Q2 2020 Synalloy Corp Earnings Call
Second quarter 2020, <unk> earnings conference call at this time of purchases in Louisiana listen only mode.
The speakers presentation, there will be a question answer session. That's the question. During the session. You want me to press Star one on your telephone. Please be advised that today's conference is being recorded if your pardon me for their systems. Please press star Zero I would now like to have a conference over to your speaker today, Craig Bram President and CEO. Thank you. Please go ahead Sir.
Good morning, everyone welcome to settle the Corporation second quarter 2020 conference call.
Joining me today at Sally Cunningham, Sally's said always new CFO.
Taking all that role as of July burst.
Prior to joining sent away almost five years ago, Sally work extensively in finance and accounting for several public companies.
A couple of weather knowledge of our business as a management teams. She is a natural fit to step into this position I.
No that she will do a great job.
Before turning the call it would have Sally I'd like to make a few general remarks.
Second quarter was without a doubt the most challenging that I've experienced during my time with minimal.
Even prior to the arrival of the code that 19 pandemic, we anticipate a difficult year for manufacturing.
While the I guess, a manufacturing index rose to 56 in August.
And it's in the recovery appears week as manufacturers continue to reduce employment levels.
Chemical products and fabricated metals products both showed growth during August.
First time since the outbreak of the pandemic.
Demand for welded stainless steel pipe in North America is tracking very closely to the recessionary levels witnessed in 26 pm.
Saudi Russian oil price war, along with the virus since catastrophic yet to all the man has created an environment, where producers are unable to earn their cost of capital.
Activity in the Permian Basin has come to an abrupt halt.
And there's no sign of a quick returned to pre coded 19 production levels.
Against this backdrop, we think we've had to make some difficult decisions.
We've reduced our headcount by more than 10% since the beginning of the year.
The executive team and other highly paid employees have reduced their salaries by between 8% in 25%.
We have eliminated the company's for one k. matched for the second half of 20 Twond.
At the end of June the company made the decision to exit the Palmer, Texas business.
Yes, that's are currently being marketed for sale and the proceeds will be used to reduce our line of credit.
During the second quarter executive team and board of Directors spent considerable time and money on the proxy contest.
Total cost of this effort was approximately $3 million.
We are mostly used to have this behind us and look forward to working with the new reconstituted board of directors.
Led by our new Chairman Henry Guy.
Despite everything that has occurred in 2020, the company made ex excellent progress on multiple fronts.
After Sally reviews, the financial results I'll spend some time, commenting on the performance or a business segments.
Well then open the call the questions.
I'll now turn the call over to Sally.
Thank you Craig good morning.
As is usual practice I will present, the financial results using three different methods.
One got based <unk>.
Adjusted net income and non-GAAP measure as defined in the earnings release.
And three adjusted EBITDA, a non-GAAP measure also defined internationally.
Starting with GAAP based EPA.
For the second quarter, the company reported a net loss of $7 million or 77 cents diluted loss per share as compared with a net loss of 3 million of zero point $3 million or three cents diluted loss per share for the second quarter of 2019.
The primary factors contributing to the current quarter losses were.
$1.9 million and pre tax operating losses at Selmo, Texas.
A 6.1 million noncash impairment charge that Palmer.
$2.7 million in cost associated with the company's proxy contest.
And the increase in inventory price change losses of 1.7 million in Q2. It this year over Q2 of last year.
For the six month period, the company reported a net loss of $8.1 million or 90 cents.
The loss per share.
That's compared with a net loss of $1.2 million or 13 cents diluted loss per share for the first six months.
The primary factors contributing to the current your losses were.
$2.7 million and pretax operating losses at Palmer.
6.1 million noncash impairment charge.
2.9 million in cost associated with the company's proxy contest.
And the decrease in inventory price change losses of $1.3 million.
Moving onto <unk> second quarter non-GAAP adjusted net loss.
Was $1.1 million or 11 cents diluted loss per share.
Paired with an adjusted net loss of zero point, Threemillion or four cents.
That was good off for share for the second quarter 2019.
For the six month period. The adjusted net loss is 1.8 million or 19 cents diluted loss per share compared with adjusted net loss.
Zero point, Threemillion or four cents diluted loss per share for the first six months, that's why 19.
And finally second quarter non-GAAP adjusted EBITDA.
Was 1.9 million.
Down from $3.4 million, the second quarter 2019.
For the first six months of 2020, adjusted EBITDA was 4.6 million down from 8.2 million in the first six months in 2019.
See adjusted net income and the adjusted EBITDA total, including add back for 2.7 million and 2.9 million for the proxy contest related cost in the second quarter and six month period, respectively.
As pointed out in the earnings release inventory price change losses in the second quarter this year, where he's pretax income by $3.5 million.
By comparison in the second quarter of last year inventory price change losses for 1.8 million.
Nickel surcharges compared with Star Trek surcharges posted five months earlier turned positive in August and September and are presently forecasted to be positive in October as well.
If this trend persist.
Should start seeing inventory price change gain in the fourth quarter.
Net debt at the end of the second quarter totaled approximately $77 million.
I'll now turn the call back over to Greg.
Thank you Sally.
During 2020, we expected the manufacturing economy to reflect a bottoming in the business cycle.
Cost cutting initiatives pursued in the latter part of 2019 written response to the weakening in demand that we were seeing across most of our end markets.
We've done in previous loved points with the business cycle.
Companies priorities are straightforward number one keep our mills reactors another production equipment operating it at close to full capacity.
Number two take market share whenever possible.
Number three lower or maintain or cost per pounds shipped.
Number four focus on quick payback capital projects.
And finally number five reduce net debt.
Our cost cutting initiatives are generated positive results across the company.
In the chemical segment adjusted EBITDA improved to 2.4 or 5 million in the second quarter of this year.
The increase of 86% over the same period last year.
This on marginally less revenue.
Our pipe in two businesses, Bristol metals, I guess, T.I. and specialty pipe and too.
Generated adjusted EBITDA of $2 million into second quarter.
Down 30% from the same period last year.
The increase in inventory price change losses from 1.79 million in Q2 last year.
The 3.51 billion in Q2 this year was the key factor in the year over year decline.
The operating teams have done an exceptional job in reducing the cost per pounds shipped across all business units.
Looking first at the chemicals segment cost per pounds shipped for manufacturing labor and benefits in the first half a 2020 declined by 10% as compared with the full year 2019.
Other manufacturing expenses brick township declined by 15% in first half of this year.
Well I guess DNA expenses per pound shifts declined 16% in the first half of this year.
With a heavy wall seamless carbon pipe and tube product line.
Are you factoring labor and benefits for pounds shipped declined by 13% in the first half of this year.
Paired with the full year 2019.
Other manufacturing expenses for pounds shipped were flat with the same period last year as were SGN a expenses.
Manufacturing labor and benefits pounds shipped four but one of mental tubing business.
Increased by 2% in the first half of this year compared with full year 2019.
Other manufacturing expenses per pounds shipped were flat.
Yes, DNA was down 2% when compared with the full year 2019.
Finally at Bristol metals solve their manufacturing labor and benefits for pounds shipped in the first half of 2020.
All by 6% compared with the full year 2019.
Other manufacturing expenses per pounds shipped were down 3%.
Well ask Junaid was all 17% when compared with full year 20 nicely.
First of all battle share of the North American markets. The walbert stainless steel pipe increased by 320 basis points in the first half of 2020 as compared to the same period last year.
With transportation related markets weakening for polished ornamental tubing.
S T I move production to support sales to the medical sector.
Late in the third quarter.
Chemicals segment.
Responded excuse me late in the first for.
Gullible segment responded to the pandemic by developing a formula for hand Sanitizers.
Following approval by the FDA This new product line generated one and a half million dollars in revenue in the second quarter. This year.
Our businesses continue to demonstrate their ability to quickly respond to market conditions.
There are several high ROI capital projects currently underway.
At Bristol battles methanol facility.
New rework shop will be operational by the fourth quarter.
The annual savings from this initiative targeted $750000 the payback period of less than 18 months.
Like the re workshop in Bristol, Tennessee, the manhole facility repair defective pipe instead of scrapping it.
Another capital project at Mt, Holly acid regeneration system for the pickling process.
The annual savings from this project are estimated at $150000 a year with a payback period of less than 18 months.
Achieving our debt reduction targets for the balance of the year will be a primary focus.
We continue to Whittle down our interest expense in the second quarter.
Interest expense was down $462000 from the same period last year.
And for the first half of 2020 was down $749000 from the same period last year.
Finally, as stated in the earnings release, because with the uncertainty related to cope with 19 a pandemic.
We've suspended all fiscal 2020 guidance that are not providing guidance at this time.
Well the full restart of the economy pending we cannot predict the impact on our various businesses.
We rate, we remain diligent and thoughtfully managing profitability and liquidity, while navigating these impressive unprecedented times and continue to execute on our strategy.
Well now open the gold questions.
[noise] as a reminder to ask a question when you want me to press Star one on your telephone to withdraw your question press the pound King. Please stand Bible, we come barbecue in a roster.
Our first question goes on the line of Davis secret.
Pardon me. Our first question comes on the line of Child School Sumptuous financial your line is now.
Good morning.
Hi, Charles.
Hey.
The proxy fight.
Hard on everybody and.
It seemed like the robot.
People and the management and old Board members.
Disagreed on virtually everything.
So that's really a was a company was being run.
But there was one thing that had total agreement.
And that was that so lawyers business was works considerably more than.
The stock reflected.
I think a private in there.
Materials thought they could get the Soc back to 25 and the company.
Said they'd already proven that they could do that beat.
Back in 2018 and had EBITDA in the 35 to 40 million dollar run rate.
Oh.
So now that we've.
Cobot and Kogas period and are preparing to Jefferson.
Palmer.
So does the board and the current management believe.
That that valuation.
Possibility is still there and is the Companys earnings.
Earning power ability to produce EBITDA and.
Bottom line earnings.
Oh is not impaired.
Too much to still produce those numbers down the road.
Charles a this is Greg let me, let me address that obviously right now we believe we're at the bottom of the business cycle.
Oh, I certainly as the case with our largest business unit their volume is trending at recessionary levels and we saw in 2016.
And there's no question that in 2018 the company demonstrated.
The ability to earn a $34 million adjusted EBITDA was that was the number in 2018.
And of course, we did not own A.S.T.I. until January Onest of 29 team.
That business contributed approximately $6 million of EBITDA for us.
And 2019.
So that gets you to the 40 plus million dollars of earnings potential on an adjusted EBITDA basis.
The Palmer operation a is basically let a drag for the last several years.
You know, it's been either marginally positive on an EBITDA basis or marginally negative.
But it's also been.
A management time Hall.
So.
Jettisoning jettisoning that business Oh, we believe is obviously the right thing to do.
We don't see that business will that market returning to the point, where we can earn a reasonable return on our capital.
That capital can be deployed more effectively and other businesses.
But oh, absolutely no doubt that the earnings power of the business remains.
Some of the projects and we're working on right now that I mentioned, particularly among all improves the earnings capability of that business beyond what they did in 2018.
So we feel very positive about the.
Oh earnings potential with business once the end markets that we primarily served.
A return to a stronger demand levels.
[noise] alright different subject.
You know the tend to and that.
Was late you got.
Slapped the risk by NASDAQ and.
Our earnings came out considerably later than.
The plan there were several issues mentioned.
Isn't that disclosure.
Including a lawsuit hiring outside counsel.
Issues of the counting.
The came up.
And.
I guess, we'll see the tend to shortly if it's not already yeah.
Tell us how.
The three issues that they.
I have been resolved or being resolved.
And what's the slate looks like going forward.
Sure.
So the 10-Q's going to come out later today, probably after the market close and so.
Alert you to that.
The item for in the 10-Q addresses.
Charles the items that you raise.
Number one there's not been a lawsuit.
I'm still need to clear on that.
The investigation that's been referenced before.
That has been concluded by an independent law firm.
And there was no evidence of intentional misconduct bad faith or criminal lack so that.
Investigation is over and complete.
We are going to report a material weakness in that 10-Q again, an item for will provide details.
I can tell you that there for.
Deficiencies that are referenced in that part of the of the 10-Q.
And I can also tell you that individually none of them.
Alone would constitute a material weakness, but in a aggregation a they do so that those details will be provided an item for the 10-Q.
As far as the remediation efforts on that that's also specifically address an item for the 10-Q and I think that speaks for itself.
Did I did I cover all the questions Charles you had there.
Thank you did there was a reference to I guess, a palmer employees that.
Had accusations of that that was the investigation centered on that.
That was that was the investigation Charles I guess, it's categorizes <unk>.
As a whistle blower a complaint but it was a it was not a palmer employee.
And but it did have to do a palmer accounting issues.
But yes, the investigation looked at that and it's been concluded with with no finding of any wrongdoing or a bad faith or criminal Act.
And for you and or Sally with this.
Impairment.
Right down on Palmer.
If the company is sold.
What and proceeds are received as problem or been written down to.
Zero and and might there be some recapture if polymer has some value to another party.
Or you know we've been conservative in the right yeah.
Taking it as far as we can legally take.
Yes, absolutely. This is this is Sally we did write down on Palmer to the it can be appropriate value associated with that and stuff in operations and actively marketing it.
Out in the business.
And back to a number for that we're going to see.
We will see what what actions are being taken and.
That's there.
Takes it appropriately he will be in good standing with your accountants.
Absolutely, yes, Charles there's never been any question on the all the numbers being reported its gets back to primarily internal control issues.
Thank you.
Well.
Thank you know our next question comes on the line of thinking the secret from a private Investor Your line is now.
Hello, Creggan Sally's, so Sally a day I'm just.
The congratulations on your promotion to CFO, that's that's nice.
Southern I take it that we are now compliant with bank covenants and FCC listing requirements is that correct.
That is crack.
Okay. Good and then I noticed in the press release. This morning, our tangible net worth I think we said was at least 67.4 million.
So it is my math correct, that's about what 740 a share.
[noise], Yeah, there's not nine day 58000 shares outstanding So I don't have a calculator in front of me, David but maybe somebody else does.
HM Okay.
Okay, that's about what actually them up with.
Yeah 67 million gives you a tangible net worth of $7.40.
Okay very good question on our 1.1 million dollar gain on investment Securities could you talk a little bit about what that is.
Yeah from David from time to time, we will take it positioned and a <unk>.
Public company that we think might be a possible acquisition target.
We've done that three or four times over the last.
10 years.
And.
We always we always done less than 5%. So we can avoid a filing on it.
And in this case a company that a that we had owned made a very substantial move in the in the second quarter.
Creating that mark to market gain of $1.1 billion, we had since Ah so that position in its in its entirety.
And I think the net proceeds were between 4.4 and $4.5 million so somewhere in that range.
Okay. Thank you know.
I see you know I see our debt is 78.6, no cash 1.4 so.
We feel comfortable I know you mentioned in your remarks, there will be managing prudently our debt cash position do you feel like.
Being where we are in the business cycle that we can manage our debt.
And.
Yep.
Reinvest in the business as needed so that we could.
It's a sweet spot going up out of this is the slope this trough.
Let me.
Comment on that and Sally can jump in as well [laughter].
This year, we did reduce our capital expenditures budget by about $2 million.
We Didnt Oh, we.
We didnt exclude any high ROI projects.
We focused exclusively on those that's why the mone all projects continue to.
The rollout and we'll see the benefit of those starting in the fourth quarter.
On the on the cash flows broad we've got some cash that we expect to come in over the balance of the year, We've got $3 billion and tax refunds that will be coming in.
We will.
As we do typically we see our inventory levels.
Come down in the second half of the year, particularly in the fourth quarter.
That will reduce our working capital needs.
David as I mentioned to you I think on a call a couple of weeks ago.
We do.
I feel like we're a little and right now in terms of our.
Capacity on the HDL.
And typically we like to be $10 million to $12 million I think we ended the second quarter. It seven six to seven.
And that was primarily a function excuse me we had a.
Our inventory valuation that was done twice a year, where the a b L. A they've is done in March March 31st.
And it was a pretty conservative valuation on our metals inventory because.
Well the pressure the metals industry was saying at that point in time.
That's a excuse me the second valuation will take place likely in October.
Of course, we've seen an uptick in a nickel prices nickel surcharges.
So we expect we're going to.
Yes, some of that capacity back when they do the inventory valuation here in the fall. So ideally, we like to have $10 million to $12 million of available capacity or to manage the ongoing operation to manage the capex projects that we think are.
Most critical to the business.
That makes sense. Thank you.
Good job with the chemicals this past quarter I saw 2.1 million operating income in second quarter chemicals, that's really good now.
I noticed stuff.
An article the other day, you introduced a man or wet D.A. surfactant.
And probably I think you've mentioned some other.
Introductions in chemicals in the second half so how long does that take once we released the product to kind of you know start affecting the bottom line.
Yeah, the process is actually pretty long dated it.
We track our bar products as in a pipeline from phase one to phase four phase for being.
The product is fully ramping in production and we've got some visibility on.
You know what kind of pounds in the impact is gonna be.
But so we moved the phase one is basically an idea they used to some testing that we're doing pulmonary testing that we're doing for potential customer.
Phase three were gone into some.
Small scale production.
But all all through that process, we're not only I'm trying to meet their quality requirements of our customer, but those samples that in turn our shared with our customers customer.
So it can take as much as a year to go from phase one to phase four.
And what we tried to do is identified the a the products that.
Our or in phase for they've got some visibility and we feel like we know what are the pounds in the impact on the facility is gonna be.
Got it.
Our Cleveland, Tennessee plant operated at about 85% capacity right now so we're somewhat limited in what we can bring into the into that plant in terms of new products.
We're only operating at about 50% capacity and see our eye. So we've got a lot more.
Capacity to bring in reactor in blend products and some of our most interesting products and the pipeline would go specifically into see our eye.
And because it doesn't require us to.
Add additional labor.
A lot of that contribution margin will go straight to the bottom line. So.
It takes awhile for these things that come to pass and its a.
It's hard to mean.
But so far out give any any impact.
Ah visibility to our shareholders, but.
Certainly we like whats in the pipeline and the chemical Division right now we liked the cost cutting initiatives that.
Those guys executed on that we put in place at the in the fourth quarter last year and that's why we had such a sizeable us excuse me sizable golf.
EBITDA, even though our sales went down about 1%.
Right.
That's true yeah very good.
You mentioned in a PR while back.
That you were shifting to semi trailer is a week of hand sanitizer is that still something that's happening due to call that a demand.
[noise] spent a little bit of a drop off obviously there were some spiking going on here early in the second core.
As people were trying to get their supply.
But we've got so we've got some bids out now to some news.
Customers that that didnt participate during that spike period. So.
We feel pretty good that's going to continue to be a.
A nice contributor to the chemical business.
Good another question regarding.
I noticed in the press release today stainless steel pricing is up 27% and second quarter any color on that.
I don't have that front, I think David but I mean, I can tell you that the.
Starting in August a nickel prices started moving up.
And surcharges are going hand in hand with that.
And it's continued into continued into October.
Its a little bit baffling from the standpoint that on a pure supply and demand basis.
A nickel is in.
And surplus right now.
[noise], but the.
The the shortfall I guess in China, a in there.
We're inventories and then the Philippines came out with a.
Reduction of a their raw material production I think that's what's driven nickel above.
$7 a pound.
I think what you referenced in the earnings release had to do specifically with special alloys.
Okay.
So we had we had seen.
Pricing improve.
In the special alloy area, primarily due to those special alloys, they're tied to projects.
The project activity is still a depressed.
But they'll be periods of time, where we'll get a couple of projects I think this one was related specifically to a mining project.
And and that'll push or you know temporarily up our selling prices on a on average basis.
Okay that makes sense.
One last question and it's regarding analyst coverage, you know I know there I know somebody's very cyclical, but do we have any plans for like investor conferences analyst coverage that can help you don't get the message out to a mainstream America regarding this company.
Yeah, Dave we typically tried to do a at least one conference a year, we haven't done one this year because of the code that situation I think most of those have been.
Virtual or kind of set up some will and lot of just haven't been held.
But we try to do one or two that it was a year.
Yeah. There was a time when we had two analysts following us it was after the a follow on offering that we did back in 2013.
Unfortunately, one of those groups did away with their research department entirely in the other group got absorbed into a.
A larger investment banking group.
But at this point you know we don't.
We don't have an analyst covering us weve.
We've been approached by.
Groups that you know our company pay meaning we would paid 30 40 $50000 a year to provide research on us.
We've been told that it's got to questionable when you get a.
Research House like that covering you you know paying for your own research I guess impacts whether you get.
Objective.
Reviews, but we would certainly be interested in getting coverage, but that's kind of coverage will be from.
A small house that you know was doing it.
Ah just as part of their natural that natural business.
We don't have their own.
We don't have any.
Plans to raise capital at this point that typically also.
Got it goes hand in hand, with getting some analyst coverage the folks that help you though.
I raised the gap.
Yeah.
That makes sense.
All in time as the results improve that will speak for itself as well so.
But oh, thank you for those those comments I appreciate it.
Thank you David.
Thank you as a reminder, task of question you want me to press Star one on your telephone I wasn't talking your question press the pound <unk>.
Our next question comes on the line of Charles Gold from Truest Financial Your line is now open.
A this is more of a hope in a desire then a question, but because the.
Box you fight.
So hostile.
I would hope and I think all shareholders would desire.
The.
The old board members and the new prevent.
Board members.
Work totally together.
To grow the value of this company I hope, they're not working it crossed purposes than anything.
Either contingent to either convince contingent.
Can do to make that transpire will be.
And the best interest of all the shareholders.
Thank you.
Thanks Joel.
Thank you at this time I'm not showing no further questions I would like to turn the call back over to Craig Brown for closing remarks.
I'd like to thank everybody for their participation today a into questions. We appreciate very much. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[music].