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spk04: Good afternoon, everyone, and thank you for participating in today's conference call to discuss Sinaloa's financial results for the first quarter ended March 31, 2021. Joining us today are Sinaloa's interim president and CEO, Chris Sutter, CFO, Sally Cunningham, and the company's outside investor relations advisor, Cody Cree. Following their remarks, we'll open the call for your questions. Before we go further, I would like to turn the call over to Mr. Cree as he reads the company's safe harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward-looking statements. Cody, please go ahead.
spk02: Thank you, Alexander. Good afternoon, and thank you all for joining our conference call to discuss Sinaloa's first quarter 2021 financial results. Before we continue, we would like to remind all participants that the discussion today may contain certain forward-looking statements pursuant to the safe harbor provisions of the federal securities laws. These statements are based on information currently available to us and are subject to various risks and uncertainties that could cause actual results to differ materially. Sinaloa advises all of those listening to this call to review the latest 10Q and 10K posted on its website for a summary of these risks and uncertainties Sinaloa does not undertake the responsibility to update any forward-looking statements. Further, the discussion today may include non-GAAP measures. In accordance with Regulation G, the company has reconciled these amounts back to the closest GAAP-based measurement. These reconciliations can be found in the earnings press release issued earlier today and posted on the investor section of the company's website at www.sinaloa.com. Please note that this call is available for replay via a webcast link that is also posted on the investor section of the company's website. With that, I'd like to turn the call over to the interim president and CEO of Sinaloa, Chris Hutter. Chris?
spk03: Thank you, Cody. Good afternoon, everyone, and thank you for joining today's call. I hope you have all continued to stay safe and well during what we hope to be the latter part of the COVID-19 pandemic. I want to start off by reiterating what an honor it is to be leading the team here at Sinaloa. We have an exciting journey ahead of us, and I am proud of the incremental progress we have made during the first quarter, while reinforcing my confidence in our ability to succeed over the long haul. Specifically, with respect to Q1, our net sales came in modestly above expectations with sequential increases across all of Sinaloa's business segments. We also recognized improvements in profitability due to our continued efforts to implement more effective cost controls and to reduce inefficiencies in our operating model. The work has only just begun, but I'm pleased that we are reporting substantial year-over-year improvement to adjusted EBITDA and our adjusted EBITDA margin. Perhaps most significant, however, was the company's positive net income in the first quarter, representing Sinaloa's first profitable quarter on a GAAP basis since the fourth quarter of 2018. We were certainly helped by a strong operating environment as customer demand for our metals products continues to be robust and surcharges are contributing to profitability. We are working to improve our throughput in order to meet the demand, and we will continue to diligently refine processes and manage costs so that we can minimize the volatility in our earnings caused by fluctuations in input costs. Q1 also saw meaningful improvements to the company's available liquidity given the refinancing of a revolving credit facility in January. Not only did we up-size the available credit of the facility, increasing our access to additional revolving credit should we elect to use it, but we secured more favorable terms, reduced costs, and less restrictive financial covenants. I am very proud of all the hard work we've put in since starting the year, and our efforts are beginning to be seen in the company's operational and financial positioning. Both will be essential to successfully position the company to achieve long-term profitable growth. I'll dive deeper into each of our segments in a moment. But first, I'd like to turn the call over to our CFO, Sally Cunningham, who will walk you through our first quarter financial results in more detail. Sally, over to you.
spk05: Thank you, Chris, and good afternoon, everyone. First quarter 2021 net sales were 69.8 million compared to 74.7 million in the prior year period. The year-over-year decline was primarily attributable to the impact of the second quarter 2020 retailment of our Palmer operations. as well as lower pipe and tube shipment, driven mostly by delays in production and deliveries due to lingering macroeconomic challenges associated with COVID-19. It is worth noting that, sequentially over the fourth quarter of 2020, we were able to grow net sales by 25% at the consolidated level, with an increase in both orders and shipments across both segments of the business. Gross margin as a percentage of sales increased 290 basis points, the 12.5% from 9.6% in the prior year period. This increase was primarily driven by our continued commitment to cost management within the supply chain and realizing some operational efficiencies across both of our segments. Lower corporate expenses, along with the previously mentioned margin enhancements, resulted in net income of $1.1 million, or 12 cents diluted earnings per share for Q1, which is a considerable improvement from a net loss of $1.2 million or $0.13 diluted loss per share for the first quarter of 2020. Adjusted EBITDA in Q1 increased 85% to $4.9 million, and adjusted EBITDA margin also improved 350 basis points to 7%, both compared to the prior year period. Lastly, looking at our liquidity position as of March 31, 2021, total debt was $63.8 million compared to $61.4 million at December 31, 2020. As of March 31, 2021, the company had $41.2 million of remaining borrowing capacity under the revolving credit facility compared to $11 million at December 31, 2020. As a reminder, we entered into an agreement for a new revolving credit facility with CMO Harris Bank on January 15, 2021. The new agreement provides us with a four-year revolving credit facility that includes up to $150 million of borrowing capacity. Overall, we have made some good financial progress over the past few quarters, and now having increased financial flexibility through a larger, less restrictive revolving credit facility has given us a strong foundation to build upon. However, we still have a lot of work to do and remain focused on improving our cash cycle, returning our company to net sales growth, and further expanding our profitability margins. With that, I'll turn it back over to Chris.
spk03: Thanks, Sally. When I joined Sinaloa as interim CEO, it was important to develop and promote a culture fostered on accountability, teamwork, results, and growth. And that starts with our people, and I am continuously impressed by the team's collective wealth of knowledge and openness to new and more efficient ways of running our businesses. Our team's willingness to embrace change has proven invaluable in our efforts to understand and identify the critical inefficiencies in our existing operational protocols. Not only are we leveraging our employees' knowledge to improve inefficient or underdeveloped processes, but we also began implementing a more targeted incentive structure to better identify and allocate spend to those areas that drive positive results across the business. We believe this will foster a culture of accountability and transparency that can enable our top performers to maximize results and achieve recognition for their efforts. While we have seen considerable improvements during the quarter, our work is only just beginning. This reality presents itself in our segment-level results, which demonstrate progress towards establishing the foundation for the company's future, but also present meaningful and tangible opportunities for future improvements. In our metal segment, we laid the groundwork for what I believe can very quickly improve our operational procedures and throughput, which were our main focus areas across our business during the quarter. With the addition of Tim Lynch as the segment's Executive Vice President in April, We are accelerating the transformation within Sinaloa Metals, and I'm proud to have Tim on our side. Tim is a veteran of the steel industry with over 20 years' experience, having served in leadership roles at steel companies such as U.S. Steel, Otukumpu, and TMS International. His relevant experience in alignment with our core value of stakeholder accountability, along with his unrelenting drive to win, has us confident in Tim's ability to drive best-in-class process across manufacturing, sales, and product management, while setting the tone for our team as an inspirational leader. As I mentioned in my opening remarks, it is certainly worth noting that we're in the midst of a strong operating environment for our metals businesses. We absolutely benefit from robust demand, improved pricing, and being able to pass through surcharges during this quarter. Though it's incredibly helpful to have these market conditions as a backdrop to our internal initiatives, we are targeting inventory controls and operational processes that continue to minimize the effect of external factors have on our business and the variability attributable to material pricing fluctuations. Although we have made early progress towards establishing the foundation for the future of our metal segment, we are still in the process of fine-tuning our operations and productivity levels in the chemical segment as illustrated by our below target margin profile in the first quarter. Although this remains a smaller portion of the company's total sales today, We are encouraged by the segment's strong macroeconomic operating environment and long-term opportunities to deliver meaningful value. You can expect this to be our priority in the coming periods as we work to refine and advance our strategic roadmap with an eye toward making chemicals a meaningful value creator in the medium term. As I said on our last call, I want to emphasize again that across both business units, we are not in the mindset of cost-cutting our way to prosperity. We have made some targeted cuts in certain administrative areas with the belief that we can reallocate these funds towards more productive uses to achieve better service with lower levels of spend. As importantly, concurrent with many of our internal initiatives, we are also focusing on deepening our critical customer and vendor relationships. We are working toward becoming a more nimble and responsive as an organization, adapting to best address our customers' needs in a true partnership model that will yield superior economic returns to both Sinaloa and its customers. And on a side note, I'm sitting here in Munhall, Pennsylvania, currently, and I walk in and see on the whiteboard here that our team on the metal segment has come up with a new tagline that I just want to share with everyone. Safely deliver best-in-class quality that exceeds our customers' expectations with an entrepreneurial spirit. Honestly, the team here did a great job, and just a Congrats to everyone that was involved in coming up with that. We're confident that the depth of experiences and relationships brought by our new management team, coupled with the excellent reputation of our businesses cultivated by our superb operating leaders, can lead to an outsized growth and operational excellence over the coming quarters. I became an investor in Sinaloa because of its reputation and potential. After joining the board, I volunteered to lead the business because I believe that my Initial assumptions about the value creation opportunity at the company had been confirmed, and I could play a pivotal role in accelerating our progress. There's no doubt that we have a lot of work ahead of us to achieve these ambitious goals. That said, we have accomplished a lot in a short period of time, and I'm proud of the foundation we have established these past few months. With some very early signs of progress shown during the first quarter, we will continue to leverage the strength of our people as we advance our strategic initiatives and drive our growth. Before taking questions, I'd like to thank our employees again for their dedication to Sinaloa. You have been incredibly welcoming, engaging, and open-minded as we work together to improve our company. I look forward to getting to know each and every one of you. Operator, we'll now open it up for Q&A.
spk04: Thank you, sir. At this time, I would like to inform everyone, in order to ask a question, please press star 1 on your telephone keypad. Again, that is star 1 to ask a question. We have your first question from Mike Hughes with SGS Capital. Your line's open.
spk00: Hi, Mike. Hey, how are you? Thanks for taking my questions. The first one is just related to the inventory gain. Has the company changed its accounting versus the past? It just seems like the last few quarters, the surcharge has probably built up. Will that start to flow through soon?
spk03: I mean, obviously, that's a very relevant question, especially based on how we reported in the past. I think I made it clear that my view is that the way of looking at the P&L truly begins with a faulty premise looking at surcharges and inventory price gains and losses. And we don't want the business to be a slave to input prices. Certainly, those are important, but this is a business we're in, and I don't like excuses. We truly need to make money in any pricing environment and manage our inventory through pricing cycles. which really is layering up production with end-use demand and having that lined up and really back-to-back. That said, the more pricing we can pass through to customers in this environment real-time, we absolutely will, and it will make our margins look higher.
spk00: But it just seems like from kind of an economic cost standpoint, you have tens of millions of dollars of inventory at a lower cost from the third and fourth quarter, And at some point, it seems like it would flow through. I appreciate what you're saying as far as consistency, but it just seems like that would start to flow through at some point.
spk03: Yeah, I think you'll continue to see it flow through. Again, with some of our pricing arrangements with customers, there's a lagging indicator and some effects coming from Q4 to Q1 when you can't maintain pricing changes as fast as the market is changing. So under some contractual agreements, you will ultimately start to see that flow through in further quarters this year.
spk00: Okay. So should we expect incremental improvement in margins in the June quarter versus March for the metals segment?
spk03: I don't want to guarantee anything, but I think given our tailwinds and backlog, you can expect that to flow through from Q1 to Q2.
spk00: Okay. And then I think you mentioned on the chemicals business that missed your internal margin target. Is that right? And if so, what is that target?
spk03: Well, I don't think we give guidance, obviously, until we have all of our metrics in line here. But we have an internal target that we do want to hit on a gross and net profit margin basis that is below our internal expectations. So obviously, on the chemical side, it's a mix of the business with respect to tolling versus direct to manufacturers. And there is definitely growth in the market that we are addressing currently.
spk00: okay okay so it's primarily was primarily a mix issue in the first quarter it's attributable to mix primarily okay and then last question for you back to the metal segment um the average selling price was down year over year which was surprising to me given you know the base metal costs going up and then the surcharge is moving up but i think the 10q said that that was due to a mix So I think that the prior management team would talk about project business, which I think would drive ASP. So can you just give us a little bit of color what's going to happen in mix over the next few quarters for that segment?
spk03: Yeah, I mean, I would say specific to project base, there are one-off projects, whether it be a pipeline project or an offshore well project or any other specialty project that requires a specialty grade of material that are one-off items. But in terms of global macro environment that we encountered, the overall mix has changed. When you look at our galvanized business, obviously if you're looking at it at a price per pound, it is going to be lower than a 304, a 316, or other specialty alloy. So the mixed change in the fact of our 304 business went up, our 316 business went down a little bit, that's a more expensive product, and our galvanized business picked up significantly. So it is a mix of the product, not just an overall level playing field.
spk00: Okay, and if I can just sneak in one last question. In the press release, you talk about delays in production and delivery. So can you just maybe attempt to quantify how much that held back the first quarter results? And is that principally on the metal side or both?
spk03: It's on both sides. Again, it's our raw material input side that is delaying. I think whether you're buying a car with a chip shortage or trying to find a washer, dryer, dishwasher, which I can't find right now, It's impacting every business. So we don't have an exact number that we can plug into that. What we can say is that it's probably attributing to our increase in backlog, which will flow through in Q2, Q3, and Q4. So it was a significant component of it, but outside of our control. Logistics is an issue, too, in terms of finding trucking companies to be able to deliver our product.
spk00: Right. And was the backlog higher at the end of the March quarter versus year-end?
spk03: Yes, I don't want to speak out of firm, Sally. Yes, it was.
spk05: Yes, yes. We continue to see month-over-month increases in the metals backlog dating back to August.
spk00: Okay. And we're talking on a per-pound basis, right, not including just the rise in nickel?
spk03: Exactly.
spk05: Correct. Yes, exactly.
spk00: Okay. Okay. Thank you very much. I appreciate it.
spk04: Thanks, Mike. Again, if you would like to ask a question, please press the star 1 on your telephone keypad. Again, that is star 1 to ask a question. We have your next question from David Siegfried, investor. Hey, David.
spk01: Hey, congratulations, Chris and Sally, on a profitable quarter. That was nice.
spk03: Thank you.
spk01: Capital expenditures for 2021, is that still projected to be about $4 million?
spk03: Right now it is. I think it may come in slightly lower. We are really assessing every CapEx dollar that's being spent. Just because it was approved and budgeted does not mean it's going to be funds that are spent. It actually has to be incremental to the growth of the business. A specific project here was there was a potential building expansion in Munhall. I'm here today. We're walking around. The team gets together and says, well, If we move this and move this internally, we don't need to expand the facility, which means it's a significant CapEx reduction. So the team is really being pressed with, you know, think of ways that you can utilize the existing assets we have. You know, if it's not a revenue-producing investment, then we're going to look one, two, three, four times at it before we actually move forward.
spk01: Good. Makes sense. Now 2020 corporate expense is about 3% of sales. I noticed already this quarter that came in under that. So do we expect a meaningful decrease in corporate expense over the years according to percentage of sales?
spk03: Yeah, I mean, obviously, hopefully our sales continue to grow rapidly. But we are going to, again, manage every expense. The corporate expense reductions you're seeing, obviously, is through interest. I think we've had some pretty significant insurance savings. And we did get rid of the airplane and terminated that agreement. So you will start to see that flow through the rest of the quarters and into 2022. But, again, every cost is looked at.
spk01: Thank you. I noticed here first quarter the Moosa stainless earn-out liability. I believe that ended at the end of the first quarter. So going forward through 2021 into 2022, that should have a meaningful impact on the bottom line, not having that liability. Is that correct?
spk03: I don't have the exact amount, Sal. I don't know if you have that handy. If not, we can circle back to you.
spk05: Yeah, I don't have the exact amount, but you're right. We only have the ASTI and the galvanized earnouts left, and it should be roughly about a 300K impact to the bottom line, which is significantly better than years past.
spk01: Okay. Good. So with the new VP, Tim Lynch, it was mentioned in the PR that there would be immediate improvement in operational execution requirements. So would that start showing up in second quarter and beyond? Are some of these adjustments to operational procedures, are they something that would quickly add to the bottom line, or is this going to be a process for things to be streamlined?
spk03: Well, it's definitely a process. Tim has already started to make significant contributions here. There's been some personnel changes within our metals group to bring in what I'll call best-in-class support for Tim. We've got an individual that came in from a continuous improvement background as well as SOP background that's implementing from the equipment side for throughput and efficiency. He's on board, and then from a business development side, we have a new individual that's come on to truly streamline our sales and revenue generation side to position us for, you know, truly long-term success and position us for our sales team to truly grow and incentivize the right kind of business we want in the margin profile we want.
spk01: Okay. Yeah, that makes sense. Now, I saw recently that there was an extension of the Safe Drinking Water Act, and I think it was like $35 billion that would be given to states, $2 to $3 billion a year. Would you anticipate that some of that eventually over time would trickle down to Sinaloa?
spk03: I think at multiple levels. I absolutely think from our chemical side, I am a firm believer in water treatment. I've known many people that have worked at Ecolab and Nalco from the water treatment side that that business has overlapped with our chemicals business. We should be looking heavily at that in R&D efforts. Same thing on our pipe side. When you look at our aging infrastructure, there's one thing that everyone in America wants and even the world. You want safe, fresh drinking water. And as pipe as new facilities are put online from a municipal water treatment side and municipal water production well side, you are going to see, I think, the opportunity for us to expand in the R&D side and hopefully look at opportunities to produce what I'll call, you know, not maybe a patented pipe product or something that goes along those lines to truly encapsulate that market share.
spk01: Okay. Yeah, good. Makes sense. Now, I noticed one of your customers is developing a stainless steel furniture line, and I know ASDI is already a supplier to that company. Will they be participating in that growth?
spk03: We're going to sell as much stainless pipe and tube as we can to any customer that wants to buy it, but I don't know which customer specifically that is. There's no lack of sales opportunity or business. Can we produce it? Can we deliver it on time? Can we produce it at a cost that delivers positive margin to us? And do we have the equipment to do it? So, again, going back to basics for us this year is truly let's deliver product on time. Let's make sure our product is priced right. Let's get our SOPs in order. Let's have the incentive team, incentive sales structured the right way, and then identify the market and business we actually want to win. The business is out there. We just have to make sure that we can deliver what we promise. Sure.
spk01: Okay. I noticed a big steel company is building a new tube mill in Kentucky and in the Midwest. I think they want to have an operational at mid-2023. Manufacturing galvanized solar torque tube. Is that anything that Sinaloa could produce or has the desire to produce? Or does that kind of answer by Alaska? Your last answer, I guess.
spk03: Yeah, I mean, again, we're going to produce, I think our focus, although we have a galvanized business, it's a very narrow niche of our galvanized business on our tube side. The majority of our margin is made in our specialty pipe and tube, stainless, and our heavy wall side. So the focus is going to be, you know, where do we make the most money and how much can we make and how fast can we make it?
spk01: Got it. Okay. Last earnings call, it was mentioned that the sales team would be strengthened in chemicals. How is that progressing?
spk03: That's a great question. As I think I've mentioned to everybody, I definitely don't know the chemicals business as well as the metals business, but I do believe there's tremendous long-term value that can be created in chemicals. I'm deeply involved right now in a strategic plan to assess how we can more aggressively best position not only the brands but also the sales effort to capitalize on the opportunity. And there is tremendous opportunity there. So we'll find a way to get after it.
spk01: Good. One last question. So last earnings call you mentioned that maybe during the second half of the year there'd be a roadshow to kind of reintroduce Sinaloa to investors. and perhaps a strategic plan that would be put out. Is that something that's still going to happen maybe second half of this year?
spk03: Yeah, I mean, if it would be second half, it would be pretty late in the second half. Again, my focus right now is our back-to-basics model. I mean, we have to operate as efficiently as possible. And once we can execute on that, we have – Everything running, I don't want to say before we start we'll have to be at 100%, but we need to be better than where we're at right now. And then I think the board and I and everyone on the management team will feel very comfortable with laying out short and long-term growth and strategic goals and sharing that with all of our stakeholders.
spk01: Okay. Very good. Well, thank you for the good work.
spk03: Yep. Thank you. Appreciate it. Thanks, David.
spk01: Take care.
spk03: You too.
spk04: At this time, this concludes our question and answer session. I would now like to turn the call back to Mr. Hatter for closing remarks.
spk03: Yeah, thank you, Alexander. Again, everyone, appreciate the time and effort and your interest in Sinaloa. Look forward to speaking with everyone again when we report our second quarter 2021 results in August. And everyone, have a great night. Thank you.
spk04: Ladies and gentlemen, this does conclude today's conference call. You may disconnect your lines at this time. Thank you for your participation.
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