Synalloy Corporation (SYNL) CEO Chris Hutter on Q2 2022 Results - Earnings Call Transcript

Aug. 13, 2022 2:37 PM ETSynalloy Corporation (SYNL)
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Synalloy Corporation (NASDAQ:SYNL) Q2 2022 Earnings Conference Call August 9, 2022 5:00 PM ET

Company Participants

Cody Cree - Director of Gateway IR

Ben Rosenzweig - Executive Chairman of the Board

Chris Hutter - President & CEO

Aaron Tam - CFO

Conference Call Participants

Operator

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Synalloy's Financial Results for the Second Quarter ended June 30, 2022.

Joining us today are Synalloy's Executive Chairman of the Board, Ben Rosenzweig; President and CEO, Chris Hutter; CFO, Aaron Tam; and the company's outside Investor Relations adviser, Cody Cree. Following their remarks, we'll open the call for your questions. [Operator Instructions]

Before we go further, I would like to turn the call over to Cody Cree as he reads the company's safe harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward-looking statements. Cody, please go ahead.

Cody Cree

Thanks, Daniel. Before we continue, I'd like to remind all participants that the discussion today may contain certain forward-looking statements pursuant to the safe harbor provisions of the federal securities laws. These statements are based on information currently available to us and are subject to various risks and uncertainties that could cause actual results to differ materially. Synalloy advises all those listening to this call to review the latest 10-Q and 10-K posted on its website for a summary of these risks and uncertainties. Synalloy does not undertake the responsibility to update any forward-looking statements.

Further, the discussion today may include non-GAAP measures. In accordance with Regulation G, the company has reconciled these amounts back to the closest GAAP-based measurement. The reconciliations can be found in the earnings press release issued today and posted on the Investors section of the company's website at synalloy.com. Please note that this call is available for a replay via a webcast link that is also posted on the Investors section of the company's website.

With that, I would like to turn the call over to Synalloy's Executive Chairman of the Board, Ben Rosenzweig. Ben, over to you.

Ben Rosenzweig

Thank you, Cody, and good afternoon, everyone. Coming off a record start to the year, we're reporting another strong quarter, our fifth consecutive one of year-over-year growth in net sales, net income and adjusted EBITDA as well as a third consecutive quarter of record net income. I want to thank our dedicated employees whose hard work has continued to transform this company into a leading provider of tubular products and specialty chemicals.

As we look to the future, to better align the company to the transformed vision and goals we've implemented over the past 18 months, we're officially rebranding to Ascent Industries Co., effective tomorrow, August 10. If you haven't seen them yet, I encourage you to check out our new logo and brand videos. They're very exciting. But most importantly, they capture the spirit of our team and the incredible work they do.

We needed to do a better job of supporting the efforts of our employees, and it was clear that the old corporate name and lack of a cohesive brand identity was setting them back in their commercial efforts. I want to publicly make the point that we've been making in private for some time now, this is not a "metals" company. We're a precision manufacturer of mission-critical products used across diverse and growing end markets. Stainless steel is a primary input in our manufacturing process, we do not simply sell a commodity. We're not a steel mill. We're not a distributor of basic steel or metal products.

I'm hopeful that the new branding can help us make that point to all of our stakeholders. We'll be going to market as 1 unified company with 2 distinct business segments. Within the Tubular Products segment, we'll continue to utilize the powerful brands we have like SPT, BRISMET and ASTI, and they will all be part of Ascent Tubular Products. Every employee will be a member of the Ascent team rather than of a company bought by legacy Synalloy. The excitement is real, and we see both tangible financial and nonfinancial benefits to the rebrand that will return many multiples of the upfront investment.

Again, I'd encourage you all to visit our new website at www.ascentco.com, our YouTube channel, by searching for Ascent Industries Co., and our LinkedIn page.

As we continue to expand our platform and reach, our capital allocation priorities remain the same. In the current market environment, we remain hopeful that we're on the cusp of finding more value than we've seen in the recent past in deals across both segments that we operate in. I probably don't need to keep saying it since it's fairly evident, but we'll stay disciplined and not reach for something that isn't a great fit.

We have ample liquidity available and will be focused on finding organizations with technical manufacturing capabilities that can help us drive new and improved processes and bring higher value-add products to our mix. Additionally, with our One Team mentality, it's important that the companies we evaluate are able to operate cohesively in our portfolio and provide cross-functional work capabilities to our segments.

In terms of other uses of capital, I recognize I've been a bit more guarded in the past about our potential share repurchase plans. I'll be unequivocal now. I believe our stock to be meaningfully undervalued across all measures, and we plan to decisively buy back stock in the open market at these levels. So I don't -- while reducing the liquidity of our shares, the returns on repurchases far exceed almost any other actionable use of capital.

And when I assess our capital allocation options, we feel good about our near-term cash generation, in addition to our significant borrowing capacity, enabling us to continue to pursue accretive acquisitions in meaningful size and scale even after repurchasing our own stock. Obviously, we'll continuously reassess as new information becomes available to us, but I wanted to share my thinking with you as we stand today.

Other than the stock price, I generally remain pleased with what we're accomplishing. We've continued to make progress in our transformation journey over these past 18 months. We're solidifying our commercial sales strategy, finding new routes to market, optimizing our footprint and promoting cross-functional work processes to drive incremental margin. While we have achieved several milestones for the first half of 2022, there's still much work ahead of us, and we remain focused on driving long-term value for our shareholders.

Now I'd like to pass the call over to Chris to provide greater details on our operations across both segments, but I'll be available later on to answer any questions. Chris, over to you.

Chris Hutter

Thanks, Ben, and thank you all for joining today's call. As mentioned earlier, our momentum continued in the second quarter, resulting in another strong quarter of growth and record results. I want to take a moment to reemphasize what Ben said regarding the rebrand of what's historically been known as our metals segment to its new name of Ascent Tubular Products.

While we have a deep history in production of stainless steel, nickel alloy and coated pipe and tubular products as well as the processing and distribution of heavy wall seamless products, our capabilities and unique products are better represented with our refresh brand. Behind the scenes, there are significantly more to our products.

When you think about Ascent Tubular products, envision a company that is a producer of fluid transfer products. Our products focus on liquid or gas transportation, and example applications include municipal water projects, oxygen production facilities, food and beverage manufacturing, pharmaceutical, household goods and chemical production, just to name a few. The brand also signifies our position in the industry as the leading domestic producer of anti-corrosion tubular products rather than a raw material or traditional metals company.

You will also see this change reflected in a new industry code that reflects our industry and segments outside of what I would say has been an incorrect classification for years. That said, we will no longer be paired against basic material steel companies.

Looking at our second quarter results for this segment. We continue to experience market tailwinds allowing us to drive competitive pricing and higher-than-expected margins. Our strategic priorities have always been to drive operational efficiencies and processes to succeed in all parts of our dynamic market cycle. The work we've accomplished by diversifying our supply chain and controlling variable costs across our facilities has put us in a better position to drive incremental margin gains and maintain our profitability through a shifting environment.

As we begin to see pricing stabilization in the back half of the year, our supply chain will play an integral role in enabling us to maintain our margin targets while lessening our working capital requirements, and the work we've accomplished this quarter has put us in a good position to do so.

We also continue to make progress with our safety initiatives. We've finished the month of May and June with 0 recordable incidents and have come a long way since we first began overhauling our safety measures. By introducing and practicing a culture rooted in worker safety, we are dedicated to creating a better work environment for our employees, which directly leads to improved productivity and a more favorable hiring environment.

Looking forward, our near-term operational priorities are focused on closely managing our inventory amid a dynamic pricing environment, growing our business development efforts and finalizing our automation projects. We continue to transition towards a manufacturing model that prioritizes booking on hand versus inventory on hand. A large function of this ties directly to our commercial efforts as we have made meaningful inroads in our OEM and project sales initiatives, which naturally tend to more discrete projects with higher volumes and a more predictable production schedule.

This is critical to our success especially in the current market cycle where we see fluctuations in material costs and surcharges. Our focus on OEM and project sales efforts is beginning to bear fruit and the outcome has been an average in approximate 1,000 basis point gross margin enhancement over our distribution route to market. These sales tend to be what we call batch-based and are highly technical sales in nature. As we continue to expand our efforts in this space, we look forward to updating you in future quarters on how this progresses.

We also have several large automation projects in our pipeline that we will work to finalize over the next few quarters. Our capital expenditure strategy prioritizes our investments in automation and technology, and again, we will provide updates as these progress.

At the beginning of the year, we communicated our expectation that pricing will begin to normalize in the back half of 2022. We continue to see signs of that stabilization at least through quarter 3, and we believe the work we've done and the strategy we're continuing to execute is setting up tubular for success into the near future.

Moving to our Specialty Chemicals segment. Much like in Tubular, we are rebranding our segment to Ascent Chemicals as a reflection of who we are and where we are heading. As a specialty chemicals manufacturer providing best-in-class solutions to our customers operating in over 15 different industries, we are committed to expanding our footprint through organic growth and value-accretive acquisitions while developing our research capabilities to yield new high-value products and production capabilities.

Throughout the quarter, we were able to capitalize on the efforts of John Zuppo and his team to drive better-than-expected bottom line results. Owing to our specialized products and the amount of R&D and customization we provide for our customers, our Specialty Chemicals business benefits from stability during market cycles, allowing us to grow in a more steady and linear fashion. We continued our upward trajectory during the quarter by bolstering our sales teams, integrating our facilities to promote cross-function work process and growing our footprint and capacity across our sites.

Our commercial development for Specialty Chemicals was one of our highlights of the quarter. We successfully recruited key industry talent and continued to finalize our commercial team reorganization plan as a means to unlock further value. This past quarter, we were also able to lock down 3 new core customers at our Virginia site. And with our strengthened sales team, we expect our sales pipeline to grow in the foreseeable future.

Our sales, technical and operations teams have also continued to integrate from separate companies into 1 unified business. This is integral to promoting more efficient work processes and will lead to more accurate production planning, reduced off-quality products and improve our on-time delivery rates. As we establish ourselves as Ascent Chemicals, a larger and more diversified manufacturer of specialty chemicals, it is crucial that we consistently deliver best-in-class products and services on time and in a reliable manner. The further integration of our teams will enhance our ability to effectively do so.

With our sites now more fully integrated, we are constantly evaluating our product mix and ensuring that we are manufacturing the right product at the right site. As I mentioned before, reducing off-quality products and improving our overall reliability remains one of our highest priorities. This is an area where we can squeeze incremental margins out of our manufacturing process alongside our automation efforts, which brings me to our next point.

We have continuously invested in and implemented our automation initiatives and expect benefits to begin materializing to our bottom line in the coming quarters. In fact, our focus in the second half of the year will be on our equipment upgrades at our Virginia site as well as some low-cost growth projects in South Carolina to diversify into personal care products and further into specialty chemical capabilities. Stay tuned for more updates on this front.

Overall, our Specialty Chemicals segment recorded a great quarter, and we look to continue our stable growth through the back half of the year. We believe this segment is well positioned to execute on the goals we've set for ourselves. We look to be the industry leader in the manufacturing of our specialty chemical products through a robust sales pipeline, efficient work process and identifying value-additive acquisition opportunities, with strong research and development capabilities to enhance our overall product mix.

In both segments, we're extremely proud of what our teams were able to accomplish throughout this quarter. Our core operations and team strategy continue to improve, and we firmly believe our company is poised to establish Ascent as a premier industrial manufacturer of both tubular products and specialty chemicals.

I'd like to now turn it over to our CFO, Aaron Tam, to walk through our second quarter financial results in more detail, then I'll return to answer any questions you may have. Aaron, the floor is yours.

Aaron Tam

Thank you, Chris, and good afternoon, everyone. For the second quarter financial results, net sales increased by 40% from $83.1 million to $116.2 million compared to the prior year period. The increase was primarily attributable to the competitive pricing increases made across both of our business segments, while also benefiting from a deliberate product mix shift towards higher average selling price and higher margin products.

Also, it's important to note that our net sales included $8.4 million in DanChem sales that weren't in the prior year resulting in a nearly 30% organic growth rate.

Gross profit increased 48% to $20.9 million compared to $14.1 million in the second quarter of 2021, while gross margin increased 100 basis points to 18% from 17% in the prior year period. The improvement in both gross profit and gross margin was primarily attributable to increased selling prices and the previously mentioned mix shifts as well as a more diversified supplier base, offsetting the impact of increased raw material costs, freight costs, repairs, maintenance and supplies expenses.

Net income in the second quarter increased significantly to $11.1 million or $1.06 per diluted earnings per share compared to a net income of $2.9 million or $0.31 diluted earnings per share for the second quarter of 2021. The increase was primarily driven by the aforementioned strong sales and gross profit performance.

The second quarter of 2022 also included a $0.2 million benefit of net income from the acquisition of DanChem. This is a pretty clean net income number without much noise from meaningful nonrecurring items or benefits.

Adjusted EBITDA in the second quarter increased by 58% to $15.5 million from $9.8 million in the year-ago quarter and adjusted EBITDA margin improved 160 basis points to 13.3% from 11.7% in the year ago quarter. For reference, DanChem contributed $0.8 million in adjusted EBITDA for the second quarter of 2022.

Lastly, looking at our liquidity position as of June 30, 2022, total debt was $68.3 million compared to $70.4 million as of December 31, 2021. And as of June 30, 2022, we had $41.2 million of borrowing capacity under our revolving credit facility compared to $39.4 million as of December 31, 2021.

With that, I'll now turn it back over to Daniel and the operator for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from David Sigfried [ph].

Unidentified Analyst

So I know the team has done a lot of work the last 18 months to get the company where it is right now. So you're convinced that the benefits to rebrand far outweigh the costs of doing so?

Chris Hutter

Absolutely. The costs weren't that significant. So it's -- the rebrand was something that's been needed, in my opinion, for years. The internal feeling of the business was extremely secular in terms of I'm part of this, I'm part of this, I'm part of this. We don't know what Synalloy is. And now we're all one team, we're all one name. So it's been extremely well received within the business.

Unidentified Analyst

I noticed last year, you revenue composition was 80% tubular, 20% chemical. But this quarter, it was 75% tubular, 25% chemical. So is that a trend that, over time, we can expect that to continue, chemicals becoming a larger component?

Chris Hutter

That is obviously DanChem is contributing to that shift of percentage and as we continue to look to expand our Specialty Chemicals business, you would see that, the pipe, change a little bit.

Unidentified Analyst

Got it. Now there's been pretty strong demand, I think, on the specialty pipe and tube side. And then we got the jobs, $55 billion related to the water infrastructure bill. So do you see that as a back step to keeping a healthy backlog in both segments into 2023?

Chris Hutter

Yes. Our backlog is extremely robust. It's continued to be robust. And I would say the only mix that we're seeing from a shift is we're seeing -- the distribution route to market, which is supplying distributors, that tends to change as surcharges and pricing fluctuates. They're obviously looking to get the lowest cost material for their inventory position.

And we've put an extreme amount of effort into shifting our approach to market by chasing the end-user projects, which we can really control the demand of that. We're not relying on a distributor to tell us when they want to buy a product. So that has significantly picked up over the past 6 months.

And that's what I referred to as batch projects, and that could be anywhere from $100,000 project to multiple millions of projects for infrastructure, water, methane, whatever type of utility project we're producing product for. So -- and again, that's got a completely different margin profile, which is we want to chase that also.

Unidentified Analyst

Okay, good.

Chris Hutter

We are having success in that space.

Unidentified Analyst

Good. And thank you for your statement on the stock price and possible stock repurchases. I think for investors who've been here for years, I think that would be appropriate considering the results that you've been putting out the last 4, 5 quarters.

Chris Hutter

Stock price where it's at is a complete joke. So I mean, I think part of it relates to when you search Synalloy as a ticker, it comes up under a completely wrong peer set. I mean that's -- and we talk about this daily on -- we're not even comped against the -- to comp us against the Cleveland-Cliffs is ludicrous.

So even look at Northwest Pipe is trading at $31. They've got more net debt, less earnings and a lower revenue and profile than we do, so -- and a market cap of $300-plus million. So it's just -- it's frustrating for many people within the organization, but we're doing what we can to remain steadfast on, again, delivering quarter after quarter of solid results, bringing the right team, building the right team, trying to be prudent with our decisions and invest in things that we think will be most accretive for shareholders, so...

Unidentified Analyst

I appreciate that input.

Chris Hutter

I appreciate it. Thanks again for being such a long-term committed investor in us.

Operator

[Operator Instructions] At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Hutter for closing remarks.

Chris Hutter

Thank you, Daniel. I'd like to thank everyone for listening today, and we look forward to speaking with you again when we report our third quarter 2022 results. Have a great day.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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