Ampco-Pittsburgh Corp (AP) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Ampco-Pittsburgh Fourth Quarter 2017 Results Conference Call. (Operator Instructions) Please note that today's 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, Andrea, and good morning to everyone joining us on today's fourth quarter conference call. I'm 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 2 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 fourth quarter.

Thank you, Melanie. Good morning, everyone, and thank you for joining our call.

Our earnings release for the fourth quarter and full fiscal year 2017 was issued this morning, and I hope you've all had a chance to read it. I will give a financial review for the quarter by taking you first through our consolidated P&L. Then I'll provide more color at the segment level and then review some balance sheet and cash flow activity.

Ampco's net sales for the fourth quarter of 2017 were $114.4 million. This compares to net sales for the fourth quarter of 2016 of $92.1 million. Net sales in the Forged and Cast Engineered Products segment grew nearly 30% compared to prior year, driven by higher sales of forged engineered products for the oil and gas industry, the full period effect of the November 2016 ASW Steel acquisition and higher sales of mill rolls.

Net sales for the Air and Liquid Processing segment for the fourth quarter of 2017 rose 5% from the prior year quarter. I'll comment more on the business segment results in just a moment.

Gross profit as a percentage of net sales was 18.1% for the fourth quarter of 2017 versus 12.4% for the fourth quarter of 2016. The increase primarily reflects higher Q4 2017 sales volumes and selling prices plus a number of nonrecurring items last year, which diluted the Q4 2016 gross profit margin, including some inventory adjustments related to physical inventory losses, reserves against certain inventory for 2 customers who filed bankruptcy and an unfavorable LIFO cost impact.

Negatives affecting the fourth quarter gross margin for 2017 include higher raw material and operating costs, including the impact of idling one of our foundries.

Selling and administrative expenses were $16.9 million or 14.7% of net sales for the fourth quarter of 2017 compared to $14.4 million or 15.7% of net sales for the fourth quarter of 2016. The dollar increase is primarily related to higher commission charges associated with the higher volume of shipments, higher corporate expenses associated with the company's increased scale, higher fringe benefits and professional fees.

This is offset by a nonrecurring reserve in Q4 2016 of $1.5 million against pre-petitioned accounts receivables from our customer who filed for Chapter 11 bankruptcy protection last year.

Depreciation and amortization expense of $5.4 million for the fourth quarter of 2017 was approximately flat with the prior year. The prior year included an impairment charge of $26.7 million, primarily for the write-off of goodwill in the Forged and Cast Engineered Products reporting unit and a net asbestos charge of $4.6 million, both of which we described at length on the last year's call and in our 2016 10-K disclosures.

Loss from operations for the fourth quarter of 2017 was $1.8 million. This compares to a loss from operations in the prior year of $39.8 million, which is inclusive of the prior year charges for impairment and asbestos litigation as well as the customer Chapter 11 receivable I just mentioned. I'll expand on operating income changes a bit further for you in my segment-level discussion momentarily.

Other expense net for the fourth quarter of 2017 declined $1.1 million versus prior year, primarily due to a small foreign exchange gain in the current year versus FX losses in the prior year quarter.

The income tax provision for the current year includes the effect of the new Tax Cuts and Jobs Act, which, among other things, lowered the U.S. corporate statutory income tax rate from 35% to 21%, implemented a modified territorial tax system and imposed a onetime tax on deemed repatriated earnings of foreign subsidiaries.

The tax reform negatively impacted our income tax provision by approximately $1.6 million in the quarter, primarily related to the onetime repatriation transition tax, offset by income tax benefits resulting from 100% bonus depreciation. There was no cash outlay due to the tax reform, however, it reduced our net operating loss carryback refund opportunity. Additionally, there was no significant impact from remeasuring our U.S. deferred income tax assets and liabilities at the new-enacted statutory income tax rate, since these net deferred income tax assets are fully valued.

We will continue to analyze the tax reform and refine our provisional amounts, which could potentially impact the remeasurement -- the measurement of our tax balances in subsequent quarters.

As a result, the net -- the corporation incurred a net loss of $3.2 million or $0.26 per share for the fourth quarter of 2017 compared to a net loss of $43.1 million or $3.51 per common share for the fourth quarter of 2016.

Now here is some detail on our operating segment results. Net sales for the Forged and Cast Engineered Products segment for the fourth quarter 2017 increased approximately 30% compared to prior year. This growth reflects a significantly higher volume of sales of frac blocks due to significantly higher demand in the oil and gas industry. The full period effect of the November 2016 acquisition of ASW Steel and higher sales of -- volume of mill rolls, primarily cast roll volumes for hot strip mills, and also higher pricing.

The segment recorded an operating income for the quarter -- a small operating income for the quarter, which is a significant improvement over prior year on an underlying operational basis, which is evident, if you adjust for the nonrecurring prior year charges for goodwill impairment and the customer Chapter 11 receivable reserve recorded in Q4 '16.

The main drivers for the improvement were the higher sales volumes and higher pricing, offset in part by higher operating and raw material costs and an unfavorable absorption effect from the idling of a cast roll foundry.

Net sales for the Air and Liquid Processing segment increased 5% for the fourth quarter of 2017 versus prior year as higher shipment volumes of custom air handlers and heat exchange coils more than offset lower shipment volumes of centrifugal pumps. Given the $4.6 million asbestos charge recorded last year, air and liquids operating income rose significantly for the quarter compared to prior year but grew also on an underlying basis from the segment's higher shipment volumes this year.

Backlog at December 31, 2017, approximated $326 million, a 40% increase from the $234 million in backlog at December 31, 2016. This increase is primarily from higher order intake in the Forged and Cast Engineered Products segment, particularly in frac blocks and both forged and cast mill rolls as well as higher order intake in Air and Liquid Processing, primarily of centrifugal pumps for U.S. Navy ship builders.

Now to review changes in the working capital accounts and some other cash related items. Accounts receivable at December 31, 2017, increased $14.4 million from December 31, 2016, primarily from higher sales. Inventories at December 31, 2017, increased $24 million from December 31, 2016. The inventory growth 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 December 31, 2017, increased approximately $10.4 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 $20.7 million at December 31, 2017, declined $17.9 million compared to the December 31, 2016, balance of $38.6 million. Some key uses for the -- of cash for the year included trade working capital growth to support sales and production growth, which I just mentioned, and capital expenditures of $14.6 million for the year.

Drawings on the Ampco revolving credit facility are $20.3 million at December 31, 2017, reflecting the refinancing of higher interest debt assumed in the ASW Steel acquisition of approximately $7.7 million, inclusive of early repayment fees and the balance to fund working capital growth. In addition to its cash balance, the corporation also has remaining availability on the revolver of approximately $56 million at December 31, 2017.

I will now turn the call over to John Stanik for his remarks. John?

Thank you, Mike. Good morning, everyone. While I'm disappointed that we aren't reporting an operating profit for the fourth quarter, I am pleased to report that major progress in many areas continues to improve -- or to occur.

Excluding nonrecurring noncash adjustments that arose in December, operating profit was realized for 2 of the 3 months in the quarter. The exception was the month of November, during which we experienced equipment failures in 3 of our plants. As a result of the associated downtime, revenue was pushed out of the quarter, maintenance spending was above expectation and fixed cost absorption was reduced. November was the third month in 2017 during which we experienced extraordinary equipment failures. The November problems were resolved and our operations have been running smoothly for the last 3 months. However, I'm not satisfied that we have a sustainable corporate-wide maintenance process and capability in place. Therefore, we are actively looking to upgrade our proactive methods and procedures and will add new global maintenance leadership.

The maintenance issues were the only negative of the quarter. We continue to book new business in both our roll business and in our open-die forged business. In fact, our backlog for -- of business for 2018 on December 31, 2017, as Mike just said, is approximately 40% higher than it was December 31 of 2016. This means that our markets continue to strengthen in both of these areas. Additionally, and very importantly, we achieved new production and shipment records for rolls and frac blocks in October and December.

You may recall during our last call, we reported a global shortage of electrodes and refractories. The lack of availability has resulted in significant cost increases to procure them. Consequently, on November 3, 2017, we announced that we were going to impose pricing surcharge -- surcharges for both electrodes and refractories beginning January 1, 2018. As many of our customers have imposed similar surcharges and price increases to offset these costs for themselves, most have accepted our surcharge.

Raw material costs continue to be at a higher level than they were in 2016. In fact, the total 2017 year-over-year purchase cost increase was in the range of $4 million globally, equaling more than 40% of our whole year operating loss. Our sales force has been working very hard since 2017 to institute pricing surcharges for raw materials on customers who, at the time, did not have them in place.

Now approximately 2/3 of our customers have contractual surcharge coverage. However, this is still not our preferred level, and we will continue our efforts to negotiate them into new contracts. I am happy to say that our contractual product pricing for 2018 is considerably higher than in 2017. While the November manufacturing difficulties pushed some 2017 product to be produced and shipped into January of 2018, contractual pricing -- 2018 contractual pricing is now in effect. Due to the rising cost of our raw materials, labor and benefits and the fact that not all of our customer contracts include raw material surcharges, we expect to announce price increases in the very near future, prior to the 2019 customer contract negotiating period, which will begin this May.

As promised, the first roll product of the new TwinAlloy product family was launched in December. We continue to be very excited about this series, as these products are expected to improve the cost effectiveness of our customers' rolling mills. Testing and actual service supports our claim. Assuming the recently announced tariffs have the impact that is hoped for, which is increasing the utilization of capacity of our customers in the U.S., cost-effectiveness improvements will become critically important to them, and the higher prices we will charge for the TwinAlloy rolls should be easily justified.

The first product in this series, VICTURA, is applied to the finishing end of hot rolling mills. Future new product launches will be aimed specifically at other sections of a rolling mill. The next TwinAlloy new product launch is tentatively scheduled for the second half of this year. We are a world-leading roll technology company, and I strongly believe that such a company should be responsible for regularly improving its product line capability. The fact that we were able to fund and launch this significant breakthrough in less than 2 years is a testament to our R&D capability.

Another important accomplishment in the fourth quarter is the progress we made in repurposing the Pennsylvania cast roll plant that was partially idled beginning in April of 2017. It now plays an important role in the manufacture of overflow rolls and open-die forged products, including frac blocks. We relocated and installed equipment in order to achieve this goal. As a result, the plant was an important contributor in achieving our production records in October and December. The overall future of that plant in the short-term will continue to be based on this strategy. However, the steel and aluminum tariffs announced last week could have an impact on our plans, should U.S. roll demand increase further.

Let's talk a little bit about the global tariffs. As you know, the newly announced tariffs of 25% and 10%, respectively, for steel and aluminum imports will be applied very soon. Being a global company, the tariff represents good news for our U.S.-based business and could have very little impact on our European and Asian manufacturing, as they are mostly region-centric. However, some scheduling adjustment may be necessary.

Currently, our European plants provide most of the cast rolls that we ship to U.S. customers. With the tariff in place and customer rolling mills expected to operate at higher capacity utilization, greater roll consumption and more spares may be needed at our customer sites. The impact of this could be increased sales potential for hot mills and cold mill rolls. The recent weakening of the U.S. dollar along with higher rolling mill utilization rates could create more favorable circumstances to restart the down portion of this partially idled Pennsylvania plant, if certain cost inefficiencies can be corrected.

Since the tariffs exclude Canada, at least initially, they have no negative impact on our Canadian subsidiary, ASW Steel. We will follow all announcements closely regarding potential future changes to the tariff that may threaten the Canadian exception and prepare proactively.

I want to briefly mention the 2017 revenue growth of our equipment business. From an operating standpoint, revenue grew by more than 4%. That may not sound like a lot to you, but consider that Aerofin's major customer base for the coal-fired power market still has not recovered from its decline in 2015 and 2016. That used to be the #1 vertical for that business.

Further, during 2017, an important market for buffalo pumps, turbine power generation, significantly contracted. This resulted in a few million dollar reduction in sales compared to our expectations. Thus our team managed to grow revenue even when faced with these substantial headwinds. The faithful execution of their strategic planned initiatives allowed this to happen while maintaining their operating income contribution to the corporation.

There were a couple of developments late in the fourth quarter and in January about which we have received questions from a few shareholders. One was an S-3 shelf registration statement filing made by the company, and the other was a 10B5-1 trading plan adopted by The Louis Berkman Investment Company, a significant shareholder of Ampco.

I'd like to clarify both of these matters to hopefully eliminate any confusion. The filing of the shelf registration statement was pursuant to a contractual obligation we entered into at the time of the Åkers acquisition, which was completed in March of 2016. In the acquisition, we issued unregistered shares of Ampco stock to the seller and agreed to register the shares at a later date, which we now have accomplished.

While the registration statement is effective, we believe none of the shares registered have been sold by Altor to date. Altor was the seller of the business, by the way. The second term -- item -- excuse me. The second item involves sales of Ampco stock by one of our significant shareholders, The Louis Berkman Investment Company, pursuant to a 10B5-1 plan, a trading plan for which insiders of a publicly traded company can sell a predetermined amount of shares at a predetermined time regardless of whether there is an open window for insiders. This plan was adopted by The Louis Berkman Company to allow members of the Berkman family to satisfy liquidity and diversification objectives.

I have a brief update on the identification of my successor. As I've said previously, the Board of Directors has created a CEO search committee, and the committee has started its search. I don't have any definitive information beyond that to provide to you at this time. I continue in my capacity with all the focus and determination that I have had since my first day as CEO of Ampco-Pittsburgh in January 2015 and will continue to do so until there is a smooth transition to a new CEO.

I am involved in the process, and I'm both pleased and convinced that the committee is doing their very best to identify the appropriate candidate. I do not have any projection of a date for an announcement at this time.

I'll end my comments with a look ahead, I have high expectations for 2018 in general, considering the vast amount of progress that we made in 2017. The surcharge coverage we will get in place. The 2018 price increases already embodied in contracts and ongoing improvements in our operations capabilities will all help, and we will continue to improve beyond that. We are very focused on reducing manufacturing inefficiencies and reliability problems. I expect revenue increases, barring any currently unforeseen negative market occurrence, and gross margin should continue to increase. That has already been shown in January. As Mike reported, 2017 revenue grew by 30% over 2016. For a company that's had its revenue decline 4 of the 5 years consecutively due to market conditions, this is an exciting development.

Yes, the majority of this growth resulted from whole year contributions from our 2 major acquisitions made in 2016, but our growth goes beyond that. And we will demonstrate this again in 2018.

Companies that are able to grow and have initiatives in place to improve cost efficiencies and the market capability to increase prices to offset inflationary cost increases have potential. Ampco-Pittsburgh Corporation now has that potential. As evidenced, despite the downtime that occurred in 2017 in our manufacturing plants and the raw material cost increases, our gross margin in that year grew 600 bps. Other than ERP software implementation at some of our acquired facilities, the integration of the Åkers Group and ASW Steel was completed. We launched a new product. The lag time embedded within our surcharge models will expire, and we'll begin to capture surcharge protection for 2017 raw material cost increases.

And finally, our price increases will have a cumulative effect on our gross margins. I am very pleased with where this company is right now. Its future prospect is to continue to grow and with increasing margins. Thank you. We will now take your questions.

(Operator Instructions) And our first question comes from Michael Gaugler of Janney.

Well, I've got 3 questions, John. I'll start with the easy one. Wondering if you can give us just a brief overview of what you're seeing in the frac blocks? Is the market demand accelerating? Has it flattened out?

Well, if you read the reports that are published every week, it seems that the United States will -- expansion is continuing, at least by small numbers, and the Canadian number of wells seems to have stabilized. There is business out there. And I would say that it's continuing to grow. We continue to get more pressure to supply blocks to additional customers that's difficult for us to do at this point, although the production records that we talked about in December and October certainly help give us confidence that we can sell more than we did at the end of the year. So I think the short answer is that there's at least a stable level, but probably it's growing a small amount.

Then on to a stickier question, and I don't know if you can answer this or not. But kind of along the same lines, with the NAFTA renegotiation pushing forward, if that goes poorly and you decided to move ASW operations into the U.S., any idea of what kind of cost that could generate on your side to do something like that?

Well, I hate to say it, Mike, but it's -- it would be sizable. The ladle metallurgy equipment that ASW has can be moved. There's no doubt about that. You can't move experience. And these are -- this is equipment that is embedded in the ground with extensive foundations and concrete, et cetera. Power requirements are very expensive. So it's important for us to continue to get an exception. And as I mentioned in my comments, we are looking into proactively what type of a case we can put together regardless of how the NAFTA investigations go, being a U.S. company and ASW selling exclusively to a U.S. company. We -- hopefully, there will be a way that we can accomplish that objective.

Okay. Then finally, I know you were looking for -- you were hoping for some level of profitability for last year. And certainly, the tax reform and job -- the tax cut and job reform act didn't help that out. Do you think it's a first half 2018 event or a second half 2018 event?

I do think it's a first half. Mike, if we were to cook all this stuff down, basically we're not getting enough price for what we're doing. We're not getting enough value for our products. It's been a long, painful process to get that price in place. The roadblock that we encountered last year with the sizable raw material cost increase of $4.2 million, whatever the exact number was, the fact that we idled a plant that cost us roughly another $8 million, you take those 2 elements out, and we have a pretty decent year, maybe a $0.50 year. And I'm really generalizing here when I make that comment. So as these surcharge time lags expire, as we get the price increase that has been negotiated months ago that began effectively on January 1 of 2018, as we get more price increases for blocks because of the growing market case in that situation, we finally should be getting the numbers that our products merit. And yes, we have some other problems. We've got a pretty serious maintenance issue that we've got to resolve. But all of these things should come together. There's been so much improvement in all the other areas of the -- of running the corporation, it's basically this one last agreement. Now things always happen and go bump in the night, that type of thing. But the stars are aligning at this point.

Our next question comes from John Walthausen of Walthausen & Co.

Okay. I'll try to limit myself to 2 questions, move it in the right direction, both about the fourth quarter. And the simpler one, when I look at your notes about ASW ran $47 million in revenues for the year but a bit less than $11 million. Am I looking at that the right way to say that things slowed down there? And if so, [could be] explained. And then the second -- well, I'll just do that question.

No, not at all. I think it's actually the opposite. I think that ASW did better as the year progressed. Now we have encountered a loss of a major customer in our market for ASW, who literally closed their factory. That's going to have some impact in the first quarter as we try and replace that hole that was created. But in terms of 2017, as the year progressed, ASW continued to do better. And we're quite confident that given a few months, we'll be able to fill the hole that was created in January when the one customer I mentioned shut down. Mike, do you have any...

Yes, John. I'd just say, to add to what John just said, ASW, we acquired the business at the very beginning of November of last year. So part of what I was describing in my remarks was just the full quarter or full period effect of ASW being one piece. But ASW sales have grown significantly from the time frame when we acquired them. And another important key factor is that in addition to its trade sales of steel to customers, it's a very valuable contributor on an intercompany basis to providing a significant load into Union Electric Steel for the production of our forged engineered products, primarily frac blocks and some other products. So there's a heavy internal sales demand on that business, and it's a very important part of the supply chain we've built for the oil and gas end market.

That's very helpful. I was wondering whether it wasn't just external sales that were quoted in there. And that's good to hear. The second question is, when I look at the fourth quarter versus the third quarter, you gained sales of, I think, a bit more than $10 million. But only -- if I take out some of the extraordinary things, only about $1 million more operating income, which that's -- it would strike me that, for your businesses, the incremental margin should be more like a 30% type thing. So I'm guessing part of that is the November issues that you talked about and some is the raw material [versus] pricing squeeze. But can you breakdown what the relative effects of those 2 things were in that lack of margin improvement?

Yes, John. On a sequential basis, Q4 versus Q3, first, the incremental margins aren't quite at that level that you mentioned, number one. Number two, you're right, the operating problems that we had, especially as John indicated in his remarks, that were especially evident in November caused some underabsorption, much more so than in the prior quarter, and that was a key factor. Raw materials just crept a bit in Q4 versus Q3, but most of the rise in the raw material effect for the full year had occurred around and kind of peaked out in Q3. There was a slight creep in Q4. So that was a part of it but a lesser part of it.

But if you think about -- if the cost increase is $4 million, so let's assume that the run rate is around $1 million. And then the added expenses with the maintenance repairs, as I said in my comments, we were -- we had made an operating profit for 2 of the 3 months with November being the -- basically, the sole negative factor that produced the $1.8 million operating loss.

(Operator Instructions) Our next question comes from Justin Bergner of Gabelli & Company.

First question would relate to just if you could review again the timing of the price negotiations. Sort of what price increases are taking effect from prior negotiations? What would be the next round of price increases to take effect from future negotiations, just the timing of that set of events would be helpful.

Yes, typically, the contract negotiation period for the following year begins in April and ends sometime in August or early September. We're experiencing customers wanting to negotiate for periods longer than one year, which I take as a sign that the market is stronger and they are trying to fix their costs for beyond one year. That's something that we're being very careful about in this year. There is a portion, however, Justin, of our revenue that is not done in the way I just described, and it's more on a spot contract type of basis, where it's not for a -- for the period of a year or more. I would say that's a relatively small portion, maybe 20% to 30% at most. But certainly, the big guys that we deal with, with maybe 1 or 2 exceptions, all fall within that 3- or 4-month period. So when I say that we're going to be announcing a price increase, we should be announcing that probably by a press release sometime in the next month or 2.

Okay, great. That's helpful. And then the price increases from last year's negotiation took effect roughly around January 1.

Correct, yes.

Okay. So the pricing book for this year is pretty much set, except for that 20% to 30%?

Yes, except the frac block business is roughly a 3- or 4-month cycle. So we'll continue to price those. In fact, that's exclusively the case. So it's unlike the roll business. We have opportunities to make adjustments much more frequently there.

Okay. Switching to the raw materials. The $4 million year-on-year increase in raw material prices, how does that relate to the 1/3 -- I mean, does that include or exclude costs that are recovered by the surcharge mechanism?

It includes the -- it's a gross number, but if you remember from prior calls, we have a time lag of at least 6 months in our models. So in the third quarter, during my call, I mentioned -- I think I did, that I mentioned that we were still paying customer credits in 2017 through the month of October for raw material cost decreases that occurred in 2015 to '16. So we were actually -- how do I say this, actually doubling the negative impact. That's over now. And since November, we have flipped, and we are beginning to receive positive contributions related to the surcharge coverage. The fact that we only have 2/3 of our customers now -- and that's been a progressing thing. It was less than that prior to the end of the year. Considering that we only have 2/3 of those customers, that's still not a good situation for us, and our sales force is trying very hard to increase that number somewhere hopefully into the 80s. But to answer your question, I think it's in positive territory and should stay there and should increase for the next few months.

Okay. That's helpful backdrop. Just finally, on the tariff issue, you presented sort of a relatively sanguine case for the effective U.S. tariffs on your European Asian roll business, if you could just help -- if you could just elaborate on that a bit more. And sort of what's the bear case for the effective tariffs on your international business?

Well, there's really only one negative potentially. Forget Canada for a moment, I think, that's going to be safe for a while, and none of us know how long. But going back to the fact that a lot of our hot mill rolls are produced -- the metal for those are produced in Europe, that is the negative. So how can this company respond competitively to eliminate the tariff, or in some way improve its financial performance. And the obvious answer may be the Pennsylvania plant that's idled, which we could reactivate, restart and take a bunch of new business. It would have somewhat of a negative impact on the plants in one of the plants in Europe. But it would certainly help the financial situation that we had in 2017 with respect to that plant. The problem that we have there is this really damaging union contract that's been in place since we bought the facility and the reluctance of the rank-and-file to adjust. So it becomes a question of economics, what can -- what is the best operating scenario for the company? Where can we make the most money? Is that with the Pennsylvania plant restarting its melting facility and producing the rolls? Or is it with the European facility continuing to make the metal, us paying the tariff and generating operating income?

Got it. And then, are you worried about decreased demand for forged and cast rolls from international customers, if the production of steel in those international markets is affected by U.S. tariffs?

Well, roughly 1/3 of the rolls that are consumed in the United States come from Europe, excluding us. So they're coming from 2 or 3 countries over there. So the tariff will make it more difficult for them to be competitive. And that should be a positive for us. I was just passed a note, Justin, that we're not certain that the tariffs will apply to finished parts. So the rule being new is still subject to interpretation, and we don't have a final judgment yet. But if what I just said is accurate, then the answer I provided on our European competitors would also not apply and the competitive situation would be pretty similar to what it is today.

Got it. So that's very helpful. So basically, you think you have a more U.S.-centric footprint than the bulk of your competitive set as it relates to U.S. demand?

Absolutely. We believe that we have the greatest capacity to supply in this country than our competitors.

Our next question is a follow-up from John Walthausen of Walthausen & Co.

I wanted to switch over to the new model of rolls that you introduced. And I was wondering how many rolling mills are those actually operating in now and what the expectations for the mill operators are of those rolls.

Well, typically most customers will go through a trial period before they commit such an important high-cost operation to something new. But we have more than a dozen mills running on those rolls already, and they've only been commercialized a short period of time ago. So that tells me that is there's a great interest in our claims and proving that those claims are correct, which we're, of course, convinced they are.

And those claims are basically a longer-lasting, primarily? Or is it also getting a more precise thickness?

Well, I think they're one and the same. Longevity without surface marks on the steel product is what the key is. But I think there are also advantages to taking the roll out of service for refinishing less frequently. So there -- not only is the roll lasting longer overall, but it's lasting longer from refinishing to refinishing, if you understand what I'm trying to say.

Yes. No, I know exactly. I understand precisely. I grew up in (inaudible) after all. So the -- how long will we -- it take before we know whether those dozen mills that are running it are getting the results that have been promised?

Well, first of all, we have bunch of data from the trials that have been ongoing for, I want to say more than a year. But it would probably -- I can't really give you a good answer, John. It would probably be different for customer to customer. This is the finishing end. It would depend on how -- what the specific customer's experience was with the rolls they used previously in terms of the time between refinishing the roll. And I don't really know off the top of my head what the longest service of those 15-or-so mills is.

Okay, that's helpful. And then, in making these rolls, is it complicated enough so that it will take us a while to get full efficiency in producing those so that we can get our cost down to where we want to? Or -- is that a correct assumption? And can you put some time frame around that?

No, I think we are pretty adept at making those rolls now, unless you're just talking about the general issue that we're having with maintenance. Is it -- what are you referring to?

No, no. No, specifically just the sort of the learning curve (inaudible) product.

I think the learning curve is behind us.

Our next question comes from Timothy Chatard of Quantum Capital Management.

I think in prior calls, there was some discussion about the effort to develop some new product within the forged segment outside of the frac block. I'm just trying to see if there's any update there with anything.

Well, there's 2 areas there. One is the ongoing R&D efforts to -- which are TwinAlloy efforts for forged rolls. That's one area. And those are in the backseat, so to speak, when compared to hot mill cast rolls. The second is the diversification into the open-die forged product area. And the only thing I can really say right now is that we continue to put more products into different industries. These are generally small numbers, so we're talking probably somewhere in the area for '17 of less than $10 million of sales, excluding blocks, of course. And we expect that number to grow. We have some prospects that we may be close to announcing here within the next couple of weeks. But it's a process, and it does take some time. And every quarter, I will continue to update that situation. If we have any breakthrough orders, you'll see press releases on those that will publicize us getting into new markets, et cetera.

Can I ask one question on big picture level? Looking at the business broadly, going back to the prior cycle, prior to the global financial crisis, so the last time we had strong steel markets, the business was operating high-20s, low-30s gross margins. Obviously, the business hasn't approached those levels in recent years. But wondering, especially with the new product introduction, the VICTURA and other follow-on products that might come from that, I think, have been implied to be at better gross margins than the existing portfolio. Is there a reason structurally why this business is a 20% gross margin business today at its peak as opposed to high 20s to low 30s. Can it approach those levels that you had in the past? Or is there any reason to change those ranges?

Not today, to answer your last comment. I think that we are -- this business and our competitors are all struggling with a multiple year, 6- or 7-year decline in consumption of rolls. The fact that our customer base was in financial distress during that period of time, and we were compelled to lower prices and lower prices and lower prices some more. So we are trying to heal and recover that margin, that price. I think that the companies, and I venture to say all of our competitors also, have done a great job with getting blood out of the stone from a cost standpoint. But there eventually runs out. That -- those types of methods eventually run out. So it's going to take a little bit of time, when you release a product like VICTURA, we expect our margins to be beginning of cycle, if you know what I mean, from a new product standpoint. So we would expect to be earning margins higher than the ones you mentioned going back to the first decade in the century, the higher than 30%. That's my aspirations for the new product and to roll out 3 of those in the next 18 months. And hopefully, behind that, a forged roll, I think, gives us a really strong potential for the future.

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

Yes, thank you. I have just a few. I won't repeat the comments that I provided during my presentation, of course, other than to say Ampco-Pittsburgh Corporation is growing. Our bench is deepening, our strategic plan is working, our margins are increasing and it's an exciting time for the employees and the corporation. I continue to feel very good about what we have accomplished in the past 3 years, and I look forward to this company continuing to realize its full potential with respect to sustaining growth and profitability.

I'd like to thank everyone for your time and wish you a great remainder of your day. Goodbye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.