Synalloy Corporation
Q3 2014 Earnings Call Transcript

Published: 28 Oct 2014

[Operator:]

Good day ladies and gentlemen and welcome to the Synalloy Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, President and CEO Mr. Craig Bram. Sir you may begin.

[Craig Bram:]

Good morning everybody and welcome to Synalloy Corporation third quarter conference call. As usual with me on the call is Rich Sieradzki, our CFO. After viewing the Company’s results, we will provide you with a brief summary of each business units’ performance followed by Q&A. We will present our financial performance for continuing operations only for the current period and year-to-date as well comparisons to the prior year using three different methods, GAAP based EPS, No. 2 adjusted net income on non-GAAP measures defined in the earnings release and No. 3, adjusted-EBITDA on non-GAAP measure also defined in the earnings release. We believe the two non-GAAP measures we will provide additional clarity on the performance of our respective businesses. Third quarter GAAP based earnings were $3.18 million or $0.36 per share an increase of 115% over the third quarter 2013 earnings of $1.48 million or $0.23 per share. Remember that the Company’s common stock offering in September 2013 increased the number of outstanding shares by 2.3 million. Nine month GAAP based earnings were $11.21 million or $1.29 per share an increase of a 181% over the prior year’s earnings with $3.99 million or $0.62 per share. Third quarter non-GAAP adjusted net income was $2.47 million or $0.28 per share an increase of 81% over the third quarter of 2013 adjusted net income of $1.36 million or $0.21 per share. Nine month non-GAAP adjusted net income was $8.05 million or $0.92 a share an increase of 64% over the prior year’s total of $4.9 million or $0.76 per share. Adjusted net income for this year’s third quarter and nine month period will reduced by approximately $3.9 per share due to tropical storm Odile’s impact on Palmer’s operations as well as several large medical claims. Third quarter non-GAAP adjusted-EBITDA totaled $5.15 million or $0.59 a share an increase of 37% over the third quarter 2013 total of $3.76 million or $0.58 per share. Nine month non-GAAP adjusted EBITDA totaled $17.02 million or $1.95 per share an increase of 48% over the prior year’s total of $11.52 million or $1.79 per share. Net debt at the end of the third quarter was $790,000 down from the end of 2013’s total of $21.66 million. Let me touch on each of the business units. Manufactures Chemicals, sales in the third quarter of 2014 were up 4% over the third quarter of last year while sales for the nine month period were up 8% over the same period last year. Adjusted-EBITDA in the third quarter was down 9% over the third quarter of last year and up 4% from the nine month period. As mentioned in the earnings release EBITDA in Q3 was lower than the previous year due to a large back debt credit in Q3 of 2013, larger corporate expense allocations in Q3 of 2014 and adjustments to the incentive bonuses in Q3 of this year. MC continues to pursue additional business in the oil and gas sector as well as related products. Over the next several quarter MC will be upgrading and replacing several reactors will provide for an increased capacity and additional throughput. Looking at CRI Tolling. The build out at CRI continues to progress nicely and we anticipate additional volume ramping up in December. As previously announced we have signed a three year tolling agreement to produce a line of products for BioBased Technologies. The initial volume will be 6 million pounds annually with the potential to grow at over 10 million pounds. Both net income and EBITDA continue to exceed our targets for the quarter and year-to-date. Moving on to BRISMET. Adjusted net income for the quarter up 135% and adjusted-EBITDA was up 94% over the same period last year. For the nine months period adjusted net income was up 154% and adjusted-EBITDA was up 121%. Inventory profits in Q3 were approximately $808,000 and for the nine month period totaling $121,000. Over the last 30 days nickel prices have fallen about 14% and are now well under $7 per pound. Looking at forecast for the next two years several firms continue to forecast nickel to be in deficit with nickel prices approaching as much as $10 per pound. We will have to see how that plays out obviously. Conversion revenue per pound continue to improve in Q3 increasing 7% over quarter two of this year. In addition our distributor customers remained positive on the prospects for increased business in 2015. Finally Palmer, Q3 revenue was down 25% over the prior year due to several factors. First Q3 of last year included a large Salt Water Disposal project with very low margins. Revenue associated with this project was approximately $1.2 million. Second, we lost a full week of shipment due to tropical cyclone Odile, while we expect to recapture these shipments in Q4, revenue in Q3 of this year was reduced by approximately $600,000. While revenue was down sharply our cost cutting initiatives helped to reduce the impact on our operating income. Gross margins actually improved by over 200 basis points from a Q3 of last year and operating income was down by only $150,000 over the prior year’s quarter. Palmer’s order book remains very strong and while oil prices have dropped considerably in recent weeks both the Permian and Eagle Ford are two of the lowest cost Shale basins in the country which should result in solid drilling activity from next year even oil prices remain depressed. Let me make a few final remarks here. Our exit from the Fab business is nearly complete as we work through the sale of surplus equipment, scrap inventory and miscellaneous items. Over the last five plus years this business unit has struggled to produce consistent profitability and acceptable return on investment. Having freed up that capital and the time required of our management team to oversee that business unit, we are now well positioned to ramp up our acquisition efforts. Our cash balance of almost $21 million nearly equals our debt all of which is term debt at very favorable interest rates. We will continue to focus on acquisition opportunities in the metals and chemical spaces and we will keep posting on our efforts. We continue to look for 2014 to be a record year of profitability for the Company and see growth prospects for 2015. I will now open up the call for questions.

[Operator.:]

Thank you. [Operator Instructions]. Our first question comes from Todd Vencil of Sterne Agee. Your line is open.

[Todd Vencil:]

Just -- that was a good summary thanks for that. If you think about the efforts to sort of push pricing and improve the mix in a pipe business. I mean it sounds like you are making progress on that, but can you give us a feeling of where we stand and how far we have come and how much further we may have to go?

[Craig Bram:]

Sure. Certainly a product mix has been our focus this year. We have seen that mix improve which has driven our conversion revenue significantly higher than where it stood in 2013. I think the last quarter’s report I spoke to the fact that our conversion revenue is just taking our revenue minus material cost and spreading that over the pound sold. Each quarter of this year it’s continued to improve, now that certainly has been impacted by what we saw as a pickup in nickel prices through the first half of the year. So the benefit of those rising nickel prices are starting to be felt if you look at the surcharges now they’re starting to drop off. So that certainly going to be a factors as we look out towards the upcoming quarters. That being said the volume in terms of the products we are selling, we continued to be very happy with what we are seeing there. We had some nice orders in the 316 alloy area. The special alloys pricing as we noted in the earnings release, those prices have declined as simply a function of the type of special alloys we’re selling. But by and large that conversion revenue has certainly exceeded our expectations for this year. And as we look at the 2015 we are in the middle of our budgeting process now so we will try and put a final look on those numbers going forward. But generally speaking we are pleased with where we stand on the conversion revenue side.

[Todd Vencil:]

Very good. And then on Palmer, on the $600,000 I guess order that you said you weren’t able to or the $600,000 revenue you weren’t able to ship and you think you will pick up in 4Q. First of all did I hear that right? And second of all I know 4Q tend to be impacted by weather and seasonality so you think you can sort get that in and that will be additive on top of you otherwise would have gotten?

[Craig Bram.:]

Yeah that’s the expectation Todd. We expect that to show up in our October revenues.

[Todd Vencil:]

And then last question for me. You have been working toward filling up CRI and you have done a good job kind of keeping as up as you get booked to bill out there and then the orders in to bring us some volume, where do you stand in both of those processes?

[Craig Bram.:]

The build-out -- the BioBased Technologies work is scheduled to start on December 01, and we still feel pretty good about where we are the build-out schedule, that initially -- the annual volume of 6 million pounds we think that will ramp fairly quickly. And then we’ve got a number of CapEx projects that we’re looking at. The TROI business is continuing to ramp at CRI. Again we are kind of in the middle of the budgeting process but our annualized run rate on pounds through CRI for this year are probably in the order of 20 million pounds to 21 million pounds. And I expect that our budget for 2015 that we will be looking at somewhere between 40 million pounds and 45 million pounds going through that facility. So most of that we have got either booked through existing agreement or we got projects far enough long that we expect -- that they’ll bear fruit for us by the middle part of 2015.

[Operator:]

Thank you. [Operator Instructions]. Our next question comes from Nick Prendergast of BB&T Capital Markets. Your line is open.

[Nicholas Prendergast:]

I just had a quick question and you kind of touched on this with Todd and you also touched in our prepared remarks but regarding oil prices. You had mentioned that you don’t expect it to affect Palmer predominantly because the Shale play it’s working in the cost basis there. But as I understand the Specialty Chemicals is also leveraged a little bit to the oil and gas space. So does the declining oil prices affect them at all?

[Craig Bram:]

Well at this point we have got a run rate of chemical sales to the oil and gas sector of our $3 million and we really don’t expect any negative impact from oil prices at this point in time. And I continue to believe that you are going to have to see a sustained decline in oil prices or lot of the projects that we are supporting to slowdown or get turned off particularly on the Palmer side our sales folks are talking to the customers all the time and quite a bit of what we are selling oil and gas chemical wise is going into the Permian through a couple of distributors up in that market. And the Shale folks, the Chevron folks they’ve got enormous amounts of acreage up in the Permian and they are continuing to do their thing. EOG which we do a lot of work with them in the Eagle Ford is also stepping their activity in the Permian. So at this point of time we don’t see anything certainly changing in 2015 as in regards the demand for either the storage tank side of our business or the chemical side of our business.

[Nicholas Prendergast:]

Got it. Okay that’s very helpful, I appreciate that. In the past we had a favorable antidumping rolling with regards to OCTG and now I don’t know if you have seen but there has been a recent somewhat complaint about line pipe antidumping. Do you have any comments about that?

[Craig Bram:]

Well we don’t make line pipe so that’s not a thing that crosses our radar.

[Nicholas Prendergast:]

Okay, fair enough. And then I guess on the cost savings plan. I know previously you said you expected about $600,000 in Q3 another $600,000 in Q4, is that still the plan. And beyond that are you seeing anything on top of that in ’15?

[Craig Bram.:]

We are continuing to come out at a $1.75 million to $2 million range for the full year 2014. At this point since we are working on our budget so I don’t know what additional savings we may develop. But the plan is after we have wrapped up the year’s numbers and reported as we did last year we will give you a forecast of what we expect will happen in 2015. And we will try to do that on a quarter-by-quarter basis as well as we can. So that all the analyst have a good handle on what our expectations are in terms of earnings and EBITDA for 2015.

[Nicholas Prendergast:]

That makes sense. And then finally, do you have any plans on what to with your Bristol assets, as I understand you still have the building and maybe some equipment there.

[Craig Bram.:]

Yes, we have the Bristol Fab building, we have of course acreage adjacent to the pipe manufacturing facility. We are actually in the process of having several parties look at surplus equipment and surplus scrap inventory. We expect to get that sold before the end of the year. In terms of value of that it’s probably on the border of $750,000 to $1 million somewhere in that range. As far as the building itself goes, we continue to explore how we might utilize that in some of our metals business activities. We also have received enquiries from folks who are in the Fab business that may have an interest in acquiring that facility, but we really haven’t entertained that level of discussion just yet but that’s kind of a snapshot on where we are on that property.

[Nicholas Prendergast:]

Okay. Well that a pretty much answered up for me. Thank you very much.

[Operator:]

Thank you. And our next question comes from Charles Gold with Scott & Stringfellow. Your line is open.

[Charles Gold:]

Let me turn next question around about losing business because of the price of oil going down. Are there some benefits to the company as in running your plants and input in the chemicals that a lower hydrocarbon price afford you?

[Craig Bram.:]

Well certainly net -- gas prices come down, our facilities will benefit from that. But utilities are fairly small percentage of our total manufacturing expenses at the end of the day. As far as raw material on the chemical side we certainly -- we will have expectations from our customers that when raw material price is in the case of any petroleum based products when they go up our customers expects prices to go up, when they go down they expect them to go down. At the same time we try to manage that in the way that we continue to stay out in front of that as best we can.

[Charles Gold:]

Let’s talk about future a little bit. My clients are mainly retail clients, but they do own a lot of shares of the stock they get a little confused when they look at the report and have a choice among $0.36, $0.28, minus $0.22 and all the explanations. So I would think that the lot of those adjustments are now behind us with Bristol closed, Ram-Fab sold and no other acquisition to date. So I would think the quarters going forward will look I believe a little easier read even though have had that feeling before and I have been wrong. Let me summarize where I see you are today and please correct me. I see a bullet proof balance sheet, no net debt and that’s an unusual situation. I see your run rate of $200 million versus maybe $240 million but the $200 million ramping up because of the both sides of the business so maybe $210 million, $220 million with no changes next year. I am seeing higher margin forgetting nickel, nickel lose up 4% today by the way. And I am assuming that you told me that you see lots of opportunities across your desk, so I assume that $20 million in cash or some of that will be put the work during the next year. So if you could just talk more about your vision for 2015 and beyond. I think that might be helpful for my clients.

[Craig Bram.:]

Sure, we are happy to. To address Charles, the later part of your question. We do see a lot of opportunities across on our desk. We continue to focus on opportunities in both the chemicals and the metal space. We have spent a lot of time I think in various forums talking about criteria that we are looking for from an acquisition standpoint. I guess first and foremost is a company that is complementary to our existing businesses and has an excellent management team in place. The other thing that’s extremely important is for the deal to be accretive. And finally if I were to rank these things, obviously we need the leverage that we are taking on as a business to reflect that we do and we always will have some cyclicality in our businesses. So we want to make sure that our use of leverage is at healthy level. And typically what the Board has decided is that after we do a deal having debt to EBITIDA 2 times to 2.2 times is about right we don’t want to reach out much beyond that. And so you are right about the balance sheet right now is strongest it’s ever been, since I’ve been on the Board anyway, with almost $21 million in cash and a similar amount of term debt. We have got obviously a lot of powder available to make an acquisition. And I would also say that with the Fab situation 99% behind us we also have shed a very time consuming very difficult business to manage. So we probably never been in better shape to pursue not only acquisition opportunities but organic growth opportunities. So I would counsel your clients, if they are not going to see us go out and do any kind of crazy acquisition that is going to be in brand new sector for us. You are not going to see us go out and do something that is not materially accretive to our operation going forward. And we are going to continue to manage our balance sheet as strongly as we possibly can.

[Charles Gold:]

And how about a view of 2015? I know you haven’t done the budget yet, but are we looking at improvements on both sides of the business?

[Craig Bram.:]

Absolutely. We see continued opportunities obviously on the organic side of the chemical business. We see ability to improve what we are doing at Palmer. And I think BRISMET should have had borrowed this year, but I think we can continue to improve on what we have accomplished at BRISMET in 2014.

[Charles Gold:]

Well now I have led my trap for you. So I will give you my dividend recommendation when you have your Board meeting in November. 28 is a nice number, so a nice increase. And then if you really just address this issue. Are we at the point where the company is -- the stability is so great that starting in the first quarter you could go to a quarterly dividend rate of $0.075 a quarter showing that you are really comfortable with where the company, future looks bright and establish $0.30 dividend rate. So no, don’t want a comment from you but just wanted to get my recommendation on the table.

[Craig Bram.:]

Well we always appreciate your inputs Charles. You have been a stock supporter of the stocks so I am sure the Board members are listening in and taking note.

[Charles Gold:]

Well my bankers will also appreciate it then. Thank you that ends my last question.

[Operator:]

Thank you. [Operator Instructions]. Mr. Bram at this time I am showing no further questions. I would like to turn the call back over to you for any closing remarks.

[Craig Bram.:]

Alright, thanks. Again we appreciate, it looks like, is Ryan Hamilton in the queue to ask a question?

[Operator:]

Yes sir he just jumped in there.

[Craig Bram.:]

Okay.

[Operator:]

Your line is open sir.

[Ryan Hamilton:]

Sorry about that guys. I was wondering if you could maybe briefly talk about the just the Salt Water Disposal business a little bit. I am just curious see what you are guys are seeing there?

[Craig Bram.:]

Salt Water Disposal projects Ryan have always been -- we class them as odd jobs and kind of hit or miss opportunities. We don’t view that as a very active business opportunity for us. Probably the thing that we were focusing most intently on right now is code vessels. I know you guys have heard us talk about code vessels in the past and I think we finally have the pieces and parts in place to actively work on that business in 2015. So that’s an area in the storage tank business, the Palmer business that we see the most potential in and certainly if a SWD job presented itself we would take a hard look at it, but those typically have the lowest margins of any projects that we work. And so it’s not a typically a very high priority for us.

[Ryan Hamilton:]

Do you breakout margins like on the projects like that. I mean what’s the typical range on something in the Salt Water Disposal?

[Craig Bram.:]

Since we have been in the business I have seen SWD at $750,000 and seeing them as much as a $1.5 million. So I think that $1.2 million project in Q3 of last year that was kind of a typical project.

[Ryan Hamilton:]

Okay, as far as it was like margin percentage, do you have any idea there? I am sure you got an idea.

[Craig Bram.:]

I mean it’s typically less than 10%.

[Ryan Hamilton:]

Okay. Then I would like to touch on head count, where are you seeing -- are you guys adding people? Working for people having a hard time finding any kind of people? Just kind of curious there.

[Craig Bram.:]

We are going to be adding some code welders out in Palmer. And based on some meetings we have had recently it looks like we are not going to have any issues in landing those folks. So that looks pretty good. We are adding some production folks in CRI. And we are having to pay a little bit more for the folks in that market than some of our markets just due to what’s going on in the Greenville South Carolina market but nothing that really gives us any concern over our anticipated margins.

[Ryan Hamilton:]

Okay, great.

[Craig Bram.:]

And really outside of the CRI and the Palmer additions, its pretty much business as usual in the other units of the company.

[Ryan Hamilton:]

Okay, great. I appreciate your time guys.

[Operator:]

And there is no other questions in the queue sir.

[Craig Bram.:]

Okay. Well again we always appreciate the support of our shareholders. And feel free to reach out to me in any point if you like. And we appreciate your time today. Thanks very much.

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.