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Investor Presentation to Scott & Stringfellow a BB&T Corporation Affiliate
August 27, 2012
Forward-Looking Statements
We want to remind everyone that the information included in this presentation may contain statements relating to future results, which are forward-looking statements within the meaning of federal securities laws. We caution you that these forward-looking statements speak only as of the date hereof, and we have no obligation to update or revise any forward-looking statement, whether as a result of new information, future events and developments, or otherwise. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including the risks described in our Form 10-K and Form 10-Q and our other filings with the Securities and Exchange Commission.
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Strategic Goals (Presented in Dec 2011)
§ Foster a Performance Driven Culture
§ Be a Sales and Customer Driven Organization
§ Pursue Complementary and New Platform Acquisitions
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Topics
I. Business Unit Review – Key Developments § Manufacturers Chemicals § Metals Group
II. Palmer of Texas Acquisition
III. Synalloy EPS Potential
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I-A. Business Unit Review:
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Ashland Defoamer Product Line
§ New line of defoamers: 50+ individual products for the water and paint industries
§ Annual revenue potential: $18MM to $20MM
§ 30% annual increase in pounds thru Cleveland (TN) facility
§ Two-year agreement with continuous one-year renewals
§ Will reach full production in Sept 2012
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Fruit of the Loom Textile Products
§ Acquired rights from former MC customer
§ Reached full production in April 2012
§ Evaluating add-on lines for Walmart
§ Annual revenue potential: $3MM+
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Other Key Developments
§ Improving material margins via daily updates to cost inputs
§ Business development re: sulfation and reactor capacity
§ New bonus program based on pounds shipped – up to 5% of base salary for production and support staff
§ Projected total annual revenue: $65MM to $68MM
I-B. Business Unit Review:
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Nickel Price History
Spot Prices for Nickel on the LME Per Pound
2008 $ 9.55
2009 6.67
2010 10.00
2011 10.37
2012 (forecast by Pres9ge Economics) 7.89
2013 (forecast by Pres9ge Economics) 7.94
August 17, 2012 7.01
Nickel Forecast (source: Prestige Economics)
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§ Prices have not yet bottomed
§ Price forecasts for 2012 and 2013 recently lowered
§ Still expect marginally higher prices in 2013 than in 2012
§ Price slide has been accompanied by increase in inventories amidst tepid global growth (LME inventories up 25% in 2012)
§ Pig nickel iron (a low grade stainless steel substitute) availability is a major bearish price factor
Raw Material Surcharges
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$ pe
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304L 316L
BRISMET inventory profits totaled $7.8 million
2006 -‐ 2007 2008 -‐ 2009
BRISMET inventory losses totaled ($5.4 million)
2012 YTD Inventory Losses
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$2.21 million total
($0.23 per share)
through seven months
BRISMET: Key Developments
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§ 17% sales growth in 1H 2012 – continued gains in special alloys and commodity pipe
§ Opening new Houston sales office with 3 account reps selling straight pipe, fabricated pipe, and FRP & steel tanks
§ DuPont project (Jan/Feb 2013 start): $1.5MM in pipe sales and $6.0MM in fabrication
BRISMET: Key Developments (cont…)
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§ Bechtel project for Wolf Creek nuclear facility (Dec 2012 start):
• Order for six miles of carbon and special alloy pipe
• First work for Bechtel in 5+ years
§ Several large projects in Argentina and Australia AND a large domestic special alloy pipe project – totaling $5MM+
§ $798K annual savings via retrofit to produce 18” pipe on a continuous mill (to be operational in 6 to 8 months)
FAB: Key Developments
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§ Ram-Fab has returned to profitability – looking to add 2nd shift and expand capacity
§ Focused on making substantial labor efficiency improvement at BristolFab
§ Current total backlog: $22 million
II. Palmer of Texas Acquisition
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Palmer at a Glance
§ Founded in 1989 as fiberglass (FRP) tank manufacturer
§ Three equal owners: One active, one recently became inactive, one passive from the start
§ Began investing in steel tank capabilities in 2007; Now 50% of total revenue
§ 130+ non-union employees
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Palmer at a Glance (cont…)
§ 100K sq ft main facility in Andrews (TX); Second facility for oversized FRP tanks in Orange (TX)
§ ISO 9001 and ASME certifications
§ End markets include oil & gas and municipal water
§ Palmer typically ships tanks up to 300 miles
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Financial Performance
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Fiscal Year (ends Sept 30) Revenue Adjusted EBITDA
Under Synalloy Ownership
2010 $16.9 million
2011 $25.7 million $3.8 million
12 Months Ended Mar 2012 $31.8 million $5.4 million
Methodology 1. Dixon Hughes Goodman (DHG) led examination of all aspects of Palmer’s financials 2. Synalloy adjusted DHG results to reflect Synalloy ownership (i.e. increased expense) 3. Analysis assumes no synergies
Fiscal 2012 YTD Revenue (Nine Months) Annualized = $34.0 million
Drivers of Recent Growth
1. Palmer’s Steel Production Capacity Ramping Up: Each oil well requires one fiberglass tank and two steel tanks
2. Oil & Gas Demand in Palmer’s Immediate Area: Horizontal drilling technology and higher oil prices are driving a shale oil drilling boom in the Permian Basin and Eagle Ford Shale
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Customers
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Primary Operation in Andrews
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Primary Operation in Andrews (cont…)
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Primary Operation in Andrews (cont…)
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Primary Operation in Andrews (cont…)
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Oil Market Overview
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§ US Oil Production: 4.95MM barrels per day in 2008; 5.7MM bpd currently; US DoE projects 7MM bpd by 2020 [source: New York Times]
§ Due to horizontal drilling, US crude oil production is projected to increase by 1.5 million bpd by 2015 [source: EOG Resources]
§ In 2011, Texas oil production exceeded 1MM bpd for the first time since 2001; Some industry executives project 2MM bpd is possible within the Permian Basin alone [source: Associated Press]
§ 475 rigs (25% of US total) are operating in the Permian Basin [source: New York Times]
Proximity to Key Basins and Shale Plays
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Palmer – Andrews 0 mi to Permian 320 mi to BarneV 320 mi to Eagle Ford
Palmer -‐ Orange
RAM-‐FAB 100 mi to Smackover 150 mi to Bossier 200 mi to Tuscaloosa
Brismet 300 mi to U9ca
Relevant Activity by Oil Industry Leaders
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EOG Resources
§ Eagle Ford: 647K acres secured; 375 wells already; Drilling 280 in 2012; 3,200 total yet to be drilled
§ BarneV: 200K acres § Permian: 240K acres; Drilling 112 wells in 2012
Anadarko Petroleum
§ Eagle Ford: 4,000+ iden9fiable drill sites (40+% oil); Plan to drill 250 wells in 2012
§ Permian: 130 wells planned for 2012 § East Texas: 70+ wells planned for 2012
Apache § Permian: 7,000+ drill sites iden9fied; Drilling 600 wells in 2012 § Mid-‐Con9nent: 2 million acres (50 to 90% liquid)
Devon § Permian: 3,500 drill sites iden9fied; Drilling 300 wells in 2012 § BarneV: 625K acres; 2,500 drill sites iden9fied; Drilling 300 wells in 2012
Relevant Activity by Oil Industry Leaders
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Chesapeake Energy
§ Aggressively shi`ing to liquid-‐rich plays § #1 liquids producer in Mid-‐Con9nent; #2 in Eagle Ford; #3 in Permian
Exxon-‐Mobil § 800K total acres in Permian, Eagle Ford and Woodford; Projec9ng steady produc9on growth from these sites thru 2022
§ 215K acres in Smackover and 75K acres in U9ca
Chevron
§ 1 million total acres in Permian and Midland basins § 150K acres in Bossier § Projec9ng 3.5x increase in “unconven9onal” oil and gas produc9on between 2012 to 2017
Cabot § 61K acres in Eagle Ford; Projected to drill 700 wells
Opportunities Outside the Oil Industry
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FRP Tank Market § 5.9% CAGR to $712 million by 2015
§ +/- 250 manufacturers in North America, most privately held
§ End Users: chemicals, oil & gas, water/wastewater, pulp & paper, septic, etc.
§ FRP Advantages: corrosion resistance, high strength-to-weight ratio, low maintenance, longer lifecycle
Steel Tank Market § Mature $7 billion industry
§ +/- 650 manufacturers in North America, most privately held
§ End Users: energy, water/wastewater, steel, pharma, micro-electronics, pulp & paper, mining, automotive, chemical, oil & gas, petrochemical, food & beverage, agri-business and pollution control
Palmer: Fit with Synalloy’s Acquisition Criteria
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Complementary Business (+)
§ SYNL management understands the business
§ Potential synergies: • Purchasing power – steel and resin
• Overlap in target markets – oil & gas, water & wastewater
• Potential to expand tank capabilities into other SYNL facilities
§ Transaction will be easily understood by SYNL shareholders and by its bank
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Strong Management Staying (+)
§ Jim Lee: 20+ years running the business day-to-day; Will remain with SYNL for a minimum of 3 years
§ An experienced group of managers report to Jim Lee
§ Palmer management has continued to invest in the business even with a potential sale pending: • New steel tank production line in Andrews
• Orange facility to pursue international sales
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Other Positive Factors (+)
§ Andrews (TX) location relative to existing and emerging shale oil plays
§ PP&E is fairly new and in good shape; Facility is “customer tour ready”
§ Palmer owns and operates specialty delivery trucks
§ Recent pressure vessel certifications present a new revenue source
§ International sales potential via Orange (TX) facility
§ Non-union workforce with relatively low turnover; Less demanding welding skills (relative to SYNL FAB); Community college alliance
§ Can consolidate results within SYNL’s existing Metals unit
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Palmer: Key Deal Terms
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Transaction Structure
§ Stock purchase of all shares in Lee-Var, Inc. dba Palmer of Texas
§ $27.5MM net upfront cost to SYNL, incl. transaction expenses
§ Includes $15MM of net tangible assets
§ Excludes Palmer’s existing debt, which Sellers retired at closing
§ Net working capital and PP&E adjusted 60 days post-closing
§ Sellers have customary non-competes and other restrictions
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Escrow
$3.65 Million for Unknown Liabilities
§ Up to $900K released at 12 months dependent on sales tax claims
§ Up to another $1.75MM released at 18 months
§ Balance released at 24 months
$375K for Orange CapEx
§ Used at Synalloy’s discretion for concrete pads and retaining walls
§ Balance released at year-end 2012
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Earn Out and Claw Back
§ Sellers eligible for three-year earn out based on actual EBITDA
§ SYNL reimbursed by Sellers for the amount by which EBITDA is less than $3.5 million in either of the first two years post-closing
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EBITDA for the Year* Earn Out Payment Three-‐Year Total
< $5.825 million $0 $0 ≥ $5.825 million $2.5 million $7.5 million ≥ $6.825 million $3.5 million $10.5 million
* Before Palmer management bonuses
Other Terms
§ SYNL reimbursed for uncollected AR at 120 days post-closing
§ Sellers pay for actual maintenance capex (if any) in excess of $500K annually during the first 18 months post-closing
§ Sellers pay for actual cost of new tank line project (if any) in excess of the $1.63 million total budget
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BB&T Lending Commitment 1. Line of Credit
§ Increased from $20MM to $25MM (as of 6/29: into it by $8.9MM)
§ LIBOR plus 1.75% (currently 2.00% total)
§ Approximately 36-month maturity
§ Note: BB&T will also provide a temporary increase to fund material purchases for Brismet Bechtel project
2. Term Note
§ $22.5MM, 10-year term, principal paid down by $2.25MM each year
§ Fixed rate at approximately 3.85% via interest rate swaps
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BB&T Lending Commitment
3. Synalloy pledged all tangible and intangible assets as security
4. Covenants provide ample flexibility under worse case scenarios
§ Funded debt to EBITDA: 3.5x
§ Minimum tangible net worth: $38 million
§ Total liabilities to tangible net worth ≤ 2.75x
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Accretion and Capital Structure
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Post-‐Transac5on Consolidated EBITDA and Capital Structure
Total Synalloy Funded Debt $36.9 million
Total Synalloy Annual EBITDA incl. Palmer and Ashland $17.9 million
Total Synalloy Funded Debt-‐to-‐EBITDA 2.06x
Total Synalloy EBITDA-‐to-‐Debt Service (term loan only in year 1) 5.83x
Estimated Synalloy EPS Increase from Palmer at Current Run Rate: $0.30 per share
III. Synalloy EPS Potential
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Impact of Recent Developments
Ashland Defoamers
Fruit of the Loom Products
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DuPont Project
Bechtel - Wolf Creek Project International Projects Special Alloy Project
Acquired
$80 to $85 million in total incremental revenue
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EPS Assumptions
§ Neutral nickel prices – no inventory profits/losses
§ Full year contribution from Ashland defoamers
§ Full year contribution from Palmer of Texas
§ Annual savings from 18” pipe production on continuous mill
§ Synalloy Fabrication at break-even
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Projected Annual EPS
$1.80 with stated assumptions
OR
$1.95 with Synalloy Fabrication at a 5% after-tax margin
NOTE: Synalloy’s previous best year since 2000 was $1.13 per share on a nickel-neutral basis
Questions?
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