Good day, ladies and gentlemen, and welcome to the Synalloy Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this call will be recorded. I would now like to introduce your host for today's conference Mr. Craig Bram, President and CEO. You may begin.

Good morning, everyone, and welcome to Synalloy Corporation's Second Quarter 2017 Conference Call. Dennis Loughran, our CFO is with me today as well. Dennis will provide a review of our Q2 financials, and then I will provide some comments on our business segments and what we are seeing so far in Q3. We will then open the call to questions. Dennis?

Hello everyone. As usual, the financial results will be presented using three different methods: First, GAAP-based EPS; second, adjusted net income, a non-GAAP measure as defined in the earnings release; and third, adjusted EBITDA, a non-GAAP measure also defined in the earnings release. Second quarter GAAP-based income was $0.8 million, or $0.10 per share, as compared with losses of $1.6 million or $0.18 per share in the second quarter of 2016. Significant differences in year-over-year performance include Q2 of this year had a pre-tax inventory gain of $0.1 million as compared with an inventory gain of $0.7 million in Q2 of last year. Q2 of this year included unfavorable net one-time adjustments and amortization of prior period manufacturing variances totaling $1.0 million compared to an unfavorable $0.4 million in the second quarter of 2016. Q2 of this year included $555,000 of acquisition-related expenses compared to $75,000 of such expenses in last year's Q2. The second quarter of 2017 was impacted by $0.6 million of rent pre-tax, related to the sale leaseback transactions that were not present in the second quarter of 2016 figures. This will be an ongoing difference through the third quarter of 2017. Second quarter non-GAAP adjusted net income was $2.0 million or $0.23 per share, as compared with adjusted net income of $36,000 or no earnings per share in the second quarter of 2016. Second quarter non-GAAP adjusted EBITDA totaled $5.5 million or 10.6% of sales compared to the prior year second quarter total of $2.2 million or 6.3% of sales. The numbers reflect the substantial improvement in our business levels in 2017 plus we earned the preferable position of having achieved this year’s results with an add back of only $0.2 million in inventory losses compared to last year’s add back of $2.2 million of inventory losses. Through six months of this year, we have had a favorable swing of $5 million in impact related to metal prices. The combined adjusted EBITDA as a percent of sales for the operating businesses in the second quarter was 13.2%, up from prior year’s second quarter of 9.6%. That level of profitability for the second quarter was achieved ahead of schedule this year, as we had previously predicted levels in the 12% to 13% range by later this year, with that level being comparable to our benchmark level of profitability of 12.4% of sales which was achieved in 2014. These comparisons exclude the parent company costs. At the end of the second quarter, our outstanding borrowing against our ABL facility totaled $33 million, calculated ABL facility remaining availability at June 30, 2017, was approximately $11.5 million. I’ll now turn the call back over to Craig.

Thanks, Dennis. Our financial results showed excellent progress in the second quarter and July started Q3 on a strong path as well. With our performance exceeding plan we have increased our projection for adjusted EBITDA for the full year to $17 million. While we are pleased to see the improvement over last year’s adjusted EBITDA of $5.5 million, we remain well below the company’s earnings potential in a normalized market. With demand at 2014 levels, comparable product mix, and associated pricing, Synalloy and its current portfolio of businesses can generate adjusted EBITDA of nearly double this year’s projection. After four months, the integration of Marcegaglia’s U.S. stainless steel pipe and tube business is essentially complete. Financial performance is very close to plan with an annualized contribution to adjusted EBITDA of almost $4 million. BRISMET, both Bristol and Munhall, had a backlog as of July 31, totaling $32 million. While volume levels at BRISMET have been reasonably good, the product mix as mentioned in the earnings release has been heavy on the commodity alloys and very light on the special alloys. Special alloys carry much higher conversion margins and these products are in high demand for downstream energy projects. Unfortunately, these projects have been slow to develop. While prices for commodity items are up about 12% on average over 2016, they’re still trailing 2014 pricing by 15% to 20%. If pricing and product mix in the first half of this year were comparable to 2014 levels, the Bristol facility would have generated $7 million more in contribution margin. This gives you an indication of the earnings power still available on the Bristol facility alone . Order activity for both seamless carbon pipe and tube and storage tanks have continued to hold at a relatively high level. The backlog for storage tanks…

[Operator Instructions] Our first question comes from Mike Hughes with SGF Capital. Your line is open.

Good morning. Thanks for taking my questions. First, on -- how you're doing today?

Very good.

Good. First on Palmer, can you just talk about the debottlenecking and your plans on that front, and how it preformed from a margin perspective in the quarter?

Sure. We -- each month, starting in April and continuing so far in July, we've been able to push more throughput through the facility, and it's actually climbed to where we produced in July about $2.2 million of tank value that doesn't include the freight, and we shipped including freight about $2.8 million in the month of July. So, at that level, we're very, very close. In fact -- and we've exceeded some of the months in 2014 from a production standpoint. So we've been able to come up with an outsourced contractor to help with the paint and blast area, which has been the bottleneck in the past. We've also got our sub-arc welding system up and running in the large tank area. So we believe that we can produce tank values now each month in the $2.4 million to $2.5 million range, and again that's absent of any freight cost. As far as the margins go, I'm looking at Dennis now to give some input on this. Material margins are running about 64% and our gross margins on that product line are running 12% to 13%, and EBITDA is about 10% at the $2 million a month level. So if we can push that up to $2.5 million, we would expect to return to EBITDA margins, 13% to 14% range.

Okay. And I think on the last quarter call, you indicated that the backlog for Palmer included better pricing. Did that all flow through in the second quarter or could the -- from a pricing perspective things just improved more in the third quarter for Palmer?

Yes. Pricing has continued to move up so you will see some improvement on that front in the third quarter as well. The bookings, the $16 million of backlog does not include freight, so we're actually pushing close to $18 million. We have actually never had a backlog that high at Palmer since we owned the business.

Okay. And then I think in the press release, did you -- I was a little confused, there was an indication that a recent order activity -- what have you seen as far as recent order activity at Palmer, I guess, is my question?

It’s continued to be strong. We booked about $3.5 million in June, and do we have the July bookings handy, Dennis?

I don’t have it. I’m sorry.

Yes, we – Mike, we can pull that up for you. We don’t have that in front of us at the moment. But the bookings have continued to be strong. The -- obviously when you start getting the plant filled up and your lead times go out beyond about 12 to 13 weeks, people are kind of having to shuffle stuff around a little bit, but we’ve got really strong relationships with Shell. Shell’s been a big booker for us so far this year, and we are continuing to see a lot of activity with Occi and some of the other more recent participants in the Permian Basin.

Okay.

It was $1.8 million booked in July.

Yes. $1.8 million was booked in July.

Okay. Which was down from June and it’s probably inappropriate to look at it on a month-by-month basis but my understanding…

I understand it was down and it depends on the size of the tanks that are being ordered and you may have a -- certainly product mix driven month to month.

Okay. Because, you’re selling into the Permian which at $50 oil is very profitable, so the activity is still very robust there, correct?

Yes. We have actually -- we’re starting to take orders that are going to take us out into the first half of 2018.

Okay, terrific. And then can you just touch upon the industry consolidation. I think with Marcegaglia, your share moved to about 45%. I’m not overly familiar with the two players that you’ve mentioned and do you have a rough ballpark number on what -- where their share would fall out, and if you consider the acquirer a rationale player and what it could mean for pricing on a go-forward basis?

Sure. This year, the North American market’s going to consume about 210 million pounds of welded stainless steel pipe. BRISMET and Marcegaglia combined will supply about 50 million of those pounds, and Ta Chin imports from their Taiwanese mills that combined with the output from the Wildwood facility is worth another 50 million pounds. So those two entities, BRISMET and Ta Chin, Primus Pipe and Tube will have roughly 50% of the entire North American consumption.

Okay. Had you defined the market differently in the past; I thought with Marcegaglia, your share was at 45%. Was that defining the market in a more narrow way?

That’s looking just Mike, at domestic producers. So if you look at only the domestic mills, which would have been Outokumpu, Wildwood, BRISMET, both Bristol and Munhall, and Felker Brothers and some of the other players, BRISMET would represent roughly 40% of that group. And then when you bring in the imports which includes about 42% penetration into the North American market, that would bring us down to about 25%.

And is your understanding, the Section 332, if that happens would that cover these products?

Yes. Section 232 has being quite a moving target from what Trump had initially talked about in the Secretary of Commerce. But the most recent information that we have is – and I think this makes more sense; there are some countries that have been bad actors in terms of dumping and other anti-competitive moves and many of those countries are over in Asia. You’re aware that we’ve had dumping suits in over the last 10 years against China, Vietnam, Malaysia, Thailand, India; those are the countries that have typically been bad actors when it comes to importing stainless steel pipe. So the most recent things that we’ve heard is the potential duties -- excuse me, potential quotas and duties which focus on the Asian countries. They would not impact the European countries who have not been bad actors, and then there might be some product-specific moves that would also be made. But we're not necessarily thinking that that’s around the corner, but it appears that, that is the direction the 232 is moving in.

Okay. And then just two more questions for you. The contingent consideration of Marcegaglia, the – I think it was $1.1 million or there about, did that flow through -- was that a charge in the income statement? Is that how the accounting works on that?

No. The -- because we're still in the one-year period of finalizing the acquisition accounting, it was purely a balance sheet -- setting up a liability with an increase in the goodwill, which basically is where we retroactively recalculated that number for the information that was interpreted as we made the first quarter payment. So after you’ve finalized and confirmed with your auditors that you’re done, anything after that in one-year period would then hit the income statement for adjustment to that liability.

Okay, that makes sense. And then the last question just on that guidance for the year, I think you’re saying EBITDA’s $17 million now, you’ve already done $7.6 million in the first half implying $9.4 million for the second half. Your run rate for the second quarter is about $11 million, you’re expecting the chemicals business to get better in the second half from what you said about Palmer. From a margin perspective, at least it should get better in the second half, so is there still some conservatism in the guidance or there is something – a disconnect that I’m missing?

There’s probably a little bit of seasonality in that Q4, Mike. We expect Palmer’s Q4 because of the backlog to be resultant in revenue and EBITDA at higher than what they would historically be in Q4. But it’s also somewhat dependent on weather, if the weather gets cold too soon, it affects our ability to blast and paint. And so we're doing a few things now with the paint and blast shop, relatively minor CapEx may be a $100,000 to $150,000 to tighten up the paint and blast area so that when we -- if we do get some cold weather it doesn’t seriously impact our throughput. But there is a little seasonality in there. And there may be a touch of conservatism but I’d say it’s more seasonality than the former.

Okay. Thank you very much.

Thank you. [Operator Instructions] And we have a question from Charles Gold with BB&T. Your line is open.

Thank you. Good morning, and congratulations on the improved quarter, great to see.

Hey, Charles. Thank you.

A year or so ago you bought this used but very effective piece of equipment from Sweden, the large, thick-wall pipe machine, and I wonder how that’s been working. Have been – I know you could do all kinds of pipe on it. So what’s the productivity been on that compared to your projections?

Yes, Charles, we in the first quarter of this year and actually going into April, I think most of the shipments were completed in April may be early part of May. We had a large LNG project [Indiscernible] with the CB&I, and that was an interesting project for several reasons. The value of the entire project was about $5 million but only a third of that was heavy wall. But we couldn’t have gotten the entire project without the heavy wall machine. So that's a good example of how by expanding the product line and our capabilities, we've been able to wrap up entire orders as opposed to getting either a portion of the order or losing out on the order completely. The effectiveness of the equipment in that project was very good. The margins were higher than normal pipe diameter sizes and thickness as we expected it to be. I'd say the one downside is when you get a big project like that, you wind up with -- when you tie up the machine you can't do some of the quick-turn projects. Those quick-turn projects are – I liken them to the specialty business in that when somebody needs a particular piece of pipe quickly to round out a project, they tend to be less price sensitive. And just like in our specialty pipe and tube business, it allows us to earn to better margins. So the good news is when you tie the press up on a project, you've got that steady revenue and margin but you also don't have the capacity when you’re doing that to handle some of the quick turn. The other thing I would say is -- and this gets back to some of the consolidation in the market, any market you're going to…

And the other question -- thank you for that, other question was about the hedging strategy. As I understood, you took the lid off so you had all the upside and you're buying puts to protect yourself on the downside. If that's correct or close to correct, did you collect on any of those puts so far, and you're going to continue that strategy?

Charles, this is Dennis. Yes, that's exactly accurate. Each month we layer on the next month's commitments at the locked-in levels around the 22nd, 23rd of the month. And so far we've had one tranche payback about $85,000 when the prices had gone up and then they’ve gone down. So we're not in the money on any of the rest of them.

But as I remember you were paying something like $25,000 a month, something like that?

Yes, as the percentage -- and as the prices have gone down the percentage on a – actually it says per pound basis has gone from about $0.14 a pound up to about $0.17 a pound. So it varies depending on how many pounds we commit to.

I am a big -- I love to root for things. So I always need to know what to root for. So I guess I’m still rooting for $5 and $6?

Yes, sir. Always.

Okay. Thank you very much.

Thank you. And I’m showing no further questions at this time. I’d like to turn the call back to Mr. Bram for any closing remarks.

As always, thanks for your continuing support. And we look forward to reporting on Q3 in November. Thanks very much.