Good day, ladies and gentlemen, and welcome to Synalloy first quarter's earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at the time. [Operator Instructions] I would now like to turn the conference over to Craig Bram, President and CEO. You may begin, sir.

Good morning, everyone. Welcome to Synalloy Corporation's first quarter 2018 conference call. Dennis Loughran, our CFO, is with me today as well. Dennis will start by providing a review of the Q1 financials, and then I'll provide some comments on our business segments and the positive trends that we are seeing so far in 2018. We will then open the call to questions. Dennis?

Hello everyone. As usual, the financial results will be presented using three different methods; first, GAAP-based EPS; second, adjusted net income, a non-GAAP measure as defined in the earnings release; and third, adjusted EBITDA, a non-GAAP measure also defined in the earnings release. First quarter GAAP-based income was net profit of $3.8 million or $0.44 per share, as compared with net income of $0.7 million or $0.08 per share in the first quarter of 2017. First quarter non-GAAP adjusted net income was $4.3 million or $0.49 per share as compared to adjusted net income of $1.3 million or $0.15 per share in the first quarter of 2017. First quarter non-GAAP adjusted EBITDA totaled $7.6 million, or 13% of sales, compared to prior year's first quarter total of $3.5 million or 8.3% of sales. As pointed out in the earnings release, inventory price change gain impacted results total on a pre-tax basis of $2.5 million in the first quarter of 2018 compared to $0.9 million in last year's first quarter. On an after-tax basis, that represents $1.2 million difference between the two quarters. The combined adjusted EBITDA as a percent of sales for the operating businesses in the first quarter was 15.2%, a substantial improvement over the prior year's first quarter of 11.3%. At the end of the first quarter, our outstanding borrowings against our ABL facility totaled $34.3 million, up $8.4 million from the December 31, 2017 total. The increase is primarily related to increased working capital due to substantially increased activity as well as replacement cost increases in steel-based components of our inventory. The calculated ABL facility remaining availability as of March 31, 2018 was approximately $30.1 million. I'll now turn the call back over to Craig.

Thank you, Dennis. Synalloy is off to a tremendous start in 2018, posting record sales and record net income for the first quarter. We expect the remaining quarters of the year to be even stronger than Q1, with each of our business units contributing improving performance. April kicked off the second quarter with a new monthly record for sales of $26 million. While pleased with our performance to date, there is considerable upside from here. I would like to touch on some of the primary drivers that we believe will help us build on these outstanding results. Focusing first on our stainless steel pipe and tube business, we've spoken in the past about the need for infrastructure spending in the downstream energy markets to return to normalized levels in order to maximize profits in this product line. We are still waiting for the recovery to take hold but believe we are on the cusp of renewed spending in this critical end market. Earlier this year, the Petrochemical Update published their outlook for the downstream energy market, which included input from the American Chemistry Council. The U.S. chemical industry remains advantaged with access to the cheapest and most abundant natural gas in the world, resulting in the U.S. being the preferred destination for chemical investment. Over the next four years, capital investment in the petrochemical sector is expected to ramp by 6% to 7% annually, culminating in upwards of $48 billion in spending in 2022. This represents roughly 2.5x the spending that occurred in 2010. All sizes and alloys of welded stainless steel pipe and tube will be required to support this effort [indiscernible] better positioned to take advantage of this opportunity. Special alloy sales with their outsized margins will be a key driver of incremental profits. In 2014, special alloy…

[Operator Instructions] I am showing no further questions. I would now like to turn the call back to Craig Bram, President and CEO, for any further remarks.

Excuse me, it looks like Mike Hughes from SGF Capital is trying to ask a question.

Mike Hughes, your line is now open, sir.

Thanks Craig. Great quarter, congratulations. If there was any disappointment in the quarter, I guess it would be Palmer Tank. I was a little bit surprised to see the revenue there decline year-over-year. I know there was some weather in the Permian in the first two months of the quarter. Was it related to that?

No, it wasn't related to the weather at all. We have two very large customers in the Permian that had been scheduled to take some tanks from us, primarily in February and March, and because of some of the bottlenecks that I referenced in the Permian generally, and I think those are primarily labor-related and I would say weather is a very low factor in that mix, but they were unable to take the tanks from us in February and March. They did however take all of those tanks in the first week of April. So, our April sales at Palmer were just shy of $4 million. So, there was a pickup of about $1.3 million to $1.4 million in tank value associated with the tanks that would have shipped in Q1 that got pushed into April.

Okay. And then can you remind me on the pricing? Obviously, raw materials for that business have increased. How you protect yourself?

Yes. Right now our bids are only good for 30 days, and to the extent that we get any type of pricing protection on our steel, carbon steel purchases out there, we'll extend that to our customers, but currently that's at the 30-day mark.

Okay. And then on the Chemicals business, the margins have been a little bit light the last couple of quarters in a row. So, is the mix shift in that business something permanent? I know you kind of addressed the range of Chemicals margins historically in the press release, but can you just elaborate on that?

The mix has changed a little bit but not certainly permanent. If you look at our range of margins in that business, they are moving around all the time. I would say that some of the business that we currently have in the pipeline for both MC and CRI are higher-margin businesses – higher-margin product lines. So, we would expect those to show some decent improvement over in the next couple of quarters. The product that I mentioned in the earnings release and that we did an announcement on about a week back, that product is going into road construction. We're pretty excited about the potential of that with infrastructure spend but that product got fast-tracked over about 60 days and we've got a significant number of purchase orders, some that actually got produced in the latter part of April, but May, June, and July are going to be very strong shipments of that road construction product.

Okay. Are there any start-up costs related to that new business or should it come on at a pretty healthy margin right away?

No start-up cost at all. We don't have to add equipment, we don't have to add personnel, so it's going to have a major impact immediately on our margins.

And you said that's not in the guidance that you issued on April 10, is that right?

That's right.

Okay. And then one last question on the Chemicals business, you brought on some new business in the second half of last year, has that ramped and is it as profitable as you had expected?

Yes, it's done very well and the volume is now at the level that we expected going in. The customer is very happy with the quality of the product and it's going very, very well right now.

Okay. And then you referenced the potential for a bolt-on and you have an LOI in place. Can you say, is that in the Metals business or the Chemicals business?

No, right now I can't mention that. Hopefully, within a couple of weeks we'll have potentially more to share on that. But I will tell you it's a business that we understand very well. It's a very, very nice fit. I think when people see the details on it, they'll say, wow, that makes a lot of sense, and it's something we can hit the ground running with. So, we're excited about it.

Okay. And is that unrelated to the public's equities that you've been purchasing over the last two quarters?

Yes, totally unrelated.

Okay. And then just on the guidance for the full year, the EBITDA, if the number falls out at roughly $30 million, you just did I think $7.6 million but there was a roughly $2.5 million inventory I guess, yes, $2.5 million inventory gain in the quarter, so I know you indicated that in the June quarter there will also be an inventory gain, but it does imply in the back half that there will be a pretty good step-up in what I'd call core EBITDA, I know you stopped adjusting, taking that out of your adjusted EBITDA number because of some of the feedback from the SEC, but can you just address how you're going to step-up from roughly a kind of clean number of I call a little over $5 million in the first quarter to probably happen to do $7.5 million, $8 million by the third, fourth quarter?

Yes, in the second quarter, Mike, we do expect some inventory profits. I would expect them to be a little bit more than they were first quarter. But if you're thinking about the breakdown over the next three quarters, I was looking at that this morning, the second quarter EBITDA would probably be somewhere in the range of $8.5 million to $9 million and that would include inventory profits. Then you get into the third and fourth quarter and as you say, we have projected those at nickel-neutral, so we're looking at core contributions. And this would assume completing the acquisition at the end of June. We would expect to see in the neighborhood of $8 million of EBITDA in Q3 and Q4. So, if we actually get the acquisition done, we would expect the EBITDA for the year to come in between $32 million and $33 million. Without the acquisition, we're in the $30 million range.

Okay, just two more for you. Sorry for so many questions. Do you think that there is some potential customer pull-in just in front of the tariff activity or is this kind of genuine demand? I'm just basically asking, do you think it's sustainable or is there kind of some channel fill?

I think it's very sustainable. I was looking at the import numbers. We don't have March as yet, but in January and February, if you think about the countries that historically have been dumpers, and we've had dumping suits against Korea, China, India, Vietnam, Malaysia, if you look at that core group of countries, in 2017 they exported into U.S. a total of about 40 million pounds of welded stainless steel pipe. In the first two months of this year, they did over 9 million pounds. So, they were front-end loading their shipments in anticipation of what may happen with Section 232. So, we got zero benefit in the first quarter from Section 232 tariffs. Some of the exemptions, as you know, have been stretched out a little bit. Right now where it stands is, Taiwan, which is the biggest importer, is looking at a 25% tariff. They are trying to get an exemption. Korea is the second largest exporter into the U.S. They have received and reached an agreement where they will reduce their shipments into the U.S. of pipe by 30%, so their quote is set at 70% of the last three years' volume. And then the rest of the Asian countries are still looking at a 25% tariff and I don't imagine any of those countries receiving an exemption for any reason. So, we expect to start seeing the benefits, and as I mentioned in my remarks, we're well-positioned because of the excess capacity that we have. I think some of these countries will try and make the case that the [indiscernible] producers are not in a position to absorb all this work, but we're certainly going to counter that argument because we've got another 40 million pounds of capacity that we believe we can handle over the coming years.

Okay. Last one for you, did you say that unaudited revenue in the month of April was $26 million, is that correct?

That's right.

Okay. So, is April typically an exceptionally strong month or I'm just thinking about the second quarter that would be north of $75 million, or is that not the way to think about it?

There's nothing exceptionally unique about April. We did have about $1.3 million of that $26 million that was carryover for Palmer, but everything else was just solid demand. It's a reflection of the bookings that we've had in the past quarter and all of our business units are reporting very strong increase at this point. And so, we certainly expect Q2 to be a stronger revenue quarter than the first quarter, but do we hit $75 million, that's not likely at this point, but I would say $70 million is probably in the ballpark.

Okay, great. Thank you very much for your time.

Our next question comes from Charles Gold from Scott & Stringfellow. Your line is now open, sir.

Congratulations on a wonderful quarter, but more importantly, putting the Company in a position to start its stuff now going forward. So, we really appreciate all the hard work over the last couple of years.

Thanks, Charles. We appreciate that.

I got dropped off the call right when the questions started, so I hope I'm not repeating anything, but you have been buying an insurance policy of puts on stainless steel for quite a while and you made a fairly positive comment about what you thought the metal might do in the foreseeable future. Are you going to continue that, or if you are, might you continue it at a lower level to reflect your optimism?

Charles, this is Dennis. I'll reply to that. In the fourth quarter of last year we reviewed our policy after having been in the hedging platform for the last two years, and we went through sort of a tiered decision process. We had always been layering on puts on a monthly basis looking out into the next month of receipts. So, since the Board approved of the three-level decision process, we have not added any layers and we currently do not have any open puts extending out forward. So, as the price of nickel goes up and the potential for downside risk levelling out versus the upside, we may get into a position where we look at layers being added, but yes, currently we don't have any exposure, we haven't paid any premiums this year for any new layers.

Thank you for the answer and look forward to seeing more quarters like the first. It feels like the first of many and I agree with you, the stock price doesn't reflect what you just laid out as our path. And we just opened at $18.50. So, somebody likes it this morning.

Thanks Charles.

Thank you and I'm showing no further questions at this time. I would now like to turn the call back to Craig Bram, President and CEO, for any further remarks.

As always, we appreciate your support. We're happy to be able to report some very positive news in Q1 and very excited about what we see for the balance of the year. So, we appreciate your support and your patience as we've been waiting for some of these initiatives to bear fruit. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's call. This does conclude today's program. You may all disconnect. Everyone, have a great day.