Ascent Industries Co (ACNT) 2016 Q4 法說會逐字稿

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

(Operator Instructions).

As a reminder, this conference call may be recorded.

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

Sir, you may begin.

Good morning, everyone.

Welcome to Synalloy Corporation's fourth-quarter 2016 conference call.

Dennis Loughran, our CFO, is with me today as well.

Dennis will provide a review of Q4 and the year-end financials and then I will provide some commentary on what we are seeing so far this quarter across our various businesses.

We will then open the call to questions.

Dennis.

Hello, everyone.

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

Fourth-quarter base losses were $1.4 million or $0.17 per share as compared with a net loss of $17.7 million or $2.04 per share in the fourth quarter of 2015.

Significant differences in the year-over-year performance includes Q4 of last year includes a pretax loss of $17.16 million related to the goodwill impairments for Palmer of Texas at $15.9 million and especially pipe and tube, $1.26 million respectively, the reasons for which were fully described in prior disclosures.

Last year's Q4 also includes a one-time casualty insurance gain of $0.92 million related to the settlement of fire loss claims at Palmer of Texas compared to no such amount in this year's Q4.

Q4 of this year had a pretax inventory loss of only $0.19 million as compared to an inventory loss of $2.01 million in Q4 of last year.

The LCM adjustment for this year reduced the inventory loss by $0.24 million as compared to the LCM adjustment last year increasing the inventory loss by $0.23 million.

Q4 of this year included favorable net one-time adjustments and amortization of prior-period manufacturing variances totaling $689,000.

Q4 of this year included $82,000 of losses and expenses related to the sale-leaseback transaction compared to no cost for that item last year.

Year-to-date GAAP-based losses were $7 million or $0.81 per share as compared with a loss of $10.3 million or $1.18 per share in the 12 months of 2015.

The 2015 figure included the impact of the $17.16 million goodwill impairment as previously described compared to no such charge in 2016.

Inventory losses in 2016 were $5.75 million as compared with $6.84 million in 2015.

The LCM and aged inventory adjustments for this year reduced the inventory loss by $1.8 million as compared to those adjustments for last year increasing the inventory loss by $0.6 million.

2015 included cumulative pretax gains for both Palmer and SPT earnout adjustments of $4.9 million compared to none in 2016.

2016 included $2.64 million of losses and expenses related to the sale-leaseback transaction compared to no cost for that item last year.

Also, 2015 was impacted by pretax gains of $0.92 million and $0.13 million related to the Palmer of Texas casualty gain and excess life insurance benefits respectively, which did not have comparable gains in 2016.

Fourth-quarter non-GAAP adjusted net loss was $1.43 million or $0.17 per share as compared with adjusted net income of $0.2 million or $0.02 per share in the fourth quarter of 2015.

Year-to-date non-GAAP adjusted net loss was $1.4 million or $0.16 per share as compared to an adjusted net income of $7.5 million or $0.86 per share in the full year of 2015.

Fourth-quarter non-GAAP adjusted EBITDA was negative $0.8 million or 2.4% of sales as compared to adjusted EBITDA of $1.8 million or 5.1% of sales for the fourth quarter of 2015.

Year-to-date non-GAAP adjusted EBITDA totaled $5.5 million representing a $13.9 million decrease from 2015 results.

At the end of the fourth quarter, our outstanding borrowings against our ABL facility totaled $8.8 million.

Calculated ABL facility remaining availability at December 31, 2016 was approximately $22 million.

I will now turn the call back over to Craig.

Thanks, Dennis.

As mentioned previously, we believe that 2016 represents the bottom of the most recent cycle for both the metals and chemicals segments.

We are seeing positive signs through the first two months of this quarter and are optimistic that we can achieve the 2017 plan as outlined in the earnings release.

Let me discuss in some detail what's been going on in each of the operating segments.

The team overseeing the Marcegaglia transaction worked very hard to complete the closing on schedule.

We've now turned our attention to the integration portion of the process.

The response from our customers has been positive as several are jockeying to make sure they have access to adequate supply.

As the largest domestic producer of welded stainless steel pipe and mechanical tube, we are in a very favorable position when North American demand returns to more normalized levels.

The Marcegaglia acquisition includes seven laser mills, which operate at a distinct cost advantage to TIG mills and will allow Bristol Metals to not only be the low-cost producer in North America, but will also position the business unit to effectively compete with imports on smaller OD products.

Demand for stainless steel pipe and mechanical tube has remained subdued so far this quarter.

North American demand in 2016 was basically at the same level as 2015 with both years down about 18% from 2014.

We are optimistic that higher energy prices will support new capital expenditures in the downstream energy markets and that under the new administration, we will see infrastructure spending in general at much higher levels than recent years.

While there was little change in average nickel prices in the last two quarters of 2016 and continuing into the first quarter of this year, surcharges on the other hand have made a substantial move to the upside.

Surcharges in Q4 of last year were up 10% over Q3 and in the first quarter of this year are up 39% over the fourth quarter.

The primary driver of the surcharge increase has been rising chrome prices.

The result of increasing surcharges has been a small inventory profit in the stainless steel business in the fourth quarter and in January and February, inventory profits totaled approximately $930,000.

While these inventory profits will be deducted from our adjusted EBITDA calculation, they nonetheless represent real cash profits for the business unit.

It has been almost six years since we have posted a meaningful inventory profit.

Our tank business in West Texas has come alive in the past several months.

WTI prices increased to as much as $54 per barrel earlier this year and have recently fallen back below the $50 level.

Drilling activity is on the rise and over $25 billion of acquisitions have been reported in the Permian Basin over the past six months alone.

We have booked over $8 million in tank orders from December 2016 through February of this year.

Pricing is not yet at the levels enjoyed during the 2012, 2014 period, but we expect them to improve as tank manufacturing capacity in the Permian continues to be absorbed.

A greater percentage of our tank orders are for larger diameter steel tanks.

To satisfy this growing demand, we are going to invest in a second paint and blast line, which we expect to be in place within four to five months.

Orders for heavy wall seamless carbon pipe and tube have also picked up in the past several months particularly from our Houston operation.

We have seen sequential monthly growth now over the past four months.

Looking at the chemical segment, we are running very close to plan for the first two months of this quarter.

As we were still supplying products to Salinas in the first quarter of 2016, we are not looking for favorable quarter-over-quarter comparisons until the second quarter of this year.

Business activity has been positive to date in this segment as well.

We recently signed a three-year contract to produce a fire retardant that is used in the manufacture of coverings for computer and telephone cable.

With annual pounds in excess of 3 million, this is a very nice addition to the productline at CRI Tolling.

We've also been selected to produce a wood additive that acts as a pesticide.

The volume for this product will start small, but has significant potential.

Not surprisingly we are also starting to see volume picking up for oil and gas-related chemicals.

As we wrapped up 2016 and heading into 2017, I am particularly pleased that in spite of falling volume and revenue, the chemical segment actually increased its EBITDA margins to more than 13%.

We will now open the call to questions.

(Operator Instructions).

Mike Hughes, SGF.

First, just one point of clarification.

The net income number you put out there, that is not an adjusted number, it's a GAAP number that includes some anticipated charges, is that correct?

That income is a GAAP number.

Correct.

What was the last part of your question -- some anticipated charges; what do you mean?

I think in the reconciliation of the net income buildup, there's about $1.1 million in acquisition-related charges, so normally companies would add that back.

You haven't done that in the number that you have presented in the earnings release, correct?

For the guidance figure?

Correct.

Yes, the guidance includes that as an expense in the period and then we should have -- our typical adjustment for that would be to pull that out so it may be something that I got to look at because we typically would add back the one-time charges in the adjusted net income.

So you may have found something we have to confirm.

Thank you very much.

Okay, okay.

And then you gave some good guidance on the metals side of the business.

I was just wondering if you could give any color on the project side.

I think you have a LNG project.

Is that still on track to ship in the first quarter and then what's baked in for the balance of the year?

Yes, Mike, the LNG project, we shipped very little of that in January and we shipped about a third of it in February and so the balance will primarily be in March.

We should get the bulk of that out in March.

As far as project activity goes, right now, on the stainless steel pipe side, it's still pretty light.

At the end of February, we did start to receive a number of stocking inquiries, so that's the first time really in quite a while.

I'm not sure if that's necessarily because of demand that our distribution customers are seeing.

I think part of it has to do with our purchase of Marcegaglia and the distribution customers wanting to make sure that they are in line and have their position in order to get their supplies in place.

So it could be a combination of those things, but we have seen in the last couple of weeks in particular a pickup in stocking inquiries.

Okay, great.

And then just the Palmer business, I think you gave some metrics on order growth, but did you mention what the revenue was in the December quarter and how that ramps in 2017 and what the expansion of that line does for your capability as far as production is concerned?

Yes, let me try and answer that for you.

If you go back and look at the second and third quarters, Palmer's revenue was averaging about $1.3 million to $1.4 million a month and the bookings were running at about the same rate.

And then once we got into Q4, starting in December, we saw the bookings jump to about $2.5 million of tank value.

And in January, we also had a $2.5 million booking and then in February, we booked over $3 million in tank value.

So it's been on a pretty dramatic ramp and a lot of that is probably being driven by not only the completion of uncompleted wells, but if you look in the Permian in January, the drilling permits were up about 45% over the previous monthly averages of the prior five months.

So there's a lot of permit drilling activity going on in and around the Andrews location.

So the $8 million in bookings in three months, obviously, that's a $32 million annual run rate.

We haven't seen that kind of level of activities until you go back to 2014.

What is baked into the guidance and what the capacity expansion, what does that do for your ability as far as quarterly production is concerned?

The additional paint and blast line, I don't know that I can tell you from a standpoint of increased capacity.

The reason we are doing that is, I think as the E&P guys are using longer laterals on their horizontal drilling, it means that coming up out of the same well, you have a greater quantity of fluid and so they are going for these larger [21-6] barrels -- 1500 barrel tanks -- and those larger steel tanks take longer to paint, longer to blast and so they can result in some chokepoints in that part of our operation.

So by adding the second paint and blast line, that second line is really going to be devoted to the larger tanks.

So I think it will allow us to push more product through the facility, but I wouldn't view it as a dramatic increase in capacity but more of a step that we are taking to deal with changing tank design and size requirements.

Okay.

I see.

And I assume you have baked in a more modest number for Palmer than $32 million in your guidance for 2017; is that correct?

Yes, sir.

Okay.

Then one last one for you.

I may have missed it, but do you have a CapEx number for 2017?

I think it's about $3.5 million (multiple speakers).

There is no significant growth CapEx in there other than the paint and blast line at Palmer and over at CRI with the new three-year contract for the fire retardant, that customer is going to provide the capital for about a $500,000 expansion that will include some expansions to the tank farm there, some filtration equipment and a couple of other odds and ends that CRI will need to produce that product.

Okay.

Great.

Thank you very much.

And just to clarify, the Marcegaglia acquisition, a big piece of that was buying equipment that would theoretically have been CapEx under -- it's an asset purchase basically so a big piece of the Marcegaglia acquisition price was for capacity expansion.

So that may show up as CapEx investment on our cash flow when it is recorded.

Okay, appreciate it.

And Mike, I did want to clarify on the guidance in the press release, we only mentioned net income to GAAP number and adjusted EBITDA, so we didn't present that adjusted net income format like we do on historicals.

Hence, if we had presented that format, we absolutely would've added back those acquisition and integration costs, but it's not presented in that table.

Okay, terrific.

But we can calculate it on our own.

I just wanted to make sure I was doing the calculation correctly.

I appreciate that.

If you looked at our historical methodology and followed it, you would get to pretty close to the right number.

Thank you very much.

Thank you.

(Operator Instructions).

I'm showing no further questions at this time.

I would now like to turn the call over to Mr. Craig Bram for closing remarks.

Thank you.

As always, we appreciate everyone's continued support and we are looking forward to improved results in 2017.

Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes today's program.

You may all disconnect.

Everyone have a great day.