Ascent Industries Co. (ACNT) Q2 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Synalloy Second Quarter Earnings Conference Call. At this time all participants are in a listen-only, later we will conduct a question-and-answer session and instruction will follow at that time. [Operator Instructions] I would now like to introduce your host for today’s presentation, Craig Bram, President and CEO. You may begin.

Good morning, everyone. Welcome to Synalloy Corporation’s Second Quarter 2019 Conference Call. Dennis Loughran our CFO will provide a review of the Q2 financials, and then I will provide some comments on our business segments. 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 a net loss of $0.3 million or $0.03 per diluted share as compared with income of $3.7 million or $0.41 per share in the second quarter of 2018. Second quarter non-GAAP adjusted net loss was $0.3 million or $0.04 per diluted share as compared with adjusted net income of $6.3 million or $0.71 per diluted share in the second quarter of 2018. Second quarter non-GAAP adjusted EBITDA totaled $3.4 million or 4.3% of sales compared to the prior year’s second quarter total of $10.3 million or 14.4% of sales. As pointed out in the earnings release, inventory price change losses impacted results total on a pre-tax basis $1.8 million in the second quarter of 2019 compared to a gain of $1.1 million in last year’s second quarter. On an after-tax basis, that represents an unfavorable $2.3 million difference between the two quarters. The combined adjusted EBITDA as a percent of sales for the operating businesses in the second quarter was 6.3% compared to the prior year’s second quarter of 17.1%, the primary factor in the decline being the inventory price change differential mentioned above. The average pricing declined experienced in the welded stainless pipe to Galvanized tube operations described in our press release and the June 19th guidance update, as well as inclusion of more commodity volumes brought in with the Galvanized acquisition that were not in our prior year second quarter. At the end of the second quarter, our outstanding borrowings against our ABL facility totaled $ 67.3 million down $9.1 million from the December 31, 2018 total. The decrease is primarily related to decreased working capital, basically inventory. The calculated ABL facility remaining available as of June 30, 2019 was approximately $20 million. In addition, the balance of the $20 million term loan drawn on January 1st to support the acquisition of ASTI stood at $18.3 million. I will now turn the call back over to Craig.

Thanks, Dennis. The Company experienced what we believe to be temporary headwinds in our welded stainless steel pipe business in the second quarter. This is primarily responsible for the downward revision in our annual forecast, which we reported in our press release on June 19th. For sharing some details on this product line, I would like to comment on our other businesses. The addition of ASTI and its ornamental tubing products in January has made a solid contribution to overall results. Sales and profit margins are equal to or better than our original forecast and the order book remained strong. The more consumer-oriented end markets for this product line had been an excellent complement to the heavier industrial markets served by our welded stainless steel and seamless carbon pipe and tube product. In June, we implemented a Company-wide ERP system for this unit and the transition has gone very well. Our Storage Tank business in West Texas produced much improved results in Q2 and year-to-date. Revenue and profit margins exceeded the original forecast for both periods. However, new order activity in July has been slow and several customers have reduced the number of tanks on previous orders. Oil production growth in the Permian has slowed considerably over the pace of 2018. The Energy Information Administration projects that oil production in the Permian will grow by 34,000 barrels per day in August, with legacy well seeing a decline of 268,000 barrels per day and production from new wells coming in at 302,000 barrels per day. The oil rig count in the Permian peaked in the second quarter of 2018 and has been on the decline ever since. In response to the slowing activity, we have started to rationalize production and cost and we will monitor this closely in the coming weeks. Our customers have indicated that new orders will be released later in Q3. There have been several recent mergers announced involving companies with significant acreage in the Permian. We expect to benefit in the long-term as we have excellent relationships with the controlling companies. I would also add that there are now over 4,000 drilled, but uncompleted wells in the Permian basin alone. The number of [docks] (Ph) has doubled from just three years ago and serves as a good indicator of potential tank battery demand in the future. Turning now to our Heavy Wall, Seamless Carbon Pipe and Tube product line, 2018 was an exceptionally good year as distributor inventories have been drawn down to very low levels. We anticipated a decline in pound shipped and lower contribution margins during 2019, that has proven to be the case. However, the decline year-over-year performance has been most evident at our Houston distribution facility. The Huston operations is almost exclusively focused on the energy market particularly offshore drilling. Order activity has been on the light side all year particularly for higher grade alloys and larger OD sizes. On the other hand the Ohio facility which serves the general industrial market has maintained a steady performance year-to-date with revenue flat with 2018. We look for this location to post stronger second half results as they begin to shift mechanical tube borders for the Dubai solar field, which we reported on earlier this year. July order activity for both facilities was higher than the revised forecast. Let me comment on the chemical segment before turning to the welded stainless steel pipe business. In the second quarter and year-to-date periods, revenue reflects a greater percentage of tolling business than contract manufacturing, tolling does not include raw materials which were provided by the customers, the result is lower selling price per pound and associated revenue. However, year-to-date pound shift for the chemical segment were up 10% over last year, as the pounds increase we expect to see continued improvement in overhead absorption and operating profits. Excluding the receipt of last year’s legal claim, operating profits are holding steady with 2018 levels. Many of our chemical customers are reporting to flat to marginal year-over-year growth which has an obvious impact on the intermediate products that we manufacture for them. That said, we have enough products coming online in the second half of the year that we expect to meet our exceed our original forecast for the chemical segment. Turning to our welded stainless steel pipe business, the first half of this year has been challenging on several fronts. The headwinds that I mentioned have been difficult to overcome, but we do believe they are temporary in nature. Let me touch on each of these, section 232 tariffs which were implemented during the first half of 2018 distorted the buying patterns throughout the supply chain resulting in excess inventory at the distributor level. Both imports and domestic producers of welded stainless steel pipe enjoyed a surge in artificial demand in the first half of last year. Reports from the Metal Service Center Institute showed that for the first six months of this year, North American shipments have welded stainless steel pipe were down 24% over the same period last year. Shoe end market demand should be growing in low single-digits so the decline in pound shipped year-over-year speaks to the level of excess inventory created by the tariffs. Number two, there has been a recent consolidation in the master distribution segment of the supply chain. Supply chain international acquired global stainless in the fall of last year and [multiply] (Ph) a division of flow works has been for sales since the beginning of this year. I think were recently acquired Texas Pipe. The integration of these companies and their inventories across multiple distribution facilities has reduced the frequency in size of inventory stock buys from mills like Bristol Metals. Consolidation coming on the heels of Section 232 tariffs has created a situation where inventory are well above historical levels. We do expect inventory levels to return in normal over the balance of this year. Third and final, nickel prices and associated surcharges have been a big negative as well. Surcharges in the first half of this year were down over 14% from the same period last year with visibility in the following surcharges, there has been no incentive for distributors to purchase now rather than later. The swing from inventory price change gains in the first half of 2018 to inventory price change losses in the first half of this year, combined for almost $9 million on a pre-tax basis. Recently nickel prices have turned favorable. Nickel prices in July were up 17% over the second quarter average and in the last several days have climbed above $7 per pound. Should nickel prices hold at current levels, we will see inventory profits returning in Q4. Looking out over the next three to five years, we do believe that there is a bias for nickel prices to increase due to strong demand for stainless steel and increasing demand for electric vehicle batteries. I believe that we have managed the welded stainless steel pipe business through these challenges as best we can. Our market share in the first half of this year, increased by 200 basis points over last year, pound shift in the first half of 2019 were down 12% over the last year, considerably better than overall North American shipments, which were down 24% during the same period. As you would expect with lower buying activity comes more aggressive pricing. Pricing for larger OD pipe sizes and special alloys, has held up reasonably well, however prices for the smaller sizes have been under severe pressure as these sizes are often sold as loss leaders in low demand environment and compete more directly with imports. While project buys have not been as strong as they were in the peak demand year of 2014, they have been relatively solid. We had increased share of this work as well. July bookings included several projects and pricing for smaller OD sizes have been higher than what we realized in the second quarter. Another unexpected hurdle for this business was presented in the latter part of Q2. Our heavy wall press was experiencing some problems and was determined that one of its, two hydraulic cylinders was cracked. The cost to replace the cylinder is less than $200,000. However, the lead time to have machine and installed will keep that equipment out of commission until mid-November. We have decided to have the supplier produce a second hydraulic cylinder at the same time, so we have a backup available in the future. A final comment on this business unit, we have reached agreement with the Bristol Union for a new five year contract, which started this month. With all the difficulties experienced in the welded stainless steel pipe business, it is easy to lose sight of improved earnings power of the Company. Adjusted EBITDA in 2018 was over $34 million had we own ASTI last year adjusted EBITDA would have been almost $41 million. This does not include any of the improvement that we have witnessed this year in our storage tank operation. We continue to look at potential acquisitions in the metals and chemical space, but no transactions are imminent. We remain focused on cash flow and reducing our debt, targeting net debt by the end of the year will be less than $65 million. As mentioned in our June 2019 press release, we opened a data room that provide Privet with additional information on the Company. Over the past eight weeks, we have had several follow-up calls with Privet and their adviser. At this time, we have not received any further comment or offers from Privet. Should Privet decide to move forward, the Company is asked that they provide a formal offer and evidence of funding by close of business on August 19th. We will now open the call to questions.

Thank you. [Operator Instructions] Our first question comes from the line of [Michael Lucero] (Ph) who is a Private Investor. Your line is now open.

Yes, good morning. My question has to do the tax rate in the second quarter and first six months of this year. There were some explanation in the press release, I’m wondering if you could elaborate a little bit more about why it is high as what it was?

Yes. This is Dennis Loughran. With the income figures being so low - relatively low, the discrete items which were only a few hundred thousand dollars have a fairly significant impact on the overall effective rate, if income and the tax were higher at the statutory rate it would have been spread over a much large tax base. So, that is basically it.

Okay. Thank you.

Thank you. [Operator Instructions] And we have no questions in the queue at this time. We do have a follow-up question from the line of Michael Lucero, The Private Investor. Your line is now open.

Another question is with the possible new tariffs on Chinese imports starting as early as September 1st. I’m wondering if you could elaborate a little bit upon the impact of additional steel imports if they are coming in rapidly to beat that possible tariff increase.

Yes. Michael, the tariff increase you are speaking to would not impact any steel products.

Alright. Okay. Thank you.

Thank you And we have no further questions at this time.

It looks like there is a question from Charles Gold?

[indiscernible] line is now open.

Hi Craig, it looks like your…

Hi, Charles.

How are you doing? It looks like your forecast is for roughly $14 million of EBITDA in the second half is that right?

Yes.

That is right.

Alright. So, you said last year would have been 41, if the acquisition had been there all year. Is 28 a better current run rate for [San Jose] (Ph), it’s obviously it’s not the run rate. I know you are not ready to put out the 2020 forecast, but it looks like revenues is in the $320 million to $350 million range and is it fair to say we are operating in run rate of 25 to 35 EBITDA, is that sort of where we are.

If you exclude metal profits and losses Charles, you know it is a good estimate.

Yes. I guess have been fixated too much on the nickel price making a one year high, and it has been holding here and when you look at the London inventory that number just keeps on coming down. So it is like Winchester back a little bit.

If those prices hold, we will definitely start to see some pick up and some inventory profits probably towards the end of Q3, but definitely into Q4.

Alright. Thanks so much.

Thank you. [Operator Instructions] Okay I would now like to turn the call back to Craig Bram for any closing remarks.

Thank you for your interest in Synalloy and we look forward to hearing from you in the future. Thank you.

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