Ascent Industries Co.

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Ascent's financial results for the third quarter ended September 30th, 2022. Joining us today are Ascent's executive chairman of the board, Ben Rosenzweig, president and CEO, Chris Hutter, CFO, Aaron Tam, 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 Cody 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.

Thanks, Andrew. Before we continue, I 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. Ascent advises all those listening to this call to review the latest 10-Q and 10-K posted on its website for a summary of these risks and uncertainties. Ascent 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. The reconciliations can be found in the earnings press release issued earlier today and posted on the investor section of the company's website at AscentCo.com. Please note that this call is available for replay via 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 Ascent Executive Chairman of the Board, Ben Rosenzweig. Ben, over to you.

Thank you, Cody, and good afternoon, everyone. Now, much of the third quarter saw a higher-priced environment compared to 2021. Pricing for stainless steel began to stabilize mid-quarter, while galvanized pricing has come down at a much faster rate. But with demand remaining consistent and a healthy backlog of work, we were able to deliver our sixth consecutive quarter of year-over-year revenue growth. Looking ahead, we do see the pricing environment continuing to normalize through the end of the year and into 2023, but we expect demand to remain stable across both of our segments. I'd like to remind everyone that we also have several ongoing initiatives aimed at improving our overall operational efficiency and the profitability of our platform, some of which accelerated in Q3, impacting our throughput and are reflected in our Q3 adjusted EBITDA. In our tubular segment, we had some missteps during the quarter, but I'm confident we'll have these mostly work through the impacts of our system as we enter 2023. Specifically, in early Q3, we began building high-priced premium inventory as part of a specific high-margin order for a current customer. With the influx of lower-cost import products accelerating into the market over that same time, we unfortunately did not win that order. Separately, though related, the prevalence of imports coincided with some destocking in our distribution channel which temporarily impacted overall demand. This confluence of events led to our inability to quickly fill our newly opened capacity with business that compared to our expected margins on the lost order, resulting in much lower absorption of our fixed costs than our recent track record and capabilities would imply. At the same time, we also had some planned operating expenses and decided to allocate additional resources to execute various operational initiatives that are part of our continuous improvement roadmap. These expenses, which we expect will benefit our earnings power in the long term, had a further negative impact on our results. I want to be perfectly clear that the degradation in our bottom line this quarter was meaningfully related to discrete lost orders, our missteps in quickly adapting to fill the unexpected open capacity, and what we believe to be transitory supply-demand imbalances, rather than the result of a negative trend in overall demand. While we do expect these impacts, both on the revenue and cost side, to continue into the fourth quarter, we believe our bottom line will return to more normalized run rates beginning in 2023. Switching gears to our inorganic growth initiatives, we're making notable progress identifying several attractive acquisition opportunities that we believe will make an instant impact to our platform. As the state of the market has affected some of the buyer demand for our target companies, we're hopeful that their valuation expectations will reset a bit. and we're already seeing some evidence of this. As a reminder, we've been looking at opportunities around the $5 to $30 million of EBITDA range, companies that have existing synergies with our production capabilities, and organizations with expertise and talent that we would expect to improve our platform. While we are keeping our eyes open across both segments, we're putting the majority of our efforts toward acquisitions that fit within our chemical segment. Our chemical segment wins business through a very technical sale, providing an inherently stickier customer set. This business also generates excellent free cash flow conversion and has high returns on invested capital. Through both organic and acquisitive growth, we see a pathway to expanding our chemical segments EBITDA contribution closer to a 50-50 split with the tubular segment within the next two years. That being said, we'll remain disciplined on identifying the right long-term fit for acquisitions instead of solely focusing on getting a good deal. We have a strong relationship with our lender, and at only 1.4 times LCM leverage, possess ample debt capacity to execute on accretive transactions. With the success of our acquisition of DanChem, where we were able to instantly add differentiated reactor capacity and leverage John Zupo's team and expertise, we've set a high bar for ourselves. But based on what we've seen so far, we're confident there are more opportunities like DanChem out there. Though inorganic growth is critical to our value creation strategy, there aren't many opportunities we can pursue that are more prudent uses of capital than continuing to repurchase our own stock at recent trading levels. As I stated in our last call, we planned on taking advantage of our existing share repurchase program and bought over 30,000 shares in the open market in the third quarter of 2022. At current levels, we expect to remain highly opportunistic with our repurchase program. We believe our share price is well below industry trading multiples of our normalized earnings power, as well as the private market value of our assets and future cash flows. Our balance sheet remains strong, and we intend to continue to invest in growth and create value through prudent capital allocation. To wrap up, we expect to generate midterm value through the following focal areas. First, execute on a refined commercial sales strategy, leveraging our refreshed, unified brand platform. Second, drive automation projects to achieve efficiency and incremental margins. And third, progress highly complementary acquisition opportunities that will further expand our footprint and production capacity to better service our customers. This will obviously be coupled with continued operational execution and prudent expense management. While our success won't proceed in a linear fashion, we've achieved significant milestones over the past few quarters, and I'm proud of what our team has accomplished so far. As always, I'd like to thank them for their hard work and dedication to helping us transform Ascent into a leading provider of tubular products and chemicals. I'm confident that our team will adapt to changing market conditions, execute on our priorities, and drive significant value for our shareholders. Now, I'd like to pass the call over to Chris to provide in-depth details on our operations across both segments, but I'll be available later on to answer any questions. Chris?

Thanks, Ben, and thank you all for joining today's call. Let's dive into what drove our third quarter results. As Ben discussed earlier, in our tubular segment, we had some missed opportunities to generate additional revenue would have allowed us to better meet our margin expectations we're taking proactive measures to support our team's ability to better forecast and react in a dynamic environment at the same time we increased our spending to provide the necessary operational enhancements to drive us towards long-term success these are not initiatives that have been unknown to us in fact they were critical opportunities that drew us to invest in the company however in the environment we've experienced over the past few quarters where demand has outstripped supply, our ability to take some of these right-sizing actions has been constrained in favor of allocating resources to restore our presence and reputation with our customers. For example, as the broader macro economy continues to evolve, we are focused on improving our sales processes to promote deeper relationships with our customers, especially those that are purchasing our products for specific projects. working closer with our customers will result in more accurate forecasts that allow us to maintain a leaner inventory model without sacrificing our promised delivery times or product availability. In turn, this will free up additional working capital needs for investments into our infrastructure, equipment, and automation projects. The outsized impact of these costs in the back half of this year is not expected to repeat into 2023. We believe this investment period of lower margins is a transactional part of our journey, and the current environment is something that we expect to be able to capitalize on in the long run, as our enhanced processes and streamlined organization will position us to perform better across all market environments. With pricing beginning to stabilize, our ability to consistently manage inventory and material ordering will improve. A key highlight in our commercial strategy this quarter, which rings true across both segments, has been our investment in marketing following our rebranding. We've rolled out Unified marketing collateral across our sites, a new website with much needed updates to our core value and service capabilities, and we've begun building awareness about our brand and culture through outbound communication, including being much more active on social media. With our branding and go-to-market strategy fully aligned, we were able to host three successful open houses at our tubular facilities in Munhall, Statesville, and Bristol. We hosted over 100 customers and vendors to showcase our new rebranded identity. Our sales team used our new brand to further explain the depth of our capabilities to our existing customers while gaining leads surrounding our supply chain and new projects. The event succeeded our expectations. With the success we experienced, you can expect us to develop additional commercial events in the future. As we navigate a shifting market environment, we are continuing to position our plant in Munhall to optimize for the right relationship between throughput and maximizing margin through product mix. Munhall is the most obvious example of what we're analyzing and moving toward throughout our system, which is working quickly to flex our output and cost structure to preemptively position the company to capitalize on the potential weakness of less nimble competitors as we pursue market share gains. As a reminder, this is a meaningful departure from what has been done at this company in the decade prior to our arrival and has been a major undertaking to alter that mentality. I'm pleased with our progress and the results we see on the horizon. It is also important to note that we had another productive quarter improving our safety measures and on-time delivery rate. Our quarter ended with a total recordable injury frequency rate of 2.7 and on-time delivery rate of 82%. And looking at our progress since 2020, this represents a 210% improvement, which has led to a 488% improvement in our total recordable incidents and a 227% improvement in our on-time delivery rates. A major... Kudos to the team for those two milestones. Our safety measures are critical in creating an employee-first work environment, and we are proud of how far we've come in a relatively short amount of time. The added benefits of fostering a safe work environment go beyond the health of our team members. It directly benefits our ability to hire employees, retain our best ones, and lower our total costs. Since day one, our priority has been to reduce the risk for our team members and moving forward we will be continuously reevaluating and developing additional procedures that ensure we remain diligent and avoid complacency regarding the safety of our team. In the near term, we will be working down our excess inventory position while we focus on our commercial efforts. Last quarter, we saw unfavorable cash use due to a large raw material receipts and vendor pressures from large suppliers that we expect to resolve in the upcoming months. Through the reduction of our material spend to reflect the stabilizing environment, and improving upon our billing and collection processes will free up additional working capital to further de-lever our balance sheet. I am proud of what our Ascent Tubular team has accomplished this quarter. We identified growth projects, dove deeper into our commercial relationships with a one-team mentality, and improved our customer experience, as well as the safety for our workers. I believe we are setting ourselves up for sustained success, and I'm excited for what's in store for Ascent Tubular. Shifting the focus to our chemical segment, Through our aggressive pricing strategy and improved customer relationships, we drove a 70% year-over-year increase in net sales in the third quarter of 2022. In the bottom line, we drove a 55% year-over-year growth in EBITDA dollars through the acquisition of Danchem and revitalized and unified strategy leading to a more effective cost management through our supply chain. Ascent Chemicals remains a stable workhorse for us and has been able to withstand the shifts of the broader macro economy while providing us with the opportunity to continue to better utilize our assets and labor to steadily drive margin improvement. We continue to leverage our scale and unique assets to progress our commercial strategy. We hired two new sales managers to help develop our sales funnel and drive onshore opportunities. As our existing sales teams work closer with our core customers to develop the additional opportunities and provide data for more efficient inventory forecasting, We expect to bring on additional talent that will be highly focused on winning new customers and projects. Our expanded sales team has seen early success, driving deeper penetration within our existing customer base, and we are confident they will be able to point to our exemplary track record and our competitive standard versus our competition as we hunt for new opportunities. In Virginia, we finalized a plan and agreement to outsource our wastewater treatment as part of our strategic investments in our infrastructure. This will provide us with long-term stability at this site for the next 10 to 15 years, while allowing us to further invest in additional capacity while eliminating previously required downtime due to issues related to wastewater treatment. In South Carolina, we finalized multiple client agreements, allowing us to move to a higher value and margin mix than the company has experienced in the past. On top of that, we see line of sight to future margin improvement as we've begun filling our funnel with higher value-added projects that can utilize the facility's unique mix of assets. These are longer sales cycle opportunities that we expect to bear fruit over the coming quarters. Our objectives heading into the fourth quarter and 2023 are simple. Commercially, we're going to be focused on building a robust sales funnel and helping potential customers better understand the range of high value added products we can provide for them. We have the capacity to grow and with the establishment of our new brand, our commercial team has the right tools they need to capitalize on the leads and find new revenue streams. Operationally, We see potential to further reduce off-quality batches to drive lower operating costs. This goal will have an immediate impact on margins. We plan to achieve this through our recently augmented quality assurance team to drive quality improvement. We will also be re-optimizing our supply chain to ensure that we are finding the best quality materials at the lowest possible cost. It sounds simple, but this organization has traditionally accepted nearly every product that just showed up. We're now able to more seriously scrutinize our supply chain to improve the quality of our deliverables. As our footprint grows, we also expect to open up larger scale vendor partners, thereby lowering our material costs through volume and freight lovers. Finally, we see the opportunity to further accelerate our high performance culture focused on KPIs, training, talent development, and retention. We want to take another step forward to create an environment where we can grow and foster talent while keeping our workers accountable and avoiding complacency. As the labor market steadies, we believe we can improve our employee churn which I expect will increase our production capacity and overall efficiency as we reduce training costs and preserve institutional knowledge. Overall, Ascent Chemicals has a strong foundation to begin capitalizing on the opportunities we've identified for 2023. We believe there is potential for this segment to find rapid growth, and I'm confident that we have the team in place to capture it. I'd now like to turn it over to our CFO, Aaron Tam, to walk through our third quarter financial results in more detail. Then I'll return to answer any questions you may have. Aaron, the floor is yours.

Thank you, Chris, and good afternoon, everyone. Let's jump right into our third quarter financial results. Net sales increased by 16% to 100.2 million compared to 86.2 million in the prior year period due to the relatively favorable pricing environment and an ongoing shift to a more favorable product mix. Also, it's important to note that our net sales included 8.3 million in Danville site sales that weren't in the prior year period. However, it is not relevant to compare to current Danville, Virginia site results to pre-acquisition DanCam as we have fully integrated that site and continuously moved projects throughout our footprint to produce the best possible results for our overall enterprise. Gross profit was $11.6 million compared to $18 million in the third quarter of 2021, while gross margin was 11.5% compared to 20.9% in the prior year period. rising raw material, labor, and freight costs more than offset competitive price increases. Net income in the third quarter was $0.6 million or $0.06 diluted earnings per share compared to net income of $8.2 million or $0.87 diluted earnings per share for the third quarter of 2021. The decrease is primarily attributable to the increased operating expenses within the tubular product segment and higher corporate expenses invested in internal process improvements. The third quarter of 2022 also included a $0.7 million net loss from the acquisition of the Virginia site. Adjusted EBITDA in the third quarter was $5.6 million compared to $14.8 million in the year-ago quarter, and adjusted EBITDA margin was 5.6 percent compared to 17.2 percent in the year-ago quarter. For reference, Danville contributed $0.5 million in adjusted EBITDA for the third quarter of 2022. Lastly, looking at our liquidity position, as of September 30, 2022, total debt was $72.6 million compared to $70.4 million at December 31, 2021. As of September 30, 2022, we had $36.7 million of borrowing capacity under our revolving credit facility compared to $39.4 million as of December 31, 2021. As Ben mentioned earlier, the company repurchased 30,200 shares in the quarter at an average cost of $16.29 per share, totaling approximately a half a million dollars. With that, I'll now turn it back over to the operator, Andrew, for Q&A.

Thank you, sir. Ladies and gentlemen, to ask a question, you will need to press star 11 on your telephone. Once again, to ask a question, please press star 11 on your telephone.

Please stand by while we compile the Q&A roster. And our first question comes from the line of David Siegfried.

Your line is now open.

Hey, guys. How are you doing today?

Hey, David. Good. How are you?

Good. Congratulations on the brand refresh. That was well done.

Yeah, I can tell you it's been extremely well received in the market. A lot of effort went into that.

I can tell. Yeah, that's good. Good to hear. So the higher corporate expenses, it sounds like they'll remain a little bit elevated through fourth quarter and then dropping off or, you know, tailing off some in 2023. Is that correct?

Yeah, I would say we've obviously invested heavily in process and procedures, and we've upgraded some of the staff. We're seeing the benefits of that through some reduced health care via the team that negotiates things. So I'm not sure what the exact number will be. It is a little elevated, but I forecast cost savings going to 23. OK.

And then the increased imports that happened in this quarter from competitors or, you know, from other countries. Do you see that as a problem affecting future quarters?

Well, it's something we're discussing internally. I mean, we really can't control the flow of imports. The flow of imports has increased significantly, but that's more on the smaller diameter tubing. On the large diameter tubing, we've seen somewhat of a – not a pause, but a slowdown in the approval rate of projects with the infrastructure spending bill. So we fully anticipate there's plenty of demand on the large project scale. It's just getting them through the system and approved so we can start making material for it. But I am surprised at the level of imports that have been flushed through in the last 12 months compared to even the prior three to five years. So it is something that Tim Lynch, who runs our tubular segment, he's on the committee for pipe and tube imports. So it is something that they're discussing actively It could become a challenge for many companies if they continue to just allow it to flow in freely. Got it.

Now, isn't it true that part of the infrastructure program is designed to promote product built here in the U.S.?

Yeah, so there's the DFARS, which is the domestic requirement for made, melted, and produced here in the United States. And that's larger scale stuff. When I say imports, you think of imports going into many different applications, whether it be ornamental or mechanical, say appliance or automotive. There's, you know, that historically has been a part of our business, and it's tough to compete with very inexpensive Taiwanese, Chinese, Korean, Vietnamese product that comes in, you know, extremely cheap. Makes sense.

You mentioned that you've become a supplier of choice and gone from a bottom tier to the top tier. So that will help you with the larger diameter pipe, you know, being a supplier of choice as demand stabilizes or whatever, you'll be in a good spot with that going forward?

Well, we've been playing about 18 months of catch up. I think I mentioned, you know, our on-time delivery was in the 30s. Now it's in the 80s. So that was always the challenge the business had was if you're a project-based consumer of our product, say you're, you know, a contractor supplying a methane or natural gas facility and you need our product, well, it's hard to rely on us for that job. Because if we only ship 30% of what you needed, you know, that's a tough business model. So that was the drive of the open houses was to truly show, you know, a hundred plus customers, which the majority of them, some were distributors, but a good portion of them were direct OEM end user customers that when you give us a purchase order, here's our process, here's our procedure. Here's how we manage quality. This is how we flow it through the system. Here's our material, you know, applicator. Here's the entire team that takes this from a coil form to a finished good. And this is why you're going to get it on time. So, you know, we've laid a tremendous amount of foundation this year that's going to, you know, finally prove to the market that we can deliver that. And we are winning a fair amount of that business.

Good to hear. You mentioned in August that the team was diversifying into personal care products and specialty chemicals. So how is that progressing and Anything you could add further on that?

Yeah, I mean, obviously, in the personal care side, we've got certain segments that we compete in. One is household, and that is a segment of area of growth that we've identified, and it's just applying our reaction capabilities to best fit the sales funnel and the opportunities we're seeing. We're still seeing a very strong demand from construction, adhesives, and sealants. We see a very robust demand there. and are winning some very large opportunities to produce, you know, especially chemicals for those customers.

Good to hear. Did I hear that correctly in the remarks that in two years, the goal is EBITDA and tubular to be equal in EBITDA and chemicals?

Yes.

Okay. That's good.

I mean, you know, on the tubular side, you're going to, you know, there will be periods of ups and downs. It's not as consistent, in my opinion, of our chemical business. Our chemical business tends to be extremely sticky. I think Ben mentioned that. The sales cycle's a little longer. It's definitely a more technical sale with quality and labs and chemistries and approvals, and depending on what application it's going into, you have to have that quality team to continue to deliver 99.9 plus percent defect-free material. So once you get committed as that outsourced specialty chemical partner, you tend to keep that business for years, not just one PO.

Sure. Yeah, that's good. I'm glad you're working in that direction.

And something to note that's, you know, to share with everyone from the Danchem acquisition, we're now starting to see it, you know, effectively one year later. We're now starting to see business that, and it's hard to just compare Dankem to Dankem because we've shifted a fair amount of the business to other facilities based on the needs and wants of our customer base that came out of Dankem. And we acquired a significant level of high caliber customers that Dankem had that had other needs in South Carolina and Tennessee. And now the sales process there is getting those locations qualified to produce you know, you're creating a specialty chemical formula. So you have to, you know, get that facility approved by that customer. Now we're expanding those tentacles into the customer base and we're seeing, oh, well, we were doing business with customer X in Danville. Well, now we're doing business with customer X in Fountain Inn and Cleveland, Tennessee. So I would say the, you know, expand the customer base through the locational needs and the needs of the customer are definitely coming true now.

Good to see. Well, you know, you could see the, what, 27.3 million in chemicals this quarter. So that was 27% of your revenue was from chemicals. That's a high watermark that I've seen since I've been following the company for a few years. So good.

Yeah, and that's definitely a focus that Ben and I have. We are not only organically, but looking for the right strategic fits to bolt on to the business.

Yep. And one last thing. I appreciated the color on the buyback and good to see some shares repurchased this quarter. I think that sends a message and I appreciate that. Thank you. Thanks, David. Appreciate it.

Thanks, David.

Thank you. And as a reminder, to ask a question, you will need to press star 11 on your telephone.

At this time, this does conclude our question and answer session.

I would now like to turn the call back over to Mr. Hutter for closing remarks.

Thank you, Andrew. We'd like to thank everyone for listening to today's call, and we look forward to speaking with you again when we report our fourth quarter and full year 2022 results.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation.