Melanie Sprowson - Director, IR John Stanik - Chief Executive Officer Mike McAuley - Vice President, Chief Financial Officer and Treasurer

Michael Gaugler - Janney Justin Bergner - Gabelli & Company

Good morning and welcome to the Ampco-Pittsburgh Corporation Second Quarter 2017 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] 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, Vanita, and good morning to everyone joining us on today's second quarter conference call. I am joined by John Stanik, our Chief Executive Officer; and Mike McAuley, 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. Now let me turn this call over to Mike, who will provide an overview of the Company’s financial performance for the second quarter.

Thank you, Melanie. Good morning, everyone, and thank you for joining our call. I hope you had a chance to read our earning release issued this morning. I will focus my discussion today on our Q2 2017 results walking you through the consolidated P&L first and then providing more detail at the segment level. Then I will turn the call over to John Stanik for his comments. Ampco’s net sales for the second quarter of 2017 were $110.6 million. This compares the net sales for the second quarter of 2016 of $93.3 million. Net sales in the Forged and Cast Engineered Products segment rose 23% compared to the prior year, driven primarily by the inclusion of the acquired ASW Steel businesses. Net sales for the Air and Liquid Processing segment for the second quarter of 2017 approximated our Q2 2016 level. Selling and administrative expenses were $14.9 million or 13.5% of net sales for the second quarter of 2017, and this includes the impact from the recovery of a receivable associated with a customer bankruptcy. This compares to SG&A of $15.2 million or 16.3% of net sales for the second quarter of 2016. Depreciation and amortization expense for the second quarter of 2017 increased slightly versus prior year due to the acquisition of ASW. Loss from operations for the second quarter of 2017 was $2 million. This compares to a loss from operations in the prior year of $4.9 million, which included the Åkers acquisition-related cost and purchase accounting impacts. I’d like to bridge that further for you in my segment-level discussion momentarily. Other expense net for the second quarter of 2017 was modestly favorable versus prior year, but there were a few moving pieces here. Interest expense is up modestly on the full year effect of debt associated with the Åkers position, and the amortized cost of interest on our revolving credit security agreement executed in May of last year. But this was offset by foreign exchange gains recorded this year with the weaker dollar versus foreign exchange losses recorded in last year’s quarter. Year-to-date, the story is a little different. Other expense net is unfavorable by $2.2 million year-to-today versus prior year, of this, interest expense is $1.1 million higher from the full year effects of debt connected with Åkers acquisition, early termination of the ASW credit facility debt and interest and fees on the Ampco revolver. Even though the dollar weakened in Q2, it’s still strong year-to-date. So we’ve foreign exchange losses recorded year-to-date 2017 versus gains recorded year-to-date last year, so quite a swing there. The modest income tax benefit for the current year quarter reflects two key issues. First, we continue to include valuation allowances against the majority of our deferred income tax assets, which we began recording in part in Q2 last year, as three-year cumulative losses began being triggered in certain subsidiaries. However, an income tax provision has been recognized for certain subsidiaries this year, not in or not likely to be in a three-year cumulative loss position. Secondly, we recorded a discrete item in the quarter of $0.5 million for the receipt of state income tax refunds. As a result, the corporation had incurred a net loss of $1.9 million or $0.16 a share for the second quarter of 2017 compared to net loss of $6.5 million or $0.53 per common share for the second quarter of 2016. Now I will give some color on our operating segment results. Net sales for the Forged and Cast Engineered Products segment for the second quarter of 2017 rose 23% compared to prior year. A majority of these was due to the addition of sales from ASW Steel, which we acquired in November of 2016. Higher shipments of Forged Engineered Products, primarily frac blocks for the oil and gas industry, were nearly offset by lower shipment volumes of mill roles than in the year ago quarter. This segment recorded a small operating loss for Q2 2017 as higher operating and raw material costs and lower absorption resulting from the temporary idling of a foundry during the quarter were only partly offset by the benefit of the higher sales volumes and recovery of a portion of pre-petition accounts receivable associated with a customer bankruptcy. This compares to larger operating losses in prior year periods, which reflect comparatively lower sales volumes and unfavorable purchase accounting affects associated with the Åkers Group acquisition last year. Net sales and operating income for the Air and Liquid Processing segment for the second quarter of 2017 were comparable to prior year quarter levels. Backlog at June 30, 2017 approximated $301 million. A 29% increase from the $234 million in backlog at December 31, 2016. This increase is primarily from higher order intake, particularly in mill rolls and frac blocks, as well as higher order intake in each of the air and liquid systems businesses. Now taking a look at working capital improvements and cash. Accounts receivable at June 30, 2017 increased approximately $9 million from December 31, 2016, primarily from higher sales, offset in part by collection of some older receivables and some mix changes. Inventories at June 30, 2017 increased approximately $12.8 million from December 31. The inventory build is primarily due to increased production levels in the Forged and Cast Engineered Products segment on higher order booking levels for frac block and roll demand. Accounts payable at June 30, 2017 increased approximately %5.3 million from the balance at December 31, reflecting the higher production levels. Cash and cash equivalents of $21 million at June 30, 2017 is stable sequentially and declined $17.1 million compared to December 31. Some significant uses of cash year-to-date included: the inventory build to support sales growth; which I just mentioned; capital expenditures of just over $6 million year-to-date; dividends paid of $2.2 million; retirement of the revolver balance and the term loan assumed in the ASW Steel acquisition, which was approximately $8 million, inclusive of early prepayment fees which we effectively refinanced by drawing on the Ampco Revolver of about the same month amount but just stays to few months later. And it’s worth noting that the Corporation has significant additional undrawn capacity available under revolving credit facility. I will now turn the call over to John Stanik. John?

Thank you, Mike. Good morning. I’ll begin my comments with additional explanation of our second quarter. We continue to make progress improving the financial performance of our company. In fact, I would say we are ahead of where we thought we would be at the end of the second quarter. I know that because that progress curved despite some significant negative factors. Since the fourth quarter of 2016 we’ve seen significant increases in the cost of major raw materials used in the manufacturing of Forged and Cast Engineered Products. I will give a few examples. As a result of the recovery in North American oil and gas markets and, additionally cut backs in production, molybdenum prices have risen by approximately 40% in 2017, chromium increased approximately 74% during the same period. These increases are due to the growth in production output for stainless steel in North America, and therefore increased consumption, and also to some degree the consolidation of producers. Roskill Information Services, a metals and minerals research company who provided this data predict that these raw material prices will remain strong at least through 2017. And finally scrap, which is the largest volume raw material we utilized in our melting operations, is up 83% during the same period. Comparatively, quarter-over-quarter raw material cost increases accounted for nearly $1 million in the second quarter alone versus last year. Remembering that there is approximately a six months delay in the various pricing surcharge models that are utilized to recover such cost increases from roll customers, there can be no release beginning until Q3. The fact that make matters worst, we actually paid to customers net surcharge credits in amounts approximating $200,000 during the second quarter due to raw material cost decreases that occurred in the second half of 2016. Obviously, this exacerbated our cost problem. Another issue that occurred during the second quarter was that a product mix. We shift a higher proportion of smaller roll than larger rolls. Typically, small rolls generate lower profit margins. I don’t have a value for this, but the result is a general lowering of gross margin. The next item has to do with our plant in Pennsylvania. As we have communicated in previous calls, we have reduced operations at our Pennsylvania cast roll plant beginning in April of 2017. The operating loss at this site alone was more than $2.5 million in the second quarter. While some of the costs associated will be reduced in Q4, a sizable operating loss will continue for the remainder of 2017 and then of abate. And last but not least, we struggle to add the production staff necessary to manufacture and ship the increasing volume of business we received. Due to low regional unemployment rates and higher industry activity, machinists are in short supply. This shortage is resulting in increased wages for this kind of expertise and some recently hired machinists are leaving to pursue higher wages. Of course, our collective bargaining agreements walk in wages for us. Consequently, we were forced to outsource a significant amount of work, thereby surrendering some of the margin that we would have realized, had we had the necessary man power in Q2. The spend for this approached $700,000 in the quarter. There was one positive cost development in the second quarter that Mike mentioned that has to do with the effects of foreign currency exchange. The net effect of foreign exchange, which is recorded in the other income/expense for the second quarter, was positive by a $360,000, but is still negative by $700,000 for the year. Although we reported a loss from operations of approximately $2 million for the second quarter, to some of the negative impacts of the headwinds I provided totals roughly $4.5 million on the operating line. As time progresses, these problems will fall of and future performance should improve as a result. Now let’s look at some positive developments. Despite the problems that I mentioned with staffing and the cost of raw materials we were able to grow revenue significantly by minimizing late shipments to customers. This performance in my opinion directly resulted in more bookings initially in early Q2 for 2017 and later in Q2 for orders delivering in 2018. June margins were approximately 150 bps higher than year-to-date. This is encouraging. I don’t believe that this was due to price increases, but rather due to the high volume of production and consequently higher fixed cost absorption. Of course, our continued implementation of lean techniques, cost reductions and productivity gains also contributed to the margin increase. Additional force reduction resulting from the continuation of the idling of that Pennsylvania cast roll plant occurred during Q2. Another reduction is possible in the third quarter, after which we will down to approximately 25% of the original work force. The monthly negative impact to P&L for this plant should continue through the third and fourth quarters, approximating $900,000 to $1. 1 million per month; but during the fourth quarter, there should be begin to be some relief in benefit costs from the force reductions in April and early June. And as a reminder, the reason that we are idling this plant is to bring our manufacturing capacity utilization to its highest point after the acquisition of the Åkers Group. The company announced another price increase for the Forge and Cast Engineered Products segment early in July. The target increase of approximately 10% is an attempt to continue to recover more of the cost increases suffered in 2017 that I previously described. Throughout the second quarter, we have continued to raise the price for all product lines and have been successful with highest increases for orders received for shipment in 2018. The second quarter was also a period during which we received growing levels of open die forged product sales. The majority of the increase is for frac blocks. In fact, we expect we will set records for the monthly manufacturing of blocks to our highest levels ever, beginning in September. I’m also happy to report that other open die business order beyond oil and gas flack blocks are also being received and manufacture. Internally, we have formed an open die forged business development team whose sole focus is to study market potential, specific product requirements and obtaining trials for our manufacturing operations so that we continue to increase sales in this new and important area going forward. Roll new product development continues to move forward. The first new roll product will launch in December this year. Trials continue to go extremely well. In fact, customers who have successful trialed this product are requesting orders for next year, and additional customer trials are planned. All new products will demonstrate superior longevity and will be priced accordingly as a premium performance product. Next I’d like to make a few comments about our June 14 dividend announcement. You may recall that in previous quarterly conference calls I’ve mentioned that our board thoroughly reduced the appropriateness of continuing the dividend payout each and every quarter. During 2017, the metals market has recovered somewhat and nearly all forecasts that I have read predict 2018 also to be a strong year. Our order book for 2017 is nearly sold out, and we are rapidly receiving orders for 2018. It became clear to us that we were getting to close to capacity level for certain of our critical manufacturing processes and that we could obtain even more volume at attractive prices. The beginning in late Q1 and into Q2, we identified specific capital investments that are needed in order to do so. While there is no single major investment, the combination of high-return projects is significant and totals in the millions. Additionally, remember that the seller notes issued in connection with the acquisition with Åkers group are due in early 2019, nearly $30 million which is not a trivial amount for us. Finally, as we continue to grow Ampco-Pittsburgh, acquisitions are certainly possible. At this time, I will do not discuss what these acquisitions may be, but I will say that we are definitely interested. All of these factors combined caused us to suspend the dividend to pursue higher returns for our cash generation. As we expect the company to return to profitability and to grow their profitability the board will reassess the status of the dividend on a quarterly basis in and through 2018. We appreciate the acceptance and the patience of our current shareholders for this decision. Let’s look ahead. Historically, the third quarter every year is the period during which we revisit our strategic plan and modify it as is appropriate. This year we will be adding significant details to our diversification initiatives into the open die forging marketplace. The plan will be finalize and presented to our Board of Directors at the end of Q3. 2018 is the third year of our three-year strategic plan. The detail that we are adding is extremely important as it will create the early roadmap for the further evolution of our business. Next year, we will a new five-year strategic plan, which will address the needs of the company to grow and hopefully approach the $1 billion revenue level during that period. Looking at the shorter term, i.e. third quarter of 2017, and based on customer delivery requests holding, we expect a small revenue increase over the second quarter. More significantly, we expect last year’s price increases and raw material surcharges to begin to hit P&L. They will not hit simultaneously, but during the quarter they are expected to increase monthly. As I mentioned earlier, we are hoping to set a new volume record for frac block production in September that we hope will grow even further through year end. I do have a word of caution. July was the month during which we conducted annual plant maintenance shutdowns at most facilities. This of course reduced our production volume, which in turn will cause the third quarter revenue line to start slowly. We will see if we catch up in August and September, and thereby, overcome the weaker July revenue month. The third quarter is also normally a substantial bidding period for 2018 roll business. And as we related in the July price increase announcement, we will continue to push price and thereby recover a higher cost for our raw materials. Sequential improvement from our financial performance in Q3 is certainly possible, but not yet assured. It depends on the mix of products which will actually ship and the impact of the price increase and surcharge for the products which do ship during the quarter. Our Air and Liquid Processing segment is sold out through the quarter, and we expect the typical stable and strong performance that we have been accustomed to receiving previously from that segment. We will now take your questions.

[Operator Instructions] Our first question comes from Michael Gaugler with Janney. Please go ahead.

One of follow up bit on your third quarter commentary. You kind of alluded to price increases in raw material surcharges has being a positive and then kind of backed off a little bit in terms of the July shutdowns in plants and what not, so I was just wondering are we looking for margin improvements in 3Q or are we relatively static at this point.

No, we are looking for increases, Michael. I think that the point in my comments -- I guess let me back up a step. We are very close to becoming a consistent profitable company, we believe, and I’m trying to – honestly here trying to ask our shareholders to be a little patient that we are in a tenuous situation right now where things are improving nearly in every single facet. But with the shutdowns, which typically lasts a week, we’ve not been able to catch up with all of the sales that we should have delivered in September. So our revenue was light. We believe our costs, although I haven’t seen the costs for July yet, will be inline with what we have been accruing and expecting this spend on maintenance. So I’m just trying to hedge our bets a little bit and hopefully overproduce for the third quarter. If our customers -- and this is something we always have to worry about, I’ve mentioned it many times in the past, if our customers decide to delay shipments for 3 months, 6 months, which in the past has happened a lot, then that can through our revenue projections into a less accurate position. So no, we’re till moving forward. We’re still pleased with where we are. We still very much look forward to the fourth quarter for sure in 2018, but I’m just a little bit concerned right now because we’re on this blink here, and I don’t want to indicate over expectations.

Understood. The comment you made about the total of the negative impacts in 2Q around $4.5 million was very helpful because, if you just put that back on the operating line, you guys were solidly profitable excess charges and knowing a good chunk are going to fall away. Certainly it does look good going out into late in the year and 2018. The other items I had – I know there is a jump in the equity gains line for the Chinese joint venture. There is just noticeable. I’m wondering what was behind that. Is that a new run rate or should we be looking more of that maybe towards where the things were in the first quarter.

I think maybe Mike and I both will have an answer to that, but let me give you less numerical answer. All three joint ventures, the one with the acquisition of Akers has just been fantastic, and we are very, very pleased about how that operation is running and is growing and we plan to and actually invest in expansions there. We are doing very well with sales throughout Southeast Asia. The other two joint ventures, one which is the 25% equity stake, that business has been profitable. It is significantly profitable this year. One of the very largest government-owned roll companies in China has temporarily idled, which has caused the shortage of rolls in China and the two joint ventures that the one we restructured that used to be with [Mass Steel] and the other one which is called Gong Chang have been picking up a lot more orders. So we believe that all three Chinese operations could actually be profitable this year, which is a huge turnaround from where those -- at least one of those businesses has been in the past. Mike, do you have anything to add?

Yes, I would say, Mike, looking at the P&L for the quarter, there’s like a $0.5 million nearly income item for the earnings in that Chinese joint venture. That happens to be the Mass Steel joint venture that we’re recording using the equity method. So the P&L results show there. We did have a onetime item in the quarter and that’s the payment for the sale of our equity and that affiliate to another Chinese roll maker, which we described an earlier calls about the restricting of Mass Steel joint venture. So we are receiving payment for that equity on an installment basis and recognizing it as we go, and we this was a quarter in which we received the second such installment.

Okay, that’s very helpful and the one just one last one for John on the oil and gas end market. Just wondering from your advantage point -- I know you said the order book’s strong, but the end market it self is in fairly steady state and you are taking share in terms of the orders and the demand, or it’s just the overall market accelerating?

Michael, pardon me, but I missed the first two words of your question. Did you say in the new oil…

In the oil and gas market?

Oh, I am sorry. Okay. Yes, I think it is stable. The oil price has been up and down during the quarter, as we all know; but based on what we are hearing, what we are reading from the energy companies, those that are planning cutbacks seems to be planning cutbacks and exploration and deep well drilling, and the fracking business is seems to be steady. We are looking at things regionally and we know that we could be growing our sales beyond the current record levels by maybe another 40% or at least 25% before the end of the year. So we like we are well positioned. We like the commercial partners that we have representing us, and we’re looking for continued strength hopefully through – at least through 2018.

The next question comes from Justin Bergner with Gabelli & Company. Please go ahead.

First question would be the customer bankruptcy recovery. Like, have you guys quantified that yet or should we thing that’s be quantified in the Q?

It will be in the queue, Justin, but I think you may remember that in the fourth quarter, I think we did disclose the amount of a reserve that we took for the bankruptcy of one of our customers for the Chapter 11 pre-petition receivable. It’s – we recovered approximately $0.92 on the dollar for that and it was $1.5 million last -- in the fourth quarter that we disclosed as the reserve.

So about $1.3 million, Justin.

Okay. Secondly, I just wanted to make sure I understood all the moving parts of this $4.5 million. I guess it seem like the largest piece was reduced operations, your Pennsylvania cast roll plant that was in excess of $2.5 million. The outsourcing of some machinist works that was – I don’t know if that was $700,000 or the $700,000 sort of included the associated volume benefit. And then what are sort of the other pieces that get me to that $4.5 million-plus of headwinds?

The raw material cost increase was about $1 million. The surcharge credits were about $200,000, and the outsource spend was around $700,000. Some of these numbers are a little conservative.

In regards to outsource spend that you would have had to spend some money if you had the internal staff or…

If we had the people here, we would have had additional staff, we would have gotten additional favorability in fixed cost absorption. But most importantly, when we outsource, we’re paying those people that we outsource the profit. And what I hate most about that situation is that’s our profits that we’re giving away, and with pricing as tight as it is, it hurts. So I think in combination, that’s pretty safe number.

Okay. And then finally, you mentioned the outlook for Q3 and sort of the uncertainty, but hopefully better results than Q2, I just want to verify you’re talking about Forged and Cast Roll profitability in Q3 versus Q2 and you were talking about it being less negative in Q3 or actually potentially positive in terms of that segment’s EBIT.

We well – I mean, we -- in terms of Q3?

Yes. I was just trying to understand if your comment was talking about the potential for that business to be positive or just the potential to have a lower loss than Q2.

In terms of this segment itself, we expect that to be profitable. Will it be profitable in combination with the Air and Liquid segment to overcome our overhead expenses, that’s the part that we are not sure of. And with respect to my comments what I am trying to do here, Justin, very candidly is maintain my credibility. So I want people to understand the moving pieces and knowing that our July revenue months was about $7 million lower than we thought it would be, we are off to a slower start. While we honestly expect a better quarter than we had in the second quarter, there are some moving pieces that historically tell us that things could be not what they are expected. So all I am trying to do here is I am not trying to see overly negative, I am not trying to give negative predictions here so that we look good in the third quarter. I am just trying to maintain credibility and not provide unreasonable expectations.

Understood. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to John Stanik for any closing remarks.

Thank you. Hopefully my remarks illustrate that the remainder of 2017 is looking to be a continuation of a positive transitional period for Ampco-Pittsburgh. We believe that we will soon return to profitable performance and due so thereafter on a consistent basis. A stronger market should remain at continued high level of utilization of our manufacturing assets. Reinvesting the cash opportunistically which the business generates should ensure more revenue growth and growing profitability. I won’t forecast whether the third quarter will have an operating profit or not, but I think my comments demonstrate that we feel we are close even considering that slow start we talked about for July. Any quarter in the near term that provides a profit should not be a surprise, and unless market conditions change, should be an indication of sustainable growing profitability in the future for our company. Thank you for listening, and have a great remainder of your day.

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.