Q3 2021 Synalloy Corp Earnings Call
Good afternoon, everyone and thank you for participating in today's conference call to discuss Synalloy's financial results for the third quarter ended September 30th 2021.
Joining us today are seen Aloyse chairman of the board.
Ben Rosenzweig.
Interim precedent N C O quits hutter.
C F O aliens Ham and the companies outside Investor Relations adviser Cody Queen.
Following the remarks will open the call for for your questions.
Before we go further I would like to turn the call over to Mister Curry as he reads the company Safe Harbor statements within the meaning of the private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward looking statements Cody. Please go ahead.
Thanks, Jeff.
Good afternoon, and thank you all for joining or a conference call to discuss synalloy's third quarter of 2021 financial results.
Before we continue we would like to remind all participants.
<unk> today may contain certain forward looking statements pursuant to the safe Harbor provisions of the federal Securities laws State.
Statements are based on information currently available to us and are subject to various risks and uncertainties that could cause the actual results to differ materially.
Oh advisers all of those listening to this call to review the latest 10-Q and 10-K posted on its web site pretty summary of these risks and uncertainties.
He does not undertake the responsibility to update any forward looking statements further the discussion today may include non-GAAP measures.
<unk> with regulation G. The company has reconciled these amounts back to the closest gap based measurement reckons.
The reconciliations can be found in the earnings press release issued earlier today and pushed on the investors section of the company's website, that's N a y dot com.
Note that this call is available for replay via webcast link. There's also posted on the investors section of the company's web site.
That I would like to turn the call over to Sinhalese Chairman of the board and Rosenzweig Okay.
Thank you Cody good afternoon.
Of course of the past few months I believe we've continued to make strides on our journey to create value for all of our stakeholders.
We said from the beginning that we had full conviction and the attractive economic characteristics of our core businesses and that changing the leadership and strategic oversight could help us return to profitable growth.
I firmly believe the actions we've taken today against the backdrop of favourable market conditions have enabled us to get a jump on our long term goals.
It won't always be as linear as it's been over the past few quarters and the last thing you'll see from US is self congratulation, but I do think it's important to quickly pause and examined the amount. This team has accomplished in a short period of time.
Since beginning implement our designer changes just over one year ago, we've been able to dramatically improve our liquidity position with a new credit facility, we've appointed new leaders across the entire organization with relevant industry experience and expertise the business has produced multiple consecutive quarters of profitable growth.
And we acquired a leading specialty chemicals manufacturer to bolster our chemicals platform.
This amount of change is never easy, but the company of our size can't afford to be stagnant and in order to capture the growth opportunities I see ahead of us will need to continue to hustle and innovate.
I'd like to take a moment to highlight a recent acquisition of Dan can which crystal discussed in more detail.
Dan <unk> is a great example of an investment we're willing to make to ensure that we're solidifying our platforms with extended capabilities and bringing an additional executive talent.
It is an ideal complement for similar chemicals offering tremendous cross selling opportunities across business processes that we know quite well. Additionally.
Additionally, damn Cam brings over 120 employees a management team with the track record of demonstrated growth and three state of the art production plants on a large campus in southern Virginia.
With this combination we've created one of the largest specialty chemicals contract manufacturers and the U S that is now primed for continued expansion.
We purchased and Cam for approximately six times estimated 2021, EBITDA, which I believe is a compelling valuation in this market environment, especially considering all the additional longterm capabilities and knowledge. This combination brings.
The purchase was funded entirely through our existing credit facility, bringing are pro forma net leverage to just over two times EBITDA on an LTM basis inclusive of Dan Cams earnings.
Going forward will continue to be opportunistic and deploying capital to strategic growth initiatives that meet our internal returned thresholds both organically and through acquisition.
As we move through November and looked at finish at our first full year I remain excited and invigorated by the opportunity that sits in front of US today I feel very confident in our team's ability to continue to drive efficiencies in our production processes, while developing and expanding our commercial positioning.
Although we still have much more to do in order to reach our ambitious goals I firmly believe we've established a strong foundation for long term success and I look forward to what will accomplish now I'd like to pass a call over to Chris and earn and I'll be available later on to take any questions crisp over to you.
Thanks, Ben and thank you all for joining today's call. It's been about one year since our first joined Synalloy as interim President and CEO and I'm pleased with the progress we've made to date, including another quarter of strong results. While we are only just beginning to scratch. The surface of success I believe this organization is capable of I still want to thank everyone involved in helping US reached this point.
And continuing to execute on the strategies, we have laid out.
During the third quarter, we experienced profitable growth across both our basic business segments with momentum from the first half of the year not slowing down customer demand maintained its strength to miss a strong pricing environment, while our teams across the organization continue to drive operational efficiencies.
As discussed on our last call we remain committed to ongoing refinement of our throughputs to ensure our production schedule is aligned with customer demand will continue to work on this throughout the quarter, which had a positive impact on our customer relationships as well as our reputation in the market.
Getting high quality product out of the door in a timely fashion that meets or exceeds expectations as a critical component to our strategy and as we work to meet our demand. This quarter are improving processes led to substantial year over year and sequential increases the net income adjusted EBITDA and adjusted EBITDA margin.
Before we dive in each segment.
I wanted to call out an important change we made to our executive team in August we appointed <unk> Chief Financial Officer Air brings over 20 years of executive level of experience in finance and accounting having served in CFO rolls across a variety of industries. Most recently Aaron was the CFO norstar aerospace a leading independent.
Sure of components in assemblies to the global aerospace industry, where he was instrumental in establishing a culture of metrics based analysis capital discipline cash conversion and margin enhancement processes. We firmly believe has deep functional experience.
And technical knowledge in all aspects of corporate finance financial planning and organizational development will be a valuable asset to send away and he has already started making significant impact across our organization.
Now I'm going to provide an operational review of each segment starting with medals. This segment continued to benefit from the pricing environment that we experienced in the first half of the year because we stayed last quarter. Our vision for the segment has to be the premier solution provider through best in class safety quality and customer experience, while creating value for all team members and stakeholders.
<unk>.
And following this mission we have been heavily focused on how to further optimize our operations to.
Safely produce high quality products, while improving on time delivery efficiency and financial performance.
In order to achieve our objectives are employees need to be engaged and feel like they are supported first and foremost we need to keep them safe to that and we've been working with safe start leading safety company with the flagship training program that provides organizations around the world a more engaging and useful approach to keeping people safe.
We are currently in the second phase of the program to further enhance the safety of our workplaces for our employees.
We're taking safety to the next level by reinforcing knowledge with practical techniques that help our employee stay more alert throughout the workday.
Not only have we improved engagement, but.
But we're also building an unmatched safety culture that is already leading to fewer injuries and delivering greater productivity may.
Making safety habits stick is tough, but our partnership with safe start along with the commitment from our employees.
Has already delivered results and there was a visible safety culture being built at each plan.
One other item to mentioned as the team's committed to delivering product to our customers and time on spec and damage free.
When we embarked on this journey, we inherited and acceptance of late product delivery is justified by our backlog. This.
This is not an acceptable position the team has increased our on time delivery by 184% between January and September of this year.
When you factor in the supply chain constraints. The team has navigated. This is truly an amazing statistic that I am proud to share nice job team.
Looking forward.
Demand remains strong and I believe we are well positioned to capitalize on that demand for next year, we're monitoring both longer term headwinds and opportunities that could emerge in our end markets in particular have.
Section 232 tariffs are lifted there could be a large influx of international competing products that could impact our pricing power from current levels.
Provided one of our pillars has to be competitive in any commodity pricing environment. We remain laser focused on operational efficiency and building control levers that would allow us to flex upward down to protect our margins.
But we are optimistic about our ability to achieve profitable growth, we continue to exploit supply chain and labor constraints that are affecting businesses across the world, including our suppliers and customers.
To help mitigate these issues it will be critical to demonstrate operational excellence in the areas that we can control, while tightly managing or working capital.
All that being said we also believe there are micro events on the horizon that could have a positive impact on her businesses.
One being the infrastructure Bill that Congress just passed.
Have a lot of customers that are looking to build their next plant or expand their operations and.
And what the infrastructure bill it could be a meaningful uptick to our pipe in two businesses.
Well I'm certainly not in a position to predict the timing of spending or tried to quantify its impact. It is something we are closely monitoring.
Overall in the business development front, our commercial team is an excellent strategy of expanding our footprint in demonstrating our value proposition our presence as being noticed and we're seeing exceptional growth opportunities.
Not only with end users, but with our distributor customer base too.
We strongly believe in the foundation, we have laid for this segment and remain confident in the longer term growth prospects for this is part of our overall business.
Now I'm going to turn it over a chemicals.
Because we discussed our last call we implemented price increases across the board to help offset operational challenges. This segment was experiencing including labor constraints.
And product shipment delays related trucking shortages the full effect of these price increases can be seen in the segments net sales growth of 32% compared to the prior year period. However, it was still not enough to overcome the impact these challenges cause to our adjusted EBITDA margin despite growing our adjusted EBITDA dollars.
We have higher expectations for our chemicals segment and are continuing to take a proactive approach to better realize the embedded value within similarly chemicals.
One major step forward, we made was.
So the subsequent last quarter was the acquisition of Dan come which is a leading full service specialty chemicals contract manufacturer that we believe will accelerate our product development capabilities.
The entrance into new and markets and applications.
While deepening our ability to serve our existing customers.
With a 55 acre campus in Virginia that is three production facilities and both the largest fleet of horizontal reactors in the industry.
This acquisition makes and what chemicals, one of the largest specialty chemical contract manufacturers in the US. Additionally acquisition brings where chemicals segment, an exceptional team and a stable of customer stable customer base that consists of notable blue chip companies and a high rate of recurring revenue.
We expect the income to generate approximately $30 million net sales with an approximate 18% adjust EBIT margin in 2021, which is closer to what we believe could be the longterm urgent profile of our entire chemicals business as we improve our operational excellence.
As we looked at this acquisition from a strategic perspective den can bring some of our industry's leading engineering and process development capabilities with a proven track record of rapidly developing products for commercialization.
Additionally, the production plants and horizontal reactors I mentioned earlier drastically accelerate the long term investment plans, we had for the segment, providing differentiated assets rail access and meaningful site acreage for continued expansion.
With this acquisition will have a much larger presence and target and markets and applications that we didn't previously have exposure to.
Combining our current customers with the additional customer relationships that we will inherit through the income.
Will now be able to offer best in class products across a much broader spectrum of industries, including case comprised of coatings adhesive stealing from elastomers, HII household industrial and institutional additives and agricultural Chemistries.
We have already begun onboarding, the Dan Kemp team and I look forward to leveraging our combined manufacturing engineering platform to continue performing critical chemistries of our customers, while driving profitable growth.
As we look at the broader picture, we're still far from being the company. We believe synalloy has the potential to be.
But it is a very large shareholder and leader of the organization I am pleased with the progress that we're making and firmly believe in the foundation we are establishing.
I want to close by thanking all of our dedicated and hard working employees.
Along with recognizing the continued support from all of our stakeholders and partners in this journey.
I would now like to turn it over to our new CFO, Eric Tam Aaron the floor is yours.
Thank you, Chris and good afternoon, everyone.
Absolute pleasure to be joining you all today and my first earnings call is the companies CFO.
Having been in the seat for the past few months I have been able to get a good read on the entire organization to better understand our strengths and weaknesses.
Serving in leadership roles in similar situations throughout my career I have the utmost confidence in our plans to drive consistent sales and margin growth.
And I look forward to helping build long term value.
Now, let's jump into our results.
Third quarter, 2021 that sales increased 45% $86 $2 million compared to $59.3 million in the prior year period.
The increase was attributable to strong commodities pricing and robust customer demand driving growth across both the metals and chemicals segments.
Gross profit increased significantly to $18 million compared to $5 million in the year ago quarter, while gross margin more than doubled to 29% from eight 4% in the prior year period.
The improvement in both gross profit.
And gross profit margin was attributable to the pricing power cheap as a result of outsized customer demand.
Along with operational efficiencies that accompanied elevated order volumes.
Net income in the third quarter increased considerably $8 $2 million.87 diluted earnings per share.
Paired to a net loss of $10.5 million 16 diluted loss per share for the third quarter of 2020.
Excluding a 10.7 million non-cash goodwill impairment charge in the third quarter of 2020 net income in the third quarter of 2021 increased 8.1 million over the prior year period.
Adjusted EBITDA in the third quarter increased nearly 10 fold <unk>.
14.8 million and adjusted EBITDA margin also improved 1400 40 basis points.
17, 2% compared to the prior year period.
Lastly.
Additionally September 30th 2021 total.
Total debt was $49 million compared to $61.4 million.
As of December 31, 2020.
With $56.0 million borrowing capacity under a revolving credit facility compared to 11 million descent.
December 31 2020.
With that I will now turn it back over to the operator or Q&A Jeff.
Thank you Sir.
At this time I would like to remind everyone in order to ask you a question fresh Sarah then the number one on your telephone keypad.
Again, that's star one on your telephone keypad.
Well, possibly get some momentum compiled the Q&A roster.
Your first question comes from the lineup David Siegfried.
Your line is open.
Hey, Congratulations Ben Chris dinner, and I was gonna have fantastic quarter.
Thanks, David.
So uhm with the acquisition you've increased.
<unk> chemicals segment revenue by a third.
It is the expectation and the plan.
Is that.
It happens that you will be able to allow the earnings to become more stable for the entire company.
Thank you.
I think we'd see significant.
Margin growth and ability within the chemicals segment that tends to be less commodity driven from pricing environment's. So.
I see a longer term growth projection in our chemicals segment.
As we as we balance out the portfolio.
Got it.
So it was mentioned that the Dan Kam operating resolved, 18% adjusted EBITDA margin.
So this quarter chemicals, Cinderella chemicals with about 11%.
So how long would it take for it to kind of work together in a great how long for them to get their EBITDA margins up to that 18% level.
Something that can happen in a couple of quarters.
I would say, we're already working on it and have uncovered opportunities for.
Accelerated margin enhancement.
How that flows through the P&L and down earnings I think that's going to be seen there was some investment we have to make an engineering.
In capabilities, we have at our existing chemicals businesses that Dan come happens to have but we're going to leverage resources and share knowledge. So.
Versus us trying to do it from a greenfield I think you'll see a rapid.
Accelerated.
Achievement of some margin pick up.
Good to hear.
55 acres, that's now owned by Senator Boy, if that that going to be developed or is that something that can be like a sales leaseback, where you were able to pull some cash out of that too.
I'm not a fan of sale leasebacks I would say the operational flexibility you have owning assets, where you have significant capital investments gives you much more flexibility owning the asset and expanding as needed versus being held high.
Hostage to a landlord. So I believe we will continue to own that asset. Obviously, if you only asked it gives U capital flexibility down the road to balance out of capital stack, but.
The business model, Dan kind of his head has been very unique with partnering with certain Oems to have capital from third parties invested in the facility to create the infrastructure and we plan to replicate that model going forward.
Okay good to hear.
You alluded to in the comments that steel prices.
Maybe at some point may begin to fall and margins may begin to compress.
So.
What do you have in mind to mitigate that risk beyond.
The operational efficiencies that.
Been able to.
Create.
The margin impact you see from the metals business really is is caused primarily from <unk>.
Neither being in a long inventory position or a short inventory position.
The goal is is to transform our business it to a true mil structure, where we are the producing mill of welded pipe into primarily and distribute to customer orders.
Historically the business was built on create product based on what you think you can have throughput on your mil side and create inventory our goal is to produce to order to eliminate the commodity price risk.
If you look back in time are gross margins. If you take the inventory fluctuations out we have relatively consistent gross margins. So is worth transforming the business to a producer versus a stocking distributor.
It's going to lessen the effect of significant swings in the commodity pricing environment.
Got it makes sense.
The.
A recent rollbacks of the European tourists sense deal on aluminum is how how will that affect that something to be determined still or.
Yeah, when you look at stainless material coming in and there's really not much heavy wall material coming in it's really.
We don't see any impact from from those tariffs and it wasn't a meaningful amount of material I think 3 million tons.
And nothing directly related to our.
And markets.
Got it okay.
One last question So January 2022.
I think the third of your for liability Earnout drops off.
And.
I did the math correctly, you'll be treating up close to a million dollars a quarter.
Uhm.
Any idea, what you're gonna be doing with that extra cash.
I would pay down debt Erin I think you would concur.
That's the plan.
Okay, very good and by the way good good to excellent that faded at quarter. So.
Good job guys. Thank you.
Thanks, David good to hear from you.
Okay.
Again for anyone else, who wants to ask questions. You May Press Star then the number one on your telephone keypad.
Your next question comes from the line of Mike Youth from S. G. S capital Your line is open.
Thanks for taking my questions couple on the Dan Kim acquisition, one you acquired the corporate out to sea not the assets is that correct.
We acquired the assets along with the entity correct.
Okay. So are there any legacy environmental liabilities to think about for that business that you've assumed.
Yeah, we had full diligence done on the environmental side and no.
Unexpected liabilities came up.
Okay and then.
It seems like that business is performing very well this year.
Just wondering how sustainable that is so what did the margins look at like at Dan Cameron and 19, and 20 and what was the level of revenue for those years.
I don't know it's been growing yes, now I mean, it's been a growth story I mean, I think that says Dan chemists and owned by a private equity firm and they brought in leadership to turn the business around post acquisition as you would expect and so it is it has been a growth story that we do believe it's sustainable with the process.
These investments that they've made in the business.
So it has been growing over the past three years, both from the top line in from a margin perspective, but we feel confident that it is sustainable.
Okay, Okay and then.
The last caller had asked about excess cash flow that you'll be generating.
And you indicated be paying down debt. So what do you still have an appetite for additional M&A either on the chemicals side or the mental side.
Yes, we do absolutely.
And is there one preference I think you have pretty good market share on the metal side.
We're going to be apprehended.
As I say the same thing yeah.
Yeah.
Okay is there an active pipeline.
Yes.
Okay, and then where would you take leverage to and how do you think about leverage and what I mean by that this seems like an exceptional quarter I'm not sure how sustainable. It is so when you think about the leverage profile.
What <unk> haircut, the current quarter or just maybe speak to the sustainability of this quarter along with the leverage question.
I'll start with the leverage and then Chris can talk about the sustainability, but I.
I expect that will predominantly utilize that in the near term given it's it's cost right now while still maintaining a prudent level of leverage.
And I can't give you a specific number as to what prudent would be rather it's more of a dynamic target that takes it does take into account the cyclicality of certain portions of our earnings as well as as the near term cash flow expectations that we have because that we do we're not going to comment on some of the longer term.
Cyclical nature of our business and what our earnings might do we do have some level of visibility into our short term cash.
Ash flow projections and earnings estimation so.
Aaron told you about the availability that we ended the quarter with.
We feel confident and that that's a pretty good place, we do know and we're going to continue to generate cash and as Chris said. The first use of that cash is going to be to pay down debt. So we feel confident in the near term that we will be utilizing that in maintaining a pretty low level of leverage but should we be confronted with larger opportunities out.
Side of our leverage comfort zone, we will consider using our equity if we determined that the specific use of that capital meaningfully exceeds its cost.
Okay.
And then and then.
China Your earnings your earnings question when you look at the what I'll call underperforming so synalloy chemicals.
I think there is.
A roadmap to sustaining a similar level of earnings that we saw in this quarter.
Okay, great. So just a couple of detailed questions though.
Corporate expense was up by roughly $650000 sequentially can you just speak to that.
Yeah of course, I can I can speak that we had some.
700 expenses relating to.
Some prior executives that was the biggest driver of that variance.
Okay, and then the provision for losses on inventory was $1.9 million in the quarter. If you look at the at the cash flow statement back into it for the quarter I assume that's for the metals physician, but why was so large this quarter and I guess, that's actually tinged earnings pretty pretty meaningfully.
That said I think Aaron I've, just solved anecdotally speak to that that's getting basically scrapping inventory based on the old methodology of just produced pipe to produce pipe versus produced pipe to a customer order.
Okay. So that when you were highly me.
Wait on the editor job by one go ahead I apologize.
Wait on earnings and.
It was.
Carrying significantly aged material that which is sitting on the floor unsaleable.
Okay. So that should not repeat in the fourth quarter is that fair with everything you know right now.
That's a fair statement.
Okay, and then just the the the concept of becoming a producer versus stocking distributor I think it's a great idea, but I guess it largely depends on what your competitors are willing to do right because you'd be at a competitive disadvantage if they're sitting a lot of inventory the delivery times are going to be a lot quicker than yours. So just just speak to the competitive dynamic and maybe.
My thoughts on it or just wrong.
No I mean, the competitive it's a very good question the competitive dynamic is.
We sell primarily to two large users one is Oems in general so end users and the other is stocking distributors, we don't want to compete with our stocking distributors and that's what happens when.
If you build an inventory up while you're supposed to be producing our synalloy, this or Bristol, especially pipe into a STI is producing to a distributor stacking need whether that be reierson reliance Olympic al Row, you go down the list.
So our throughput through our plants is built off of that customer need.
We don't want to be viewed as a competitor to that customer and if you start stacking inventory up while what happens is then you go to a master distributors and you have to basically.
Give your inventory way, it very poor and weak pricing.
Okay that makes sense.
Then just one last question I guess this is for Ben.
Chris has been at the company for almost a year now and he's still the interim CEO. So can you just address that issue.
Yeah, I think that's something that we discuss.
At length very frequently at the board level, obviously, we're happy with the overall performance of the team and how it's functioning and so that's something that the board is considering in real time.
Okay. Thank you very much.
Thanks, Mike.
At this time. This concludes our question and answer session I would now like to turn to call back over to Mr. Hunter for closing remarks.
Thank you, Jeff again, we'd like to thank everyone for listening today's call and we look forward to speaking with you again, when we report our fourth quarter and full year of 2021 results. Thanks, again and have a great day.
Ladies and gentlemen. This concludes our teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
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Good afternoon, everyone and thank you for participating in today's conference call to discuss Synalloy's financial results for the third quarter ended September 30th 2021.
Joining us today are seen alloys chairman of the board.
Rosenzweig interim.
Interim president and CEO, Chris Hutter.
CFO.
Erin Tam and the company's outside Investor Relations advisor Cody Cree.
Following their remarks, well open the call for <unk> for your question.
Before we go for you there I would like to turn the call over to Mr. Cui as he reads the Companys Safe Harbor.
Statements within the meaning of the private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward looking statements Cody. Please go ahead.
Thanks, Jeff.
Afternoon, and thank you all for joining our conference call to discuss <unk> third quarter 2021 financial results before we continue we'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.
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.
<unk> advises all of those listening to this call to review 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 regulation G. The company has reconciled these amounts back to the closest GAAP based measurement.
The reconciliations can be found in the earnings press release issued earlier today and posted on the investors section of the company's website at <unk> Dot com.
Please note that this call is available for replay via webcast link that is also posted on the investors section of the company's website.
With that I'd like to turn the call over to <unk> Chairman of the Board Ben Rosenzweig.
Okay.
Thank you Tony and good afternoon.
And of course of the past few months I believe we've continued to make strides on our journey to create value for all of our stakeholders.
We said from the beginning that we had full conviction and the attractive economic characteristics of our core businesses and that changing the leadership and strategic oversight and help us return to profitable growth.
I firmly believe the actions we've taken to date against the backdrop of favorable market conditions have enabled us to get a jump on our long term goals.
It won't always be as linear as it's been over the past few quarters and the last thing you'll see from US is self congratulation, but I do think it's important to quickly pause and examined the amount. This team has accomplished in a short period of time.
Since beginning to implement our desire changes just over one year ago, we've been able to dramatically improve our liquidity position with a new credit facility, we have appointed new leaders across the entire organization with relevant industry experience and expertise the business has produced multiple consecutive quarters of profitable growth.
And we acquired a leading specialty chemicals manufacturer to bolster our chemicals platform.
This amount of change is never easy, but a company of our size can't afford to be stagnant and in order to capture the growth opportunities I see ahead of US we'll need to continue to hustle and innovate.
I'd like to take a moment to highlight our recent acquisition of Dan, Ken, which Chris will discuss in more detail.
Dan <unk> is a great example of an investment we're willing to make to ensure that we're solidifying our platforms with extended capabilities and bringing on additional executive talent.
It is an ideal complement for cellular chemicals offering tremendous cross selling opportunities across business processes that we know quite well. Additionally.
Additionally, Dan Cam brings over 120 employees, our management team with a track record of demonstrated growth and three state of the art production plants on a large campus in southern Virginia.
With this combination we have created one of the largest specialty chemicals contract manufacturers in the U S that is now primed for continued expansion.
We purchased <unk> for approximately six times estimated 2021, EBITDA, which I believe is a compelling valuation in this market environment, especially considering all the additional long term capabilities and knowledge. This combination brings.
The purchase was funded entirely through our existing credit facility, bringing our pro forma net leverage to just over two times EBITDA on an LTM basis inclusive of Dan <unk> earnings.
Going forward, we will continue to be opportunistic in deploying capital to strategic growth initiatives that meet our internal return thresholds, both organically and through acquisition.
As we move through November and look to finish out our first full year I remain excited and invigorated by the opportunity that sits in front of US today I feel very confident in our team's ability to continue to drive efficiencies in our production processes, while developing and expanding our commercial positioning.
Though we still have much more to do in order to reach our ambitious goals I firmly believe we've established a strong foundation for long term success and I look forward to what we will accomplish now I'd like to pass the call over to Chris and earn and I'll be available later on to take any questions Chris over to you.
Thanks, Ben and thank you all for joining today's call. It's been about one year since I first joined Synalloy as interim President and CEO and I'm pleased with the progress we've made to date, including another quarter of strong results. While we are only just beginning to scratch. The surface of success I believe this organization is capable of I still want to thank everyone involved in helping us reach this.
Point and continuing to execute on the strategies, we have laid out.
During the third quarter, we experienced profitable growth across both our business segments with momentum from the first half of the year not slowing down customer demand maintained its strength amidst the strong pricing environment, while our teams across the organization continue to drive operational efficiencies.
Discussed on our last call, we remain committed to ongoing refinement of our throughput to ensure our production schedule is aligned with customer demand.
We continue to work on this throughout the quarter, which had a positive impact on our customer relationships as well as our reputation in the market.
Getting high quality product out of the door in a timely fashion that meets or exceeds expectations is a critical component to our strategy and as we work to meet our demand. This quarter are improving processes led to substantial year over year and sequential increases to net income adjusted EBITDA and adjusted EBITDA margin.
Before we dive into each segment.
I wanted to call out an important change we made to our executive team in August we appointed Aaron Thomas Chief Financial Officer, Eric brings over 20 years of executive level experience in finance and accounting having served in CFO roles across a variety of industries. Most recently Aaron was the CFO of Northstar Aerospace a leading independent.
Sure of components and assemblies to the global aerospace industry, where he was instrumental in establishing a culture of metrics based analysis capital discipline cash conversion and margin enhancement processes, we firmly believe his deep functional experience.
And technical knowledge in all aspects of corporate finance financial planning and organizational development will be a valuable asset to us in Hawaii and he has already started making significant impact across our organization.
Now im going to provide an operational review of each segment starting with metals. This.
The segment continued to benefit from the pricing environment that we experienced in the first half of the year.
We stated last quarter, our vision for this segment is to be the premier solution provider.
Through best in class safety quality and customer experience, while creating value for all team members and stakeholders in.
And following this mission we have been heavily focused on how to further optimize our operations to.
To safely produce high quality products, while improving on time delivery efficiency and financial performance.
In order to achieve our objectives, our employees need to be engaged and feel like they are supported first and foremost we need to keep them safe to that end, we've been working with safe start leading safety company with a flagship training program that provides organizations around the world a more engaging and useful approach to keeping people safe.
We are currently in the second phase of the program to further enhance the safety of our workplaces for our employees.
We're taking safety to the next level by reinforcing knowledge with practical techniques to help our employees stay more alert throughout their workday.
Not only have we improved engagement, but.
But we're also building an unmatched safety culture that is already leading to fewer injuries and delivering greater productivity.
<unk> safety habits stick is tough, but our partnership with save start along with the commitment from our employees.
Has already delivered results and there is a visible safety culture being built at each plant.
One other item to mention is the team's commitment to delivering product to our customers on time on spec and damage free.
When we embarked on this journey, we inherited an acceptance of late product deliveries justified by our backlog. This.
This is not an acceptable position the team has increased our on time delivery by 184% between January and September of this year.
When you factor in the supply chain constraints. The team has navigated. This is truly an amazing statistic that I'm proud to share nice job team.
Looking forward demand.
Demand remains strong and I believe we are well positioned to capitalize on that demand for next year. We are monitoring both longer term headwinds and opportunities that could emerge in our end markets in particular.
If section 232 tariffs are lifted there could be a large influx of international competing products that could impact our pricing power from current levels.
Provided one of our pillars is to be competitive in any commodity pricing environment. We remain laser focused on operational efficiency and building control levers that would allow us to flex up or down to protect our margins.
Though we are optimistic about our ability to achieve profitable growth, we continue to experience supply chain and labor constraints that are affecting businesses across the world, including our suppliers and customers.
To help mitigate these issues it will be critical to demonstrate operational excellence in the areas that we can control while tightly managing our working capital.
All that being said we also believe there are micro events on the horizon that could have a positive impact on our businesses.
One being an infrastructure bill that Congress just passed.
A lot of customers that are looking to build their next plant or expand their operations.
And what's the infrastructure bill that could be a meaningful uptick to our pipe and tube businesses.
Well I'm certainly not in a position to predict the timing of spending or try to quantify its impact. It is something we are closely monitoring.
Overall on the business development front and our commercial team has an excellent strategy of expanding our footprint in demonstrating our value proposition. Our presence is being noticed and we're seeing exceptional growth opportunities.
Not only with end users, but with our distributor customer base too.
We strongly believe in the foundation, we have laid for this segment and remain confident in the longer term growth prospects for this as part of our overall business.
Now I'm going to turn it over to chemicals.
As we discussed on our last call we implemented price increases across the board to help offset operational challenges. This segment was experiencing including labor constraints.
Product shipment delays related to trucking shortages. The full effect of these price increases can be seen in this segment's net sales growth of 32% compared to the prior year period. However, it was still not enough to overcome the impact these challenges caused to our adjusted EBITDA margin despite growing our adjusted EBIT of $1.
We have higher expectations for our chemicals segment and are continuing to take a proactive approach to better realize the embedded value within synalloy chemicals.
One major step forward, we made was.
So the subsequent last quarter was the acquisition of <unk>, which is a leading full service specialty chemicals contract manufacturer that we believe will accelerate our product development capabilities and provide entrance into new end markets and applications.
While deepening our ability to serve our existing customers.
With a 55 acre campus in Virginia that has three production facilities in both the largest fleet of horizontal reactors in the industry.
This acquisition makes an oil chemicals, one of the largest specialty chemical contract manufacturers in the U S. Additionally, the acquisition brings our chemicals segment, an exceptional team and a stable of customers stable customer base that consists of notable blue chip companies and a high rate of recurring revenue.
We expect income to generate approximately 30 million in net sales with an approximate 18% adjusted EBITDA margin in 2021, which is closer to what we believe could be the long term margin profile of our entire chemicals business as we improve our operational excellence.
As we look at this acquisition from a strategic perspective, Dan can bring some of our industries, leading engineering and process development capabilities with a proven track record of rapidly developing products for commercialization.
Additionally, the production plants in horizontal reactors I mentioned earlier drastically accelerate the long term investment plans, we had for the segment, providing differentiated assets rail access and meaningful site acreage for continued expansion.
With this acquisition, we will have a much larger presence in target end markets and applications that we didn't previously have exposure too.
Combining our current customers with the additional customer relationships that we will inherit through Dan Kim.
We'll now be able to offer best in class products across a much broader spectrum of industries, including case.
Prize of coatings, adhesives, sealants, and elastomers, HII household industrial and institutional additives and agricultural Chemistries.
<unk> already begun onboarding, the Dan Cam team and I look forward to leveraging our combined manufacturing engineering platform to continue performing critical chemistries for our customers, while driving profitable growth.
As we look at the broader picture, we're still far from being the company. We believe <unk> has the potential to be but it is a very large shareholder and leader of the organization I am pleased with the progress that we're making and firmly believe in the foundation we are establishing.
I want to close by thanking all of our dedicated and hard working employees.
Long with recognizing the continued support from all of our stakeholders and partners in this journey.
I would now like to turn it over to our new CFO Aaron Tam Aaron the floor is yours.
Thank you, Chris and good afternoon, everyone.
Absolute pleasure to be joining you all today in my first earnings call as the company's CFO.
Having been in the seat for the past few months I have been able to get a good read on the entire organization to better understand our strengths and weaknesses.
By serving in leadership roles in similar situations throughout my career I have the utmost confidence in our plans to drive consistent sales and margin growth.
And I look forward to helping build long term value.
Now, let's jump into our results.
Third quarter 2021, net sales increased 45% to $86 2 million compared to $59 3 million in the prior year period.
The increase was attributable to strong commodities pricing and robust customer demand driving growth across both the metals and chemicals segments.
Gross profit increased significantly to $18 million compared to $5 million in the year ago quarter, while gross margin more than doubled to 29% from eight 4% in the prior year period.
The improvement in both gross profit and gross profit margin was attributable to the pricing power achieved as a result of outsized customer demand.
Along with operational efficiencies that accompanied the elevated order volumes.
Net income in the third quarter increased considerably $8 2 million or 87 cents diluted earnings per share.
<unk> to a net loss of $10 5 million or $1 16 diluted loss per share for the third quarter of 2020.
Excluding a $10 7 million noncash goodwill impairment charge in the third quarter of 2020 net income in the third quarter 2021 increased $8 1 million over the prior year period.
Adjusted EBITDA in the third quarter increased nearly 10 fold to $14 8 million and adjusted EBITDA margin also improved 14 140 basis points to 17, 2% both compared to the prior year period.
Lastly.
Additionally.
2021.
Total debt was $49 million compared to $61 4 million as of December 31, 2020.
With $56 million of borrowing capacity under our revolving credit facility compared to $11 million at December 31, 2020.
With that I'll now turn it back over to the operator for Q&A Jeff.
Thank you Sir at this time I would like to remind everyone in order to ask your questions Press Star then the number one on your telephone keypad.
Again, Thats star one on your telephone keypad.
We'll pause for just a moment to compile the Q&A roster.
Your first question comes from the line of David <unk>.
Yes.
Your line is open.
Yes.
Hey, Congratulations Ben Chris scenario.
Fantastic quarter.
Thanks, David.
So.
With the acquisition you have increased.
Chemicals segment revenue by a third.
Is the expectation in the plan.
That.
As that happens that you will be able to allow the earnings to become more stable for the entire company in fact kind of a thank you.
I think we see significant.
Margin growth in mobility within the chemicals segment that tends to be less commodity driven from pricing environment. So.
I see a longer term growth projection in our chemicals segment.
As we as we balance out the portfolio.
Got it.
So it was mentioned that the Dan can operating results a 18% adjusted EBITDA margin.
So this quarter chemicals chemicals with about 11%.
How long would it take for us to kind of work together and a great how long for them to get their EBITDA margins up to that 18% level.
That can happen in a couple of quarters.
I would say, we're already working on it and have uncovered opportunities for <unk>.
Accelerated margin enhancement.
How that flows through the P&L and down to earnings I think that's going to be seen there is some investment we have to make on engineering.
And capabilities, we have at our existing chemicals businesses that Dan cum happens to have but we're going to leverage resources and share knowledge. So.
First is us trying to do it from a greenfield I think youll see a rapid.
Accelerated.
Achievement of some margin pickup.
Good to hear.
The 55 acres. That's now owned by <unk> is that going to be developed or is that something that can be like a sale leaseback, where youre able to pull some cash out of that too.
I'm not a fan of sale leasebacks I would say the operational flexibility you have or owning assets, where you have significant capital investments gives you much more flexibility owning the asset and expanding as needed versus being held.
Hostage to a landlord.
So I believe we will continue to own that asset obviously, if you own the asset gives you capital flexibility down the road to balance out our capital stack, but.
The business model, Dan kind of has had has been very unique with partnering with certain Oems to <unk>.
Have capital from third parties invested in the facility to create the infrastructure and we plan to replicate that model going forward.
Okay good to hear.
You alluded to in the comments that steel prices.
It may be at some point may begin to fall in margins may begin to compress so.
What do you have in mind that mitigate that risk beyond the.
The operational efficiencies that.
<unk> been able to.
Create.
The margin impact you see from the metals business really is is caused primarily from.
Either being a long inventory position or a short inventory position.
The goal is is to transform our business to a true mill structure, where we are the producing mill of welded pipe into primarily and distribute to customer orders.
Historically the business was built on create product based on what you think you can have throughput on your mill side and create inventory our goal is to produce to order to eliminate the commodity price risk.
If you look back in time, our gross margins if you take the inventory fluctuations out we have relatively consistent gross margins. So as we are transforming the business to a producer versus a stocking distributor.
Its going to lessen the effect of significant swings in the commodity pricing environment.
Got it makes sense.
The recent rollbacks of the European tariffs on steel and aluminum.
How will that affect kind of lawyers that something to be determined still are.
Yes, when you look at stainless material coming in and Theres really not much heavy wall material coming in it's really.
We don't see any impact from from those tariffs and it wasn't a meaningful amount of material I think 3 million tonnes.
Then nothing directly related to our <unk>.
End markets.
Got it okay.
One last question So January 2022.
I think the third of your for liability earn out drops off.
And if I did the math correctly, you'll be trading up close to about $1 million quarter.
Any idea of what you're gonna be dealing with that extra cash.
I would pay down debt Erin I think you would concur, yes, that's the plan.
Okay, very good and by the way good excellent that's made this past.
At quarter so.
Job guys. Thank you.
Thanks, David good to hear from you.
Okay.
Again for anyone else, who wants to ask questions. You May Press Star then the number one on your telephone keypad.
Your next question comes from the line of Mike Hughes from <unk> Capital. Your line is open.
Thanks for taking my questions a couple on the Dan Kim acquisition, one you acquired the corporate entity not the assets is that correct.
We acquired the assets along with the entity correct.
Okay. So are there any legacy environmental liabilities to think about for that business that you've assumed.
We had full diligence done on the environmental side and no.
Unexpected liabilities came up.
Okay and then.
It seems like that business is performing very well this year.
Just wondering how sustainable that is so what do the margins look like at Dan Kammen in 19, and 20 and what was the level of revenue for those years.
I don't know its been growing yes, no I mean, it's been a growth story I mean, I think that says Dan canvas and owned by private equity firm and they brought in leadership to turn the business around post acquisition as you would expect and so it is it has been a growth story that we do believe it's sustainable at the prompt.
<unk> investments that they've made in the business.
So it has been growing over the past three years, both from a topline and from a margin perspective, but we feel confident that it is sustainable.
Okay, Okay and then.
The last caller had asked about the excess cash flow that you'll be generating.
You indicated would be paying down debt. So what do you still have an appetite for additional M&A either on the chemical side or the metal side.
Yes, absolutely.
And is there one preference I think you have pretty good market share on the metals side.
We're going to be opportunistic.
As I say the same thing.
Yeah.
Okay is there an active pipeline.
Yes.
Okay, and then where would you take leverage too and how do you think about leverage and what I mean by that.
Seems like an exceptional quarter I'm not sure how sustainable it is so when you think about the leverage profile.
Haircut, the current quarter or just maybe speak to the sustainability of this quarter along with the leverage question.
I'll start with the leverage and then Chris can talk about the sustainability, but.
I expect that will predominantly utilized debt in the near term given its cost right now while still maintaining a prudent level of leverage.
And I can't give you a specific number as to what prudent.
B, rather it's more of a dynamic target that takes it does take into account.
Cyclicality of certain portions of our earnings as well as the near term cash flow expectations that we have because that we do we're not going to comment on some of the longer term cyclical nature of our business and what our earnings might do we do have some level of visibility into our short term cash.
Cash flow projections and earnings estimation so.
Aaron told you about the availability that we ended the quarter with.
We feel confident that that's a pretty good place. We do know that we're going to continue to generate cash and as Chris said, the first use of that cash is going to be to pay down debt.
So we feel confident in the near term that we will be utilizing debt and maintaining a pretty low level of leverage but should we be confronted with larger opportunities outside of our leverage comfort zone, we will consider using our equity if we determined that the specific use of that capital meaningfully exceeds its cost.
Okay.
And then and there.
To touch on your earnings your earnings question. When you look at the what I'll call underperformance of Synalloy chemicals.
I think there is.
Our roadmap to sustaining a similar level of earnings that we saw in this quarter.
Okay, great. So just a couple of detailed questions now the corporate expense was up by roughly $650000 sequentially can you just speak to that.
Yeah.
Yes, Chris I can I can speak that we had some <unk>.
Severance expenses relating to.
Some prior executives that was the biggest driver of that.
<unk>.
Okay.
The provision for losses on inventory was $1 $9 million in the quarter. If you look at the cash flow statement factored into it for the quarter I assume that's for the metals division, but why was it so large this quarter and I guess, that's actually ticked earnings pretty pretty meaningfully.
That said I think Aaron I'm, just all anecdotally speak to that that's getting basically scrapping inventory based on the old methodology of just produce pipe to produce pipe versus produce pipe to a customer order.
Okay. So that when you would agree with me.
Good job by one go ahead I apologize.
What day weighed on earnings and.
It was.
Carrying significantly aged materials, which is sitting on the floor unsalable.
Okay. So that should not repeat in the fourth quarter is that fair with everything you know right now.
That's a fair statement.
Okay, and then just the fee the concept to becoming a producer versus a stocking distributor I think it's a great idea, but I guess it largely depends on what your competitors are willing to do right because you'd be at a competitive disadvantage if they're sitting a lot of inventory the delivery times are going to be a lot quicker than yours. So just kind of speak to the competitive dynamic and maybe more.
Thoughts on it are just wrong.
No I mean, the competitive it's a very good question the competitive dynamic as well.
We sell primarily to two large users one as Oems in general So end users and the other is stocking distributors, we don't want to compete with our stocking distributors and Thats what happens when.
You build in inventory up while youre supposed to be producing our synalloy as a bristol specialty pipe and tube STI is producing to a distributor stocking need whether that be ryerson reliance Olympic Al Roy you go down the list.
So our throughput through our plants is built off of that customer need.
We don't want to be viewed as a competitor to that customer and if you start stocking inventory up well what happens is when you go to master distributors and you have to basically.
Give your inventory way at very poor and weak pricing.
Yes.
Okay that makes sense.
And then just one last question I guess this is for Ben.
Chris has been at the company for almost a year now and he's still the interim CEO. So can you just address that issue.
Yes, I mean, I think that's something that we discuss.
At length very frequently at the board level, obviously, we're happy with the overall performance of the team and how its functioning and so that's something that the board is considering in real time.
Okay. Thank you very much.
Yeah.
Thanks, Mike.
At this time. This concludes our question and answer session I would now like to turn the call back over to Mr. Hunter for closing remarks.
Thank you, Jeff again, we'd like to thank everyone for listening today's call and we look forward to speaking with you again, when we report our fourth quarter and full year 2021 results. Thanks again have a great day.
Ladies and gentlemen, this does conclude our teleconference. You may disconnect. Your lines at this time. Thank you for your participation.