Ascent Industries Co (ACNT) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Synalloy Corporation's second-quarter earnings conference. (Operator Instructions).

Now I would like to welcome and turn the call to the President and CEO of Synalloy Corporation, Mr. Craig Bram. You may begin, sir.

Good morning, everyone. Welcome to Synalloy Corporation's second-quarter 2016 conference call.

With me today is Dennis Loughran, our CFO. Dennis is going to start with a review of the Q2 financials and then I'll provide some comments on our two business segments. Following my comments, we will open the call to questions. Dennis?

Hello, everyone.

As usual, the financial results will be presented using three different methods, GAAP-based EPS; adjusted net income, a non-GAAP measure as defined in the earnings release; and adjusted EBITDA, a non-GAAP measure also defined in the earnings release.

Also, since we did incur a small charge related to a discontinued operation, all amounts referenced will be for continuing operations only.

Second-quarter GAAP-based losses were $1.58 million, or $0.18 per share, as compared with earnings of $2.45 million, or $0.28 per share, in the second quarter of 2015.

Significant differences in year-over-year performance include Q2 of this year had a pretax inventory loss of $2.18, million as compared to an inventory loss of $2.32 million in Q2 last year. The lower cost to market adjustment for this year reduced the inventory loss by $0.71 million, as compared to the LCM adjustment last year increasing the inventory loss by $0.13 million.

Q2 of this year included unfavorable net one-time adjustments in amortizations of manufacturing variances totaling $361,000. Q2 of this year also included $75,000 of acquisition and $122,000 of shelf registration-related expenses, compared to only $11,000 combined for those items last year. Second-quarter non-GAAP adjusted net income was $0.04 million, or inconsequential on a per-share basis, down 99% as compared with adjusted net income of $3.35 million, or $0.38 per share, in the second quarter of 2015.

Second-quarter non-GAAP adjusted EBITDA totaled $2.21 million, or 6.3% of sales, a decrease of 68% from the prior year's second-quarter total of $6.98 million, or 13.9% of sales. The combined adjusted EBITDA margin for the operating businesses in the second quarter was 9.6%, comparable sequentially to the first quarter of 2016, but down from prior year's second quarter of 16.1%. This excludes the parent company costs.

Term debt at the end of the first quarter was $23.8 million, while the line of credit was $4.6 million. Total net debt at the end of Q1 was $26.3 million -- excuse me, at the end of Q2 was $26.3 million. This totaled down by $7.4 million, or 22%, since the second quarter of last year.

We remain committed to managing our costs tightly and our balance sheet effectively during a difficult business climate. I will now turn the call back over to Craig.

Let me start with a discussion on the chemicals segment. Revenue for the first half of this year was down 22% from the same period last year, with pounds down by 17% and selling prices down 5%.

As previously reported, the loss of several products that were taken in house negatively impacted the first half of the year. We are starting to see the gradual ramping of several new product lines that will gain momentum as the second half of the year progresses.

Quarter 2 revenue for the chemicals segment was actually up 4% over Quarter 1 of this year, reflecting the start of this increased activity.

EBITDA margins for the chemicals segment improved in the first half of this year to 13.6% from 11.9% for the same period last year.

We continue to reduce cost wherever possible. In July, we completed the installation of a new cooling tower that manufactures chemicals. The total cost was approximately $400,000; annual savings on their water bill will approach $250,000. In addition, we will realize faster turnover of reactors as cooling times are reduced. We are in the process now of replacing reactor four, which will result in production efficiencies and reduced maintenance.

A customer has recently been awarded a contract with a large furniture manufacturer. CRI Tolling will be manufacturing the product for delivery to several plants in Mexico within the next several months, with the potential to also supply facilities in Europe.

Let me move on to the metals segment. For the first six months of this year, pounds shipped of stainless steel pipe from North American producers was down 14% from the same period last year. Reflecting the continued absence of large project work, our volume was off about 19% during the first half of this year.

Blended pricing for commodity pipe and special alloy was down 26% over the first half of last year, with commodity pipe pricing down 34%, on average. While domestic producers had captured a larger percentage of the under 12-inch volume following the dumping suit, at least one producer has been extremely aggressive on pricing, particularly in the six-inch and under sizes. In a market where capacity exceeds current demand, pricing pressure has remained a constant.

Nickel prices and resulting surcharges had showed some life in recent months. Nickel prices were up 11% in the second quarter and up another 12% since the end of Q2. As is typical, the forecasts that we follow offer opposing viewpoints. Several suggest 15% upside from current levels, while others expect nickel prices to retrace their steps back to the end of 2015.

The key driver of pricing to date has been the closing of several mines in the Philippines as their new President enforces environmental regulations. Surcharges on 304 are projected to be $0.43 per pound in September, up about 35% from this year's low point in March.

However, we've yet to see any signs of significant order activity from our distribution customers. In fact, the general attitude in the industry has been over the last six months that this has been the worst market in over 20 years.

Our heavy wall project was completed on time and within budget. July marked the first production of a true heavy wall order. We will be rolling out our marketing and sales campaign later this month, with an open house likely in spring of next year. When the overall market begins to improve, we would be well positioned in the large OD product lines, both in terms of product breadth and from a cost advantage.

Storage tank sales in Q2 were in line with Q1 of this year, while operating margins continued to show improvement. The seamless carbon pipe business experienced a sales gain of 4% in Q2 over Q1, with improving material and EBITDA margins as well.

We remain encouraged by our cost controls across the entire metals segment and across the entire company. We continue to believe that we've reached the bottom in sales for all product lines in the metals segment, but have limited visibility on when to expect a recovery to more normal activity.

We will now open the call to questions.

(Operator Instructions). Charles Gold, Scott & Stringfellow.

Hello, Dennis and Craig. Two questions to start, first on share repurchases. I believe you had authorized 1 million shares and you've done, I guess, a little over 100,000, if that's correct. With the book value -- and please correct these numbers -- a little over $10 and the tangible book approximately $9, would this be an activity that you would start to accelerate trading under $7?

We will certainly be taking that up again in our Board meeting next week. We've been in a closed trading window for several months, so that window may be opening later this week. But we will certainly be chatting about that use of capital at the Board meeting next week.

So you have to wait for that Board meeting? I mean, don't you have an authorization to go ahead after, let's say, 48 hours?

We do have an authorization, but because of the -- if the window opens, it's likely going to be the end of this week, and so we probably couldn't jump on it until early next week and we've got a Board meeting on Thursday. So we will be talking about that at the Board meeting on Thursday.

Second question is about the collar, and please don't put too much weight on the semantics here; you'll get the idea. Has any money changed hands between you and the counterparty or is it due to change hands based on the activity in nickel since you put the collars on?

Yes, through June we had a total of under $5,000 exchange hands with two small -- two of our monthly layers having closed out with a price just above the upper end of the collar.

We have a mark-to-market liability on the books with the movement up in nickel, so that as collars close out, it's possible they're going to be above that price. We've done an analysis that we are about -- 40% of our nickel is hedged now that we have multiple monthly layers in the books. We did not hedge the cumulative balance of inventory that was there at 12-31. So I suspect, based on our policy of doing monthly collars at 85% of our monthly purchases, that 40% number is going to be about where it's going to end, so -- as we buy and sell about equivalent pounds each month.

So while we will end up paying out as the metal rises on certain layers, we've accumulated over $1.1 million of metal gains during the year on the unhedged portion, really offsetting tremendously the small amount of liability that we'd have if the prices do end up above the collars.

So it's working. We are buying insurance against the downside, not paying out much, and still taking significant advantage of the upside.

I guess the good news, I guess it's better for you to pay out small amounts than get paid. I guess if you were receiving checks, that would mean nickel would be crashing again.

Yes, sir. That's the way it's working.

And we will -- based on our policy, we will be presenting to the Board the policy as flexible. As we get toward a market where the upside and downside becomes more balanced, the approach and the collar levels and maybe going to different methodology might be appropriate, but for now we feel comfortable with what we are doing.

As Craig stated earlier, it's going to be pretty difficult to know when the upside and the downside are balanced. This is a big guessing game. It just looked like $3.50 down from $12 looked like at the lower end of the spectrum. And it seems like the big problem is really topline now. It's a sales issue. Is that a fair description?

Absolutely. There is still softness in the metals segment, really across all three segments, the storage tanks, the seamless carbon pipe, and the stainless steel pipe.

There's been pretty limited ordering activity, and when it occurs, it's much smaller than what we have typically seen. And at this point, we haven't seen any indications that those markets are ready to turn.

On the chemicals side, it's been much more business as usual, kind of the steady influx of activity. Within the ramping of the new products, we should see improved results over the next several quarters as those products come online. The chemicals side of the house has typically been less cyclical than the metals side of the house, and that has certainly been the case this year.

Speaking for myself and shareholders who give me their strong opinions, we would love to see the Company use its capital to buy shares at 20% to 25% below tangible book. We think the timing would be great for that. So you have my vote and support on that issue, and I'll turn it over to other questioners. Thank you very much.

(Operator Instructions). Bill Dezellem, Tieton Capital.

A couple of questions. First of all, relative to the chemicals segment, would you please discuss a little bit further the new product delays that you have experienced and now the ramp or wind-up that you are seeing? And then, secondarily, I'd like to talk about the tanks business, please.

Sure. On the chemicals side, we try to put each of our product opportunities in different buckets. Phase IV are the products that had been fully tested by our customers and our customers' customers, and the actual production has started.

And those products probably cover six or seven different categories right now, and in total when they fully ramp, there's about 15 million pounds of annual volume across those products. The issue is --

Craig, if I can interrupt, can I can ask what that 15 million pounds equates to in revenue?

Sure. Well, it's easier to tell you in terms of volume. When you look at the pounds being shipped across both of our facilities, we're looking at about 120 million pounds. And so, 15 million pounds represents a pretty sizable bump.

And I don't have the specifics to tell you which of the facilities those pounds are being allocated to, but I think at this point a fairly large percentage of them will go into the MC plant in Cleveland, Tennessee, because that's where the larger product line that was taken in house departed from that facility.

We think about the pounds more in terms of contribution margin, so the contribution margin across the 15 million pounds when they are fully ramping is worth about $2.5 million, the last time I looked at it.

As far as the timing goes, though, the reason why it's not particularly easy for the chemical guys to forecast which month or which quarter the product is going to start in is a lot of it depends on the demand from our customers' customer and when they need the product.

We've had a couple of issues with some raw material shortages. I think we mentioned on the last call the lithium grease product for Lubrizol. It's been hard to get a hold of the lithium product because of all the work being done in the car battery area.

But most of the difficulty in forecasting when it's going to ramp really gets down to our customers' customer and their production schedules.

That's helpful. And you did say the contribution margin on that 15 million pounds is roughly $2.5 million?

That's right.

And is that a normal sort of matrix to think about? I'm going to try to oversimplify here, but $2.5 million on 15 [million] pounds is about 16.5%, dollars to pounds. I realize I'm mixing apples and oranges here, but is that a reasonable way to look at profitability of incremental business or does that just happen to be specific to this 15 million pounds?

It's going to be specific to this 15 million pounds because it's very much driven by product mix. For example, if we take a product and we supply the raw material, we get a markup on the raw material plus the tolling charge. If we simply are taking the customers' provided raw material, then all we are going to get is a tolling charge on the activity. So, it really depends on the product that we are talking about.

That's fair. And then moving to the tanks business, that really wasn't addressed in any detail in your opening comments. Could you talk about what you are seeing there from that business, please?

Sure. I'd say that the order activity and the backlog activity has been pretty stable over the last several quarters. We've seen a little bit of activity pick up in terms of some new rigs coming into the Permian for our customers.

Obviously, we support the big guys, so if you were to look at the recent earnings release and some of the investor presentations from folks like EOG, Apache, Pioneer, all of those guys are starting to report some increased rig activity. And I think a lot of that got kicked off when WTI prices moved back closer to $50. Of course, we've seen them drift back down over the last 30 days, closer to, I think, $43 this morning.

But there has been increased activity in terms of rig count. EOG the other day reported that they were going to increase the number of drilled but uncompleted wells; they're going to increase the number of those wells they frac from 270 this year to 350. Those are all very much in the Permian Basin, and EOG has historically been one of Palmer's larger customers.

Apache has done some additional rigs in the Permian. They've actually got a couple of new wells that we've been asked to support that we are looking at orders for between 40 and 50 400- to 500-barrel tanks. And those are going primarily into New Mexico, where they've done some new work that those wells are producing at very high rates. And they've indicated even at $40, it's a pretty exciting play for them.

The current CEO of Pioneer Natural Resources did a presentation recently where he basically talked about the quality of the Permian Basin and the fact that that was going to be the primary supply of growth in US oil supply over the next 10 years.

So, we continue to see some very positive commentary on what's going on in the Permian. We are fortunate to be in that area; we can service the Eagle Ford as well, but there's no doubt that the Permian has one of the better cost structures of any of the shale plays in North America, and we are well positioned to support that when the turn comes.

Thank you. And Craig, I'm not even sure if this next question has relevance or a solid basis, but are you seeing a difference where the drilled uncompleted wells that the operators are looking to complete now, that they are leaning towards those where there is already infrastructure in place, meaning that maybe there's some tanks that are underutilized or other infrastructure that's underutilized, they go ahead and complete those wells? That's an increase in activity, but it doesn't do you a lot of good because they just use existing infrastructure.

That's a great question, Bill. I guess the last time we looked at this, about two-thirds of the drilled but uncompleted wells are in areas where there are existing infrastructure. And so typically with that, we are going to sell fewer tanks than we would in a greenfield area.

What we generally see in the areas that had infrastructure is instead of them purchasing -- let's say, on a typical tank battery, they may have two steel tanks, a fiberglass tank, and a couple of pressure vessels, if the infrastructure is already in place, they may only buy a single steel tank or typically a couple of pressure vessels, whereas in a greenfield we get the full -- we sell the full breadth of our product line into a greenfield.

And as a result, the initial DUCs that are completed probably aren't going to be near as vibrant in terms of your sales, but as time goes on, they're going to eventually work towards those that have less infrastructure.

I think that's probably a fair way to look at it. I would say that it gets a little more complicated because if they have a -- let's say they've drilled a well in an area that does not have infrastructure, but they believe the flow rate is going to be substantially better than with a well that's been drilled in an area that does have infrastructure.

Even though the cost going in may be lower in that infrastructure play, they may actually tackle the greenfield with the better flow rate. So there are some other factors in there, Bill, but I think by and large your conclusion is a fair one.

Great. Thank you for the detailed answers.

Thank you, and I am not showing any further questions in the queue. I will turn the call back to Craig Bram for any final remarks.

Thank you for your time today. We appreciate your continued support of the Company.

Ladies and gentlemen, this concludes our conference for today. You may all disconnect. Have a wonderful day.