Ascent Industries Q3 2023 Earnings Call Transcript

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November 8, 2023

There are 6 speakers on the call.

Operator

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Ascent's Financial Results for the 3rd Quarter Ended September 30, 2023. Joining us today are Ascent's Executive Chairman of the Board, Ben Rosenzweig President and CEO, Chris Hutter CFO, Bill Steckel and the company's outside Investor Relations Advisor, Cody Cray. Following their remarks, we'll open the call for your questions. Before we go further, I would like to turn the call over to Cody Cray 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.

Speaker 1

Thanks, Sherry. Before we continue, I'd like to remind all participants that the discussion today may contain certain forward looking statements pursuant to the Safe Harbor provisions in 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. Ascent advises all of those listening to this call to review the latest 10 Q and 10 ks posted on its Web for a summary of these risks and uncertainties. Ascent does not undertake the responsibility to update any forward looking statements.

Speaker 1

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. Reconciliations can be found in the earnings press release issued earlier today and posted on the Investors section of the company's website atascentco.com. Please note that this call is available for replay via webcast link that is also posted on the Investors section of the company's website. Additionally, an updated presentation is available on the Investor Relations section of the website, which we encourage you to view.

Speaker 1

With that, I'd like I'll turn the call over to Ascent's Executive Chairman of the Board, Ben Rosenzweig. Ben?

Speaker 2

Thank you, Cody, and good afternoon, everyone. After a challenging last few quarters and the closing of our Munhall operations officially behind us, we began seeing signs of improvement within our operations during the Q3. I want to be clear that we still do not view our current level of performance as acceptable and there is much work left to be done, but we are turning the corner. Persistent volatility in the macro environment still hampered sales volumes across both segments in the Q3 as we continue to see larger scale projects being pushed out or delayed along with several of our end markets experiencing a decline in demand. Despite the lower sales volumes, we were able to return to positive adjusted EBITDA in the and continued to manage working capital more efficiently.

Speaker 2

Most impactfully, towards the end of the quarter, we were pleased to welcome Brian Kitchen to Ascent as President of Ascent Chemicals. Brian joins Ascent with a proven track record of taking underperforming businesses and putting them back on the road to growth and profit maximization. We believe that Brian has the potential to take Ascent Chemicals to new heights with a durable growth strategy and we are pleased with the actions he has already taken to return this segment to profitable growth. Within our Tubular segment, we continue to streamline and optimize our operations now that we have completely shuttered our Munhall facility. While we do expect some cash and non cash costs within the ranges we laid out last call, we have worked through the vast majority of the expected costs and look forward to having this completely off our books as we enter 2024.

Speaker 2

We continue to believe we have a healthy asset base and strong reputation within the tubular industry that can return to consistent growth and generate the earnings and cash flow to fund future growth opportunities. Similar to our Specialty Chemicals segment, our sales are continuing to be impacted by the broader economic slowdown. While some of our end markets have been more affected than others, particularly those for premium ornamental stainless steel tubing that go into more discretionary purchases, it is safe to say that we are seeing a heightened level of caution when it comes to spending across many of our distribution customers. We still believe there is healthy long term demand potential for premium American made tubular products and we're continuing to optimize our operations to be ready for when the pendulum swings back in our favor. In terms of capital allocation, our biggest priority has been and will continue to be repurchasing shares in the open market.

Speaker 2

In fact, we've repurchased nearly 100,000 shares in the open market through the 1st 9 months of 2023. We were able to ramp up our volumes significantly in Q3 with the 10b5 program in place, repurchasing nearly 45,000 shares, which is almost 2.5 times more than we were able to repurchase last quarter. Now that we can effectively repurchase stock in the open market nearly every single day, we continue to expect to be as aggressive as possible on this front. M and A does remain a long term focus for our organization, but we recognize the need to focus on building a more stable foundation prior to layering in larger deals. We are nowhere near satisfied with how this year has gone.

Speaker 2

But I do believe that where we sit today and as we work through our budgeting process for 2024, we've made it over the largest of our hurdles and the company is well positioned to be much more focused and efficient. We continue to appreciate the patience of our shareholders and remained aligned with your interests as the largest holders of the company's shares. We've unquestionably made mistakes, but have learned from them and feel very confident in the team we've assembled to lead this company into 2024. We look forward to re earning your trust over the coming quarters. Now I'd like to pass the call over to Chris to provide more details on our operational performance in both segments.

Speaker 2

I'll be back to answer any questions during the Q and A portion. Chris, over to you.

Speaker 3

Thanks, Ben, and thank you all for joining today's call. Jumping right into our Tubular Products segment. We are pleased to be moving forward with our focus being squarely on Bristol Tubular Products, American Stainless Tubing and Specialty Pipe and Tube now that operations have completely ceased at Munhall. During Q3, destocking trends within the industry continue to persist as many of our customers remained over inventoried relative to their immediate needs. This is directly correlated with both the prolonged volatility we continue to experience and our broader macroeconomic economy and our distribution customers' uncertainty surrounding near term commodity pricing.

Speaker 3

Surcharges continue to work down, especially on a year over year basis, which is not necessarily bad for us long term, but certainly played a role in slowing inventory bias from distributors. Though difficult to predict, we'd expect surcharges to come down a bit more throughout the end of the year with larger buys coming during periods of flattened surcharges. As we've discussed in the past, we've been targeting larger infrastructure projects for this segment that provide a healthier margin profile for us. Unfortunately, we have seen many of these orders pushed out 1 to 2 quarters, which continue to be a drag in our volumes. However, we have a scrappy team that is turning over every stone to drum up demand and we are working hard to optimize factors within our control.

Speaker 3

Import products continue to impact volumes, specifically on our smaller diameter products. However, we're seeing some signs of stabilization and have begun to began winning business back due to quality issues of the imported products. We would expect this to continue to help us, but some of it still depends on the health of the broader economy, which ultimately impacts the price versus quality decisions of our customers. Within ASTI, we're holding relatively stable even with a meaningful drop in end market demand for some of the high end consumer products we supply, specifically the marine market, which is down over 40% year over year as consumers pair back these types of luxury purchases. But we have remained aggressive on pricing and believe we are beginning to Some market share here as we can afford a much more quick turn inventory model than our competitors, which is valued highly during times of end market fluctuations.

Speaker 3

During the year, we embarked on some products that we believe would drive cost savings and avoidance at all facilities. I'm pleased that those efforts accelerated further in Q3 with some vendor Consolidation on the procurement side and the use of some of the excess equipment supplies from the closure of Munhall to be used across our remaining sites in place of purchasing new equipment. These are initiatives that not only are large in an individual basis, but can aggregate into 6 figures and help us control costs throughout all input pricing environments. We continue to have confidence in the long term viability of our Tubular Products segment. We worked through down cycles before, so none of this is new to us, but it's obviously still challenging.

Speaker 3

The biggest difference is we no longer produce commodity galvanized product out of a high cost facility like we were dealing with at Munhall. Exiting that fixed cost base further taking advantage of the slowdown to ramp up our operational efficiency creates a much more durable segment that is better positioned for these cycles in the future. We firmly believe we are creating a healthier and more productive Tubular segment and we continue to expect earnings improvements to accelerate over the coming quarters. Turning to our Specialty Chemicals segment. Scent Chemicals has experienced general softness across segments.

Speaker 3

The softness has been compounded further by destocking and working capital corrections in segments such as paints and coatings and personal care as well as select in sourcing by customers who now find themselves with historically low volumes of internal asset utilization. Outside of these expectations, we believe our demand has largely been consistent with the softness of the markets we serve. We are currently in the process of raising pricing as a result of our cost escalations. In conjunction with this exercise, we are also working to implement strategies that allow us to adjust pricing more efficiently and quickly to broader macro conditions. I still remain highly confident in this segment and the profitable growth potential we see on the horizon.

Speaker 3

Having Brian at the helm has further solidified my confidence and provided our team with a renewed sense of optimism in the future. While we do not forecast material near term market recovery, our team led by Brian has been actively working to diversify the markets and customers that we serve, while optimizing our cost basis and taking actions to extract the appropriate value for our products and services. At the end of the day, we feel confident that there are multiple things we can, should and will improve upon that will get us back on track next year. With all of this happening as we speak, we do believe that all these efforts will be accretive to our segment level adjusted EBITDA as soon as Q1 of 2024. As a whole, our organization is in a much better position today than it has been over the last several quarters.

Speaker 3

We're obviously still a good distance from where we want to be, but a roadmap that can get us back there quickly has been developed and we are making tangible progress towards our long term strategic goals. Although macro volatility doesn't seem to be letting up in the near future, we will continue to be hammer away at improving our operations and be sure to capitalize on every growth opportunity that comes our way. We have a strong leadership team in place, a more efficient operational footprint and teams within each segment working together much more cohesively. We're firmly committed to delivering the value that all of our stakeholders have come to expect from us, and we look forward to exceeding those expectations in the future. Now, I would like to turn the call over to our CFO, Bill Steckel, who will provide a detailed overview of our 3rd quarter financial results.

Speaker 3

Then I'll return to answer any questions you may have. Bill, the floor is yours.

Speaker 4

Thank you, Chris, and good afternoon, everyone. Before I jump into the financials, I want to remind everyone that we have categorized the financial results from our Munhall facility into discontinued operations, given that we permanently ceased operations at the end of August. To give a more accurate representation of our performance ex Munhall, the results I'll be discussing today are from continuing operations and we have adjusted our prior year periods to reflect the results ex Munhall to enable more relevant comparisons. Additionally, I wanted to update you all on the impact of the Munhall closure on our financials to date. Through the Q3, we have incurred approximately $2,600,000 of pretax cash charges and approximately $10,100,000 of non cash charges, which remain in line with the original expectations.

Speaker 4

With that, let's talk about Q3 continuing operations. Net sales from continuing operations were $56,100,000 compared to $78,200,000 in the prior year period. The decrease is due to lower overall sales volume within both Tubular Products and the Specialty Chemicals segments. Gross profit from continuing operations was $6,000,000 or 10.7 percent of net sales compared to $14,100,000 were 18.% of net sales in the Q3 of 2022. The decrease is primarily attributable to the decline in net sales.

Speaker 4

Net loss from continuing operations was $12,800,000 or $1.26 diluted loss per share compared to net income from continuing operations of $3,100,000 or $0.30 per diluted share in Q3 of 2022. The decrease is primarily attributable to an $11,400,000 non cash goodwill impairment within the Specialty Chemicals segment along with the aforementioned decline in gross profit. Adjusted EBITDA was $900,000 compared to $8,200,000 in the Q3 of 2022. Adjusted EBITDA margin was 1.7% compared to 10.5% in the prior year period. Lastly, looking at our liquidity position as of September 30, 2023, total debt was $53,000,000 compared to $71,500,000 at December 31, 2022.

Speaker 4

As of September 30, we had $41,800,000 of borrowing capacity under our revolving credit facility compared to $37,600,000 at December 31, 2022. During the Q3 of 2023, we repurchased 44 $1,799 shares at an average cost of $8.87 per share for approximately $400,000 bringing total year to date purchases for 2023 to nearly 96,000 shares. We currently have 584,024 shares remaining under our share repurchase authorization. With that, I'll now turn it back over to the operator for Q and A.

Operator

Thank And our first question will come from the line of Vincent Anderson with Stifel. Your line is

Speaker 5

Ben? Yes. Good afternoon, gentlemen.

Speaker 3

Hey, Vince.

Speaker 5

Hey. So just starting off, I was hoping you could discuss if there are any specific drivers of the goodwill impairment. I mean, maybe specifically if that was the loss of a single customer or just You have a more normal review of the recent operating environment?

Speaker 3

Yes, pretty much related to the Danville operation and Not necessarily the loss of a customer, but the normalization of the customers go forward estimated annual volume.

Speaker 5

Okay. And then sticking to a high level, I know guidance is not on the table. But just looking at your overall level of profitability, how much leverage do you think you have In hand right now from self help over the next few quarters if we were to assume no real help in the overall demand environment?

Speaker 2

I'd say a lot, Vince. I mean, we feel pretty good that we can get back to where we were before on the chemical side within the next few quarters without necessarily feeling like there's going to be a boisterous market environment. Now obviously, I'll caveat that with I know it's pretty bad out there on the chem side and we would hope that it doesn't get worse. But there are a lot of things under our control that can get back to where we were before, which if you recall is still not where we think we need to be. So if you were to kind of make that bridge from that mid single digit EBITDA margin on the chem side back to where we were in the call it 10% range is within our control and then that bridge up to the much higher mid teens or so, we think hopefully there will be a little bit of a normalization in the market and some of these headwinds will abate, but there is a lot within our control.

Speaker 5

Okay. Excellent. And then I've got a few. I assume that's okay. I'm just going to keep going.

Speaker 5

But can you just maybe discuss at a high I don't know if you want to speak for Brian too soon, but at a high level in your chemicals portfolio right now. How you're thinking about securing new business for volumes lost during this destocking period versus trying to keep the door open for existing relationships. And I don't want to say counting on the assumption that next year is better, but how aggressive are you right now in getting things filled versus maybe managing more of the cost side and just how you go about securing?

Speaker 3

That's a great question. I mean, yes, we're doing both. I mean, we're extremely aggressive on the customer touch side. And it's somewhat difficult or noisy in the numbers, but we have facilities, obviously our Chemical business is 3 facilities. We have certain facilities that are over performing and certain facilities that are underperforming.

Speaker 3

So this is I would say it's more limited to one facility, the operational struggles right now, which we're addressing and have some light at the end of the tunnel on it. But There's also a lot of good things and some very good wins we've had within other parts of the chemical business that we're extremely excited about. So after discussing with Brian, this is he's very optimistic about 2024.

Speaker 5

Okay. That's good to hear. And that probably answers my next question, but maybe more specifically, you have some larger customers on the chemical side in areas that used to be more predictable revenue streams like agriculture and parts of personal care. I'm curious if they've started to offer you guys any kind of color on their planning into next year or if it's Too early to even be counting on those conversations having any weight.

Speaker 3

Yes, I mean, we're having them, but I think it's they have Cloudiness in their forecast also. So we're getting I would say the band of range the range band we have is much wider than normal with the customer volume expectations, whether it be the personal care side and Or even just oil and gas or CAES, it's historically we'd have here's our standard deviation of volume, there'll be £1,000,000 to £1,500,000 to £2,000,000 So we're having those discussions and doing the best we can to also backfill additional demand with other customers.

Speaker 5

Okay. All right. Excellent. And then I know Brian came in with a lot of experience and we've talked a bit about the commercial side But curious if you shared any initial thoughts on your procurement and inventory management side of things and just if you've had a chance Do like a proper postmortem on how the business was managed through the last couple of years on that front?

Speaker 3

Yes, the high level view is he has and we've already recognized opportunity and we have a team being put in place. Brian Brian is a very aggressive, hardworking person that has deep connections within the Chemical business and he's already identified a few people that he's brought on board with him and We continue to upgrade the talent really on a weekly basis. So we're feeling really good. We had a meeting last week with Brian and I think Ben and myself, Bill and the entire Board are very optimistic about what he's going to deliver.

Speaker 5

Great. And then so to move to 2 biller for just a minute. Chris, I know you hate to look like you're hiding behind the macro environment when the business isn't operating as well as you want it to. So if I can pose this as a hypothetical instead, if The tubular business was already where you wanted to be coming into the year that we've had in 2023. Looking at the environment right now, what parts of the portfolio, whether it's the sales channels or just specific products, would you really be leaning on in this environment to support your through cycle margins and which parts would you have to just kind of set expectations lower and focus on costs?

Speaker 3

No, I mean, I'll fall on the sword here. I mean, there's tremendous opportunity in tubular. Again, you have to look at each business unit specifically. Specialty Pipe and Tube, they're killing it. They're doing a great job.

Speaker 3

They've got demand and there's tremendous opportunity in growing that business. The oil and gas market, which is one of the larger markets in Texas. Bristol is we definitely we missed we missed the mark. There's huge demand for our large diameter pipe that goes into infrastructure applications and just didn't deliver on the sales forecast. Now there's a lot of things going on behind the scenes on improving the team there and getting that dialed in.

Speaker 3

But I mean that's a very good business when it's operating the way it should operate. It's just not operating the way it needs to. So we have work to do there, absolutely.

Speaker 5

All right. That's fair enough. Do you have I mean, I assume it's a constant review from your perspective, but are you still looking for any Key leaders in the steel business or do you feel pretty good already?

Speaker 3

Yes, I mean, I think we're always looking for the right talent leaders and we're always discussing how we grow the business and who we have run the business. So we're always looking for the right opportunity.

Speaker 5

Okay. All right. Excellent. Well, thanks a lot. That was all for me.

Speaker 3

Thanks, Vince.

Operator

Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Chris Hutter for any closing remarks.

Speaker 3

Thank you, Sherry. We'd like to thank everyone for listening to today's call, and we look forward to speaking with you again for our Q4 and full year results for 2023.

Operator

This concludes today's program. Thank you for participating. You may now disconnect.

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Key Takeaways

  • Despite persistent macro volatility, Ascent returned to positive adjusted EBITDA in Q3 and improved working capital efficiency.
  • The appointment of Brian Kitchen as President of Specialty Chemicals is expected to drive profitable growth and be accretive to segment EBITDA by Q1 2024.
  • With the Munhall facility fully closed, the Tubular segment has streamlined operations and is on track to eliminate remaining cash and non-cash closure costs by 2024.
  • Q3 net sales fell to $56.1 million from $78.2 million a year ago, resulting in a $12.8 million net loss and an adjusted EBITDA margin decline to 1.7%.
  • Ascent repurchased nearly 100,000 shares year-to-date (including 45,000 in Q3) under its 10b5-1 program, with 584,024 shares still authorized for buybacks.
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Earnings Conference Call
Ascent Industries Q3 2023
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