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Page 1 AMPCO-PITTSBURGH CORPORATION STRATEGIC PLAN PRESENTATION -- NOVEMBER 10, 2015 My name is John Stanik. I m the CEO of Ampco-Pittsburgh Corporation. Today, we will be talking about the future so the
Page 1 AMPCO-PITTSBURGH CORPORATION STRATEGIC PLAN PRESENTATION -- NOVEMBER 10, 2015 My name is John Stanik. I m the CEO of Ampco-Pittsburgh Corporation. Today, we will be talking about the future so the content of the presentation is covered under the Safe Harbor provision of the Private Securities Litigation Reform Act of Today, we have two objectives. Historically, the company hasn t communicated very much with the investment community. So, one of the things that we want to accomplish is to introduce the company a little bit better. You ll see photographs of the things we do. We ll talk a little bit about the marketplace that we re in, things that we want to do. And then, of course, the second and very important part of the presentation is the summary of the Strategic Plan and where we re going over the next three years. So let s start with who Ampco-Pittsburgh Corporation is. We are a valueadded manufacturing corporation. We provide very precise, highperformance materials -- metal materials, and industrial equipment. We ll talk a little bit later about why our margins don t reflect the fact that we are a specialized value-added type of corporation, but that s who we are. We do report two segments. Roughly two-thirds of the revenue base comes from our Forged and Cast Engineered Products Division, which is also known as Union Electric Steel. It s a name that is very respected and known throughout the world. Page 2 The second segment is comprised of three companies. We call it the Air and: Liquid Processing Segment, also very well-known, and all three companies produce customized equipment. Next I d like to introduce our speakers. Dee Ann Johnson is our CFO. She ll be summarizing the financials and the strategic plan for you. Terry Kenny, on the end, is the president of the Air and Liquid Systems Group, the segment that I just mentioned. And Rodney Scagline, to my right, has just been promoted to the position of president of Union Electric Steel or the Forged and Cast Engineered Products segment. Rodney has been with us for four years and has been very instrumental in helping us diversify the business. He will be taking over this part of the company in April when the incumbent Bob Carothers retires. I d also like to introduce in the back of the room Gail Gerono. Gail is our Investor Relations contact and makes everything happen when it comes to days like today. So let s get right into it. Let s talk about the condition of the company as it sits today. As I mentioned, two-thirds of the revenue of Ampco-Pittsburgh Corporation comes from the Union Electric Steel Division and one-third from the Air and Liquid Systems Division. Our primary market for UES is the steel industry. We also provide rolls to the aluminum industry, but our primary source of income over the past decades is the manufacture of steel rolls for rolling mills. And, Rodney will give you a little bit more background about that. Over the last three years, our financial performance has been deteriorating. All of this stems from the condition of our primary market -- the steel industry. Page 3 I assume most of you here know about the tremendous turmoil in the industry. But for those who may not be as familiar, I ll just briefly go through it. Right now, there is a very, very large overcapacity in steel-making in the world. In fact, China and the rest of the world probably produce approximately 60 percent excess steel in the world today. The Chinese have been selling that steel throughout the world at very low prices primarily because their economy has slowed, and they currently don t have the need for construction materials, structural steel, et cetera. That has created a problem for all of the steelmakers in the rest of the world who can t compete with the low prices that the Chinese are providing. So what s been happening is they have been cutting back capacity and reducing costs. That s what we are also doing in this situation when our utilization is lower in manufacturing. These cost reduction programs have gotten more and more severe as the last three years have transpired. One of the measures that customers have instituted is asking for price deductions or reductions each year from all of their suppliers. Typically, it s been 15 percent per year, which if you think about that over the course of three years is staggering. It s continuing. However, I m happy to say with the price increase that we tried to institute in March, I think we sent a signal that was heard reluctantly -- but it was heard. And the reductions are getting much smaller, although they are still demanding them. And just to give you an example, customers are saying, If you re not willing to cut your price from what it was last year, you re out. So that s what we mean by that second sub-bullet. This cost control has been extended to everything that the steelmakers are buying. So, we give price concessions. And in turn, one of our major objectives this year has been to reduce our costs. The bottom sub-bullet there about capacity reflects a number of steel mill closings in the West, several in the United States, a few in the U.K., and elsewhere. We believe there is a good chance that that capacity will not come Page 4 back, so the size of our marketplace is shrinking, and that s a big concern, of course. So, at this point, what s happened over the last three years is -- lower revenue, lower volume, and margin decline. And I want to point out in our strategic plan, we do not see any recovery of the steel industry or at least we haven t incorporated any into our numbers, until So this year, we have spent a lot of time changing the company. Much of what we have done until now has been reducing costs, and we believe that we have captured about $10 million of cost reductions that will be seen in Some of them haven t landed, as I said in my quarterly conference call with investors last week. I said that we relocated our headquarters, and we expect a nice cost decrease in February when our lease runs out in our current building. The biggest thing though, and the most important thing that we have done this year has been the strategic planning process. So, we have studied our company; we have studied our competitors; and we have studied the marketplace throughout the world, and we ve learned a lot. So while we have this negative cloud hanging over us in the steel industry, we do believe that there are opportunities for us and there s plenty of good news. So, what s some of that good news? Well, our manufacturing assets in the Forged and Cast Materials Group are very flexible and can do open die forging with almost no capital expense. And you ll see when Rodney presents the huge market and how that the open die market dwarves what the company has historically been doing in the roll production market. Over the last two years, with Rodney s help, we have been pulled into the fracking industry by customers who have require valve blocks. And that has become a very attractive business for us. But the important thing about it -- in addition to being a very strong possibility for growth-- is it has introduced us to other products and a whole new customer base. So, there s nothing better in my opinion than being pulled into a new market because of the products that you make, and we are establishing ourselves as a very credible supplier in this area. Page 5 Once we get into this, I think you ll see, a slide that shows you a list of the things that we can do beyond the blocks that we have done already. The bottom bullet on Slide 7 shows that we have added a small company. It was only a $5 million purchase, but it s an important strategic acquisition for us because it is a logistics and distribution center for open die products. It has an existing customer base. It s located in Eastern Ohio, which we believe is a perfect location. We have an inventory of material there that we plan to sell on an emergency basis, which should bring higher pricing and higher margins. It possibly is the first of several of these types of acquisitions as our diversification philosophy shows success. It was a very important first step for us. The other segment of the company which is very important to us is the Air and Liquid Systems Segment. It s comprised of three businesses -- Aerofin, which is a heat exchanger company; Buffalo Air Handling, a custom air handling system company, which by the way, is providing some of the air that you re breathing in at this very moment; and Buffalo Pumps who makes specialty centrifugal pumps. All of these companies, as Terry will point out, are custom manufacturers. They are specialized. They do not compete with some of the more household names that you re familiar with, but they are very strong businesses historically, with the exception of one. Overall, this segment has been very profitable for us. It s a very consistent, strong performer. In the past few years, we ve had a problem with Buffalo Air Handling s financial performance. We believe we have conquered that problem. And as we stand today, the business is growing its revenue and it s breakeven. So, we re hoping that their performance will improve, and we expect it will through the strategic plan. The problem with the segment and the reason that we had to spend quite a bit of time on our strategic planning process is that we have lacked growth. So we ve got a very profitable company, but one that s not growing. And in my Page 6 philosophy, if you re not growing, you re dying. So, we have to get some revenue growth. As I took over and assumed leadership of the company, and I analyzed the strengths and weaknesses of the company in the first couple of months -- I started on January 1 st -- it became very clear to me that we had to stabilize the Union Electric piece. It is the biggest part of the company. It comprises twothirds of the revenue. It has the majority of our physical asset base. It s been extremely profitable and successful in the past, and we had to put forth the best effort we could to stabilize this business and return it to profitability. So that was our first and the most important objective. We find that, as we analyze the business, there are a number of things that we can do improve it even though we are in a terrible part of the cycle in the steel industry. There is a significant amount of additional costs that we can remove in manufacturing. We re going to capture them. We re going to get them out. And we re going to get it out as quickly as possible. Our products were getting stale. As we were losing margin, we stopped our new product development process. So we instituted a new one. We have approved the products that we re working on right now because the market wants them, and we will be releasing new products beginning in mid-2016 or earlier. And if you re a value-added company, you had better be coming out with new products, although now our customers are not paying for performance; they re buying based on cost. We must have something that puts us ahead of the market because we have aspirations for higher margin. So, we will be spending some of the costs that we have saved. We re going to take some of those expenses and put them into technical development, and Dee Ann will show you that. We need to position ourselves as more of a global player. Right now, our strengths are North America and Europe. That s only 30 percent to 35 percent of the global market, so we have got to get outside of our comfort zone and become a bigger player throughout the rest of the world. Page 7 And then there s a number of other actions. I talked briefly last week in my call about M&A and some other things that we can do to the company that will add synergy and cost reduction that make us a stronger player. The second thing we can do for the Forged and Cast Engineered Products Division is diversify. And we are doing this, and we re jumping in with both feet. Yes, the fracking industry is also suffering at this point in time due to the low price of oil, but we expect that sometime next year that industry is going to recover, and we expect to be a significant player. What we have done this year and, of course, there are more efforts that will continue in the future, but what we ve done this year is shown to you on slide 10. We have added some of the best sales representatives in North America who have historically captured more than $100 million of revenue per year for companies they have repped for in this fracking industry. They are very well-known. We have added logistics capability. I already mentioned the Alloys Unlimited acquisition we made in July. We are moving some physical assets. We re doing some different things to prepare to extend our manufacturing in this product area. And then, of course, we re looking into geography and products, as I mentioned before, in addition to the fracking valve blocks. And you ll get much more detail from the folks to my right as they go through their strategies. On the Air and liquid processing side on Slide 11, we do believe we can grow revenue. Terry will show you how. We also believe that we can reduce costs and improve our margins even further. This is an attractive business. It can be a growing business. And we think there are some things that are adjacent to what we do today that we may be able to get into in the future, so we re going to strengthen our engineering and manufacturing capability and take another look at who we sell with, and increase or change our marketing approach. So that s almost it for me. I have one more slide, slide 12, which is perhaps the most important. Everybody puts together strategic plans. Page 8 What makes them work? This is the second time I have led a company that was in turnaround or was in dire need of turnaround. And I ve instituted this process before. What I want to impress upon you is it is a complete networked process. Yes, we have done a strategic plan. It s never on the shelf. It s on everybody s desk. Action plans have been created. They have been assigned throughout the organization. Those action plans will be followed up quarterly to make sure they re proceeding. Compensation is involved for those who have responsibility for these action plans in terms of bonuses and stock allotments. We have put in place an enterprise risk management organization for the first time in the company to watch our risks as we do some of these things, and if we get involved in more mergers and acquisitions, we will be monitoring and mitigating our risks in a timely fashion. And we have a very strong balance sheet that needs to be mentioned. We have nearly $100 million of cash on the balance sheet. That s a tremendous asset. We plan to use it, and we plan to use it wisely, so we re going to set return on investment goals. We re going to adhere to them. And the other thing and also very importantly-- that comes through my experience of purchasing many companies in the past -- we will integrate those companies, make them a part of Ampco-Pittsburgh. We will study their performance beyond the due diligence that we do pre-acquisition and make them an immediate part of the company and capture whatever synergies there are. So I m going to hand it over now to Rodney and he ll talk more about UES. Rodney Scagline: Well, good morning. And as John said, first of all, I m newly president, and think it s my 10th day today so it s relatively new. I ve been with the company for four years. And I think what John has really presented is the story of change. Now we re changing a company that s been very traditionally managed and offered traditional products. Going forward, the company will be much different, and that s kind of the message. Page 9 And it actually starts somewhat with the name of the segment. We talk about Forged Engineered Products. It used to just be Forged and Cast Rolls, and now it s the Forged and Cast Engineered Products segment. And that is actually a signal that we are changing who we are -- that we aren t just going to be a forged and cast roll producer. We re going to be more than that. One of the key messages I want to present is how we re entering into this other market. The other key message is how we re taking cost out of the systems that was somewhat traditionally managed to more of a lean type manufacturing business going forward. Slide 14 shows the revenue we believe we can achieve through the strategic plan. You can see that we expect the compound annual growth rate on revenue of around 15% -- greater than 15 percent if this plan is very successful. And again this is coming through mostly product diversification, entering other markets that are very much in alignment with the assets that we have currently. And when we talk about diversification, it does not mean diversifying our core competency. Our core competency is actually making steel forgings. Rolls just happen to be a steel forging that we specialize in and we will continue to specialize in, but we re going to use the same talents in the open die forge market to enter into other markets. Slide 15: So, I ll start with rolls, since they are primary products, and I ll talk about the other products. This is a picture from our website. Actually, you ll see forged and cast rolls. That s actually one of our newer machines. It s a mill turning center. I think we spent around $3.2 million four years ago for this machine. It s state-of-the-art. It has the best efficiencies. It s one of the ways by which we can maintain our position as one of the leaders in the roll industry -- taking costs of the system. But rolls have always -- since the 1930 s, s been our main product. What are rolls? You know, I get this question from my wife and kids. I don t think they still understand, but it seems simple because the name itself makes Page 10 people think of coils that are on tracks. Well, it s not actually that. A roll is a piece of steel that deforms and forms the metal in between. It forms the steel. Slide 16: You re seeing a picture here. They re rather large pieces. We make the spectrum from, let s say 2-ton size rolls up to 40-ton size rolls. They re backup rolls. They are edger type rolls. And if we look where rolls are used in the manufacturing system, one of the first distinctions I want to point out is there s actually two different classifications -- there s hot rolling and cold rolling. Slide 17: We have two different plants focused on the two classifications. First, cast rolls are produced at our Gatehead facility in the UK. Cast rolls are used in the hot rolling process. So if we look at all these steps where you see roughing mills (inaudible) or finishing rolls, these are all types of cast products. And the cold mill rolls predominantly use the forged products. The cast roll is coming from our U.K. plant. Our forged roll is coming from our U.S. plants. Now, there is some overlap. There s some cases for cast and forged application, and forged and vice-versa, but that is the exception. Slide 18: So I put a little picture here so we could see a hot strip mill. The rolls are staged down front of it because one of the other items to keep in mind is rolls are consumables. So when a mill purchases a roll, it is going to last some period of time, and then another one will be purchased. Demand for rolls is directly related to the volume of steel that s produced. So when we talk about steel production being down, it s going to directly affect the demand for rolls in the market. And performance improvement on these rolls means a lot to the mill, so there should be a clear path forward with value-added to the roll, because it s tied so much to their ability to keep their uptime and their production. And that s where we ve excelled. Slide 19: I had mentioned we have a U.K. facility. This is our global footprint currently as it sits today. So we see in Western Pennsylvania we Page 11 have essentially three plants -
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