Synalloy Corporation
Q3 2017 Earnings Call Transcript

Published: 10 Nov 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Synalloy Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Craig Bram, President and CEO. Sir, you may begin.

[Craig Bram:]

Thank you. Good morning, everybody. Welcome to Synalloy Corporation's Third Quarter 2017 Conference Call. With me as always, is Dennis Loughran, our CFO. Dennis will provide a review of the Q3 financials and then I'll provide some comments on our business segments and what we're seeing so far in Q4. We'll then open the call to questions. Dennis?

[Dennis Loughran:]

Hello, everyone. As usual, the financial results will be presented using three different methods

[Craig Bram:]

Thanks, Dennis. We were pleased to see momentum from Q2 carry over into Q3. Net sales company wide for the third quarter and year-to-date showed continued strength when compared to the same periods last year, up 59% and 41% respectively. The Metals segment drove our top line performance with strong contributions from each of our product lines. Stainless steel pipe and tube sales were up 103% and 69% over the prior year's third quarter and year-to-date respectively. Excluding the Bristol Metals' Munhall acquisition, sales were up 42% over Q3 of last year, and up 29% year-to-date. Seamless carbon pipe and tube sales were up 84% over last year's third quarter, and 70% -- 74% year-to-date, while storage tank and vessel sales were up 69% and 41% respectively. The backlog in the storage tank and vessels business remains at a record level of $17 million, and a backlog for the stainless steel pipe and tube is a healthy $24 million. Chemical sales in the third quarter did not meet our expectations as a new fire-retardant product was slower to ramp than anticipated. Sales were down 4% from the third quarter of last year, and year-to-date sales were off approximately 2%. EBITDA results for the entire company in the third quarter were in line with expectations, excluding the $0.3 million in expenses associated with an increase to allowance for doubtful accounts in the Chemical segment and one time legal fees. In the Metals segment, EBITDA for seamless carbon pipe and tube was up 359% in the quarter, stainless steel pipe and tube was up 150%, and storage tank and vessels was up 126%. Chemicals segment EBITDA was down 10%, excluding the previously mentioned increase to allowance for doubtful accounts and legal fees. While volume and unit pricing have shown excellent improvement in the stainless steel pipe and tube business, product mix continued to be a drag on profits. In Q2 of this year, we shift a high volume of larger OD sizes for the LNG project helping to drive the highest quarterly EBITDA year-to-date. While our special alloy mix increased marginally in Q3, our large OD shipments declined substantially. This resulted in lower conversion margins at our Bristol facility. As we've discussed in the past, we need to see a ramping of infrastructure projects to drive those special alloys and larger OD orders. After 2.5 years of soft project activity the industry is looking for a rebound in 2018. Inventory losses in our Metals segment in Q3 reflected a sharp decline in nickel surcharges from the first half of 2017 through the third quarter. Though 304 and 316 alloy surcharges essentially did a round trip from the last quarter of 2016 to the third quarter of this year. The result was strong inventory profits in Q1 of this year followed by large inventory losses in Q3. While inventory gains and losses do not impact our adjusted EBITDA, they materially affect our reported GAAP income. Should nickel surcharges hold at the current estimates for the balance of 2017, we would expect to see inventory profits return in November and December. In recent weeks, we've been working on the 2018 plan. Our assumptions include

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Mike Hughes with SGF Capital. Your line is now open

[Michael Hughes:]

Good morning. Thanks for taking my questions. First, on the stainless business, I’ll be quick, on the stainless business, can you just talk about core pricing excluding commodity moves since there's been some consolidation on your part and then one of your competitors did this year just how pricing is looking?

[Craig Bram:]

Sure. There have been several price increases this fall, Mike, the first one was September 1. That was about a 4% increase, and then again, on October 1, which was about a 3% increase. So those increases have held. It's difficult from quarter-to-quarter to be able to isolate those increases in the results simply because our product mix changes pretty dramatically quarter-to-quarter. So as the alloy mix changes, as the size mix changes, it can mask what's going on behind the scenes in the base prices. But we've been pleased so far with the upward trajectory in those base prices and the fact that they've been holding.

[Michael Hughes:]

Okay. So if the mix in the fourth quarter were the same as the third quarter the 7% accumulative price increase because it compounds a little bit more than 7%, would fall to the bottom line, or is it offsetting something? I assume if its base, it's just -- it's all falls to the bottom line.

[Craig Bram:]

Yes. That's -- it's a good way of looking at it, Mike. The bulk of that should fall to the bottom line.

[Michael Hughes:]

Okay. And when was the last time you saw that -- cumulative price increase a little over 7%, when was the last time you had that type of pricing power?

[Craig Bram:]

It's been several years for sure.

[Michael Hughes:]

Okay, okay. And then the project business, you said you are assuming a little bit of a pickup in the 2018 forecast. What are you actually seeing out there? Are you starting to see orders?

[Craig Bram:]

Yes. We -- our guys spend a lot of time in Houston. Obviously, that's an important market for us and the feedback has been positive, optimistic about what folks are expecting what they are seeing right now. We also look at some of the larger E&C companies and what they are saying about their order book. Floor is one we look at quite a bit. And in their Q3 report, their CEO reported that he believes that they are at the start of the next commodity cycle as it relates to the mining business. And then he also talked about the oil and gas side and the downstream petrochemical market. And they're seeing a fair amount of final investment decisions that folks are making on chemical facilities, LNG and pipeline projects in North America right now. So they tend to be kind of on the front end of the curve. They are seeing more activity on design and that kind of work. So that's consistent with what we're hearing from our customers out in the market right now.

[Michael Hughes:]

Okay. And then turning to the chemical side of the business. The $300,000 charge that was all within that division, is that correct?

[Craig Bram:]

That's right. That charge was about $225,000. And there were some legal fees in that same segment of about $80,000.

[Michael Hughes:]

Okay. Can you speak to -- about that?

[Craig Bram:]

The customer -- at the time we took the charge was considering a bankruptcy filing. They have since filed. At the same time, they had another entity that operates out of Europe. And I expect that they're going to be ramping some activity in North America. Obviously if we were to continue making the product we made for them was a biocide that goes into paints. If we were to start doing work with them again post bankruptcy, obviously, we would require payment upfront, funds wired into the accounts. So we expect that business to actually develop again, but because of the bankruptcy filing, we had to take that charge.

[Michael Hughes:]

Okay. So you don't have any exposure left on your books to be done at this point.

[Craig Bram:]

No.

[Michael Hughes:]

Okay, good. And then the implied guidance for the Chemicals business in the fourth quarter. If I adjust for that item, it still looks pretty robust up, I don't know $600,000 to $700,000 at least sequentially, what will drive that?

[Craig Bram:]

Well, the continued ramping of the fire retardant business that was slower coming out of the gate than we expected. We actually -- part of it was on the client end. They had a problem with a plant in Mexico. They asked us to stop what we were doing on the product that we're going to be making for them going forward and ask for our assistance when that Mexican plant ran into some production issues. Then they flip-flopped, they got production issue resolved. And in the meantime, had built up some inventory from their former supplier to make sure that they recovered. So as a result, they didn't need some product from us as early as we had expected to be the case. And then we've had a couple of minor issues that have since been worked out where the color of the product that we were producing needed to be revised and so we've gotten that issue addressed. So we expect to see that ramping continue into the fourth quarter and the first quarter of next year. The agreement calls for them to give us about 3 million pounds a year of volume, and we expect to be running at that rate sometime in the first quarter of next year.

[Michael Hughes:]

Okay. And then my last question just on the Metals segment, same type of question. The guidance implies about $1 million sequential increase. I think seasonally, I thought the fourth quarter was typically a little bit weaker. Is that a reflection of the pricing actions that have stuck over the last 2 pricing actions that have stuck?

[Craig Bram:]

Mike, it's probably not so much the pricing action as it is. We've got a certain amount of backlog in both the stainless steel pipe and tube side and in the vessel business. And because of those backlogs, we actually expect the fourth quarters to be a little stronger than what they've historically been. So that's really driving the sequential gain.

[Michael Hughes:]

Okay. So you're not assuming the 7% price increase in the fourth quarter because part of that's covered by backlog. It did not include the price increase, is that correct?

[Craig Bram:]

That's right.

[Michael Hughes:]

Okay. Okay, I’ll turn it over. Thank you very much.

[Craig Bram:]

Thank you.

[Operator:]

[Operator Instructions] I'm not showing any further questions. I would now like to turn the call back over to Craig Bram for any further remarks.

[Craig Bram:]

As always, we appreciate your interest in the company and look forward to finishing the balance of the year strongly. Thank you.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.