Synalloy's (SYNL) CEO Craig Bram on Q2 2014 Results - Earnings Call Transcript

Jul.22.14 | About: Synalloy Corporation (SYNL)

Synalloy Corporation (NASDAQ:SYNL)

Q2 2014 Earnings Conference Call

July 22, 2014 10:00 AM ET

Executives

Craig Bram - President and CEO

Analysts

Kevin Maczka - BB&T Capital Markets

Todd Vencil - Sterne Agee

Operator

Good day ladies and gentlemen and welcome to the Synalloy Second 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, Craig Bram. Please go ahead.

Craig Bram

Good morning everyone. Welcome to Synalloy Corporation second quarter conference call. As usual with me today on the phone 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.

Please start with a financial summary. We will present our financial performance for continuing operations for the current period and year-to-date as well as comparisons to the prior year using three different methods; number one, GAAP based EPS; number two, adjusted net income and non-GAAP measures defined in the earnings release; and number three, adjusted EBITDA, a non-GAAP measure also defined in the earnings release. We believe the two non-GAAP measures will provide additional clarity on the performance of our respective businesses.

Second quarter GAAP based earnings were $5.75 million or $0.66 per share, an increase of 215% over the second quarter 2013 earnings of $1.82 million or $0.28 per share. Keep in mind the Company’s common stock offering in September 2013 increased the number of outstanding shares by 2.3 million. Six month GAAP based earnings were $7.96 million or $0.91 per share, an increase of 160% over the prior year’s earnings of $3.06 million or $0.48 per share.

Second quarter non-GAAP adjusted net income was $2.84 million or $0.33 per share, an increase of 17% over the second quarter 2013 adjusted net income of 2.42 million or $0.38 per share. Six month non-GAAP adjusted net income was $5.47 million or $0.63 per share, an increase of 34% over the prior year’s total of $4.08 million or $0.63 per share.

Second quarter non-GAAP adjusted EBITDA totaled $6.17 million or $0.71 per share, an increase of 30% over the second quarter 2013 total of $4.73 million of $0.74 per share. Six month non-GAAP adjusted EBITDA totaled $11.95 million or $1.37 per share, an increase of 36% over the prior year’s total of $8.78 million or $1.36 per share. Net debt at the end of the second quarter was $16.08 million, down from the end of 2013’s total of $21.66 million.

Let me take you through the business unit summary. Manufacturers Chemicals sales in the second quarter of 2014 were up 7% compared to second quarter last year. Sales for the six month period were up 10% over the same period last year. Adjusted EBITDA in the second quarter was up 2% over the second quarter of last year and up 10% for the six month period. EBITDA gains in Q2 were reduced by larger accruals for incentive bonuses. MC continues to gain new business in the oil and gas sector and has several promising projects under review. Organic growth from existing customers resulted in sales increases for seven of MC’s top 10 customers in the first half of this year.

CRI Tolling, we continue to be very pleased with the progress at CRI. Our build out continues on schedule with a targeted completion date in early October. Net income and EBITDA exceeded targets for both the second quarter and six month periods remaining solidly profitable since the acquisition last August. We’re excited to report the ramp up of new business this month at CRI. For several months we’ve been working with an existing customer on a new line of specialty dispersions. The expected annual volume associated with this product line is 10 million pounds. This represents an increase in annual pounds through the plant in excess of 50%.

We will invest $175,000 in new equipment to support this initiative, which is totally outside of the main build-out. This project will fully ramp over the next three months and is expected to make a substantial contribution to profits with both CRI and the overall chemical segment.

Let’s move on to the metal sector. BRISMET continued its strong showing in Q2. Adjusted net income was up 143% and adjusted EBITDA was up 127% over the same period last year. For the six month period, adjusted net income was up 160% and adjusted EBITDA was up 132%. Nickel prices continue to improve in Q2 and we posted an inventory profit in June for the first time in several years.

Q2 results were benefited by an order of 316 type for a mining project with the balance of new order to be completed in July. Product mix has been a key driver performance so far this year. Special alloys and 316 alloys have been a larger percentage of both volume and sales dollars during the first six months. Margins on these products are much higher than the 304 commodity products. An important metric for this business is conversion revenue per pound. This is simply sales minus material cost divided by pounds shift. It takes into account product mix increases in base prices, the sale of lower priced raw material and of course nickel surcharges.

For the six month period conversion revenue per pound, excluding the mining order increased 35% over the same period last year. This comparison looks only its stainless products and excludes the carbon pipe for the Bechtel project that was completed last year.

Moving on to Palmer, second quarter and six month revenue was relatively flat with the same periods last year. Second quarter adjusted net income exceeded budget by 15% while EBITDA was up 4%. Operating metrics showed solid improvement in Q2 reflecting the cost cutting initiatives implemented earlier in the year. Bookings for steel tanks continue to be very strong, while we’ve seen a small decline in bookings for fiberglass mix. We are presently working on a new project for a customer which involves the production of a large number of 1,500 barrel steel tanks. These tanks we produced on the automated steel tank line. This customer has recently acquired significant acreage in the Permian basin and we’re optimistic that this first project will lead to additional business going forward.

As reported in the earnings release, in Q2 the Company recorded a one-time favorable adjustment at the parent company level of approximately $3.5 million to reduce the earn out liability for Palmer. While the base threshold of 5.825 million in EBITDA required for the earn out payment was achieved in the first year following the transaction, the soft fourth quarter in 2013, along with a slow start in January and February of this year will result in EBITDA falling short of the threshold for year two.

While management expects the base threshold for EBITDA to be achieved in the third and final year of the earn out, the top level of $6.25 million in EBITDA is unlikely to be realized. The Company remains very pleased with Palmer’s performance almost two years following the acquisition. EBITDA margins have consistently been in the mid-teens, in line with our models at the time of the acquisition. We are optimistic that with increased production at the facility, we can raise EBITDA margins into the high-teens.

Moving on to Synalloy Fabrication; Ram-Fab our shop in Crossett, Arkansas was profitable in Q2 and for the six months, but its trailing budget of those periods. In June this facility started a large project which will continue through the first quarter of next year. We expect improved profitability as this project ramps very quickly.

The Company completed the planned closure of Bristol Fab on June 27. Losses for this unit over the three year period 2011 through 2013 totaled $5.2 million with additional operating losses of $2.26 million in the first half of this year. The Company realized a one-time charge in Q2 of $6.99 million for costs associated with the closure of Bristol Fab. The majority of the closure costs was approximately 1.9 million from the withdrawal liability from the union pension plan and a non-cash charge for disposal of inventory on hand of approximately $3 million. The metals unit is in the early stages of identifying alternative uses for the Bristol Fab facility and we will have more to report as these plans develop.

In closing, the Company’s performance in the first half of this year has met or exceeded targets for all business units with the exception of fabrication business. We have a number of exciting opportunities across the Company that we believe would have the potential to provide meaningful contributions going forward. Management is optimistic that we can achieve our goals for the remainder of 2014.

With that let me open it up to questions.

Question-And-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Kevin Maczka with BB&T Capital Markets. Your line is open.

Kevin Maczka - BB&T Capital Markets

Can I just start with price? I'm hoping you can say a little bit more about what you saw in Q2 and what your outlook is there? It looks like price in pipe was just slightly negative but a big difference here between commodity and non-commodity. And if you can just kind of talk to the mix element of that non-commodity price decline, please?

Craig Bram

The special alloy pipe category Kevin is pretty broad. And the alloys within that special alloy category carry many different price points. There are times where we have a very high percentage of the special alloys that are coming from the highest priced alloys. They maybe in $14 to $15 and higher a pound price category. There’re also a number of special alloys, C276 being one of them that while there classed as special alloys, they typically don’t carry as high as selling price and they maybe in the $7 to $8 a pound range.

So what happened in Q2 is we sold more of the lower end special alloy products than we did the higher end. At the same time our pounds sold increased, which allowed the blended price that we received and the conversion revenue per pound received increased pretty dramatically over the prior quarters.

Kevin Maczka - BB&T Capital Markets

So, how much visibility do you have into the mix going forward? I'm just wondering if we should think about the same dynamic kind of playing out in the back half of the year. And can you talk about any further lift you’ve seen following the favorable trade case ruling?

Craig Bram

Well, on the favorable trade ruling, certainly the imports from those three countries Vietnam, Malaysia and Thailand have virtually dried up. We've seen a little bit of pick up in the most recent quarters from India, but enough yet that’s really put any pressure on base prices and so in the first half of this year base prices on most of the commodity type products are up anywhere from 5% to 8% over what they had been last year.

Kevin Maczka - BB&T Capital Markets

Okay, and is that generally in line with what you had expected once that ruling came down?

Craig Bram

Yes, we had expected that over a period of a couple of quarters that the base prices should begin to approach what they looked like in the first half of 2012. We’re not quite there yet but we’re about halfway there.

Kevin Maczka - BB&T Capital Markets

Okay. And just finally on me, if I could put you over to the cost side, beyond the Bristol Fab close you had talked about in December and January, $1 million savings item you started on and identifying 2 million more after that. I'm wondering if you can give an update on where we are there and what we might expect even if you’re not ready to quantify anything. Should we expect there is more to come in terms of initiatives like that?

Craig Bram

Kevin most of the monies from a saving standpoint were identified and have been implemented and we started to realize the benefits of that in Q2. On an annualized basis, the last time we looked at it, we were at about $1.8 million of the total savings and these are outside of the headcount reductions that were made early in the year. So I guess on a quarterly basis, if you look at Q3 and Q4, we’ve got another $600,000 a quarter of savings that will be baked into our results.

Kevin Maczka - BB&T Capital Markets

Okay. And again should we be thinking that the first of a multiphase type of program if you will or is that some -- something you’ve identified and for the time being that’s kind of the end of it?

Craig Bram

I think for the most part that's the end of it. But I will say that we’re continuously looking at opportunities. An example is we’re looking at potentially outsourcing the freight part of our Palmer operation and right now we handle that in house and if we were to outsource it, the potential savings on something like that could be as much as $300,000 to $350,000 a year. So, we’re continuing to burn off [ph] specific projects like that but I’d say the big wave of activity from a material impact on the earnings for 2014 have already been accomplished.

Operator

Our next question comes from the line of Todd Vencil with Sterne Agee. Your line is open.

Todd Vencil - Sterne Agee

Going back to the pipe price being a little bit -- to follow up on Kevin’s question, you mentioned in the release that you guys have some new sales pricing tools that they use and it's helping them sort of target the kind of business you want. Can you talk about that a little bit? What kind of tools you put in there and what impact it's having?

Craig Bram

Todd, it’s really hard to talk about the tools without getting into maybe some competitive things that we’ve got going on. I will say that the sales team, their incentivized now on conversion revenue per pound and say pound shift each quarter. So -- and that’s something new. We had never incentivized the sales team beyond a pound shift type program. And by focusing them on conversion revenue per pound which really is driven -- while it’s driven in small parts, increases in base prices and surcharges, it's driven more importantly by product mix. So that is something that they are looking at daily in terms of what have we shipped in the special alloy category? What do have in the order book that we could advance into the quarter, picking off some of the higher priced special alloy products? Can we move some 316 as opposed to moving 304? So they are constantly looking at what’s available in our inventory, what’s sitting out there in backlog and how quickly can we move some of that product through the plant and get it shipped out the door.

Todd Vencil - Sterne Agee

Switching to chemicals, you mentioned in the release you had the lower cost raw material at MC and then you said generally lower selling prices at CRI. Is that a price deterioration or is that a mixed issue? What’s going on there?

Craig Bram

No that’s a mix issue, we purposely moved away from dyes and pigments and we’re grinding more product there.

Todd Vencil - Sterne Agee

And going back to something you said in your prepared comments. You talked about this new project on the line of dispersions I believe, 10 million. Was that pounds of annual volume?

Craig Bram

That’s right.

Todd Vencil - Sterne Agee

You said -- I think you expected a contribution or a significant contribution, I forgot the exact wording. Can you frame up a little bit how big a job this is and how big the contribution could be?

Craig Bram

Well, the first six months of this year, the entire throughput through the CRI facility was 10.5 million pounds. So that’s an annualized rate of 21 million pounds. So we’re talking about putting 10 million pounds of this new product through. The product ramp up started in July. We expect it to be fully ramped over the next 60 days. This is a product that we’re grinding. It's going into industrial coatings to prevent mold and mildew from forming in the coating material. 10 million pounds, that’s 50% additional throughput. You can imagine that that is a big factor in the absorption of overhead. We're only spending about 175,000 on CapEx to expand some grinding capacity and out in some dust control mechanisms. Let me say this. It’s worth a minimum of $0.5 million of pretax to that facility.

On the oil and gas the thing I’ll add there in this is both an MC opportunity and also what’s going on at CRI generally with the main build out. We’ve had a lot of success with selling our polive [ph] oil products into the oil and gas industry and these are used primarily as corrosion inhibitors. We’ve had some projects here recently that are going very well from a testing standpoint. It's too soon to out anything out on it but the thing is it continued to progress. These are the kinds of projects that we’ve targeted when we talked about spending $3.5 million at CRI. These are 10 million pound plus type orders on an annual basis. And that business the oil and gas penetration is moving along very quickly and we’re very pleased with the efforts of our sales people out in Texas right now.

Todd Vencil - Sterne Agee

And so that’s at CRI and I guess you are excited to have the new -- when did you say the expansion is going to come online, October?

Craig Bram

Yes we’re scheduled right now early October to have everything in place and ready to roll.

Todd Vencil - Sterne Agee

Last question from me Rick. Just so I can see the rest of the income statement, can you tell me what gross profit was in the quarter consolidated?

Craig Bram

Rick is in a car. He’s not going to have that in front of him. Let me do a quick look here. So you want to see the gross profit margin consolidated for the quarter?

Todd Vencil - Sterne Agee

Yes the actual dollar amount, yes correct.

Craig Bram

Let me see here if I’ve got that handy in any of the stuff I'm looking at. I may have to give that to you after the call. I don’t have that handy but why don’t you give me a ring after the call and I’ll get that to you.

Operator

And I am not showing any further questions from the phone lines at this time. I would like to turn the call back over to Craig Bram for closing remarks.

Craig Bram

Thanks Kate. We appreciate everybody’s participation today and look forward to having a good second half of 2014. 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 good day.

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Synalloy Corporation (NASDAQ:SYNL): Q2 EPS of $0.66 beats by $0.32. Revenue of $58.79M (+10.0% Y/Y) beats by $0.39M.