Good day, ladies and gentlemen, and welcome to the Synalloy Third Quarter Earnings Conference Call. [Operator Instructions] I would now like to introduce your host for today's conference, Craig Bram, President and CEO of Synalloy. Sir, you may begin.

Thank you. Good morning, everyone. Welcome to Synalloy Corporation's third quarter 2018 conference call. Dennis Loughran, our CFO, is with me today as well. Dennis will provide a review of the Q3 financials, and then I will provide some comments on our business segments. We will then open the call to questions. Dennis?

Hello, everyone. As usual, the financial results will be presented using 3 different methods: one, GAAP-based EPS; two, adjusted net income and non-GAAP measure as defined in the earnings release; and three, adjusted EBITDA and non-GAAP measure also defined in the earnings release. As. A note, the information disclosed in this call is subject to the disclaimers that are printed at the end of the press release regarding forward-looking statements and non-GAAP financial information. Third quarter GAAP-based income was net profit of $5 million or $0.56 per share as compared with a net loss of $1.2 million or $0.14 per share in the third quarter of 2017. The third quarter 2018 results were favorably impacted by a pretax $0.3 million adjustment to decrease the company's earn-out liability related to the 2017 acquisition of the Bristol Metals' Munhall stainless steel business compared to only a $63,000 unfavorable charge in 3Q of last year. The assessment of our earn-out liability is done quarterly and will change up or down when forecasted pricing and volumes under the agreement change. Q3 of this year included $396,000 of acquisition-related expenses compared to $186,000 of such expenses last year. We expect such costs to continue into the fourth quarter of 2018 as various professional services and other costs are incurred to complete required acquisition accounting and startup activities. We continue to expect the full total for 2018 expenditures related to the recent Munhall galvanized acquisition to reach a total of approximately $1.2 million to $1.3 million. Third quarter 2018 results also included a charge of $494,000 on mark-to-market valuation of marketable securities held by the company. Last year's third quarter had a benefit of $310,000 related to the realized gain on marketable securities disposed during that period last year. The change in the effective tax rate…

Thank you, Dennis. We were pleased with the company's performance in the third quarter with results exceeding the midyear forecast. Sales for the quarter were just shy of $78 million, a new record, and adjusted net income totaled $5.8 million. Sales for the 9-month period were $208 million, and adjusted net income was $16.3 million. These were substantial improvements over the same periods last year and continued the trend of strong results for every quarter this year. At our next board meeting on November 15, the board will set the record and payment dates for this year's dividend of $0.25 per share. Also, we are completing our budgeting and planning process for 2019 and expect to issue our forecast in early December. Before commenting on each of our business segments, let me address some of our other initiatives. As reported in the earnings release and in the 10-Q, during the third quarter, we sold over 44,000 shares of Synalloy stock under the aftermarket offering for net proceeds of $1 million. You will recall that the ATM provides for up to $10 million in stock sales. With the recent selloff in the Russell 2000, and specifically the decline in our share price, the sale of Synalloy stock at recent prices is not as attractive as it was back in September. While less likely that we will sell shares in the open market at current prices, we may issue shares as part of an acquisition. This assumes that the transaction would be immediately accretive. Should we issue shares for an acquisition, these shares would count against the shares allotted for the ATM. Our M&A activity remains focused on potential acquisitions in the Metals and Chemicals segments. We've continued to see good deal flow and have several opportunities that we believe would fit…

[Operator Instructions] Our first question comes from Mike Hughes with SGF Capital. Your line is now open.

Thank you. Hey Craig and Dennis, how are you?

Hey Michael, how you doing?

Good, good. First question, I think you instituted a 10% base price increase on the stainless business in March. How much of that flowed through in the just-reported quarter?

Mike, the pricing throughout the year is held up, so there's not been any retrenching on the pricing side. So the bulk of that is going to be showing up in our Q3 numbers. If you look at our backlog right now, the pricing is actually up. But that is more due to the mix. We've got more special alloy in that backlog mix than we've had in a long time. And the commodity products, the pricing is basically flat with what it was in Q2. So there's not been any retrenchment in pricing on the commodity products, but the improvement in pricing in the backlog is really driven by mix right now.

Okay. But the March 1 10% price increase did stick, right? Craig?

Yes. Sorry, Mike.

I apologize. And then you mentioned the alloy mix. I think you disclosed the number for the first and second quarter to roughly 3.5% and 6.5%. What was it in the just-reported quarter?

I missed the first part of your question. You're kind of...

The alloy mix.

The alloy mix. Okay. Yes. Alloy mix in the third quarter, the pounds have moved up from the 5% range earlier this year to 7%. And then the backlog right now, the pounds are roughly 11% or 12%, and the dollars - percentage of revenue is roughly 21%. But you have to recognize that all of those are not going to shift in the next 3 months. So it's more of a 6-month look on the backlog, particularly with alloys. So we're continuing to see the percentage creep up. We probably had the best mix in 2014, where the special alloys represented about 9% of our pounds. And I expect that we're going to start moving up closer to that, certainly for the shipments in 2014. So some of that backlog's going out in the fourth quarter of this year. Some of it will go out in January and February of next year.

Okay. So the - you mentioned some project work in the fourth quarter, and then that kind of flowing into at least January. So the - especially alloy mix will improve in the fourth quarter this year versus the third quarter, right?

That's right.

Okay. And then one more for you, and then I'll jump back in the queue. I understand the nickel dynamics. So have you started to see distribution buying slowdown at this point? Or are you just commenting that, historically, that has happened if it continues to decline?

Well, our backlog certainly continue to grow, but again, most of that's coming on the special alloy side. So I'd say at this point in time, the purchasing of commodity products is basically flat. We have not seen that uptick, but we haven't seen it decline yet either. So - but typically, when you have declining nickel prices, you're going to have customers, who are reluctant to pull the trigger until they have the sense that nickel prices have bottomed.

Okay, okay. So the sequential increase in the backlog at BRISMET from, I don't know, $35.5 million at the end of the June quarter to $37.2 million is more of a function of specialty, which carries a better margin?

That's right.

Okay, I'll get in queue. Thank you.

Sure.

Our next question comes from Michael Markowski from Overbrook Capital. Your line is now open.

Good morning, guys. Great job executing and continuing on your plan here. I was glad to see you discuss the ATM in your comments. And I'm wondering, it sounded like you're backing off a little bit, but that you might also continue to sell shares if the stock does rebound up into that low 20 area, where you guys sold before? I'm wondering, has there been any discussion about possibly canceling that and just doing a straight offering, given the liquidity of the stock or lack of liquidity in the stock? It really does serve as a ceiling to where your stock can go, and I think it kind of killed the momentum of where the stock was going a couple of months ago. So I'm interested if there's been discussions about that taking a different approach to raising the capital and the lease just getting over it with rather than having a possible 2-, 3- quarter, 4-quarter overhang.

Yes. Michael, I mean, those are all good questions. I think let me start with the thought of doing a larger offering. We did a follow-on offering back in 2013, in the fall of 2013. And that was specifically following an acquisition we did that was a substantial size. At that time, it was a substantial size for us. Our concern with doing a follow-on right now when we don't have a deal teed up large enough to support it is that we could wind up selling stock, albeit at what could be a favorable price. But if we, in turn, don't relatively quickly do a deal that requires that type of funding, we're going to create some pretty significant dilution to our shareholders that we would like to avoid. So typically, when we look at a deal, if we're going to do all debt, obviously, that's going to be accretive out of the gate. And if we're going to use a portion of stock in the transaction, we want to make sure that that, combined with the transaction, is immediately accretive. So unless we had a significant transaction, we're not going to go out and sell $30 million worth of stock at a single point. The ATM, that $10 million, we had couple of thoughts on that. One is with the strong results we're producing, if there was adequate interest in buying the stock, we'd be in a position to sell some shares like we did in the third quarter. Albeit not as many shares as we would have liked to, we sold those shares at $22.60, which on an enterprise value to EBITDA basis was in the 7.8 to 8 range, which if you look at Synalloy stock prices historically, when the company's doing well, that's about the…

Okay. And then one follow up then. If I recall correctly, I believe that you guys have talked about closing on an acquisition by year-end at least as a goal. Could you comment a little bit on where you are with that if you still think that's feasible?

At this point, I can't comment on it. Hopefully, we'll have more to talk about between now and the end of the year.

Okay, fair enough. Thank you, guys.

Sure.

Thank you. [Operator Instructions] Next question comes from Charles Gold from Scott & Stringfellow. Your line is now open.

Thank you. Congratulations, Dennis and Craig. It really is great to see you hitting on all cylinders and putting aggressive goals out there, and then beating the goals. So I commend you both on that.

Thanks, Charles.

On the - I like the tying of ATM with a potential acquisition using shares in that method because then if it's accretive, you can see it from the beginning. I've seen some companies use shares and not base it on a formula. And your center stocks have thinly traded. That would scare me a little bit because if you did an average price over a 30-day period or something, you could get whipsawed there. But I have seen companies that can justify that they're trading at or below their enterprise value, and you're earning a lot of money now, you've got strong EBITDA, pegging a price that's often above where the stock's trading. Let's say, before the day is open, if you were pegging a deal at $22 or $22.5, I think you can justify that to the seller. I think the market might reward you for doing a deal where the shares are priced at $22.5. And obviously, you don't have those costs you have with doing an offering. So any thoughts on that concept?

Yes. I mean, Charles I think that all makes sense. In a lot of respects, there's going to be deals specific - we - historically, we've done transactions that are in the $5 million to $6 million EBITDA range in our $30 million plus transactions when you include the earn-out. We've done transactions where the stock piece is not as important. Yes, we had a deal that we are working on at the end of last year that got pretty close that would have involved as much as $17 million or $18 million of Synalloy shares, and would have been immediately accretive. And at that point, we are actually considering the fact that with the transaction that was being contemplated, that the value of the stock should be higher than it was trading at in that point in time. And we talked about whether or not it made sense to sell shares that actually are higher priced than what they were trading in at the market at that time. So I think that's a reasonable approach depending on what the specific deal looks like.

Terrific. Thanks again. You are making that smarter than we really are, so I appreciate it.

Thanks.

Thank you. So we have a follow-up question from Mike Hughes from SGF Capital.

Follow-ups for you. Just on the Chemicals business, the new customer, I think maybe it was an existing customer. The 5 million pounds, is that on a tolling side? And then what type of revenue or margin will that generate?

It is on the tolling side, Mike. The way that deal works is there's about $0.5 million of CapEx that the customer is going to pay for over time. And so that's going to be built into the tolling price. I can't recall. Are we providing the raws? I know we're not making money on the raws.

Yes, there is.

Because the customer's going to provide the raw materials. So we're just - it's just a flat-out total. And we really haven't had very little labor to that. So it's going to be materially profitable to the folks at CRI, where they're going to be making that product.

Okay. And then just on the Chemicals Segment, where do you see the margins playing out in the fourth quarter and then into next year prior to this business ramping?

Yes. Mike, this is Dennis. Yes, and we've talked about those numbers in the past, right, with the mix of what the total businesses flowing through with toll as well as materially - material added to the value of a contract manufacturing. I think looking at where we're at, maybe plus 100 basis points for the fourth quarter would be about it, we're down from comparable periods in the earnings release. I think it's about 240 basis points of material margin down. But that's because we're basically passing through material in the price and not - you're not going to have that tolling base high margin percent going forward. So I think they're going to get a little bit better because the third - the second and third quarter had a lot of summer and early fall sales that did have us owning the material. And it goes back to a little higher percentage of total base up in the fourth quarter. And it's hard to calculate, but I think it will be a little bit better than you saw in the third quarter.

I see. And then you did provide the revenue from the new galvanized and ornamental steel business for the quarter. Can you just comment on the EBITDA from that business?

We probably shouldn't comment specifically on that, Mike, because it's - there's a relatively small number of customers that we're selling into that market, and that's probably not something we'd want to lay out for now.

Okay. Was the EBITDA for that positive in the quarter?

Yes.

Okay. And then you talked about an opportunity to expand your business with a couple of chemical customers in the galvanized business. How is that proceeding?

The chemical customers didn't have to do with the galvanized business. Are you saying between the Chemicals and the galvanized business?

I thought they were integrated bulk containers, that there was an expansion opportunity in the galvanized business, and I thought the end market was Chemicals.

Oh yes, yes, yes. Okay. You had me confused here. You said the Chemicals and galvanized. Yes, we continue to work with several customers about expanding the tonnage that we're providing for their IBCs, and we're also making some pretty good progress on opportunities for galvanized and road construction.

Okay. And then 2 last questions for you. There's been multiple reports of a slowdown in the Permian, but it looks like your backlog going into a seasonally slower quarter is still pretty good. So can you just talk about the activity you're seeing at Palmer?

Yes. We don't have any sense of a slowdown. I'm sure some of the E&P guys, they may not be punching as may holes in the ground as they like to because they're waiting for the takeaway capacity to get in place by the end of next year, into 2020. But we've got plenty of inquiries. Most of what we're doing is larger tanks that carry higher selling prices. And yes, there's been no sign at all on our end of any kind of slowing activity in the Permian. The biggest issue we got there is labor. In the last peak period we had in 2014, most of our labor was within a relatively close proximity of the Andrews facility. And right now, probably half of our labor is what I'd call transient. It's coming in from New Mexico and other parts of Texas. And we've actually had to look at putting up some - getting ahold of some houses and apartments of leasing space to put some of these transient folks - transient labor into. So it's higher turnover. I mean, it's been a challenge out there because things have been going and blowing for so long now that everybody's scrambling around trying to get their share of the manpower.

And I assume your competitors have the same issue. So will you be able to pass along the additional costs, you think, next year to the end customer?

Yes. When we look at our backlog right now, our tank prices are quite a bit higher. It's not so much the ability to pass on the wage increases. We can do that. It's more disruptive to our productivity because of the turnover. So if you have a guy that comes in, and he's there with you 6 months, and he's finally getting to the point where he knows how to make a tank and do it efficiently. And then he turns around and runs off and takes another job in some other part of Texas or even outside of Texas that has a negative impact on our productivity, for sure.

Okay. Thank you. I appreciate it.

[Operator Instructions] I'm not showing any further questions. I would now like to turn the call back to Craig Bram, President and CEO of Synalloy, for any further remarks.

Thank you very much for your support. We certainly appreciate the continued interest in our company and look forward to sharing future results with you as we get into 2019. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.