Ascent Industries Co (ACNT) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Synalloy second-quarter earnings conference call.

(Operator Instructions)

I would now like to introduce your host for today's conference, Mr. Craig Bram, President and CEO of Synalloy.

Please go ahead.

Good morning, everyone.

Welcome to Synalloy Corporation's second-quarter 2015 conference call.

With me today is Dennis Loughran, our new CFO.

In a challenging environment for our metals segment, we were pleased with our performance in Q2 and the first half of this year.

Nickel prices were down 7% in Q2 and down 20% through the first 6 months of this year, falling to as low as $4.72 per pound in July and nickel has recovered recently to $4.95 per pound, which still remains well below the marginal cost of production.

Inventory losses related to falling nickel prices totaled $2.32 million in Q2 and $3.12 million year to date.

We expect continued inventory losses in Q3.

WTI prices showed some strength in Q2 as they moved up to the $60 per barrel level, but have recently fallen back to the $48 level.

Achieving a level of stability above $60 per barrel will be important for all of our metals business units, but particularly for our tank storage and seamless carbon tube businesses.

In comparing this year's financial performance to last year, last year's results will be for continuing operations only.

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

Number one: GAAP-based EPS.

Number two: adjusted net income, a non-GAAP measure that's defined in the earnings release.

And number three: adjusted EBITDA, a non-GAAP measure also defined in the earnings release.

Second-quarter GAAP-based earnings were $2.46 million or $0.28 per share as compared with earnings of $5.78 million or $0.66 per share in the second quarter of 2014.

Q2 of last year included a pre-tax gain of $3.48 million for the Palmer acquisition earnout adjustment.

Also, Q2 of last year included an inventory loss of $60,000 as compared with the inventory loss of $2.32 million in Q2 of this year.

Year to date, GAAP-based earnings were $6.09 million or $0.70 per share as compared with earnings of $8.03 million or $0.92 per share in the first 6 months of 2014.

Inventory losses in the first half of 2014 totaled $697,000 as compared with $3.12 million in the first half of 2015.

The Palmer acquisition earnout adjustment resulted in a pre-tax gain of $3.48 million in the first half of 2014 as compared with a pre-tax gain of $2.48 million in the first half of this year.

Second-quarter non-GAAP adjusted net income was $3.35 million or $0.38 per share, up 13% as compared with adjusted net income of $2.96 million or $0.34 per share in the second quarter of 2014.

Year to date, non-GAAP adjusted net income was $6.29 million or $0.72 per share, up 11% as compared with adjusted net income of $5.69 million or $0.65 per share in the first 6 months of 2014.

Second-quarter non-GAAP adjusted EBITDA totaled $6.98 million or $0.80 per share, an increase of 12% over the prior year's total of $6.22 million or $0.71 per share.

Year to date, non-GAAP adjusted EBITDA totaled $13.74 million or $1.57 per share, an increase of 14% over the prior year's total of $12.03 million or $1.38 per share.

The combined adjusted EBITDA margin for the operating businesses in the second quarter was 15.2% of revenue, and for the first half of 2015 was 15.0% of revenue.

For all of 2014, the combined adjusted EBITDA margin for the operating businesses was 13.4%.

This excludes parent company cost.

Turn debt at the end of the second quarter totaled $28.47 million, while the line of credit was $5.43 million.

Total net debt at the end of Q2 was $33.7 million.

We are pleased to report that there were no lost time accidents in the first six months in any of Synalloy's business units.

Looking at the business units, let me start first with the metals segment.

Sales from continuing operations in Q2 were off 5% from the prior year and were flat for the year-to-date period.

Lower volume and selling prices negatively impacted revenue for our pipe manufacturing operation in both Q2 and for the six-month period.

Revenue at our tank storage business was down due to the April fire in our fiberglass shop and the reduced activity at customer well sites.

Sales of carbon seamless pipe to the industrial markets was relatively firm in Q2 and the first half of 2015.

However, sales to the energy sector weakened in Q2.

The blended adjusted EBITDA margin for the metals segment in Q2 was 16.6% and for the first 6 months of 2015 was 16.4%.

Looking out to the remainder of 2015, the direction of nickel prices and WTI prices will have a major impact on the business units in the metal segment.

Distributor customers of our pipe manufacturing unit have been wary of large stock buys due to the continuous downward trend in nickel prices.

When they have made large purchases of pipe, much of their orders have gone to imports.

We believe that higher and more stable WTI prices are required for the E&P companies to restart midstream and downstream CapEx projects, particularly LNG.

These projects typically require large amounts of stainless steel pipe.

We did see increased quoting activity in Q2 related to our tank storage business when WTI prices approach $60 per barrel and are optimistic that trend will continue, should WTI prices return to the $60 to $65 per barrel range.

Our distributor customers in the carbon seamless business have reduced their inventories of energy-related pipe and tube to a very low level, which should result in increased order activity for this product line in the second half of this year.

Due to the relative size of our pipe manufacturing operation, the metals segment's performance in the second half will be very much dependent on the level of order and shipping activity in this unit as it looks to rebuild its backlog.

As previously reported, we're very excited about our heavy wall welded pipe shop.

This initiative opens up an entirely new market for this segment and we believe further strengthens our position in the North American stainless steel pipe market.

By capturing as little as 10% of the heavy wall market, we can increase manufactured pipe revenue by more than 15% annually.

We continue to expect the heavy wall shop to be operational by year end.

Moving over to the chemical segment, sales in Q2 were down 4% over the prior year, while year-to-date sales were down 3%.

While unit volumes were up due to the increased chemical polling business, selling prices for products with petroleum-based raw materials were under pressure as compared with last year's periods.

EBITDA margin for Q2 was 12.2% and year-to-date 11.9% for the chemical segment in total.

We are forecasting stronger results for the second half of 2015, as several new product lines begin shipping in Q3 and Q4.

During Q3, we have new products shipping that will add annual run rates of approximately 4.5 billion pounds.

In Q4, new products will ship that have annual run rates of approximately 4 million pounds.

In addition, we have products in final stage testing that have the potential to add an excess of 10 million pounds to chemical segment sales in 2016.

Let me touch on corporate briefly.

With future earnings calls and investor presentations, you'll be hearing more from our new CFO, Dennis Loughran.

We're very fortunate to add Dennis to the Synalloy team.

He has extensive public company CFO experience, both in multiunit operations and with a manufacturing focus.

Dennis will be a tremendous help during M&A work going forward, as well with our efforts to drive additional profits from our operating units.

With that, let me turn the call over to the Q&A session.

(Operator Instructions) Kevin Maczka, BB&T Capital Markets.

First question: can we maybe start with price?

A lot of talk here about price pressure -- price mix, anyway, in various parts of the business, whether it's on the pipe side, in metals, or the chemical side of the business.

Can you say a little bit more about that?

What your outlook is there on the price mix on the second half?

Let me speak to the chemical side.

We certainly have had good experience in the past and continue to have good experience passing along the raw material prices.

We look at that on a -- actually, on an order-by-order basis.

So we have had good success in maintaining what we refer to as our material margin, which is simply the selling price minus the material cost.

And so while we have -- we had seen pressure on the price per pound that is a function of what's going on with raw material cost, our material margins have held up to the point where we have actually increased our EBITDA margins in the chemical segment this year over last year.

On the metals side, basically we're talking about three different product lines there.

On the tank storage side, we really have not seen any significant price pressure on the fiberglass tanks or steel tanks that we are selling at this point in time.

On the carbon seamless product line, the pricing pressure has really been felt at the energy level.

You may recall we have two facilities in that -- selling carbon seamless tube.

One of those is in Ohio that's focused on the industrial markets.

The pricing and the revenue of the product line sold into that market has held up very nicely in Q2 as well as the first half of this year.

The products that are being sold out of our Houston facility -- I would say the pricing pressure has been fairly limited in that our material margins have held up, but it's the size of the orders overall have been diminished out of that facility in the second quarter.

What we're seeing happening in that business is our distributor customers have run their inventories down to a level where we expect an uptick in our seamless carbon product line sales into the energy sector in the second half of this year.

The BRISMET area is where we've certainly felt the most pricing pressure.

That's come from nickel and the related surcharges falling pretty dramatically in the first half of this year.

Nickel prices are down 20%.

Nickel surcharges on 304 alloys are down about 18%, so not -- almost as much as nickel itself.

So we've certainly felt the pressure there.

And then we have also seen in the first half of this year a pickup in imports, particularly from India.

And so that has put pressure on pipe in the 2 inch to -- particularly 2 inch to 8 inch in diameter size.

That's something we've talked about in the past.

I can tell you that we are fairly far along in the process of collecting data with our other domestic competitors in a possible lead up to a dumping suit, but we don't have enough information at this point to give you a firm timeline on that.

But that certainly -- the nickel trend in pricing as well as the imports have put downward pressure on particularly on pipe that's less than 12 inches in diameter.

Okay.

Got it.

That's all very helpful.

Another question on the tank business -- down 40%.

You mentioned the fire and the decline in oil prices impacting that.

Is oil the bigger issue there?

I'm just wondering if you can maybe parse through the contributions from each of those.

Kevin, I'd say that when we started the year and we saw the direction of oil prices that we had anticipated that our tank storage business could see something in the neighborhood of a 25% to 30% reduction in top line.

And I'd say that the impact from the oil has kind of held true to that range.

The increased shortfall in sales in Q2 to the 40% range was from the fiberglass shop being down for a good part of that time period.

Now starting in June, we were able to start building some tanks in other parts of the plant and we will be 100% operational.

We are 100% operational as to the start of Q3 on the fiberglass side.

So I guess that's a long way of answering the question to yes, the 25% to 30% reduction in top line is the impact that I've seen from the decline in drilling activity out in West Texas.

Got it.

And just finally from me.

I'm just wondering if you can quantify anything in terms of your new outlook for the year.

It sounds like there's puts and takes, like always.

There's some good things going on with new product introductions coming out in the second half on the chemical side.

But net net, it sounds incrementally a bit more negative with the obvious pressures from oil and nickel.

Can you maybe address what you've quantified before in terms of sales and EBITDA?

Our visibility on the metals side is diminished right now because of the points that you've made.

If nickel and WTI prices stay depressed, there's no question that I see that the metals side being less robust in the second half of this year versus the first half.

On the chemical side, we do anticipate that both the top line and EBITDA will be improved over the first half of this year based on what we have in the pipeline.

We did on an annualized run rate in the chemical side, we shipped about 108 million pounds of product, the equivalent of 108 million pounds annualized in the first half of this year.

So if we can pick up another 8.5 million pounds, that's a pretty sizable pickup in growth on the chemical business.

I do expect that our seamless carbon sales into the energy sector will be improved over the second half -- excuse me, over the first half of this year.

Right now, the big question mark for us is what BRISMET will do in the second half of the year and can we see a pickup in some of our distributor customers doing some larger stock buys.

They've been pretty timid in terms of the size of their orders, most recently in Q2.

And we don't have some of the large project orders that we were working on in the first half of this year that helped BRISMET's overall performance.

So Kevin, I'd say the big question mark we have is BRISMET and the lack of visibility we have on the order book right now.

Okay, got it.

Thank you.

Todd Vencil, Sterne, Agee.

Dennis, welcome aboard.

Thank you very much.

Good to be here.

Appreciate it.

Craig, circling up on Kevin's last question.

So you just said I think the big swing factor is going to be BRISMET.

Can you give us kind of a range of outcomes if nickel and WTI stay depressed versus if they recover a bit?

What's the revenue sort of swing there?

Todd, I don't have a clear number for you at this point.

We could probably do some work on that, but to answer that question with any clarity, I'd have to have some insight into exactly what our distributor customers are thinking.

And obviously, you can follow the activity with MRC and Shale-Inland and some of those guys, so those are distributors that we sell to on a regular basis.

They have been purposely trying to keep a fairly lean inventory.

What would cause that behavior to change I think would require an uptick in the nickel price and a trend that they believe was something they could bank on, that hey, it's time to go out and make some significant buys before nickel prices get away from us.

We keep reading about how nickel was going to go into a deficit position later this year.

Obviously, that has not yet happened; there's still a ton of inventory in the LME storehouses.

And I think demand generally has not lived up to the expectations that we had going into this year.

So at this point, I think I'd be really pulling a number for you out of thin air without having a little more insight on what our customers are thinking.

But I think it's clear from their behavior in the last several months that until they see a trend upward in nickel prices that they're going to kind of sit on their wallets.

Fair enough.

Last quarter, you'd talk about consolidated top line of $210 million to $215 million for the year.

You've done a little over $100 million in the first half of the year.

Fair to say that in order hit that $210 million to $215 million, you're going to have to see that bounce in nickel?

That's right.

Okay.

Thanks for that.

On the import situation -- thanks for the color there.

I was going to ask about that.

Can you -- relative to a couple years ago when you went through this with the Southeast Asia manufacturers, where are you in that process?

If you can name me a month in 2013 where you were sort of in this same situation, was it start of spring 2013?

Yes, Todd.

We saw a couple things.

The imports, particularly from India, picked up in Q4 of last year and then they fell off in the first quarter of this year.

So we were kind of in at a position at that point that we thought well, it's not a deadlock that we could get something done based on the level of imports we saw in Q1.

In Q2, those imports picked up quite a bit.

And so I think we're at a point now where we've started to feel some of the pressure in the early part of Q2 on our commodity pipe.

And I'm talking primarily 2 inch to 8 inch to 10 inch in diameter.

We started feeling the presence of those imports more dramatically.

And keep in mind that we had a lot of good project stuff that we were working on.

So we were less concerned about it as long as we had that solid mix in the plant.

But starting in the early parts of Q2, we started feeling the pressure of some of those imports and the buys that we were seeing.

And I'd say that we're kind of in a mode where it's similar to where we were with the Malaysian, Vietnamese, and the imports from Thailand in terms of both the quantity of imports, the [cons] that are coming in, and the level of pricing that we are seeing.

So I think we're reasonably encouraged at this point based on the data that we have in hand that we would be in a strong position if we decide to move forward.

Got it.

All right, thanks for that.

And then just remind me, given all that color, what fraction of metals is BRISMET these days?

On a top-line basis?

In terms of top line?

Yes.

Yes, the BRISMET operation, you could think of that as including all of their pipe products, with the exception of the heavy wall, which obviously isn't up and going, that's on an annualized run rate of in the $90 million to $95 million range right now.

Got it.

Perfect.

And then I guess if I'm thinking about what's most important there, would you rather see no change in WTI and a bounce in nickel or the reverse?

I think I'd rather see a bounce in nickel right now, if I had to pick one.

Okay.

I'd like to see a bounce in both of them, of course.

Yes, right.

Okay.

I think that's got me.

I was going to ask some questions about chemicals, but I think you gave me enough to be dangerous.

But I don't want to go without mentioning it, so I guess we'll count this as my mention.

Thanks a lot.

(Operator Instructions) And I am showing no further questions in the queue.

I would like to turn the call back over to Craig Bram for any closing remarks.

All right, everybody.

We appreciate your time this morning and hope everyone is doing well.

Thanks, again.

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.