Q2 2022 Synalloy Corp Earnings Call
we do not simply sell a commodity. We're not a steel-making company that can help us make that point to all of our stakeholders. We'll be going to market as one unified company as the powerful brands we have like SPT, Brisbane and ASTI. They will all be rather than of a company bought by a legacy symboloid.
The excitement is real and we see both tangible and tangible. Again, I encourage you all to visit our new website at www.asensco.com. I need to expand our platform and reach. Our capital allocation priorities remain the same. And the current market and bills across both segments that we operate in.
I probably don't need to keep saying it since it's fairly evident, but I'll be unequivocal now. I believe our stock to be meaningfully undervalued across all measures and we plan to decisively buy back stock in the open market at these levels. Though I don't love reducing the liquidity of our shares, the returns on repurchases far exceed almost any other actionable use of capital.
And when I assess our capital allocation options, we feel good about our near-term cash generation in addition to our significant borrowing capacity.
enabling us to continue to pursue accretive acquisitions in meaningful size and scale, even after repurchasing our own stock.
Obviously, we'll continuously reassess as new information becomes available to us.
but I wanted to share my thinking with you as we stand today.
Other than the stock price, I generally remain pleased with what we're accomplishing. We've continued to make progress in our transformation journey over these past 18 months.
We're solidifying our commercial sales strategy, finding new routes to market, optimizing our footprint, and promoting cross-functional work processes to drive incremental margin.
While we've achieved several milestones through the first half of 2022, there's still much work ahead of us, and we remain focused on driving long-term value for our shareholders.
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. Chris, over to you.
Thanks Ben, and thank you all for joining today's call. As mentioned earlier, our momentum continued in the second quarter, resulting in another strong quarter of growth and record results.
I want to take a moment to reemphasize what Ben said regarding the rebrand of what's historically been known as our metal segment to its new name of Ascent Tubular Products. While we have a deep history in production of stainless steel, nickel alloy, and coated pipe and tubular products, as well as the processing and distribution of heavy wall seamless products, our capabilities and unique products are better represented with our refresh brand. Behind the scenes, there is significantly more to our products.
When you think about the scent tubular products, envision a company that is a producer of fluid transfer products.
Our products focus on liquid or gas transportation, and example applications include municipal water projects, oxygen production facilities, food and beverage manufacturing, and more.
pharmaceutical, household good, and chemical production, just to name a few.
The brand also signifies our position in the industry as the leading domestic producer of anti-corrosion tubular products rather than a raw material or traditional metals company.
You will also see this change reflected in a new industry code that reflects our industry and segments. You will see this change reflected in a new industry code that reflects our industry and
outside of what I would say has been an incorrect classification for years.
That said, we will no longer be paired against basic material steel companies.
Looking at our second quarter results for this segment, we continue to experience market tailwinds allowing us to drive competitive pricing and higher than expected margins.
Our strategic priorities have always been to drive operational efficiencies and processes to succeed in all parts of a dynamic market cycle.
The work we've accomplished by diversifying our supply chain and controlling variable costs across our facilities has put us in a better position to drive incremental margin gains and maintain our profitability through a shifting environment.
As we begin to see pricing stabilization in the back half of the year, our supply chain will play an integral role in enabling us to maintain our margin targets while lessening our working capital requirements, and the work we've accomplished this quarter has put us in a good position to do so.
We also continue to make progress with our safety initiatives. We finished the months of May and June with zero recordable incidents and have come a long way since we first began overhauling our safety measures.
By introducing and practicing a culture rooted in worker safety, we are dedicated to creating a better work environment for employees, which directly leads to improved productivity and a more favorable hiring environment.
Looking forward, our near-term operational priorities are focused on closely managing our inventory amid a dynamic pricing environment, growing our business development efforts, and finalizing our automation projects.
We continue to transition towards a manufacturing model that prioritizes booking on hand versus inventory on hand.
A large function of this ties directly to our commercial efforts, as we have made meaningful inroads in our OEM and project sales initiatives.
which naturally tend to more discrete projects with higher volumes and a more predictable production schedule.
This is critical to our success, especially in the current market cycle where we see fluctuations in material costs and surcharges.
Our focus on OEM and project sales efforts is beginning to bear fruit, and the outcome has been on average an approximate one-thousandth of basis point gross margin enhancement over our distribution route to market.
These sales tend to be what we call batch-based.
and are highly technical sales in nature.
As we continue to expand our efforts in this space, we look forward to updating you in future quarters on how this progresses.
We also have several large automation projects in our pipeline that we will work to finalize over the next few quarters.
Our capital expenditure strategy prioritizes our investments in automation and technology, and again we will provide updates as these progress.
At the beginning of the year, we communicated our expectation that pricing will begin to normalize in the back half of 2022.
We continue to see signs of that stabilization at least through quarter three.
And we believe the work we've done and the strategy we're continuing to execute is setting up Tubular for success into the near future.
Moving to our specialty chemical segment, much like in tubular, we are rebranding our segment to ascent chemicals as a reflection of who we are and where we are heading.
As a specialty chemicals manufacturer providing best-in-class solutions to our customers operating in over 15 different industries, we are committed to expanding our footprint through organic growth and value of creative acquisitions while developing our research capabilities to yield new high-value products and production capabilities.
Throughout the quarter, we were able to capitalize on the efforts of John Zuppo and his team to drive better than expected bottom line results.
Owing to our specialized products and the amount of R&D and customization we provide for our customers, our specialty chemicals business benefits from stability during market cycles.
allowing us to grow in a more steady and linear fashion.
We continued our upward trajectory during the quarter by bolstering our sales teams, integrating our facilities to promote cross-functional work crosses.
and growing our footprint in capacity across our sites.
Our commercial development for specialty chemicals was one of our highlights of the quarter. We successfully recruited key industry talent and continued to finalize our commercial team reorganization plan as a means to unlock further value.
This past quarter, we were also able to lock down three new core customers at our Virginia site, and with our strength and sales team, we expect our sales pipeline to grow in the foreseeable future.
Our sales, technical, and operations team have also continued to integrate from separate companies into one unified business.
This is integral to promoting more efficient work processes and will lead to more accurate production planning, reduced off-quality products, and improve our on-time delivery rates.
As we establish ourselves as a scent chemicals, a larger and more diversified manufacturer of specialty chemicals, it is crucial that we consistently deliver best-in-class product and services on time in reliable manner.wort.com
The further integration of our teams will enhance our ability to effectively do so.
With our sites now more fully integrated, we are constantly evaluating our product mix and ensuring that we are manufacturing the right product at the right site.
As I've mentioned before, reducing off-quality products and improving our overall reliability remains one of our highest priorities.
This is an area where we can squeeze incremental margins out of our manufacturing process alongside our automation efforts. In order for us to visually contemporary non- Coffeeadiath, with the ability to contradict
Which brings me to our next point.
We have continuously invested and implemented our automation initiatives and expect benefits to begin materializing to our bottom line in the coming quarters.
In fact, our focus in the second half of the year will be on our equipment upgrades at our Virginia site, as well as some low-cost growth projects in South Carolina to diversify into personal care products and further into specialty chemical capabilities.
Stay tuned for more updates on this front.
Overall, our specialty chemical segment recorded a great quarter and we look to continue our stable growth through the back half of the year. We believe this segment is well positioned to execute on the goals we've set for ourselves.
We look to be the industry leader in the manufacturing of our specialty chemical products.
through a robust sales pipeline, efficient work process, and identifying value-additive acquisition opportunities with strong research and development capabilities to enhance our overall product mix.
in both segments.
We're extremely proud of what our teams were able to accomplish throughout this quarter. Our core operations and team strategy continue to improve, and we firmly believe our company is poised to establish a scent as a premier industrial manufacturer in both tubular products and specialty chemicals.
I'd like to now turn it over to our CFO , Aaron Tam, to walk through our second quarter financial results in more detail, then I'll return to answer any questions you may have. Aaron, the floor is yours.
Thank you, Chris, and good afternoon, everyone.
For the second quarter financial results net sales increased by 40% from 83.1 million to 116.2 million compared to the prior year period.
The increase was primarily attributable to the competitive pricing increases made across both of our business segments while also benefiting from a deliberate product mix shift towards higher average selling price and higher margin products.
Also, it's important to note that our net sales included 8.4 million in Dankem sales that weren't in the prior year resulting in a nearly 30% organic growth rate.
Gross profit increased 48% to $20.9 million compared to $14.1 million in the second quarter of 2021, while gross margin increased 100 basis points to 18% from 17% in the prior year period.
The improvement in both gross profit and gross margin was primarily attributable to increased selling prices and the previously mentioned mix shifts.
as well as a more diversified supplier base, offsetting the impact of increased raw material costs, freight costs, repairs, maintenance, and supplies expenses.
Net income in the second quarter increased significantly.
to $11.1 million or $1.06 per diluted earnings per share compared to a net income of $2.9 million or $0.31 diluted earnings per share for the second quarter of 2021.
The increase was primarily driven by the aforementioned strong sales and gross profit performance.
The second quarter of 2022 also included a $0.2 million benefit of net income from the acquisition of DamCap.
This is a pretty clean net income number without much noise for meaningful non-recurring items or benefits.
Adjusted EBITDA in the second quarter increased by 58% to 15.5 million from 9.8 million in the year-ago quarter. Adjusted EBITDA margin improved 160 basis points to 13.3% from 11.7% in the year-ago quarter.
For reference, Dan Chem contributed $0.8 million in adjusted EBITDA for the second quarter of 2022.
Lastly, looking at our liquidity position as of June 30th, 2022, total debt was $68.3 million compared to $70.4 million as of December 31st, 2021.
And as of June 30, 2022, we had 41.2 million of borrowing capacity under our revolving credit facility, compared to 39.4 million as of December 31, 2021.
With that, I'll turn it back over to Daniel, the operator, for Q&A.
Thank you, sir. As a reminder, to ask a question, you will need to press star 1 1 on your telephone.
Again, that is star 11.
1-1 to ask a question.
Please stand by while we compile the Q&A roster.
Once again, ladies and gentlemen, that is star 11 to ask a question.
Our first question comes from David Sigfried.
David?
Your line is now open.
Congratulations on a strong quarter.
Thanks, David.
So I know the team's done a lot of work last 18 months to get the company where it is right now. So you're convinced that the benefits to rebrand
far outweigh the costs of doing so.
Absolutely, but the costs weren't that significant.
So it's.
The rebrand was something that's been needed, in my opinion, for years.
The internal.
feeling of the business was extremely secular in terms of, I'm part of this, I'm part of this, I'm part of this. We don't know what Sinoi is. And now we're all one team. We're all one name.
So it's been...
extremely well received within the business.
Go ahead.
I noticed last year your revenue composition was 80 percent tubular, 20 percent chemical. At this quarter it was...
75% tubular, 25% chemical. So is that a trend that over time we can expect that to continue?
chemicals becoming a larger component.
That is obviously Dan Chem's contributing to that shift of percentage and as we continue to look to expand our specialty chemical business.
you would see that the pipe change a little bit.
Got it.
there's been pretty strong demand.
I think on the specialty pipe and tube side. And then we got the jobs, $55 billion related to the water and construction bill. So do you see that as a backstop to keeping a healthy backlog?
In both segments in the 2023.
Yeah, I mean, our backlog is extremely robust. It's continued to be robust. And I would say the only mix that we're seeing from a shift is we're seeing – the distribution route to market, which is supplying distributors, it tends to change as – you can see, it has increased over time for a few whenever we change.
surcharges and pricing fluctuates, they're obviously looking to get the lowest cost material for their inventory position.
And we've put an extreme amount of effort into shifting our approach to market by chasing the end user projects, which we can really control the demand of that. We're not relying on a distributor to tell us when they want to buy a product.
So that is significantly picked up over the past six months.
And that's what I refer to as batch projects, and that could be anywhere from a $100,000 project to multiple millions of projects for infrastructure, water, methane, whatever type of utility project we're producing product for.
And again, that's got a completely different margin profile, which is we want to chase that also.
Okay, good. We are having success in that space.
Um, and thank you for your statement on the stock price and possible stock repurchases. I think, you know, for investors who've been here for years, I think that would be appropriate considering, you know, the results that you've been putting out the last four or five quarters.
Oh, stock price where it's at is a complete joke. So I mean.
I think part of it relates to when you search, you know, Sinoloy is a ticker. It comes up under completely wrong peer set. I mean that's...
We talk about this daily on we're not even comped against the you know to comp us against a Cleveland Cliffs is ludicrous.
Right. So.
You know even look at you know Northwest pipe is trading at $31
I mean, they've got more net debt, less earnings.
and lower revenue and profile than we do.
So in a market cap of 300 plus million.
So it's just, it's frustrating for many people within the organization, but we're doing what we can to, you know, remain steadfast on, again, delivering.
you know, quarter after quarter, solid results, bringing the right team, building the right team, trying to be prudent with our decisions and, you know, invest in things that we think will be most creative for shareholders.
solid results, bringing the right team, building the right team, trying to be prudent with our decisions and invest in things that we think will be most creative for shareholders.
Thank you, I appreciate that input.
No, appreciate it. Thanks again for being such a long-term committed investor in us.
Oh, my pleasure. All right. Thank you.
Thank you. Once again, to ask a question, you will need to press star 11 on your telephone.
Again, that is star 11.
on your telephone to ask a question.
At this time, this concludes our question and answer session. I would now like to turn the call back over to Mr. Hutter for closing remarks.
Thank you, Daniel. We'd like to thank everyone for listening today, and we look forward to speaking with you again when we report our third quarter 2022 results. Have a great day.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
The conference will begin shortly. To raise your hand during Q&A, you can dial star 11. You can now use the Q&A to raise your hand during Q&A. To raise your hand during Q&A, you can dial star 11. To raise your hand during Q&A, you can dial star 11.
I.
I.
We.