:]

I'm sorry?

[Brett McBrayer:]

Repeat that, David. We're getting a little audio trouble there.

[David Wright:]

I'm sorry, can you hear me better?

[Brett McBrayer:]

Yes, that's good.

[David Wright:]

Terry, the -- at Buffalo Pumps, what's the impact of Navy business on the recent results?

[Terrence Kenny:]

The Navy business in 2020 was strong and was relatively flat between 2019 and 2020, but activity remains strong.

[David Wright:]

Okay. And Sam, in your prepared remarks, I missed your full comment on Harmon Creek shutdown.

[Samuel Lyon:]

I just said that we were down in the first week of the year at Harmon Creek just for maintenance work. And then in the second quarter, we'll evaluate order intake whether or not we need to take a week or 2 out at the end of the quarter. But just relative to last year, we had 6 weeks out in the fourth quarter of last year.

[David Wright:]

Okay. And then just lastly, any -- can you give us any expanded detail on where you are with the equipment upgrade initiatives?

[Brett McBrayer:]

Yes. So we have been working our final kind of layout, David, is what this is going to look like and how we're going to deploy the capital needs. We are at the point now of placing orders and aggressively trying to move these expenditures or make these expenditures happen as quickly as possible. Obviously, we're pretty excited about the transformation that's going to occur in the Forged and Cast Engineered Products segment, and we have little patience for delaying those improvements. And so we're trying to push and expedite this equipment into our facilities as soon as possible. We're obviously doing some heavy negotiation with our equipment suppliers, trying to see what we can do to shorten their lead times to us. But that program and process is well underway, and we look forward to being able to share the results with you, David, and the rest of our shareholders, hopefully, here in the very near future.

[David Wright:]

Okay. Well, congratulations on the continued improving results, and thanks for the great job you're doing for all of the stockholders.

[Operator:]

. The next question is a follow-up from Justin Bergner of G. Research.

[Justin Bergner:]

Just one quick one here. I mean could you elaborate a bit more on some of the headwinds you're seeing in heat exchangers and air handling systems? And obviously, the backlog was up year-on-year, but it's been tempered by some of the comments you made. And any comment on sort of the relative profitability of those three product lines just from a ranking point of view in Air and Liquid Processing, if you're able to share that?

[Terrence Kenny:]

Justin, thank you for the question. The headwinds that we've experienced has been, for the heat exchanger business, specifically is the lack of -- or the reduced replacement business opportunities, the capacity, the occupancy in office buildings that we've experienced as well as not being able to reach out in person to maintenance people in various facilities, so that has been a headwind on the heat exchanger business. The air handling business has been impacted slightly with the reduction of capital spending in some of our markets, specifically in the university market.

[Brett McBrayer:]

And Justin, this is Brett. I'll just add to Terry's comments. A big detractor, I would say, for those two businesses for Terry has been the fact that limited actually filled activity where we have our salespeople actually out in the field, and that's where a lot of our transactional work occurs. And it's been learning a new way to do the dance, if you will. Still there are some barriers that make it difficult. And so Terry and his team have worked, I think, extremely well around those challenges, but it's been one that's been very apparent to us.

[Justin Bergner:]

Okay. And then just one, I guess, clarifying question. With respect to heat exchanges, you mentioned industrial and commercial headwinds, are the heat exchangers sort of split fairly evenly between industrial and commercial markets? Or is it much more commercial than industrial?

[Terrence Kenny:]

It's probably 60% commercial, Justin.

[Operator:]

And this concludes our question-and-answer session, and this also concludes our conference call for today. We want to thank you all for joining. Feel free to disconnect at this time. Have a great day.