Good day ladies and gentlemen, and welcome to the Synalloy fourth quarter earnings conference call. At this time, all participants are in a listen-only mode. Later during the call, we will conduct a question and answer session and instructions for how to participate will follow at that time. During the conference, if anyone should require assistance, please press star then the number zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Craig Bram, President and CEO. Sir, you may begin.

Good morning everyone. Welcome to Synalloy Corporation’s fourth quarter 2018 conference call. With me today is Dennis Loughran, our CFO. Dennis will provide a review of the Q4 financials and then I’ll provide some comments on our business segments and what we are seeing so far in 2019. 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. Fourth quarter GAAP-based net income was $0.5 million or $0.06 diluted earnings per share as compared to net income of $1 million or $0.11 diluted earnings per share in the fourth quarter of 2017. Significant differences in the year-over-year performance include: Q4 of this year was negatively impacted by $2.1 million in mark-to-market valuation losses on investments in equity securities compared to no such losses in the fourth quarter of last year; Q4 of this year contained $0.2 million of inventory price change losses compared to the fourth quarter of last year, which incurred inventory price change losses totaling $1 million; Q4 of this year includes a favorable net one-time adjustments and amortization of prior period manufacturing variances totaling $0.3 million compared to no impact in the fourth quarter of 2017; Q4 of this year included $0.8 million of reduced earn-out accrual compared to an unfavorable earn-out adjustment of $0.5 million in the fourth quarter of 2017. The decrease in projected earn-out liability represents the present value of expected payouts under the Marcegaglia acquisition agreement as a result of lower prognosis for sales than previous projections over the remaining contract. Fourth quarter non-GAAP adjusted net income was $2 million or $0.22 diluted earnings per share as compared with adjusted net income of $1.2 million or $0.13 diluted earnings per share for the fourth quarter of 2017. Fourth quarter non-GAAP adjusted EBITDA totaled $5.9 million or 8.1% of sales compared to the prior year’s fourth quarter adjusted EBITDA of $4.0 million or 7.5% of sales. Those comparable figures topped off a tremendous growth year for the company with full-year adjusted EBITDA totaling $34.1 million compared to just $12.5 million for the full year 2017, based on incremental profits from the company’s latest two acquisitions and strong performance across our core metals and chemical markets. The combined adjusted EBITDA as a percent of sales for the operating businesses in the fourth quarter was 10.5%, up substantially from the prior year’s fourth quarter of 3.4%. At the end of the fourth quarter, our outstanding borrowings against our ABL facility totaled $76.4 million, up $13.6 million from September 30, 2018 total primarily related to working capital increases. The calculated ABL facility remaining availability as of December 31, 2018 was approximately $17.5 million. I will now turn the call back over to Craig.

Thanks Dennis. 2018 was a record year on multiple fronts: record sales, record EBITDA, and record adjusted net income per share. In late summer, our share price hit a 10-year high of over $24 and in December we nearly doubled our dividend from the previous year. On top of stellar operating results, we completed the purchase of Marcegaglia’s galvanized tube business on July 1, 2018 and followed that up with the acquisition of ASTI’s assets on January 1, 2019. In January, we provided our forecast for 2019 with targeted revenue of $340 million, up 21% from the record set in 2018, and adjusted EBITDA of $34 million. The adjusted EBITDA forecast for 2019 assumes no inventory profits for the year and represents a 24% increase over 2018’s adjusted EBITDA on a comparable basis. While our share price finished 2018 up 24% over the prior year, we have seen it decline this year by as much as 23%. At our February board meeting, the directors authorized a share repurchase of up to 850,000 shares. It is the board’s belief that our share price does not reflect the value that has been created in recent years. At this year’s low of $12.79, Synalloy was valued at an enterprise value to EBITDA multiple of only 5.4 times. By comparison, the average historical multiple in a peak year of the cycle for Synalloy was 7.8 times. The median multiple in our peer group recently exceed 9 times. While pleased with the company’s financial performance and the completion of two complementary acquisitions, we are certain disappointed with the share price. Let me make some general comments on Q4 and what we’re seeing so far in Q1 of this year. At the corporate level, we took a mark-to-market valuation loss on investments in equity securities in…

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

Hey Craig, hey Dennis, how are you?

Hey Mike.

Good, thanks.

Good. Just wanted to start with the chemical division. I guess that was, in my opinion, the one disappointment for the year. I think the margins in the second half were shy of 7% and midyear you were thinking 12 to 13%, at least that was implied from the full year guidance, so what happened there and then what’s the outlook from a margin perspective for 2019 for chemicals?

Yes Mike, I would say a couple things. We rate our product opportunities in different phases, and we didn’t see some of the products that we expected to ramp in production, it didn’t happen in the latter part of last year. Some of those product lines have made good progress and we’re actually seeing the benefits of that in the first couple months of this year, so the chemical segment is definitely running north of our plan in 2019 so far, and some of that, as I said, are these products that we’d anticipated contributing some margin for us in the fourth quarter, moving into the first quarter of this year. In addition to that, we’ve gotten quite a few additional opportunities that have presented themselves, including the bio-side volume that I mentioned, the non-reactor product lines that I mentioned at MC, so we’re expecting that you’ll see some significant improvement in the chemicals segment in the first quarter of this year.

Okay, and then just one detail follow-up on that. Was there a bonus--reversal of a bonus accrual in the chemicals division in the fourth quarter? Just for modeling purposes, I was wondering.

Dennis is looking at a couple things here, Mike.

Okay, do you want me to jump to just the metals division?

Yeah, sure.

Okay. Palmer, you had some labor issues. Can you just talk about where the margins--I’m not sure if you’ll disclose this or not, but where the margins were in the second half of the year for Palmer, and if you’ve been able to address those issues and things are running more smoothly now?

Yes, I won’t get into the specifics of the exact margins, but the margins for Palmer in the second half were definitely improved over the first half. They’ve been strong the last several months, and to address your question to labor specifically, the turnover among our welders is much reduced from what it was the first half of the year, so that’s definitely had a positive impact on throughput. The last three months, our production levels have been hitting targets, so we’re pleased with what’s going on there.

Okay. The backlog looks essentially flat sequentially, so are you still seeing good demand levels in the Permian?

Yes, historically what happens is we get second and third quarter bookings are the highest booking quarters of the year. January is always a little soft, so we saw that again this year. February bookings picked up very nicely. Right now, we’ve got bookings as of March 1 that at current revenue run rates, there’s about five, a little more than five months’ worth of work in our backlog, and we expect that will continue to hold in that level. That’s where we’ve been the last 18 months.

Okay, and then just one more for me. The galvanizing and ornamental steel business, I think in the third quarter it did roughly $6 million. If I did the math correctly, it did roughly $5 million in the fourth quarter, and I think the ornamental steel business was supposed to be ramping during the fourth quarter and you’d exit the year at a run rate of $25 million. Can you just give us an update on those two businesses?

Yes, the galvanized in the fourth quarter was probably one of the more significant reduction of inventory that we saw on the customer base, meaning some of our customers were saying please don’t ship that product to us right now, we’re trying to maintain inventory levels at a target that was either internal to them, maybe driven by their ABL lines, so we saw some more pressure in the galvanized area. So far this year, we’ve seen that volume pick back up. It’s a little bit below plan, but not materially so. On the ornamental side, you may recall we’ve got high frequency mills up in our Munhall plant outside of Pittsburgh, and we’re starting to ramp that up. At the same time, we completed the ASTI acquisition - that’s a higher end ornamental product. That business has done very well the first couple months of the year, and we’re actually using that team to try and help us both on the manufacturing side at Munhall but more importantly doing some collaboration among their sales team and what I’ll call the commodity ornamental pipe sales efforts. So we’re seeing some good benefits from that acquisition, and we’ve also seen some positive things on the raw material side as well. Adding that volume into the Bristol Metals purchasing mix has actually at this point exceeded some of our projections on the raw material savings, so we’re very pleased with ASTI two months into the acquisition.

Okay, just two follow-ups and then I’ll jump back in the queue. It sounds like it’s safe to assume that the ornamental steel business did not exit the fourth quarter at $25 million in annualized revenue. Is that correct?

No, absolutely not.

Okay, and then the second question, I think part of the reason that you were excited about the galvanized business was the opportunity to increase the IBC business, the chemical companies. Can you give us an update on that front?

Yes, we’ve signed two long-term contracts at volume commitments that are higher than what we were when we acquired the business, so we expect that to continue to be a positive development. Secondarily, we’ve started doing some work in the road construction market as well.

Okay, thank you. If you have the accrual information or you’re willing to provide it--

Mike, this is Dennis. The chemical business total incentives for the fourth quarter were only off $20,000 lower than the average for the full year quarters, so no major reversal.

Okay, thank you.

This is Dennis. Before we have any other questions, I would like to correct one of my statements. I found in my script a typo that I’d like to correct. In the statement where I mentioned the combined adjusted EBITDA of the operating units, the correct percentage for the fourth quarter of 2018 was 10.75%, and the fourth quarter of last year was 10.5%, so we had neglected to overwrite script from the prior periods, so that’s a correction of that statement. Please continue with the questions.

Thank you. As a reminder, ladies and gentlemen, if you’d like to ask a question, please hit star then one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, you may hit the pound key. One moment while we wait for any further questions. Speakers, I am showing no further questions at this time. I’d like to turn the call back over to Craig Bram for any closing remarks.

Looks like you have one more follow-up from Mike, maybe?

Yes sir, you are correct - sorry. We have a follow-up from Mike Hughes. Your line is now open again.

Hey, thanks guys. Just want to go back to the metals segment. Could you give us the specialty alloy mix for the backlog at year-end?

Mike, I don’t have that handy, but if you want to check back in with Dennis offline, we could give you a breakdown on that.

Okay. Just high level, what are you seeing from a large project perspective, which tends to be, I think, more weighted towards specialty alloy?

Well certainly the shipments--Bristol Metals out of the Bristol, Tennessee facility is where the bulk of the special alloy is produced, and their mix has been very good in the first couple months of this year from a shipment basis, and that’s a reflection of some of the bookings that occurred in the fourth quarter. I have not seen a significant uptick in project bookings so far, there have been a few. We’ve had a mining project that got booked in late January, and there’s also a plastics company booking that occurred in early February, but those are the two primary projects that I’ve seen that we actually reported on in our most recent board meeting.

Okay. I think the Koreans were out of the market because they hit their quota at the middle of last year. I’m not sure how much market intelligence you have on this front, but are they more active in the first half and is that an issue?

No, I wouldn’t say--I mean, they are back in, in fact they’ve been bidding on projects since the end of the fourth quarter, but I can tell you that Bristol Metals’ market share in January, which is the latest month that we have, we actually increased our market share among domestic producers by 120 basis points.

Okay, and then do you happen to have the imports statistics [indiscernible] on maybe the second quarter call of last year, when even though the tariffs were in place, the imports were still pouring in. Do you have those numbers from maybe the fourth quarter?

I know that, without getting into where it’s coming from, imports represented about 42% of North American consumption for all of 2018.

Okay. You made one comment about on the Brismet business, prices moderating. You’re not actually envisioning a price decline this year, are you?

No, our plan actually has a price increase. Obviously a lot of that is dictated by the direction of nickel prices and the associated surcharges, so if you go back and look at the nickel prices really starting in September on a--it really got double digit declines starting in October of last year on a sequential month basis, and that carried through February-really through February of this year, and I’m talking about surcharges. We’ve seen surcharges reverse, so. At the end of last year, the surcharge on 304 was about $0.63 a pound, and in February it was roughly $0.53 a pound. In March, we saw it jump to $0.58, and right now the projected for April is $0.61, pushing $0.62. We had inventory losses in the fourth quarter, you’ll see some inventory losses in January and February, but based on the nickel price and the current surcharge, we’ll have double digit increases in surcharges starting in April. As long as nickel prices are trending up or they don’t lose ground, then we would expect our average selling prices to show some increase over 2018 and be consistent with the plan that we’ve built and have shared, going back earlier this year.

Okay. Can you just talk about where you would take the leverage to? I think it’s around, I don’t know, roughly a little less than three times at this point, debt to EBITDA. Would you take it above three times?

No, that’s not an area we would be comfortable with. If you look at--during my tenure as CEO going back to 2011, our leverage has averaged about 1.75 times. At the end of 2018 before we did the ASTI deal, it was about 2. Immediately following the ASTI deal, it was about 2.5, and if we don’t do any more acquisitions this year, we’re projecting that net debt would average roughly $55 million over the course of this year, so if we hit our plan, that would suggest that our leverage would fall back to about 1.5 times. But three times if not a level that we would be comfortable with, again recognizing that our businesses are cyclical and while we don’t see any signs at all of any softening in our end markets right now, we certainly don’t want to go out and be sitting over three and then have things start heading south a little bit.

Right, so you must be projecting fairly robust free cash flow for the year, so what are your working capital assumptions? I think your cash conversion cycle is over 100 days because of the inventories you carry, so you have working capital actually contributing this year to free cash flow?

Mike, this is Dennis. As we mentioned in our commentary and the press release, working capital was up. We had all of our metals side of the business pursued higher inventories in the second half of the year, some of it related to SPT, long lead times brought in metal in the fourth quarter, anticipating not being able to get it in the first half for sales. So we’re looking at anywhere between $7 million and $14 million of free cash flow from reduction of working capital by year end, moving back to sort of historical targets, and just managing our working capital. Obviously we had a great year and we’re just trying to moderate that and make sure our cash flow is positive over the two-year period.

Okay, good. Have you put out a 2019 capex number?

No, we have not.

Would you be willing to put a range out for us?

Non-acquisition base would be in the $4 million to $6 million range.

Okay, and then the two equity investments, what do they total right now? I don’ think they’re broken out on the balance sheet. They’re probably in the 10-K, but I haven’t looked at that yet.

As we sit right now, let me see. Have we got a calculator handy here?

Yes, current market on them.

Yes, we give you current market, so--.

The beginning of the year, it was about $3 million. Mike, while he’s calculating that number--

It’s just shy of $4 million right now.

Okay, okay. Then my final question, did you put out where the Brismet backlog is right now? I know at year-end you said it was 31.2, I assume it’s higher right now.

The Brismet--? It’s about $28 million.

Brismet right now is about $28 million.

Does that include Munhall?

Brismet is--yes, Bristol and Munhall.

Yes, Bristol and Munhall. That’s right.

Okay, thank you very much for your time.

Mike, I did go--I looked at those stats. For Brismet for both facilities, excluding galvanized, backorder or backlog, the special alloy is about 15% on a pounds basis, which is a pretty good number historically.

Yes, okay. Thank you very much.

Thank you, and I am showing no further questions in the queue at this time. I’d like to turn the call back over to Craig Bram for any closing remarks.

As always, we appreciate your support and again we’re looking forward to a strong 2019. Thank you.

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude your program and you may all disconnect. Everyone have a great day.