Melanie Sprowson - Director, IR John Stanik - CEO Mike McAuley - VP, CFO & Treasurer

Justin Bergner - Gabelli & Company John Walthausen - Walthausen & Co.

Good morning everyone and welcome to the Ampco-Pittsburgh Third 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 also note today’s event is being recorded. At this time I would like to turn the conference call over to Ms. Melanie Sprowson, Director of Investor Relations. Ma’am, please go ahead.

Thank you, Jamie, and good morning to everyone joining us on today's third 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, 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 third quarter.

Thank you, Melanie. Good morning, everyone, and thank you for joining our call. I hope you all had a chance to read our earning release issued this morning. I will take you first through the consolidated P&L for the quarter, then I’ll provide more detail at the segment level and then review some balance sheet activity. Ampco’s net sales for the third quarter of 2017 were $103.9 million. This compares the net sales for the third quarter of 2016 of $82.9 million. Net sales in the Forged and Cast Engineered Products segment rose 30% compared to prior year, driven by higher sales of Forged Engineering products for the oil and gas industry and the inclusion of sales for ASW Steel which was acquired in November of 2016. Net sales for the Air and Liquid Processing segment for the third quarter of 2017 increased 11% from the prior year. I’ll comment more on the business segment results in a moment. Selling and administrative expenses were $14.2 million or 13.7% of net sales for the third quarter of 2017 compared to $15 million or 18.2% of net sales for the third quarter of 2016. The prior year quarter included restructuring charges of approximately $1.3 million. The expected benefit from the prior year restructuring actions was offset by a higher R&D expenses, commissions and higher sales volumes and some corporate related expense this year. Depreciation and amortization expense for the third quarter of 2017 was approximately flat versus prior year. Loss from operations for the third quarter of 2017 was $3.2 million. This compares to a loss from operations in the prior year of $4.9 million, I’ll expand on that further for you in my segment level discussion momentarily. Other expense net for the third quarter of 2017 was $0.5 million higher than prior year but there were a few moving pieces there. Interest expense is up slightly on a revolver borrowings and this includes the effect of having effectively replaced the debt of ASW Steel we acquired using the Ampco revolver. But the larger effect on other income expense net year-on-year was a $0.4 million foreign exchange loss in last year’s quarter compared to a small foreign exchange gain this year. Year-to-date, the story is a little different. Other expense net is unfavorable by $2.4 million year-to-date versus prior year, of this, interest expense is $1.2 million higher from the full year effects of debt connected with Åkers acquisition, early termination of the ASW credit facility debt and the interest and fees on the Ampco revolver. And even though the dollar weakened for Q3 versus prior year slightly, it’s still strong year-to-date versus prior year. So the majority of the rest of the change reflects foreign exchange losses recorded year-to-date 2017 versus gains recorded year-to-date last year. The income tax benefit for the current year periods the benefit for the release of valuation allowances during the quarter for additional net operating losses able to be carried back to prior years. By comparison the income tax for the three and nine months ended September 30, 2016, includes valuation allowances of $26.9 million and $28.3 million against the majority of the corporations deferred income tax assets. An income tax provision has been recognized in each of the period for subsidiaries, not in or not likely to be in a three-year cumulative loss position. Additionally, the income tax provision for the nine months ended September 30, 2017 has been offset by approximately a $0.5 million of state income tax refunds which were reported in Q2... As a result, the corporation incurred a net loss of $2.2 million or $0.18 per share for the third quarter of 2017 compared to a net loss of $27.4 million or $2.23 per common share for the third quarter of 2016. Now, here some color on our operating segment results. Net sales for the Forged and Cast Engineered Products segment for the third quarter of 2017 rose 30% compared to prior year. There were two key drivers here, sales from the November 2016 acquisition of ASW Steel accounted for almost half of the increase. The segment also experienced a significantly higher volume of sales of frac blocks due to the uptick in the oil and gas industry. While the segment recorded modest operating losses for both the three and nine months ended September 30, 2017, operating results improved from the comparable prior year periods which included unfavorable purchasing accounting effects associated with the Akers acquisition. While benefiting from a higher volume of sales and the recovery of a portion of pre-petition accounts receivable associated with a customer bankruptcy, year-to-date operating results are being impacted by lower absorption due to the idling of a Castrol foundry and higher operating and raw material costs. The segment experienced an unusual level of mechanical issues and related plant downtime and maintenance during Q3 which John will comment more about. Net sales and operating income for the three and nine months ended September 30, 2017, improved against the prior comparable year periods due to a higher volume of sales in Air and Liquid Systems. Customer air handle sales increased for the quarter primarily as a result of timing and for the first nine months of 2017 as a result of higher order intake. Although current order sales of Centrifugal Pumps fell short of the prior year, year-to-date sales exceeded prior year driven primarily by higher shipments to U.S. Navy shipbuilders. A stronger Q3 volume of shipments to OEM and nuclear markets pushed year-to-date heat exchange coils to slightly exceed prior year levels. Backlog at September 30, 2017 approximated $332 million, a 42% increase from the $234 million in backlog at December 31, 2016. The increase is primarily from higher order intake in Forged and Cast Engineered Products, particularly in frac blocks and cast mill rolls, as well as higher order intake in each of the air and liquid processing businesses. Now reviewing some movements in working capital and other cash related items. Accounts receivable at September 30, 2017 increased $11.6 million from December 31, 2016, primarily from higher sales. Inventories at September 30, 2017 increased $18.7 million from December 31, 2016. 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. John will comment on some production bottlenecks and mechanical issues in the Forged and Cast Engineered Product segment which impacted shipment timing thus responsible for a portion of the inventory rise. Accounts payable at September 30, 2017 increased approximately $10.8 million from the balance as of December 31, 2016, reflecting higher raw material and operating expenditures associated with the higher production activity. Cash and cash equivalents of $25.4 million at September 30, 2017 declined $13.9 million compared to the December 31, 2016 balance of $38.6 million. Some selected significant uses of cash year-to-date included: the inventory build to support sales and production growth; which I just mentioned; and capital expenditures year-to-date of $9.7 million. Drawings on the Ampco revolver are $20.3 million at September 30, 3017 reflecting the refinancing of higher interest debt assumed in the ASW Steel acquisition of approximately $8 million, and the balance to fund working capital requirements I just described for the higher level of business activity. As of the end of Q3, the Corporation has remaining availability on its revolver of approximately $50 million. I will now turn the call over to John Stanik. John?

Thank you, Mike. Good morning. The operating loss for the third quarter was a disappointment to all of us at Ampco-Pittsburgh. We had expected an improvement over second quarter results. Unfortunately, we encountered operations difficulties in our metal business segment. To summarize our performance in Q3, the business opportunity we had could have yielded much better results. Revenue opportunities beyond what we shipped had been secured by our sales force, but we fell considerably short of that potential for two reasons. Internal gaps in our production processes and follow up communication and secondly mechanical failures in a portion of our metals manufacturing plants. The fact that we were also in the process of attempting to manage a major step up in production volume compounded our problem. Aggregating these complications, the ultimate result was potential operating income being tied up work in progress inventory as manufacturing product was not completed and shipped. At the beginning of the fourth quarter we find ourselves behind schedule. However, we’ve evaluated the root causes of these issues and have already instituted what we believe will be corrective actions. These actions will involve redirecting personnel resources, adjusting our manufacturing processes and reorganizing communications within our scheduling and production forces. As I inferred previously and as Mike reported, revenue increased in both segments year-over-year and by significant percentages. Beneath the segment level I’m pleased to report that revenue was up in the roles sub-segment and in our diversified Forged Engineered Products business. And additionally we saw an increase in revenue for the Air and Liquids processing segment. I’ve discussed the obstacles, let me enumerate those challenges. Mechanical and electromechanical problems that our plans were responsible for approximately $1.6 million of operating loss from lower than expected sales, lost fixed cost absorption from the downtime and higher maintenance expenses. We estimate that the buildup of the inventory we couldn’t deliver as partially manufactured product was well in excess of $1 million. The good news is that as our buildup stabilizes and reduces as finished shipments catch up, income will be released. Continued raw material cost increases beyond current price surcharge levels had an unfavorable impact of approximately $1 million in the quarter. And when we add the ongoing 2017 approximate $3 million per quarter impact of the partially idled Castrol manufacturing facility in Pennsylvania and compare all of these problems within our reported results you can see that the opportunity that was lost in the third quarter was substantial. The company has moved forward on other fronts during the third quarter. I’ve been tracking the progress for you of a new and exciting product that has been in development. The product is a new generation of roll that through the application of its enhanced metallurgical properties provides a significant improvement in performance enabling hot strip mills to lower costs while also improving the productivity of the mill by extending roll campaigns. The commercial release of the product is expected to be formally announced on or around December 15. An extended trial customer use is designed has displayed lengthened campaign service by roughly 100% over traditional Castrol design. The product will be offered at much higher margins than are typical today considering its value to our customers and we’re already seeing a great deal of interest from them. During the last week of September, our Board of Directors approved the 2017 strategic plan update. Revised plan looks ahead three years reviewing business potential through 2020. This year’s update included for the first time what we believe our near term potential is for the further diversification and to the open die forged production industry. The outcome I’m pleased to report is a very exciting outlook with attractive compound annual growth rates of revenue and profitability at rates higher than the top line compound annual growth rate. A negative market development occurred during the quarter also. Due to the impact of hurricane Harvey on a domestic electro manufacturer in addition to a very large and unexpected decrease in the manufacture of electrodes in China as a result of new environmental restrictions, there is suddenly a severe shortage in supply. Any producers that has electric arc premises to melt scrap needs electrodes, these electrodes are consumable materials and they’re made using a raw material named needle coke. Consequently, short term to intermediate term costs for these electrodes have already increased two to three fold and sometimes more. Last week Ampco-Pittsburgh issued a press release announcing that effective January 1, 2018 it will begin to assess a price surcharge on its manufactured products to recover the increased cost of electrodes. Many other consumers of electrodes including some of our largest customers are also implementing like surcharges so we expect little opposition. Before looking ahead to the fourth quarter, I should say a few words about the recent announcement of my retirement as CEO. I will begin by saying that I came to Ampco-Pittsburgh for very specific reason and that was to provide an enhanced future for the company. During the three years that I’ve been here I believe the company has ceased many opportunities which should provide that enhanced outlook. We’ve made acquisitions and integrated them, numerous cost reductions, efficiency improvements and strategies have been compiled and implemented. Remember our first major acquisition occurred only 18 months ago and the second one year ago. And the depressed market in 2016 certainly didn’t cooperate and helped. Resolving issues like weak margins and equipment failures such as those we’ve encountered in the third quarter are not unusual under such timeframes. This was a time of important transition for Ampco-Pittsburgh and I’m proud of what we achieved. And now I feel it’s a good time for a change. I’m not saying to you that the work is completed, what I’m saying is the strategies are in place, the action plans are in place and a bright future is possible. But as always plans need to be executed, unforeseen negative developments overcome and strategies modified to fit future eventualities. I care very much about Ampco-Pittsburgh Corporation, its shareholders and its employees. Therefore, I’ve offered my services on a part time basis in any way that the Board would choose to use them. I look forward to the new leadership continuing to build a great future for the company with increasing shareholder value. Now let’s look ahead to the fourth quarter. Based on my comments from earlier on this call, we have an opportunity to have a strong fourth quarter. Being successful in improving our operations processes could allow us to recover some profit that was missed in Q3 in addition to what is scheduled in Q4 already. The revenue opportunity is in-house. Our corrective actions are relatively new and untested so I do not promise that we will entirely be successful. However, I’ll say that I’m personally involved in these changes and will continue to review their progress often. So for this year the second quarter has been our highest revenue quarter. We could approach that number again in Q4 and catching up on our manufacturing delays could result in improved operating income. So I’m very much looking forward to what we achieve by year end. We will now take your questions.

[Operator Instructions] And our first question today comes from Justin Bergner from Gabelli & Company, please go ahead with your question.

Hi, good morning John. I had a couple of questions about some of the comments you made. I guess just to understand the various impacts of the raw materials, the mechanical and electrical issues and the idling of the Castrol facility. It was $1.6 million impact in the third quarter from the mechanical and electrical costs, continued raw material increases were negative $1 million and then there was a $3 million from the idle Castrol facility in the quarter or year-to-date and was that sort of anticipated or unanticipated?

That was for the quarter and it’s been very close to that since we idled the plant in April, so it’s running at somewhere a $900,000 and a $1 million per month hit and that’s the way it will be most likely for the remainder of this year and then once we reset the business in January, hopefully we will see an improvement.

Okay. So in terms of the unanticipated hits is that mainly the $1.6 million mechanical and electrical headwinds and then the raw material headwinds of, I guess, an incremental $1 million beyond what you’re expecting?

Yes, in the delays of another million.

Okay. Second subject of questioning was just sort of next gen roll product with better metallurgical properties that allows you to sort of extend the life by I think it says much as a 100%. If I was hypothetically a steel mill and I was buying that I would need to buy sort of half as many rolls over the course of the year. I mean, is it your intention that you can price that to recover the full sort of the incremental usage benefit to the customer or is it that you can recover a lot of that and gain market share with this product. What sort of the economics of process behind that?

I think that we see this in a number of different ways. The first way to see it is, this technology can lengthen campaigns and this technology applies to hot strip mills. So it applies for a fraction in the market, for Castrols in other words and we see it as a major improvement for them. It does not eliminate the need to resurface or refinish rolls, it also will not eliminate the need to purchase rolls but it will have rolls last considerably longer. So with those benefits we believe that we should and will be able to incur much higher margins. The other part of the story is, we’re not making these claims without evidence so when we release the product in December we will have had several successful campaigns with customers who have taken these rolls and utilized them and proven these statistics. So not again to the economics of your question, so yes, there are lot of Castrols out there, we believe that will give us a significant cost share improvement opportunity some will buy, some may not, but we’re banking on introducing this and in addition to this other new products, I mentioned there is two others coming in 2018, and we’re calling these rolls a different category of roll. So I guess the bottom-line is we’re expecting to increase share, we’re expecting to increase margin, I don’t want to talk about exactly what the percentage of increase in margin is, but we believe that it will enhance our performance overall bottom-line.

Okay that’s helpful. And then just on the electrode surcharge, you operate one mini mill is that right?

No. Well, we operate one in Pennsylvania for our roll business and one in Canada for our Forged Engineered products.

Okay. So you’re just passing on a surcharge, you’re not doing anything more to further recover or further benefit from the tightness in the electro market, like the electrode manufacturers might be doing?

That’s correct.

Okay, that’s helpful, thanks for taking my questions and hope to see you in a few more calls before your retire, John.

Yes, me too Justin, thank you.

[Operator Instructions] Our next question comes from John Walthausen from Walthausen & Co. Please go ahead with your question.

Yes, good morning, couple of questions. You mentioned that you were seeing some potential in your Forging business for movements beyond the steel industry and the frac blocks. Can you talk a little bit about where are those might be and what the potential timing if they’re successful might be?

Yes. To help with this, if you check our website you will see some of our recent presentations and there are slides showing pictures of the different types of products, there is chart showing the size of the market if some of these verticals that the Forged Engineered Products, open die products specifically that we hope to enter. But to give you an answer now I think there is a very broad number of potential industries we’re looking into the nuclear industry, we’re looking into aerospace, obviously energy including the oil industry with our biggest penetration thus far being frac blocks. But beyond that there are other things in other transportation industry such as shafts, other products in energy other than frac block, so there is just a large number, rings is an another one so there are both large and small products, there are limited competitors in these markets. And with ASW’s ability to manufacture alloyed metals including stainless steel, we believe that it’s very possible that we will grow into all of these markets. The strategy we’re using now and the strategy that must be used to penetrate markets like this is to conduct trials of our material with potential customers and prove that our material is as acceptable at least as competitive materials before customers will commit to long times. An advantage we’ve is that ASW has been in this market supplying intermediate materials for a long period of time to some of these exact same industry markets. So that means that the base material has already been proven in many of these situations. What will need to be tested is our machining capability, e-treating capability and some of the other things that needs to take place with the products before they’re completed. So our confidence is very high, but it will take time to go through these trials and these proving tests before we have very large increases outside of the things that we’re doing today. Frac block industry, have we mentioned what the total is in revenue this year so far.

No, we haven’t so far, but it is significantly higher than last year.

Well, significantly higher, even higher than the 2015 number which was at something like $24 million before the market collapsed. So we’re doing much better than that this year, so anyway I hope that answer the question, I was a little bit of the rambling response.

No that was a helpful response. I just wanted the things that I would take away from here I think it’s obvious when you start, getting into things like – pretty extensive process to prove yourself out. So you should, we assume that this will probably be more of a cost at least through 2018 than a bottom-line benefit?

No, I don’t think so, I mean, we don’t give these products to customers to trial them, we sell them admittedly not at the margin that we expect to eventually get. But we don’t expect large quantities of failures, in other words for warranty claims although there certainly maybe some. No, I think that taking it slowly and going through the trials, making sure that we’re satisfied with what we expect the product to, I do not expect large or any type of losses, ongoing losses from this diversification. In fact, I guess as evidence of that we really haven’t encountered any problems with the frac blocks since we’ve begun to manufacture them other than we can’t handle the total number that we seem to be getting orders for.

I mean, that’s very encouraging what’s happening with the frac block. Is it just that they’re using so much more sand particularly in places like the Permian or you also gaining share of that market?

Well, I think the biggest issue this year is the fact that the market has come alive and I think that in addition to that other markets have also come alive. So while there are maybe three main competitors, the growth of the market has allowed the growth in business that we’re receiving. In addition to that we’re receiving the difference, there is a difference this year over 2015 and that is, it appears that stainless steel blocks are winning out over mild carbon alloy blocks which used to be majority that we’re purchasing 13, 14, and 15 and with that change which I presume is because of superior economic performance by the metal stainless steel and being because we own ASW which is an excellent source for stainless I think that is supporting our success. I don’t if John, if I can, if we can say authoritatively that we have increased share but we certainly have doubled our level and maybe even double what we had in 2015 sometime in the near future in terms of revenue. That’s big change for us.

That’s very helpful, it sounds like as expected ASW is proving so far to be helpful as it’s getting up to where it’s actually a bottom-line contributor at this point?

Yes, it is John. One of the things John discussed earlier in this call was the fact that we’re doing a lot of intercompany activity, the ASW and there is a fair bit of transfers are going on that we’ve to get the flow through on the ultimate sale of the customer to recognize the income on the frac blocks in total so while we’re disappointed with the quarter, we know that the demand is high for the frac blocks and that when we do finally get the production process lined out, straightened out and get the flow through, we’re going to see that income flowing through on the intercompany level of activity and then of course, the ASW has its own trade sells activity as well which are net positive, but tend to be the lower margin because as John indicated for an intermediate level product basic steel in Castrol form, but there is certainly a high value on the stainless products. And they’re not only selling stainless intercompany to us or selling stainless to other consumers as well. So we’re happy with ASW in the year that we owned ASW it’s opened a door to value creation for the company.

And I think one more comment John about that to add to Mike’s good answer is that when you refer to the markets that ASW serves directly, our strategy includes a shift from some of the products they have historically made to hire value more difficult to produce alloyed products that they plan to sell in the coming years. So we’re hopeful that there still be, will be contributing even more profitability as a standalone enterprise for us as opposed to not only brining us value from an intercompany standpoint.

Good, good. I mean if I understood correctly, when you acquire at – it was, they were underperforming in terms of productivity at the mill as well as other premises and now you’re kind of challenging they’re doing on actual productivity and efficiency in the mill?

They’re making strides in reducing mill time and improving their productivity. So I’m sorry John, I don’t remember the reference that you’re making about problems. They’ve always been pretty efficient, the problems that ASW is having when we purchased them was a lack of working capital and a lack of just cash to maintain their plans or their plant and to invest money into product and as Mike pointed out in his prepared comments we’ve taken care of that, we’ve obviously supplied them with working capital. But there are very efficient operation and in fact so much so that several of our competitors actually purchase thei4r material from ASW.

Okay, thank you very much.

You’re welcome.

[Operator Instructions] And ladies and gentlemen, at this time I’m showing no additional questions, I would like to turn the conference call back over to management for any closing remarks.

Thank you. In roughly four weeks we will finalize our 2018 business plan. As I’ve previously mentioned we recently had our strategic plan update approved by the Board and naturally the strategic update provides an indication of what to expect as possible for the upcoming years including 2018. I expect to see top line growth again for the third consecutive year, but that’s not our top goal. Major bottom-line improvement is, right now it appears that our markets may be strong again in 2018. Already our bookings for the first half of next year are higher than they were at this time last year. I expect 2018 to be a good year for Ampco-Pittsburgh Corporation. Thank you for your time, have a great remainder of your day.

Ladies and gentlemen that does conclude today’s conference call. Thank you for attending, you may now disconnect your telephone lines.