Synalloy Corporation

Craig C. Bram – President, Chief Executive Officer & Director

Kevin Maczka – BB&T Capital Markets

Welcome to Synalloy Corporation’s fourth quarter and year end [indiscernible] our CFO. It’s been an exceptionally strong year for the company as we’ve completed a number of major initiatives including our exit from the fabrication business and the acquisition of Specialty Pipe & Tube.

Adjusted EBITDA on an absolute basis reached record levels in 2014 and we are positioned for additional growth in 2015. Synalloy increased its dividend for the year at double digit rate which represented the eighth consecutive year of payouts.

After reviewing the company’s results we will provide you with a brief summary of each business unit’s performance followed by Q&A. As is customary we will present our financial performance for continuing operations only for the current period and year-to-date as well as comparisons to the prior year using three different methods: one, GAAP based EPS; two, adjusted net income a non-GAAP measure as defined in the earnings release; and three, adjusted EBITDA a non-GAAP measure also defined in the earnings release.

We believe the two non-GAAP measures will provide additional clarity on the performance of our respective businesses. Fourth quarter GAAP based earnings were $1.41 million or $0.16 per share as compared with a loss of $1.1 million or $0.13 per share in the fourth quarter of 2013.

GAAP based earnings for 2014 totaled $12.62 million or $1.45 per share an increase of 335% over $2.9 million or $0.42 per share for 2013. Fourth quarter non-GAAP adjusted net income was $1.83 million or $0.21 per share as compared with a loss of $419,000 or $0.05 per share in the fourth quarter of 2013.

Non-GAAP adjusted net income for 2014 was $9.88 million or $1.13 per share, an increase of 120% over the prior year’s total of $4.48 million or $0.65 per share. Fourth quarter and 2014 earnings were reduced by approximately $0.02 per share for two items.

Number one, delayed shipments at Palmer due to ice storms in West Texas, and number two, EPA administrative fines at MC for unregistered compounds. Q4 in 2014 results were positively impacted by the six weeks that we owned Specialty Pipe & Tube contributing approximately $0.03 to earnings.

2014 was essentially a nickel mutual year for BRISMET with inventory losses totaling only $118,000. Fourth quarter non-GAAP adjusted EBITDA totaled $4.66 million or $0.53 per share, an increase of 732% over the fourth quarter of 2013 total of $4.56 million or $0.07 per share.

Non-GAAP adjusted EBITDA for 2014 totaled $21.68 million or $2.49 per share an increase of 79% over the prior year’s total of $12.08 million or $1.74 per share. Net debt at the end of the year was $31.76 million, up from the end of 2013’s total of $21.66 million.

The increase reflects the cash and debt used to fund the acquisition of Specialty Pipe & Tube. Let me move into the business unit summaries.

Manufacture’s chemical sales in 2014 were up 8% over 2013 and adjusted EBITDA was up 6% over the prior year. MC shipped a record 75 million pounds of finished product in 2014 and we anticipate increase in that volume by another 4% to 5% in 2015 through improvements to existing reactor capacity.

CRI tolling, our build out at CRI has been essentially completed. We are making product for bio based technologies and expect their volume to ramp up quickly in the first quarter of this year.

CRI shipped in excess of 15 million pounds of finished product in 2014 and we anticipate that volume will double in 2015. Adjusted EBITDA for the year was up 122% over the prior year.

The EBITDA margin for our chemical operations in 2014 was approximately 11%. Of the 90 million pounds shipped between the two facilities, about four million pounds went into the oil and gas industry.

The chemical team continues to pursue oil and gas business and while the overall industry demand is expected to decline in 2015, we are competent we can increase the amount of pounds sold into this market. Let me move onto BRISMET.

BRISMET produced a record year in 2014. Adjusted net income for the year was up 259% and adjusted EBITDA was up 185% over the prior year.

While year-over-year sales were down approximately 5.5%, product mix and overall selling prices were greatly improved from 2013. Adjusted EBITDA margins approached 14% in 2014.

BRISMET’s cost per pound produced in 2014 was down 7% from the prior year while conversion revenue per pound exceeded our budget by 12%. I’m pleased to report that BRISMET’s union has ratified a new contract for a term of 54 months.

Moving onto Palmer. Revenue in 2014 was down about 8% from 2013 with the primary difference being fewer salt water disposal projects and some yearend weather factors.

Adjusted EBITDA after 2014 was virtually flat with 2013 with Palmer generating EBITDA margins in the 14% range. Palmer bookings in the fourth quarter of 2014 were marginally higher than 2013 when including odd jobs such as [gangways], supporting structures, and field work.

Looking only at tank bookings, these were down about 10% in quarter four 2014 from quarter four 2013. Total tank bookings in 2014 were off about 9% from 2013.

Much of the year-over-year decline is due to fewer tank orders from one of our main customers who pulled back on their activity in the Eagle Ford Basin. Let me talk about Specialty Pipe & Tube.

We owned SPT for six weeks in 2014 and they made a nice contribution to our results in quarter four. We believe this business unit will contribute low 20% EBITDA margins going forward.

Looking at the adjusted EBITDA margin on a blended basis for all of Synalloy’s operating companies excluding discontinued operations and parent company related expenses, EBITDA margin on a blended basis came in at 12.4% in 2014. Had we owned Specialty Pipe & Tube for the entire year, the blended adjusted EBITDA margin would have been 13.4%.

Synalloy’s adjusted EBITDA margin continues to show steady improvement up from approximately 5% in 2010. I expect that the primary question on everybody’s mind is the impact of declining oil prices on Synalloy in 2015.

We are certainly watching all the indicators including cap ex announcements by the E&P companies and the Baker Hughes rig count. Based on what we are hearing we expect to start feeling the impact sometime in Q2 as it relates to Palmer and to SPT’s Houston facility.

So, what are we doing to address the situation? First, our cost structure at Palmer has never been better and we will adjust our variable expenses as needed.

Second, both Palmer and SPT have introduced new product lines this year code vessels at Palmer and 4130 alloy tube at Specialty Pipe & Tube, and we expect that to help mitigate any declining sales in existing product lines. Third, in the case of SPT Houston, we will take advantage of any softness in that market by selectively purchasing inventory from the mill at attractive pricing.

This will benefit SPT’s margin in future months. Let me discuss briefly the forecast for 2015 and the sensitivity analysis around the oil related business.

Should all of Synalloy’s businesses achieve their financial targets that were approved in November, adjusted EBITDA for 2015 for the entire company would approach $30 million. Should the business units achieve their financial targets, with the exception of Palmer and SPT Houston and assuming their sales and EBITDA decline 30% and 50% respectively, adjusted EBITDA for the entire company in 2015 would be approximately $26 million.

We anticipate that our oil related businesses will fare better than this in the cap ex downturn for the reasons that I’ve previously mentioned, but I think this is a reasonably way to frame the prospects for 2015. I will also say that if such a scenario were to play out, because of the deal structure used in both the Palmer and SPT transactions neither selling groups would receive an earn out payment in 2015.

The $5 million saved in earn out payments would completely offset the shortfall in adjusted EBITDA. We are excited about 2015 and believe that even with the decline in the oil and gas sector Synalloy will show solid year-over-year growth and profitability.

Our net debt to trailing EBITDA is one and a half times and on a forward look is less than 1.2 times providing the balance sheet strength to continue our acquisition strategy. This year’s annual meeting will be held in Richmond and we look forward to seeing everyone there.

As always, we thank you for your continued support. With that done, I’ll open it up for questions.

First question, there’s no mention here in the release or on the call today, but in January you did trade letters with Eastern Company. Is there anything more you can say about the status of where that stands?

At this point I can’t comment on that.

Pricing, there sounds like there’s some pretty wild swings here. Maybe it wasn’t pure price but more driven by mix, but you do have a comment in the release about rolling out some new sales tools and avoiding some lower margin business that hurt pricing.

Can you address what pure price pressure you were seeing in Q4, how you envision that as it’s baked into your guidance for the new year, and what kind of impact these new pricing tools can have?

I think that mention in the earnings release was really focused on 2013 and what we experienced there in terms of pricing generally being depressed. Part of that was of our own making in 2013 where we ship a lot of commodity pipe and considerably less special alloys and we were able to rectify that in 2014 which is why the conversion revenue was much stronger for BRISMET in 2014 than in 2013.

We actually saw our conversion revenue improve from about $0.86 a pound in 2013 to about $1.22 in 2014.

Is that the best way to think about the magnitude of the pure price that you’re seeing? Again, can you comment on anything that you’ve baked into your 2015 outlook?

We really haven’t baked anything into 2015 in terms of a material change in pricing for BRISMET. We’re still looking for a similar product mix that we had in 2014.

It’s interesting, if you look at nickel prices at the start in the fourth quarter of 2013 and then first half of 2014, nickel price per pound is virtually now at the same price it was that we started out 2014 so while nickel is certainly depressed it’s not at a lower level than what we experienced going into 2014. I guess that’s a long way of answering your question that we don’t expect any material price changes at BRISMET assuming we can hold the mix constant to what we did in 2014.

Some of those tools that are referenced in the earnings release are really focused on keeping track of the sizes of pipe that we’re selling, the alloys, how much of our production is dedicated to certain commodity pipe versus special alloy pipe, how much is dedicated to small OD pipe versus large OD pipe. We’ve got a very nice backlog going into this year.

We had orders in Q4 that were $32 million at BRISMET that were heavily oriented towards special alloy and large OD type pipe sales. At this point in time based on what we can see, we’re expecting similar pricing and conversion revenue per pound look in 2015 that we achieve in 2014.

I appreciate the color on the impact of lower oil, you gave some numbers there on EBITDA, in that same type of scenario what kind of revenue hit would you expect?

The revenue hit on that $26 million low end number is based on about a 30% to 35% revenue hit and that translates into about a 50% EBITDA hit. Again, we would expect that we would perform better than that.

We’ve got some product lines for both Palmer and SPT Houston that we didn’t have last year. We’ve got the code vessel certification – we’ve made our first code vessel out at Palmer and that is actually a certification that we need to not only sell code vessels but to sell tanks to a number of customers in the Permian and Eagle Ford that we currently do a minimal amount of business with.

We think that will be very helpful in mitigating any of the hit we might be exposed to. The other thing I’d say is that Palmer’s customers tend to be very large E&P companies and while they’re certainly cutting their cap ex as well, they’re not focused on cap ex cuts because they’re highly leveraged and their balance sheets won’t allow them to drill as much as they’d like to and so we’re not burdened with any customers who are in financial difficulty that quite frankly, may actually go away during a time period like this as opposed to just slowing down.

Again, we appreciate everybody’s support this year and I hope to see as many of you as possible at our annual meeting in Richmond. Have a great day.

Thanks.