Ascent Industries Co.

Good morning, everyone, and thank you for participating in today's conference call to discuss Ascent's financial results for the fourth quarter and full year ended December 31st, 2022. Joining us today are Ascent's Executive Chairman of the Board, Ben Rosenzweig, President and CEO, Chris Hutter, CFO, Erin 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 meeting of the Private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward-looking statements. Cody, please go ahead.

Thanks, Liz. 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 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 of 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 responsibilities 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 gap-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 at ascentco.com. Please note that this call is available for replay via a webcast link that is also posted on the Investors section of the company's website. Additionally posted on the Investors section of the website is a newly updated investor presentation that we encourage you to view. With that, I'd like to turn the call over to Ascend's Executive Chairman of the Board, Ben Rosenzweig. Ben, over to you.

Thank you, Cody, and good morning, everyone. Before we jump into everything, I'd like to start by putting our financial performance over the last two quarters into the proper context. The reported profitability has come down over the prior year periods, but I think it's important to recognize that the most recent periods have a meaningful amount of noise in them and are not fully representative of our forward-looking earnings potential. As we've discussed, we knew that the fourth quarter was going to be messy due to some of the ongoing effects from previously disclosed material buys and destocking trends within our tubular product segment, along with the overall pricing environment stabilizing from the highs at the start of the year. That said, the bulk of the decline in our financial performance was contained to our facility in Munhall, Pennsylvania, specifically within our galvanized business. As we've discussed in the past, the galvanized business was something we inherited. and did not believe to be a meaningful part of our long-term business plan due to the commodity-like nature of the product, leading to a much more competitive market. As a result of our exit from the galvanized product, which makes up a large percentage of our manufacturing at this site, we've begun to explore strategic alternatives for our facility in Munhall, while simultaneously working late in the fourth quarter and into the first quarter to significantly reduce operations there as we allocate resources towards our more profitable products. Although we knew this would have a detrimental impact to our consolidated financials in the short term, we believe it was necessary to begin moving on from this business and focus on our long-term goals. It's important to note that if you exclude the impact from the Munhall facility, which produced revenue of $16.3 million, a net loss of $8.9 million, and adjusted EBITDA of negative $7.4 million during the quarter, as well as one-time non-cash $1.5 million inventory charge in the quarter, our consolidated results were about a 10.4% adjusted EBITDA margin, which is in line with expectations similar to the third quarter and much more representative of the base earnings of the ongoing business than our consolidated results were for the quarter. All of this is shown on page eight of our updated investor presentation. To expound on this further, since I know our financials can be difficult to discern, I'll give some insight into our historical results, excluding Munhall. For now, this is a hypothetical exercise, is very much unaudited and non-GAAP, et cetera, but we believe provides further context to the earnings power of our business. The ex-Munhall fiscal year 2021 adjusted EBITDA was $35.3 million, and fiscal year 2022 would have been higher, at about $46 million, excluding non-recurring and non-cash charges. The first part of 2022 certainly benefited from very strong pricing, but our view is that something similar to 2021 in the low 30 millions of adjusted EBITDA is not far off from how we view the run rate earnings power of our go-forward assets. Obviously, it will fluctuate from quarter to quarter, with 2023 expected to see a stronger back half of the year than the first half, but we do not believe our base earnings are as volatile as they may appear. Exiting business lines can certainly be messy, but I firmly believe we made the decision that was in the best interest of shareholders and that our ongoing tubular segments will now be able to operate more efficiently and predictably. To my comment about better expectations for 2023, we expect there could still be some minor impacts related to our inventory buys in late 2022 carrying over into the first quarter of the year, along with some costs that we likely won't be able to exclude as we reallocate resources from Munhall to our other sites. However, by the second quarter of 2023, we feel confident in getting back closer to our expected level of earnings, which we believe is north of the 10% or so adjusted EBITDA margin range on a consolidated basis, and being able to sustain and grow that level through the back half of the year, even on a lower revenue base following the exit of our galvanized business. We also remain confident that after a year that included a meaningful investment in working capital, we will resume generating free cash flow in the first quarter of 2023 and going forward. As we continue to evaluate the highest returning uses of our capital, it's become abundantly clear that we need to prioritize assent chemicals within our overall growth roadmap. We found that our specialty chemical segment is, without question, a more attractive engine than the tubular product segment to achieve assent's long-term growth objectives. Focusing more heavily on our chemical segment will allow us to take advantage of longer-term contracts that generate predictable high-margin revenue with less fluctuation from macro pressures outside of our control. We plan to achieve this by leveraging our refreshed brand, capitalizing on an improved sales strategy, and remaining focused on our proactive M&A approach to expand our footprint in production capabilities. Amid the current market landscape, we're continuing to identify promising prospects to expand our specialty chemicals business through strategic M&A. Similar to our DanChem acquisition, we'll maintain a measured approach in assessing potential targets, prioritizing overall fit while being mindful of our underwriting standards. I know we've been speaking about M&A efforts for some time now, but we experienced a disjointed M&A environment throughout 2022 with buyers and sellers having significant differences in expectations for valuation multiples. We stayed on the sidelines last year and were not willing to overpay just for the sake of completing a transaction, knowing well that the landscape would begin to open up as sellers' expectations came back down to earth. As far as other potential uses of capital, We still fundamentally believe that our stock is undervalued and does not reflect the potential future earnings of our platform. As a result, we've been aggressively repurchasing shares within the regulatory framework and will continue to buy back shares at these levels. Although we still have much more work to do and are mindful of the noise in the reported results of the past two quarters, I'm proud of the significant progress we've made since embarking on this journey and remain grateful for the tireless efforts of our teams. With their continued dedication to executing our priorities, I'm confident that we have the right strategy in place to drive value for our shareholders over the long term. 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, over to you.

Thanks, Ben, and thank you all for joining today's call. Despite the issues we encountered in our tubular segment to close out the year, I still find significant encouragement in what we were able to achieve across the organization throughout the year and remain highly focused on future growth prospects. As Ben mentioned, we did not embark on this journey with the goal of measuring our success on a quarter-to-quarter basis. We took on this challenge knowing there were going to be hiccups and unforeseen issues. However, I think it's important to briefly take stock of what has been accomplished when we measure our progress in years rather than quarters. I became the CEO in the tail end of 2020. So for the years 2019 and 2020, the company's revenue was $256 million and $305 million. Adjusted EBITDA was $9.3 million in 2020 and $13.4 million in 2019. The company's net leverage ratio at the end of 2020 was 6.6 times. In the two years since our team has been in place, Even acknowledging that we have spent far more time than I would have liked on unwinding prior events and creating future ones, our revenue was over $334 million in 2021 and over $414 million in 2022 and adjusted EBITDA was over $44 million in 2021 and over $36 million in 2022 with a net leverage ratio down to 1.9 times even after acquiring Dancom. Again, There has been and will continue to be noise in the numbers, but I believe we can keep moving in a positive direction and continue to improve the quality and sustainability of our revenue and earnings base. With that, let's dive into our tubular product segment. I want to start by saying we have been open with our stakeholders on both opportunities and challenges in this segment. We have made great strides with our team, safety, culture, and go-to-market strategy. our challenges can be specifically identified as site, material type, or end-use demand fluctuations, all of which were identified as areas to address. As we peeled the onion back, we tackled these as fast as possible and continue to make great strides as we start 2023. As mentioned earlier, outside of the dynamics related to our Munn Hall facility, the bulk of the quarter was in line with our expectations. Our tubular segment historically has been known as the premier stainless pipe and tube producer in America. I want to reiterate that the galvanized business is one that we never would have chosen to be in. It was simply part of the platform we inherited. It is outside of our core competency and carries a much lower competitive moat as the lightweight nature and relatively low cost of shipping these products left us susceptible to losing out on pricing from cheaper import markets, regardless of the lesser quality that they are offering. It also requires a significant amount of working capital to manufacture these products, making it a business that does not meet our internal profitability and return thresholds. We knew this going into the investment, but as the world supply chain remained unreliable exiting COVID, we were able to capture meaningful price increases due to spiking demand for domestic products. So we made the decision to continue to operate the product line while we were earning above average margins. I will say that we were a bit caught off guard by how quickly the supply chain normalized, paving the way for the reentry of import products, which happened late this past summer. In hindsight, we did not move fast enough to pare back resources from that product line and begin reducing operations at the facility. No excuses. We own that, and the bandwidth should not have been an excuse. Sitting here at March, I can say that we have moved on from the production of galvanized and we are working to quickly and efficiently allocate those resources and the associated working capital to more profitable areas of the segment. Due to a more stable pricing environment resulting from less macro pressure, we have been able to focus more of our finance attention on maintaining greater control over inventory management, material ordering, and product pricing. With this stability and the continued strengthening of our customer relationships, we can more accurately project our inventory needs and free up additional working capital, which can then be invested in infrastructure, equipment, and automation projects. Going forward, we project that these ongoing initiatives will enable us to better gauge our working capital requirements and ensure that we can keep our capital invested in high-returning initiatives. Now let's jump into our specialty chemical segment. As Ben mentioned, we believe this segment can and will become a major growth and profitable engine for Ascent. and we are hyper-focused on ensuring its success. During the fourth quarter, our specialty chemical segment demonstrated resilience with the year-over-year revenue growth, relatively stable earnings despite industry-wide destocking. At a high level, a few customers began to destock, moving from abnormally high inventory levels carried during the pandemic to a more traditional level. We are seeing this normalized and expect destocking to ease over the coming quarters. I'm also excited to share that throughout the quarter we added high-value projects to our sales funnel, and we anticipate taking advantage of several of these opportunities in the next quarter. The extended sales cycle associated with our specialty chemicals clients results in enduring revenue from longstanding customer partnerships, and although it takes longer to acquire new clients, we find this to be a worthwhile tradeoff since it aligns with our company's long-term vision and prioritizes profitability and stability over short-term growth. Our overall sales pipeline for 2023 remains robust. We plan on incorporating tangential products and new offerings as the broader M&A landscape begins to open up. Recently, we announced that our head of chemicals, John Zupo, was appointed to the Society of Chemical Manufacturers and Affiliates, or SACMA, Executive Committee. Given SACMA's history of advancing important initiatives for our industry, we're excited that John will be included in these decision-making processes to further support specialty and batch chemical manufacturing. We all recently returned from the SACMA show in Nashville, Tennessee, and I can confirm that our belief that John's involvement within the organization has begun to meaningful increase the profile and visibility of Ascent Chemicals among its peers and potential customers. In terms of our ongoing customer engagement initiatives, We're also continuing to utilize our scale and unique assets to advance our commercial strategy. By leveraging our strength and sales team, we will continue to target lucrative onshore opportunities and enhance our sales funnel. Additionally, our existing sales teams are working hand in hand with our core customers to identify new prospects and provide data for more accurate inventory forecasting. Throughout the fourth quarter, our sales team continued to expand our reach within our current customer base. We are confident they will. be able to highlight our outstanding track record and competitive advantage as we pursue new opportunities in the upcoming quarters. Just as one example, we recently received a large new business award from a resources company for an oil and gas application. We won that business by using a collaboration between our South Carolina and Tennessee sites to fill a void where another supplier could not procure enough materials in their supply chain. Our scale in this space enabled us to source enough supplies to fulfill the customer order above our margin thresholds. We continue to use that model of cross-facility collaboration to source and compete for new business. I want to reiterate the extent of the long-term opportunity we see at Ascent Chemicals and our desire for this segment to become a much larger piece of our overall revenue makeup. We could not be more pleased with what John and his team have accomplished in such a short period of time. We believe in more scaled and diversified assent chemicals as a potential to grow market share, realize purchasing, manufacturing, and sales synergies, and lead to the creation of long-term shareholder value. Overall, we are confident that we are on track to achieve consistent and profitable growth in the long run. To get there, we will prioritize delivering best-in-class products, services, investing in technology and automation to increase efficiency, and pursuing strategic acquisitions that align with our financial goals. Our dedicated team is firmly committed to delivering long-term value to our shareholders through a culture of hard work and performance-driven outcomes. While our success will not always be linear, we remain on the right path and will appreciate all of our stakeholders' support as we navigate this transformation process. As a very meaningful shareholder, I firmly believe that patience and our long-term vision for Ascent has the potential to provide a significant payoff, and we look forward to delivering upon those expectations. I'd now like to turn it over to our CFO, Aaron Tam, to walk through our fourth quarter and full year financial results in more detail. Then I'll turn to answer any questions you may have. Aaron, the floor is yours.

Thank you, Chris, and good morning, everyone. Let's jump right into our financial results, starting with the fourth quarter. Net sales were $81.6 million compared to $95.7 million in the prior year period. The decrease is due to a reduction in low-margin sales within our tubular product segment, partially offset by year-over-year growth in our specialty chemical segment. Gross profit was $1.6 million compared to $19.9 million in the fourth quarter of 2021, while gross margin was 2.0% compared to 20.8% in the prior year period. The decrease is primarily attributable to the aforementioned decline in net sales, primarily in Munhall, as well as increased input and labor costs and a slightly unfavorable product mix over the prior year. Net income in the fourth quarter was 127,000, or one penny, diluted earnings per share compared to net income of 8.1 million, or 84 cents, diluted earnings per share for the fourth quarter of 2021. The decrease is primarily attributable to the aforementioned lower gross profit, accelerated depreciation and amortization charges, related to the strategic reassessment of certain operations within the tubular product segment and an increase in corporate expenses to optimize internal processes, partially offset by an income tax benefit associated with the ceased Palmer operations. As Ben previously discussed, our Munhall facility produced a net loss of $8.9 million during the quarter, and excluding this impact, our net income would have been in line with our expectations. Adjusted EBITDA in the fourth quarter was a loss of $2.0 million compared to $14.9 million in the year-ago quarter, and adjusted EBITDA margin was negative 2.4% compared to 15.5% in the year-ago quarter. The decrease is primarily attributable to the aforementioned net sales reduction, the bulk of which occurred at our Munholl facility, and an increase in corporate expenses. If we exclude the unfavorable $7.4 million impact to adjusted EBITDA from our Monhal facility, we would have reported adjusted EBITDA margin of 8.4%, which is in line with our expectations for the quarter. Now turning to our full year 2022 results. Net sales increased by 24% to $414.1 million compared to $334.7 million in the prior year, primarily due to a more favorable pricing environment in the first half of the year, partially offset by a lower volume of shipments due to product mix shifts to meet long-term profitability objectives. Gross profit was 56.5 million compared to 60.8 million in 2021, while gross margin was 13.7 percent compared to 18.2 percent in the prior year. The decrease was primarily attributable to an increase in raw materials and freight costs. Net income increased 9 percent to 22.1 million or $2.12 diluted earnings per share compared to $20.2 million or $2.14 diluted earnings per share in the prior year due to the aforementioned increase in net sales and an income tax benefit recognized in 2022. Adjusted EBITDA was $36 million compared to $44.3 million in the prior year and adjusted EBITDA margin was 8.7% compared to 13.2% in the prior year. The decline is primarily due to lower net sales in the tubular product segment in the back half of the year compared to prior year and meaningful lower profitability of our galvanized product in 2022 compared to 2021. Lastly, looking at our liquidity position as of December 31st, 2022, total debt was 71.5 million compared to 70.4 million at December 31st, 2021. As of the end of 2022, we had $37.6 million of borrowing capacity under our revolving credit facility, compared to $39.4 million at the end of 2021. During the year, we also repurchased 110,404 shares for $1.3 million through our share repurchase program. I'd also like to add that we filed for a 15 calendar day extension with the SEC on March to file our 2022 annual report, which we expect to file later today. With that, I'll turn it back over to our operator, Liz, for Q&A.

Thank you, sir. If you'd like to ask a question at this time, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, press star 1 1 again. Please stand by while we compile the Q&A roster.

Again, that is star 1-1 to ask a question. I'm showing no questions at this time.

That concludes our question and answer session. I'd like to turn the call back over to Mr. Hutter for closing remarks.

Thank you, Liz. 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 first quarter 2023 results.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.