Q1 2021 Synalloy Corp Earnings Call
Okay.
Good afternoon, everyone and thank you for participating in today's conference call to discuss and Invoiced by National results for the first quarter ended March 31, and it to anyone.
Joining us today are <unk> interim president and CEO wastewater.
C F O Sally Cunningham and.
And the companies I'll tell you the Investor Relations advisor Cody Cree.
The following their remarks, we'll open the call for your questions.
It's more of the go further I would like to turn the call over to Mr. Cui and shouldn't be the company's safe Harbor statement within the meaning of the private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward looking statements.
Cody. Please go ahead.
Thank you Alexander and good afternoon, and thank you all for joining our conference call today to discuss and always first quarter 2021 financial results before we continue and you'd like to remind all participants that the discussion today may contain certain forward looking statements pursuant to the safe Harbor provisions of the federal Securities laws.
These statements are based on information currently available to us and are subject to various risks and uncertainties that could cause actual results to differ materially synalloy advisors all of those listening to this call to review of the latest 10-Q and 10-K posted on its website for a summary of these risks and uncertainties.
<unk> does not undertake the responsibility to update any forward looking statements. Further the discussion today may include non-GAAP measures in accordance with the regulation G. The company has reconciled these amounts back to the closest GAAP based measurement. These reconciliations can be found and the earnings press release issued earlier today and posted on the investors section of the.
The Companys website web site at Www Dot Synalloy Dot com.
Please note. This call is available for replay via a webcast links that is also posted on the investors section of the Companys website with that I'd like to turn the call over to the interim president and CEO of Synalloy, Chris Hunter Chris.
Thank you Cody and good afternoon, everyone and thank you for joining today's call I Hope you of all continue to stay safe and well during what we hope to be the latter part of the COVID-19 pandemic I wanted to start off by reiterating what are non or it has to be leading the team Harrison of why we have and exciting journey ahead of us and I'm proud of the incremental progress we've made during the first.
Order, while reinforcing my confidence and our ability to succeed over the long haul.
Specifically with respect of Q1, our net sales came in modestly above expectations with sequential increases across all of us and wise business segments. We also recognized improvements and profitability due to our continued efforts to implement more effective cost controls and to reduce inefficiencies and our operating model. The work has only just begun.
But I'm pleased that we are reporting substantial year over year improvement to adjusted EBITDA and our adjusted EBITDA margin.
Perhaps most significant however was the company's positive net income and the first quarter, representing synalloy its first profitable quarter on a GAAP basis since the fourth quarter of 2018, we were certainly helped by a strong operating environment as customer demand for our metals products continues to be robust and surcharges are contributing to profitability. We are.
Working to improve our throughput in order to meet the demand and we will continue to village and Lee refine processes and manage costs. So that we can minimize the volatility and our earnings caused by fluctuations and input costs.
Q1 also saw meaningful improvements of the company's available liquidity given the refinancing of our revolving credit facility in January.
Not only did we not only do we upsize of the available credit of the facility increasing our access to additional revolving credit should we elect to use it or we secured more favorable terms and reduce costs and less restrictive financial covenants.
I am very proud of all of the hard work, we've put in and starting the year and our efforts are beginning to be seen in the companys operational and financial positioning.
Both will be essential to successfully position the company to achieve long term profitable growth.
I'll dive deeper and each of our segments and a moment, but first I'd like to turn the call over to our CFO Sally Cunningham, who will walk you through our first quarter financial results and more detail Sally over to you.
Thank you, Chris and good afternoon, everyone.
First quarter 2021, net sales were $69 8 million compared to $74 7 million and the prior year period. The year over year decline was primarily attributable to the impact of the second quarter of 2020 curtailment of our Palmer operations as well as lower pipe and tube shipments driven mostly by.
Ladies and production and deliveries.
Lingering macroeconomic challenges associated with COVID-19.
It is worth noting that sequentially over the fourth quarter of 2020, we weren't able to grow net sales by 25% at the consolidated level with an increase in both orders and shipments across the segments of the business.
Gross margin as a percentage of sales increased 290 basis points the 12.
<unk> <unk> five per cent from nine 6% and the prior year period. This increase was primarily driven by our continued commitment to cost management within the supply chain and realizing some operational efficiencies across both of our segments.
Lower corporate expenses, along with the previously mentioned the margin enhancements resulted in net income of $1 1 million or 12 cents diluted earnings per share for Q1, which is the considerable improvement from a net loss of $1 2 million of 13 cents diluted loss per share for the first quarter of 2020.
Adjusted EBITDA in Q1 increased 85% just $4 9 million and adjusted EBITDA margin also improved to 350 basis points to 7% that's compared to the prior year period.
Lastly, looking at our liquidity position as of March 31, 2021, total debt was $63 8 million compared to $61 4 million at December 31, 2020.
As of March 31, 2021, the company had $41 2 million of remaining borrowing capacity under the revolving credit facility compared to $11 million at December 31st 2020.
And as a reminder, we entered into an agreement for a new revolving credit facility with BMO Harris Bank on January 15th 2021.
The new agreement provides us with the four year revolving credit facility and that includes up to 150 million of viral and capacity.
Overall, we have made some good financial progress over the past few quarters.
And now having increased financial flexibility through a larger and less restrictive revolving credit facility, that's given us a strong foundation to build upon.
However, we still have a lot of work to do and remain focused on improving our cash cycle.
Turning our company the net sales growth and further expanding our profitability and margins with that I'll turn it back over to price.
Thanks Sally.
And I joined Synalloy as interim CEO. It was important to develop and promote a culture of fostered an accountability teamwork results and growth.
And that starts with our people and I'm continuously impressed by the team's collective wealth of knowledge and openness to new and more efficient ways of running our businesses. Our teams willingness to embrace change has proven invaluable and our efforts to understand and identify the critical inefficiencies and our existing operational protocols not.
Not only are we leveraging our employees knowledge to improve inefficient or underdeveloped processes, but we are also began implementing a more targeted incentive structure to better identify and allocate the spend to those areas that drive positive results across the business. We believe this will foster a culture of accountability and transparency that can enable our top performers to Max.
<unk> results and achieve recognition for their efforts.
While we are seeing considerable improvements during the quarter. Our work is only just beginning the.
This reality presents itself and our segment level results, which demonstrate progress towards establishing the foundation for the company's future, but also present meaningful and tangible opportunities for future improvements.
And our metal segment, we laid the groundwork for what I believe can very quickly improve our operational procedures and throughput.
Which where our main focus areas across our business during the quarter with the addition of Tim Lynch as the segment's executive Vice President in April we are accelerating the transformation within synalloy metals and I'm proud to have him on our side.
Tim is a veteran of the steel industry with over 20 Years' experience, having served in leadership role of the steel companies such as U S steel <unk> and Tms international his relevant experience and alignment with our core value of stakeholder accountability along with his unrelenting drive the win has us confident in terms of ability to drive best in class process.
<unk> across manufacturing sales and product management, while setting the tone for our team is and inspirational leader.
As I mentioned in my opening remarks, it is certainly worth noting that we're in the midst of of strong operating environment for of metals businesses.
We absolutely benefited from robust demand and improved pricing and being able to pass through surcharges during this quarter.
Though it's incredibly helpful to have these market conditions as the backdrop to our internal initiatives, we are targeting inventory controls and operational processes that continue to minimize the effect of external factors.
On our business and the variability attributable to material pricing fluctuations.
Although we have made early progress towards establishing the foundation for the future of our metal segment, we're still in the process of fine tuning our operations and productivity levels and the chemical segment as illustrated by our below target margin profile and the first quarter.
Although this remains a smaller portion of the company's total sales today, we are encouraged by the segment's strong macro economic operating environment and long term opportunities to deliver meaningful value.
You can expect this to be a priority in the coming periods as we work to refine and advance our strategic roadmap with an eye toward making chemicals of meaningful value creator and the medium term.
As I said of our last call I want to emphasize again that across both business units, we are not and the mindset of cost cutting our way the prosperity we.
And we've made some targeted cuts and certain administrative areas with the belief that we can reallocate. These funds towards more productive uses to achieve better service with lower levels of spend.
And as importantly, concurrent with many of our internal initiatives. We are also focusing on deepening our critical customer and vendor relationships. We are working toward becoming a more nimble and responsive as an organization adapting to the best address our customers' needs and the true partnership model that will yield superior economic returns to the synalloy.
And as customers.
And on a side note I'm sitting here and Munhall, Pennsylvania of currently and I walk in and see on the whiteboard here that our team on the metal segments come up with the new tagline that I just want to share with everyone safely deliver best in class quality that exceeds our customers' expectations with and entrepreneurial spirit.
The team here did a great job and just.
Congrats to everyone that was involved and coming up with that.
We're confident that the depth of experiences and relationships brought by our new management team coupled with the excellent reputation of our businesses cultivated by our superb operating leaders can lead to outsized growth and operational excellence over the coming quarters.
And I became an investor and similarly, because of because of its reputation and potential after.
After joining the board of voluntary to lead the business because I believe that my initial assumptions about the value creation opportunity at the company had been confirmed and I could play a pivotal role in accelerating our progress. There is no doubt that we have a lot of work ahead of us to achieve these ambitious goals that said we have accomplished a lot in the short period of time and I'm proud of the.
And we have established these past few months.
With some very early signs of progress shown during the first quarter.
We will continue to leverage the strength of our people as we advance our strategic initiatives and drive our growth.
Before taking questions I'd like to thank our employees again for their dedication to synalloy you have been incredibly welcoming engaging and open minded as we work together to improve our company.
Look forward to getting to know each and every one of you operator, we'll now open it up for Q&A.
Thank you Sir at this time I would like to inform everyone in order to ask the question. Please press the star one on your telephone keypad and again that he the star one to ask the question.
We have and your first question from Mike Hughes with <unk>.
<unk> capital your line is open.
<unk>.
Hey, how are you. Thanks.
Thanks for taking my questions the.
The first one is just related to the inventory gains the company changed the accounting.
Versus the.
The the past it just seems like the last.
A few quarters, the surcharges properly built up and will that start to flow through soon.
I mean, obviously, that's the very relevant question, especially based on how we reported in the past I think I made it clear of that my view is that the way of looking at the P&L truly begins with the.
With the faulty premise looking at the surcharges and inventory price gains and losses.
And we don't want the business to be a slave to input prices certainly those are important but this is the business. We're in and I don't like excuses, we truly need to make money and any pricing environment and manage our inventory through pricing cycles, which really is layering up production with end use demand and having that lined up and really back to back.
That said the more pricing, we can pass through to customers in this environment real time, we absolutely will and it will make our margins look higher.
But it just seems like from kind of and economic cost standpoint, you have it.
Tens of millions of dollars of inventory at a lower cost from the third and fourth quarter and at some point it seems like it would flow through I appreciate what you're what you're saying as far as consistency, but it just seems like that would start to flow through at some point.
Yeah, I think you'll continue to see of flow through again with some of our pricing arrangements with customers. There is a lagging indicator and some effects coming from Q4 to Q1, when you cant maintain pricing changes as fast as the market is changing and so on under some contractual agreements the.
You will ultimately start to see that flow through and further quarters. This year.
Okay. So should we expect incremental improvement of margins in the the June quarter versus March for the metals segment.
I don't want of guarantee anything, but I think given our tail wins and backlog you can expect debt to flow through from Q1 Q2.
Okay, and then I think you mentioned on the chemicals business that mixture of internal margin target is that right and if so what is that target.
Well I don't think we give guidance obviously until we have all of our metrics and line here, but we have an internal target that we do want to hit on a gross and net profit margin basis that it is below our internal expectations.
So obviously on the chemical side, it's a mix of the business with respect to tolling versus direct to manufacturers and.
And there is definitely growth and the market that we are.
Addressing currently.
Okay. Okay, so and it's primarily it was primarily a mix issue and the first quarter.
It is attributable to mix primarily.
Okay.
And then last question for you back to the metal segment.
The average selling price was down year over year, which was surprising to me given the base metal costs going up and and the surcharges and moving up but I think the 10-Q said that that was due to the mix. So I think the the prior management team would talk about project business, which I think would drive asps. So can you just give us a little bit of it.
Color of what's going to happen and mix over the next few quarters for that segment.
Yes, I mean, I would say specific to project base. There are one off projects whether it be of pipeline project are in the offshore well project or any other specialty project that requires the specialty grade of material that are one off items, but in terms of global macro environment that we encountered the overall mix has changed and when you look at our galvanize business obviously.
If you are looking at at a price per pound it is going to be lower than the three or four $3 16, our other specialty alloy. So the mix change and the fact of our three of four business went up or $3 16 business went down a little bit that's the more expensive product and our galvanized business picked up significantly. So it is a mix of of the product.
And not just.
And overall level playing field.
Okay, and if I can just sneak in one last question and.
And the the press release, you talk about delays and production and deliveries. So can you just maybe attempt to quantify how much of that held back the first quarter results and is that principally on the on the metal side or both.
And it's on both sides again, it's our raw raw material input side that is delaying I think with whether you are buying a car with the chip shortage or trying to find the washer dryer dishwasher, which I can't find right now it's it's impacting every business. So we don't have an exact number that we can plug into that well what we can say is that it's probably <unk>.
We're getting to our increase in backlog, which will flow through in Q2, Q3 and Q4 so.
It was a significant component of it but outside of our control logistics as an issue too in terms of finding trucking companies to be able to deliver a product.
Right and what was the backlog higher at the end of the of March quarter versus year end.
Yes, I don't want to speak out of firm Sally Yes. It was.
Yes, yes, we continue to see month over month increases and the and the metals backlogs are they're getting back to all of that.
Okay and were talking on a per pound basis, right and not including just the rise of nickel exactly.
Exactly your assets.
Exactly okay. Okay. Thank you very much I appreciate it.
Thanks, Mike.
Again, if you would like to ask the question. Please press the star one on the telephone keypad again that if the car wants to ask the question.
We have your next question from David Siegfried and we are in that.
Your line is open.
Hey, David.
Hey, congratulations Chris and Sally on a profitable quarter that was nice thank you.
Capital expenditures of <unk> for 2021 is that still projected to be about $4 million.
Right now it is I think it may come in slightly lower.
We are really assessing every capex dollar that's being spent just because it was approved and budgeted does not mean, it's gonna be funds that are spent it actually has to be incremental to the growth of the business.
A specific project here was there was the potential building expansion and munhall I'm here today were walking around and the team gets together and says well if we move this and move this internally, we don't need to expand the facility, which means it's the significant capex reduction.
So the team is really being pressed with you know think of ways that you can utilize the existing assets we have.
And if it's not and it's not a revenue producing investment then we're going to look 123 or four times out of it before we actually move forward.
Good makes sense.
And now 2020 corporate expenses about three percentage of sales.
I noticed already this quarter.
That came in under that so do.
Do we expect of meaningful.
Decrease in corporate expense over the years.
According to percentage of sales.
Yes, I mean, obviously as hopefully our sales continue to grow rapidly but.
We are going to again manage every expense the corporate expense reductions youre seeing obviously is through interest I think we've had some pretty significant insurance savings.
And we did get rid of the airplane and terminated that agreement. So and you will start to see that flow through the rest of the quarters and into 2022, but.
And again every cost is looked at.
Thank you.
And I noticed here first quarter the mood sustain this earn out liability.
And I believe that ended.
At the end of the first quarter, so going forward through 2021 and 2022.
That should have a meaningful impact on the bottom line and not having that liability is that correct.
And one of the exact amount sales I don't view of the handy if not we can circle back to you.
Yeah, I don't have the.
And the exact amount, but youre right.
We only have the the STI and the and the galvanized and are now.
And it should be roughly about a 300 K and tied to the bottom line, which is significantly better than years past.
Okay.
Good.
So with the the new M V P Timna and.
It was mentioned and the PR that there'd be immediate improvement and operational execution, so with that start showing up and second quarter and and beyond.
Some of these adjustments to the operational procedures or they something that would quickly and to the bottom line or is that gonna be of a process for things to be streamlined.
Simply of process.
Tim has already started to make significant contributions here there's been some personnel changes within our metals group to bring in what I'll call. The best in class support for Tim and we've got an individual that came in from a continuous improvement background as well as the SLP background that's implementing.
From the equipment side for throughput and efficiency.
He is onboard and then from a business development side.
We have of new individuals' thats come on to truly streamline our sales and revenue generation side the position us for.
The truly long term success and.
Position us for our sales team to truly grow and incentivize the right kind of business, we want and the margin profile we want.
Okay, and it makes sense and I saw recently that there was an extension of the safe drinking water Act and I think it was like 35 billion debt would be given the state's two to three doing the year.
Would you anticipate that some of that eventually over time would trickle down the center line.
I think that at multiple levels of absolutely I think from our chemical side I am a firm believer in water treatment.
I know and many people that I've worked at Ecolab and nalco from the water treatment side that that business has overlap with our chemicals business, we should be looking heavily at that and R&D efforts. The same thing on our pipe side.
When you look at our aging infrastructure. There is one thing that everyone in America wants it and even the world you want safe.
The safe fresh drinking water and is pipe as the new facilities are put on line from a municipal water treatment side and municipal water production wall side, you are going to see I think the opportunity for us to expand and the R&D side and hopefully look at opportunities to produce so what I'll call.
Maybe a patented pipe product or something that goes along those lines to truly encapsulate debt market share.
Okay and good makes sense now.
And I noticed one of your customers is developing of stainless steel furniture line and.
A S T I S already of supplier.
To that company will they be participating in.
And that growth.
Okay.
We're going to sell as much stainless pipe and tube as we can to any customer that wants to buy it but I don't know which customer specifically that is.
There is there is no lack of sales opportunity or business. It's can we produce it can we delivered on time can we produce it of course, it delivers positive margin to us and.
Do we of the equipment to do it so.
And then going back to basics for US. This year is truly let's deliver product on time, let's make sure our product is price right, let's get our Sop and order, let's have the incentive team incentive sales structure of the right way and then identify the market and business, we actually want to win the business is out there. We just have to make sure that we can deliver what we promise.
Sure.
Yeah.
I noticed a big steel company is building of new tube mill, and Kentucky and in the Midwest I think they want to have the operational like mid 2023.
Manufacturing galvanize solar torque tube.
Is that anything that synalloy.
Could produce or has the desire to produce.
Or does that kind of answered by your last your last answer I guess, yes, I mean again, we're going to produce.
I think we're focused although we have of galvanize business, it's a very narrow niche of our galvanize business on our tube side.
The the majority of our margin is made and our specialty pipe and tube stainless and our heavy wall side. So the focus is going to be.
Where do we make the most money and how much can we make and how fast can we make it.
Got it okay.
And that's earnings call It was mentioned debt.
The sales team would be strengthened and chemicals, how is that progressing.
And that's a great question.
As I think Ive mentioned, everybody I definitely don't know the chemicals business as well as the metals business, but I do believe there is tremendous long term value of that can be created and chemicals.
Deeply involved right now and our strategic plan to assess how we can more aggressively and best position not only the brands, but also the sales effort to capitalize on the opportunity and.
There is tremendous opportunity there so.
We will find a way to get after it.
And when the question.
So last earnings call you mentioned debt maybe during the second half of the year there'd be a road show to kind of reintroduce synalloy to investors.
And perhaps a the strategic plan that would be put out and so is that something that still.
Uh huh.
And going to happen, maybe second half of this year.
And.
If it would be second half of it would be pretty late in the second half again.
My focus right now is our back to basics model I mean, we have to operate as efficiently.
And as possible and once we can execute on that we have everything running I don't want to say, we're going to before we start we will have to be at 100%, but we need to be better than where we're at right. Now and then I think we'll feel the board and I and everyone on the matter of team will feel very comfortable with laying out short and long term growth and strategic goals and sharing that with the.
All of our stakeholders.
Okay.
Very good well thank you for the good work debt.
I appreciate it thanks David.
Take care.
Sure.
At this time. This concludes the question and answer session I would now like to turn the call back to Mr. Hunter for closing remarks.
Yeah. Thank you Alexander again, everyone I appreciate the time and effort and your interest and synalloy.
Look forward to speaking with everyone again, when we report our second quarter 2021 results in August and everyone have a great day. Thank you.
Ladies and gentlemen, this does concludes today's conference call.
May disconnect your lines at the time, Thank you for your participation.
Okay.
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