Ascent Industries Co. (ACNT) Q3 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Synalloy Third 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 be given at that time. [Operator Instructions]. As a reminder this call is being recorded. I would now like to the conference over to, Craig Bram, President and CEO. Please go ahead.

Good morning, everyone. Welcome to Synalloy Corporation's third quarter 2015 conference call. With me today is Dennis Loughran, our CFO. For today's agenda, Dennis will first provide a review of the third quarter and year-to-date financials and then I will offer some general comments about the quarter and provide an overview of our key initiatives for the remainder of this year and into 2016. Following my comments we will open the call to questions. Dennis?

Hello, everyone. In comparing this year's financial performance to last year's, last year's results will be for continuing operations of Synalloy. As usual the financial results will be presented using three different methods; GAAP based EPS, adjusted net income and non-GAAP measures defined in the earnings and adjusted EBIDTA, a non-GAAP measure also defined in the earnings release. Third quarter GAAP based earnings were $1.36 million or $0.16 per share as compared with earnings of $3.18 million or $0.36 per share in the third quarter of 2014. Q3 of this year includes a pre-tax gain of $2.41 million for the Specialty Pipe & Tube acquisition earn-out adjustment. Also Q3 of last year included a pre-tax inventory gain of $0.81 million as compared with an inventory loss of $2.21 million in the Q3 of this year. Year-to-date GAAP based earnings were $7.45 million or $0.85 per share as compared with earnings of $11.21 million or $1.29 per share in the first nine months of 2014. Inventory losses in the first nine months of 2014 were $0.12 million as compared with $5.72 million in the first nine months of 2015. The Palmer acquisition earn-out adjustment resulted in a pre-tax gain of $3.48 million in the first nine months of 2014 as compared with cumulative pre-tax gains for both Palmer and SPT earn-out adjustments of $4.90 million in the first nine months of this year. Third quarter non-GAAP adjusted net income was $1.06 million or $0.12 per share down 58% as compared with adjusted net income of $2.53 million or $0.29 per share in the third quarter of 2014. Year-to-date non-GAAP adjusted net income was $7.35 million or $0.84 per share down 11% as compared with adjusted net income of $8.21 million or $0.94 per share in the first nine months of 2014. Third quarter non-GAAP adjusted EBITDA totaled $3.90 million or $0.45 per share, a decrease of 26% from the prior year's third quarter total of $5.24 million or $0.60 per share. Year-to-date non-GAAP adjusted EBITDA totaled $17.62 million or $2.02 per share, an increase of 2% over the prior year's total of $17.27 million or $1.98 per share. The combined adjusted EBITDA margin for the operating businesses in the third quarter was 12.9% for the first nine months of [2014] and for the first nine months of 2015 was 14.7%. For all of 2014 the combined adjusted EBITDA margin for the operating businesses was 13.4%. This excludes parent company costs. Term debt at the end of the third quarter totaled $27.34 million, while the line of credit was $4.96 million. Total net debt at the end of Q3 was $32.08 million. I will now turn the call back over to Craig. Craig Bram Thanks, Dennis. Let me start with some general comments. Synalloy's faced a number of headwinds in 2015, none of which were anticipated when we prepared our initial forecast for this year. Everyone is familiar with the decline in nickel and WTI prices and their negative impact on our Metals segment. The stainless steel pipe operation endured the dumping of 30 million pounds of pipe from India over the past 12 months, resulting in lower prices and volume for domestic manufacturers. Our Fiberglass tank operations suffered a fire in April that took that unit out of production for about four months. The Chemicals segment also lost revenue due to the downturn in the energy sector. Our stock price has been under heavy pressure as well trading as much as much as 57% below its year-to-date high. The fact that our peer group, suppliers, customers, and competitors have felt similar pain offers little comfort. Against this backdrop, I am pleased with how the operating segments have performed year-to-date. With adjusted EBITDA of $17.6 million through three quarters, we should finish the year in a range of $20 million to $21 million, not far off last year's record adjusted EBITDA of $21.7 million. We still have plenty of work to do, but all-in-all, have done a good job on those things under our control. The Board of Directors continues to believe that our stock is undervalued at this time. When the trading period reopens for insiders, the company will resume purchasing its shares. Let me [stretch] on the Metals segment. As we expected Q3 continued to provide a challenging environment for our Metals segment. Nickel surcharges on 304 and 316 alloys declined by an average of 18% during the quarter and were down 33% from the prior year. The result was inventory losses for the quarter in our stainless steel pipe operation of $2.2 million and year-to-date $5.7 million. By comparison in Q3 of last year we had inventory profits of $808,000 and year-to-date inventory profits of $121,000. At the end of Q3 nickel spot prices were $4.50 per pound and are currently running at $4.35 per pound. We expect Q4 surcharges to be flat. Should nickel prices remain stable over the next three months, we would expect to see inventory losses on our stainless steel pipe operation end by late in the first quarter of next year. A recent Bank of America Merrill Lynch report forecasted nickel will be in deficit next year, suggesting the potential for increasing prices. As reported on September 30th, Bristol Metals and three other domestic manufacturers filed anti-dumping and countervailing duty petitions against welded stainless pressure pipe from India. The outcome is uncertain. However, we anticipate a favorable ruling. If so we expect our commodity stainless steel pipe volume to increase in the first quarter of next year. We are beginning to see the early signs of improved order activity with some restocking by distribution customers. WTI prices have been hovering in the $40 to $55 -- $45 to $50 per barrel range for the last several months. While our orders for tanks and heavy wall seamless carbon pipe from the oil and gas sector appear to have bottomed, we've yet to see any signs of an improving market. There has been recent news that several E&P companies moving CapEx away from other shale plays to the Permian Basin, Occidental Petroleum specifically. That being said we are still of the opinion that it will take WTI prices stabilizing in the $65 range, for well completion activity to increase and thus positively impact these product lines. The heavy wall project in Bristol, Tennessee is making excellent progress. All the equipment from Sweden's been delivered to the facility and installation is on schedule. Our target date for the new press becoming operational is the end of February. We will be running standard jobs on the new equipment for training purposes in the first and second quarters and book to start generating new business in the second half of 2016. Renovations have been completed at our fiberglass tank facility following the fire in April and we are now back to full production there as well. Product line extensions are planned for both our carbon seamless pipe and our tanks in early 2016. We have a goal of generating non-energy tank business of $5 million annually by 2018. I am very pleased with the cost controls that have been implemented in the past two years, which have allowed the Metals segment to produce relatively strong margins in a depressed market. For the first nine months of this year our stainless steel pipe operation generated an adjusted EBITDA margin of 18.4%, up 400 basis points over the same period last year. On a year-to-date basis, the entire Metals segment saw its adjusted EBITDA margin improve from 13.6% last year to 16.0% this year, including the impact of 2015 insurance proceeds from the Palmer fire. Turning the Chemicals segment; the Chemicals segment has a solid pipeline of new products that are scheduled for production over the next two quarters. At the same time we do anticipate the loss of several current products due to customers moving product in-house to utilize excess capacity. While volume for 2016 is projected to be marginally higher than 2015, an improving product mix is forecast to increase gross profit by 9% year-over-year. The Chemicals segment has also generated improved EBITDA margins in 2015. During the first nine months of this year EBITDA margin was 12.3% as compared with 11.4% last year. Capital expenditures for the Chemicals segment in 2016 will focus primarily on increasing reactor capacity and throughput. Moving over to the corporate side, we continue to review possible acquisitions and are focused primarily on tuck-in opportunities at this time. So far this year we pushed several transactions close to the finish line but for various reasons decided not to move forward. We will remain disciplined in our M&A work, while maintaining the strength of our balance sheet. Synalloy continues to build on the quality and depth of its management team. Dennis joined us in July and we recently added Sally Cunningham, who will be VP of Corporate Administration. She will be based in Richmond and will have a number of responsibilities rolling up to her in the coming months. Dennis and I will be in New York later this week to present at the Cowen & Company Metals & Mining Conference. We look forward to seeing some of our current shareholders at that event. With that we will turn the session over to Q&A.

[Operator Instructions] Our first question comes from the line of Nic Prendergast of BB&T. Your line is now open.

Just a quick question on your distributor restocking comments. Just a lot of distributors out there are cutting back, and I am just curious if you could provide somewhat a little bit more color on that because that seems kind of outside the norm I guess in this environment.

Yes, Nic. Obviously I am speaking to the stainless steel pipe area, and not so much the carbon seamless area. But yes, we had recently received in more increase of stocking buys. They are not quite as large as what we would typically see, but they have definitely been larger than what occurred the prior two quarters. And I would attribute some of that to what's happening in the -- with our dumping suit. Folks have been focused on that. Obviously they are interested and to see what this ruling -- initial ruling looks like probably later this month. But I think the expectation is then that the [speculative] imports from India are likely to be turned off and so there are turning to the domestic manufacturers for new supply.

And then I guess on that India anti-dumping thing, obviously you said you expect some kind of ruling within a month or so. But I guess, last time we had talked you had suggested that the importers might have changed their behavior simply on your filing a complaint, because I guess it could have been retroactively applied to them, the negative pricing, or the imports could have been -- there would have been a tariff retroactively applied. Have you seen any change in behavior on that yet or is it not until we actually see a ruling?

Yes. We can't really state to what they are doing on the imports side but we can certainly speak to what's happening on the order book side. And I think as I said earlier, I think the sense is that that -- the ability for that product to come in specifically from India at the depressed prices is likely to change very soon. So they are other more focused on what the domestic manufacturers can provide over the next couple of quarters.

In your prepared comments you had -- I am switching over to the fiberglass tanks. I think you said that you are eyeing some product expansions in 2016 and you are targeting about $5 million in non-tank business. Can you provide some more color on that? What exactly is that?

There is two areas in particular we are focused on. The one that's the furthest along is the aqua culture zoological market. We have been making tanks for SeaWorld. We are also doing some sand filter work for them. These are additional tanks that are part of the process. We also -- the same company who is purchasing those tanks is also doing work with Cabela's and Bass Pro for all of their retail locations. So that's that one example of the fiberglass product lines that we see expanding behind -- beyond the energy sector. The other area involves chemical and water and wastewater applications. So we are pretty intently focused on identifying some additional markets beyond the oil and gas side over the next 12 to 18 months, so that we can begin to diversify a little bit away from the energy concentration that, that facility has out in Andrews, Texas.

Sure. You said that was -- I believe you had said there was about $5 million opportunity and you see that as a potential $5 million opportunity over the next 12, 18 months?

The aquaculture piece is probably $2 million to $3 million kind of opportunity. So the balance of that $5 million is going to have to come from the Chemicals sector or from the water and wastewater sector.

Then I guess one final question here. Did you say the Chemicals segment you see volume marginally higher in '16 versus '15?

That's right.

Okay. All right.

What we do there is we categorize the new products we are working on. Phase 1 is the initial enquiry. Phase 2 we've done some preliminary testing and Phase 3, products -- products that we have completely tested and we've actually gotten indications from the customer that they are going to start production at some future quarter. So we build our 2016 forecast, we have got those Phase 3 products that are included in that analysis and then we also have indications from current customers of declining volume or even volume that may actually move in-house due to them having excess capacity. We have seen a few instances where an existing customer who also does oil and gas work, because of the decline in oil and gas chemicals some of their capacity in their own facilities has been freed up. And so the first thing they look towards whether or not they can bring any outsourced towing capacity back in-house. So we've had some preliminary indications of that taking place in the last 30 to 45 days. And so we have built that into the 2016 forecast to arrive at the marginal increase in volume year-over-year. But I will say the analysis we've done so far suggests that the product mix and the associated gross margins on what we are picking up versus what we are losing will actually result in about a 9% increase in gross margin year-over-year and that will float back down to the bottom line as well for the Chemicals segment.

Wow. Okay. 9% increase in gross profit in the Chemicals segment just based on kind of current early indications, is my understanding of that correctly, is that about right?

That's right.

I think that's about it for me.

[Operator Instructions]. And I am showing no further questions at this time. I would now like to turn the conference over to Craig Bram for any closing remarks.

Everyone thanks for your participation today. We look forward to finishing up the year as strongly as we possibly can. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.