Q1 2022 Synalloy Corp Earnings Call

Speaker 2: Good afternoon everyone and thank you for participating in today's conference call to discus a cinaly financial results for the first quarter added March thirty-first 2022. joining us today: our caliz Executive Chairman at the Board, Ben rosenswick, President CEO , Chris Hutter, cefo Aaron TAM, and the company's outside vbest Relations advisor, Cody Cree, on their remarks to open your calls for your questionsbefore we go further, I'd like toturnthe callorover to MR creee as V company's safe harbor statement within the meaning of the Private Securities litation formact in 1009 85. that proves important cautions regarding forward-looking statements. Cody, Please go ahead.

Speaker 5: Thanks fine. Before we continue, I'd like to remind all participants.

Speaker 5: That the discussion today may contain certain forward-looking statements pursuant to the safe. Harbor provisions of.

Speaker 5: The federal securities law.

Speaker 5: These statements are based on information currently available to us and are.

Speaker 6: Subject to various risks and uncertainties that could cause actual results to differ materially.

Speaker 5: senineoid advises all of those listening.

Speaker 5: To this call to review.

Speaker 7: Latest 10-Q in 10-K post on's website for summary of these risks and uncertaintity.

Speaker 5: Oi does not undertake the responsibility to update any forward-looking statement.

Speaker 5: Further the discussion today may include non-GAAP measures.

Speaker 5: In accordance with the regulation G, the company has reconciled these amounts back to the closest.

Speaker 6: outbas measurement. The reconciliations can be found in the earnings press release issued earlier today, poed on the Investors section of the company's website.

Speaker 6: At sinloy DOT com.

Speaker 5: Please note that this call is available for replay: VA webcast link that is also poed on the Investors section of the company'swe.

Speaker 6: Site but that I'd like to turn the call over to syoy's Executive Chairman of the Board, Ben rosenswag B, over to you.

Speaker 8: Thank you Cody, from good afternoon. everyonecnoi had a very strong start to 2022, leading to our fourth consecutive quarter of year-over-year growth and second consecutive quarter of record results for revenue, net income and adjusted EBITDA. We're very pleased that our dedicated employees are able to see the fruits of their labor manifest in our record results. They worked TI tirelessly to set this company up for sustained success and continue to transform cnoloy into the premier provider of pipe, tube and specialty chemical solutions.

Speaker 5: Throughout the quarter we capitalized on a favorable pricing environment due to the significant progress we've made in our operations since the start of our turnaround.

Speaker 5: This market dynamic drove higher than expected margins and allowed us to benefit at a much greater rate from the continued elevated demand we experienced.

Speaker 5: We believe we can continue to improve productivity, but I am pleased with our efforts in enhancing our sales and operations, planning to unlock greater efficiency within our platform.

Speaker 5: A prime example of this has been our efforts across both divisions to break down prior silos and operate as one cohesive unit. We've made meaningful progress in manufacturing and selling certain products across multiple sites in order to better control costs and improve lead times.

Speaker 5: And I wanted to take a moment to commend Tim and John for the one team unified mentality that they bring to their respective organizations, ensuring that we fully capitalize on our broad manufacturing and distribution capabilities to become a full-service solutions provider for our customers.

Speaker 5: Providing solutions will always prove more durable and profitable than just selling products.

Speaker 5: Our finance team continues to focus on monitoring the pricing environment and developing better ways to refine our pricing adjustments in real time.

Speaker 5: We continue to prioritize investments that automate our forecasting processes, allowing us to reallocate resources to growth-related pursuits.

Speaker 5: As you may remember, we made substantial progress updating our inventory accounting system, beginning in January .

Speaker 5: We've already seen the benefits of doing so, as our operators now have better insight into their costs, enabling them to make more informed pricing and production decisions.

Speaker 9: Further to improving our decision-making. We've identified multiple lessons learned from the integration of Dan cam that we plan to leverage for future acquisitions.

Speaker 5: We remain opportunistic in our EA strategy and have found several potential prospects that we believe to be additive to our growth plans.

Speaker 5: We'll continue to be disciplined with how we allocate our capital and look to focus on both organic and inorganic growth.

Speaker 5: We have ample liquidity available and plan to continuously assess what offers our shareholders the highest return on incremental capital deployed.

Speaker 5: We're cognizant of the tailwinds that have helped us achieve our record results.

Speaker 8: We remain focused on capitalizing on the market conditions, while prioritizing longer-term initiatives like diversifying our revenue streams in both segments.

Speaker 8: Continuously improving core operational efficiencies through automation and disciplined process control levers.

Speaker 5: As well as developing best-in-class commercial and consumer excellence.

Speaker 5: To retain our loyal customers and further cement ourselves as a premier solution provider.

Speaker 8: The work that we've been performing these past 18 months has revolved around building a company that can withstand the inevitability of cyclical pricing environments.

Speaker 8: We feel good with where we sit today, but there is certainly more work ahead to drive long-term value for our shareholders.

Speaker 5: Now I'd like to pass the call over to Chris to provide greater details on our operations across both segments, but I'll be available later on to answer any questions.

Speaker 8: crestp overue.

Speaker 10: Thanks Ben, and thank you all for joining today's call. likeke Ben said, we continu our momentum and capitalized on the strong market environment to drive a record results for this quarter. Let's start by discussing our metals segment. While the entire supply chain experienced higher material costs, we worked with our customers to pass through the increased indirect expenses, often realizing a greater contribution margin on those incremental sales taking place at higher prices. With our improved delivery timelines, reliability and overall product quality, our hope is that we can provide some level of differentiation So that pricing becomes stickier even as the macro environment normalizes.

Speaker 11: We previously discussed several initiatives that we were working on that will help position this segment for long-term success. We maintain our focus on improving manufacturing efficiency and prudent cost control procedures, which includes finding favorable material costing in our supply chain, investing in new technologies and automation upgrades, and having disciplined inventory management systems. Also, with our capaciity growing each day, we have and will continue to invest in our sales and business development teams to grow into the market and secure orders from large bluechip customers in the space.

Speaker 10: We anticipate materials material pricing may begin to normalize for the second half of 2022 and we have made good progress in our deliberate shift from producing to stock to producing for specific orders. We are optimistic that moving toward a manufacturing model where we do not even begin to order certain materials until the booking is in hand will help us to remove certain portions of the earnings risk that come with a volatile raw material pricing environment. Obviously, that shift cannot be successful unless we are dialed in with our sales and operations planning So we can effectively manage our production costs along the way, even if we are not in operating a full capacity. So far, we're very pleased with the efforts of Clint skipper, who is leading the operational execution for Tim's team, and we think the best is still to come. Throughout the quarter we have also been thoughtful about strengthening our supply chain by broadening and diversifying our supplier base as we look to mitigate potential disruptions. We hope to continue to wield our increased purchasing power to drive favorable volume discounts and procurement rebates.

Speaker 11: We absolutely believe there are more opportunities for cost savings in our supply chain and we will continue to aggressively pursue them.

Speaker 10: Technology and automation are also an area that we continue to invest in. That will allow us to drive better operational margins.

Speaker 10: At our North Carolina facility we have developed a road map that will guide us towards ramping automation to increase our operational margins. I expect we will see the additional benefits of reduced labor and overhead expenses slowly roll through towards the end of the year and into the next.

Speaker 10: Given our current assets' assembled in a bit of a piecemeal fashion, we believe there will always be future opportunities for targeted technological and automated improvements.

Speaker 10: We are willing to get creative and aggressive.

Speaker 11: As Ben stated earlier, we are pursuing a high-growth strategy for this segment and we invested heavily in our sales personnel over the past few quarters. Our overall capacity is improving and, in conjunction, our expanded sales team has seen encouraging results.

Speaker 10: Our business development efforts in this quarter resulted in over 120 new customers and we expect to continue organically growing this number. I am proud of the progress we've made in our metal segment. In the quarter we made key foundational changes that have allowed us to take advantage of an attractive market to maintain the upward trajectory that we are on.

Speaker 10: Moving into our Chemicals business. We continue to execute on our initiatives by improving our overall capacity and optimizing our processes to drive growth. Increased profitability enhance our operational resiliency. Much like the metals segment, alongside rising cost and material labor, we made competitive price increases and achieve higher margins as a result.

Speaker 11: We drove higher year-over-year sales at all three sites while continuing to invest in our operations.

Speaker 11: Through this, we are prioritizing an organizational structure that can promote our high growth mindset and set up our company for long-term success. While we are experiencing higher headcount costs in the near term, these additions are necessary and congruent with our expansionary efforts and we anticipate will ultimately lead to robust pipeline opportunities, additional operational efficiency and increased margins.

Speaker 11: Under John's leadership, we are investing in our engineering and process development team by adding process engineers to our South Carolina and Tennessee facilities.

Speaker 10: We are going to be utilizing a 24: seven work cycle in Tennessee to handle the increased volume. Our engineers will ensure that we maintain our growth mindset as we look to actively court our existing customers in order to win new programs.

Speaker 10: Our Virginia plant, which we acquired through dancome, has been at the forefront of our engineering efforts and we've been able to exploit our other sites.

Speaker 11: In order to grow the overall pie for the entire division.

Speaker 12: Lastly, we have made meaningful changes to our South Carolina site, transforming our go-to-market strategy away from tolling and towards contract manufacturing.

Speaker 10: With our focus on scaling of this site's hot oil and ractor capabilities, we are already winning new specialty manufacturing business at a significantly improved margin.

Speaker 10: Our sales team has worked tirely to build out a vastly improved sales pipeline and we expect a strong ramp-up in the coming quarters and years.

Speaker 10: We are continuously investing in our sales ecosystem and plan to enhance our team throughout the restof the year.

Speaker 10: We expect to be aggressive in pursuing opportunities in the future through leveraging the scale of our footprint: diverse equipment base and superior service by our dedicated team to manufacture our customers' complex chemistries.

Speaker 10: As the market continues to realize. We are dedicated to quality, service and safety. Our chemical team is truly proving the other go-to solution provider in the specialty chemical space.

Speaker 10: Our dancom acquisition continues to exceed our expectations.

Speaker 11: We are driving growth through our increased capacity and have utilized the team's expertise to develop higher value-added products.

Speaker 10: And improved product mix is going to be essential in driving our margins through a normalized pricing environment. We continue to look for any and all opportunities to expand our overall capacity and have identified areas to upgrade our legacy equipment to operate in line with our automation efforts.

Speaker 10: With the success of the income, we remain committed to reviewing potential acquisition opportunities that would complement our existing operations in the Chemicals segment.

Speaker 10: We believe we have vetted vision for value creation through our platform and we will continue to be opportunistic, pursuing our Ma strategy.

Speaker 10: There is still much work to be done, but with a strong foundation in place, we are excited for what the future holds for chemicals.

Speaker 10: Overall both segments.

Speaker 10: We are proud of the record results we experienced. While we enjoyed our accomplishments for the past quarter, we will remain active in executing our strategy to position this company for long-term success. With our core operations solidifying every quarter, our company is poised to become the premier provider that we set out at the start of our transformation.

Speaker 10: I'd now like to turn it over to our CFO , Aaron TAM, to walk through our first quarter financial results in more detail. Then I'll return to answer any questions you may have. Aaron, floor resyours.

Speaker 13: Thank you Chris, and good afternoon everyone. Let's jump right into our first quarter financial results. Net sales increased significantly to 116.2 million, compared to 69.8 million in the prior year period. The increase was primarily attributable to continued strong demand and increased input prices.

Speaker 14: Which drove favorable average selling prices.

Speaker 13: Also it's important to note that our net sales included seven point five million in dancan, sales that obviously weren't there in the prior year period.

Speaker 13: Gross profit increased significantly to 22.5 million, compared to eight point seven million in the first quarter 2021, while gross margin increased 690 basis points to 19%.

Speaker 13: From 12% in the prior year period.

Speaker 13: The improvement in both gross profit and gross margin was primarily attributable to the aforementioned strong pricing environment, partially offset by increased raw material and freight costs.

Speaker 13: Net income in the first quarter increased considerably to 10.3 million or nineline-centse diluted earnings per share, compared to net income of one point one million or 12 centse diluted earnings per share for the first quarter of 2021.

Speaker 13: The increase was primarily driven by record revenue and gross profit results.

Speaker 15: Partially offset by increased SGNA spending from the hiring of additional sales and operational personnel in both segments.

Speaker 13: Adjusted EBITDA in the first quarter increased significantly to 17 million from four point nine million in a year-ago quarter.

Speaker 13: And adjusted EBITDA margin also improved: 760 basis points to 15%.

Speaker 13: From 7% in the year-ago quarter.

Speaker 13: The reference dam can contributed zero, eight thousand in adjusted EBITDA for the first quarter of 2020. -two and.

Speaker 13: Lastly, looking at our liquidity position, as of March thirty-first 2022, total debt was 71.1 million, compared to 70.4 million at December thirty-first thousand and 21. as of March thirty-first 2022, we had 38.6 million of borrowing capacity under our revolving credit facility.

Speaker 13: Compared to 39.4 million at December 30. first 2020 one.as you can see, we invested heavily in our working capital to support our strong sales demand.

Speaker 13: Even with these investments, we are still right about cash flow neutral for the quarter. I'd expect free cash flow to accelerate over the balance of the year and event pricing normalizes to some expectent.

Speaker 13: With that now I'll turn it back over to the operator, Adrian.

Speaker 16: proca.

Speaker 17: Thank you, sir. Will now begin the question and answer session. If you have a question, please press zero one on your touch phone phone. If you wish to be Q, please press zero two if you using a speaker phone, you may to pick up the handset first for pressing the numbers. Once again, if you have a question, please press zero one on your touch one phone.

Speaker 18: You're seeing better for questions, and their first question is from David sefried.

Speaker 2: He has a glline of.

Speaker 19: Think what was going to.

Speaker 10: Good our own order.

Speaker 20: Yeah good, Thank you.

Speaker 21: I noticed you moved to corporate offices, to Chicago.

Speaker 13: So my question is the former: the former corporate office in Richmond and also the manufacturing space there in Texas, that homof facility and any other, the extra footprint that you may have. Have you been able to sublease some of that to free up some of that expense?

Speaker 10: Yes we've suleasast a portion of our Texas facility in our Richmond lease expires this year, in a few months.

Speaker 11: So the obligation there terminates in a few months and then we're working on. There's a little bit of space left in our Texas, the former Palmer operation that we're working on subleasing the balance of that.

Speaker 22: Good okay, the that new high frequency mill that was discussed last quarter in monhealth monhall is that. Has that installation started up?

Speaker 11: Yes we're in the process of mapping out in the facility where it's going, as well as upgrading some of the equipment that needs to go along with installing the new mill.

Speaker 23: But that is anticipated, the operational this year.

Speaker 24: Got it.

Speaker 25: Okay and then the automation, the investments that you've been making in your facilities. What type of payback do you expect?

Speaker 13: Like a one -year payback, or is that something that more long term oriented?

Speaker 26: Some of it is shorter term and then some of its longer term depends on the.

Speaker 11: What we're installing or putting in place.

Speaker 22: Obviously that are preferred as the short as possible payback is possible, but majority of it is two areas of focus. one is safety for our employees taking out higher risk, repetitive tasks that can be accomplished through automation, which those- some of those have a little bit longer payback, and the other is pure efficiency implementation of automation that has a shorter-term payback.

Speaker 24: Got it. The earnout liability has that last one is that dropping us here in second quarter?

Speaker 22: Aaron, I believe So. Yes yes, it is. We have just remaining. St is no longer obligated and all we have left are a couple of payments for M Hall. Both of them will be booked in Q2, although the last 1, actually from a cash standpoint, won't be paid until July .

Speaker 24: Okay all right. Another question: recently the administration has said that the infrastructure package product that needs needs to be that's procured through that package needs to be American made.

Speaker 27: So my question is: can you source enough raw material from the U S?

Speaker 28: To.

Speaker 13: You know.

Speaker 13: To go into chemicals and new mes.

Speaker 13: Meet that man.

Speaker 10: That's a great question from a supply chain. We're primarily procuring hot roll and coal roll stainless and we have sufficient North American supply base to handle the projects that we're looking at to be awarded from a production standpoint.

Speaker 24: ok hel.

Speaker 13: It has the internal control issues been rectified yet?

Speaker 2: Well we have. We have developed a detailed remediation plan with the help of.

Speaker 29: Ei as well as our internal resources, and been mapping out what's required to make sure that we remediate all of those internal control concerns. May will be tested internally by the end of the second quarter and then we'll begin to work with our auditor. A video to test those therea, fter to make sure that they are fully tested embedded by year-end.

Speaker 24: Okay good, So well in handthen.

Speaker 25: Correct.

Speaker 25: one other two other questionions. So regard what the market turmo recently. Do you think some of the market turmoil can actually maybe soften enough to pricing a little bit for some of your acquisition targets to make them perhaps more?

Speaker 13: More attractive.

Speaker 30: I think potentially.

Speaker 2: I think the one thing that it will definitely do is obviously, with higher interest rates, going into certain buyer profiles that competed against us for deals in the past, changes their economics and what they're willing to pay for on a multiple standpoint. But also, I think we're seeing some of the market participants from a competitive standpoint, from a bid side. You're seeing some of them fall out of the process.

Speaker 11: So I mean anecdot-ally. I've seen a couple of transactions that are coming back to market because of a failed processes.

Speaker 10: So I think hopefully the deal flow does accelerate and I think Ben IR are very involved in active discussions with potential targets- and it's significantly greater volume than it was two months ago.

Speaker 31: Okay good.

Speaker 25: Now one last question. You did 44 million in EBITDA in 2020 - one

Speaker 25: 17 million a adjusted e bit done in first quarter.

Speaker 25: And a market cap of a hundred and fifty million.

Speaker 13: You think?

Speaker 13: That what do you think it will take for others to see the disconnect?

Speaker 10: For great question. I wish I knew the answer. I complain about it to B all the time.

Speaker 32: Yeah I mean David. There's no question that the stock is way to cheap. You know we're we're expecting the generate more cash over the course of the year, as there and said right now are in know our l t M adjusted EBIT does is north of 56 million. So we're, I guess, trading at enterprise value l t M adjusted EBITDA about four times. It's a pretty, pretty conservative leverage profile: about one in the quarter times. So you know what we're feeling really good about, what we've done. We we've done everything that we feel like we said we werere going to do and hopefully more, and now it's on us. Right, we can'tjustwe CAn't just sit here andwait for people recognize we're going to go out and, and you know, spread the gospel. We feel like we've been unfairly characterized as a potentially maybe a metals company. You know Chris, and I talked about the time where you know we're a manufacturing company. You, we've got a great presence: specialty chemicals. We're providing value add solutions on the type and tube side with, you know, with commodity inputs that are very unique and pricing and solution provider that that is, you know, has an amazing reputation. So you know we feel like there aren't maybe a ton of a pure play type two or metals manufacturing pers that are out there, but we do feel valuation is aesspecially punitive and even more so potentially on the specialty chemical side.

Speaker 2: Yeah well, I see you have a conference. What it o the conference?

Speaker 7: Thursday I believe So or Wednesday. So that's I spoke that will help get some transparency and get the word out there. So.

Speaker 22: Well Thank you guys'. Great quarter, excellent quarter for taling with you.

Speaker 33: Thanks said be thanks.

Speaker 34: And just as a reminder, if you'd like to answer the queue, please press zero one on your touchstone phone. Again that zero one to answer the queue. To ask a question.

Speaker 2: And currently we have no questions. This concludes our question interduion. I'll now turn the call back over to MR hudter for closing remarks.

Speaker 11: Thank you, Adrian. We'd like to thank everyone for listening to today's call and we look forward to speaking with you again when we report our second quarter 2022 results.

Speaker 2: Thank you, Ladies and gentlemen. This concludes today's conference call. Thank you for participating. You now disconnect speakers. Please stand out for your post.

Speaker 2: six nine 9, six R.