Ascent Industries - Q2 2023

Transcript

Operator (participant)

Good afternoon, everyone. Thank you for participating in today's conference call to discuss Ascent's financial results for the Q2 ended 30 June 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 Cree. Following the remarks, we'll open the call for your questions. Before we go further, I'd like to turn the call over to Cody Cree, as he reads the company's Safe Harbor statement within the eaning of the Private Securities Litigation Reform Act of 1995, that provides important cautions regarding forward-looking statements. Cody, please go ahead.

Cody Cree (Director of Investor Relations)

Thanks, Michelle. 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 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 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. We have also uploaded an updated presentation to the Investors section of the website, which we encourage you to view. With that, I'd like to turn the call over to Ascent's Executive Chairman of the Board, Ben Rosenzweig. Ben, over to you.

Ben Rosenzweig (Executive Chairman of the Board)

Thank you, Cody. Good afternoon, everyone. During our last few earnings calls, we've been transparent about the issues we faced as an organization and the expected softness within our Tubular Products segment as we transition out of the Munhall facility. While this transition has been more of a drag on our business than originally anticipated, macro headwinds and execution issues across many of our end markets in both segments have simultaneously affected our consolidated results more than we originally anticipated.

Speaking on behalf of our board and senior leadership team, we do not view our current performance as acceptable and are working hard to take immediate corrective action. That said, I am pleased that during the Q2, we made a strong push in our efforts to finalize the permanent closure of our Munhall operations, which we expect to be fully shut down by the end of August.

As of today, there is very little left at Munhall, which is why we have moved it into discontinued operations and are now showing the core business as it will be going forward, as well as in prior periods, to enable a proper comparison. The process of the Munhall closure has involved a lot of moving parts, including finishing production at Munhall, transitioning the remaining volume, and evaluating the movement of certain mills to our facility at Bristol. All of this has unquestionably been a distraction for our ability to execute on the core business, but it had to be done in order to remove the unnecessary volatility from our business that came from a product line outside of our core area of differentiation.

We are pleased to be moving on from this legacy element of the business and expect this will have a long-term effect of stabilizing our Tubular segment with a focus on higher margin, more defensible product lines. More broadly, we still view Ascent Chemicals as one of the long-term growth engines for our company. Although macro volatility has made sales cycles even longer than typical, our team has been hard at work building relationships and expanding our pipeline. As you may have seen in the 8-K we filed over a month ago, we parted ways with our head of our segment. This was an amicable parting, we feel very confident in who we'll be bringing on to next lead that segment. Stay tuned.

We're very focused on empowering leadership to further scale the Chemical segment and unlock the embedded growth and profitability potential we're confident is there over the coming years. Despite all the challenges we faced in Q2, we continued to focus on closely managing our working capital. We were able to generate cash, pay down debt, meaningfully clean up our accounts receivable, and repurchase shares as aggressively as possible.

So far in 2023, we've repurchased over 50,000 shares, and our top capital allocation priority remains continuing to buy back stock, given where our price is today. During the Q2, we authorized a 10b5-1 repurchase plan and have effectively been repurchasing stock in the open market every single day. Although we're constantly evaluating additional strategies to further deliver value to shareholders, we strongly believe this is a very attractive use of capital right now.

Based on the visibility we continue to gain in our future performance, now that we've streamlined our operations, we expect to remain active repurchasers of our stock, and the board is open to all alternatives to more aggressively repurchase our shares if the stock continues to trade at these levels or even lower. Though not ideal, we firmly believe the short-term impacts that come with the changes we're making today are the right moves for the business in the long term.

We believe the largest of our hurdles are now behind us, and we anticipate seeing improvements in our consolidated results beginning next quarter, then having more of a positive impact in Q4 and beyond. We appreciate the patience of our shareholders as we work through these challenges and set our business on the right course to ultimately deliver significant shareholder value.

Our leadership team remains highly aligned with the interests of our shareholders, and we continue to believe in our ability to execute the long-term goals we've set for ourselves.

Bill Steckel (CFO)

Now I'd like to pass the call over to Chris to provide more details on our operational performance in both segments, and I'll be back to answer any questions during the Q&A portion. Chris, over to you.

Chris Hutter (President and CEO)

Thanks, Ben. Thank you all for joining today's call. Jumping right into our Tubular Products segment. As Ben mentioned, we are pleased to be moving on from our galvanized business, and we'll be operating with a much more efficient footprint going forward. This entire process has been distracting and time-consuming for our entire organization, but as we have talked through on multiple occasions, we believe this strategic exit was necessary, given the business did not meet our internal return thresholds.

Looking at the remaining parts of the segment, we are now much more streamlined, focusing on Bristol Tubular Products, American Stainless Tubing, and Specialty Pipe and Tube. We believe each of these businesses represent the best people and products within each of their competitive peer groups. We can generate profitable growth and deliver attractive returns within each and acknowledge we have work to do.

To explain the current environment, we are continuing to deal with the effects of prolonged volatility in the macro economy. In the Q2, industry-wide destocking trends and meaningful import pressures continued to impact our bottom line as sales declined year-over-year, resulting in unacceptable adjusted EBITDA margin. Although we generated a meaningful cash flow number, we believe our businesses can and will perform better. Overall, we are still seeing over-inventoried customers, and in the first half of the year, import products have been coming in and undercutting prices. That said, many of our customers have told us that these imports have had quality issues, and we are seeing these customers slowly come back into our sales pipeline. At Bristol, the volatile and falling surcharge market has caused many distribution customers to slow new purchase orders.

We've also been a bit under-inventoried in the first half of this year, as we've been focusing on working capital in light of the closure of Munhall. On the positive side, the surcharges have stabilized a good bit over the past few months. I also feel confident that we are much closer to a normalized working capital position to enable us to see a ramp in sales beginning in August. On the project side, we've experienced more delays and cancellations, as overall macro uncertainty has caused customers to delay projects that we were assured and will ultimately move forward. There's been more of a focus on de-risking. Overall, we believe the long-term viability of our end markets for tubular products remains intact. Our industry data shows service center inventories are still below historical averages.

We are working hard to ensure we are in the best possible position to capitalize on the momentum when the pendulum does eventually swing in our favor again. That being said, we continue to anticipate earnings improvements from this segment in the back half of 2023, with accelerating progress in the Q4. Turning to our Specialty Chemicals segment. We remain confident in this part of our business, despite headwinds persisting in Q2, with continued destocking, the loss of a customer program really affecting our short-term results. We're not the only ones facing this pressure, as industry peers and customers have also been significantly impacted by this broad-based pullback.

However, we're not just waiting for demand to bounce back. Our sales team is aggressively pursuing profitable opportunities to generate more long-term revenue streams with both new and existing customers and make good inroads in recent months.

We see trial activity coming on very strong in Q4 into Q1 of 2024 and remain hopeful that this will turn into more recurring revenue projects. Post the loss of our customer and some other large relationships not meeting their volume projections, we have been working to move things around with the goal of improving our capacity utilization. Admittedly, the first half was not a good performance in this area, as all sites have been operating below our utilization targets, resulting in a disproportionate impact on the bottom line. We have taken some corrective action to reduce certain operating expenses, and I believe that by Q4, we'll be closer to the growth track we had been on. Overall, our organization continues to make progress towards our long-term goals.

We have a very specific vision for Ascent, and we believe we are on track to achieving what we set out to accomplish a few years ago. We have come a long way since 2020. We've essentially stripped the organization down to its core, implemented an entirely new processes and mindsets as we work to build it back stronger than ever. We have turned over nearly every leadership position in the organization as we search for world-class business leaders capable of growing and optimizing their business units. We've made many mistakes, and we'll be the first to acknowledge them. While challenging microdynamics this year have exasperated our execution issues, please recognize that some of our pain is a result of intentional decisions that we believe will put our business in a better position to succeed over the long run.

We don't expect our results to turn on a dime, but we do believe the worst is over now, and we can begin to substantially grow from this point, dramatically reducing earnings volatility. We appreciate the continued support and patience of our investors and look forward to delivering upon expectations we have set out for ourselves. Now I'd like to turn the call over to our CFO, Bill Steckel, who will provide a detailed overview of our Q2 financial results. I'll return to answer any questions you may have. Bill, the floor is yours.

Bill Steckel (CFO)

Thank you, Chris. Good afternoon, everyone. Before I jump into the Q2 results, I wanted to call out the accounting change you may have noticed on the financial statements we released this afternoon. As a result of the decision to permanently cease operations at Munhall, we have categorized the financial results from the facility into discontinued operations. To give a more accurate representation of our performance ex Munhall, the results I'll be discussing today are from continuing operations. We have adjusted our prior year periods to reflect the results ex Munhall as well, to enable more relevant comparisons. Additionally, I wanted to reiterate the impact we expect the closure of Munhall to have on our full-year financials. Currently, we expect to incur pre-tax cash charges of approximately $2.8 million-$6.7 million in 2023.

which is expected to include $2.6 million in severance costs and $2.2 million-$4.1 million in other restructuring costs that come with the facility shutdown processes, contract termination, transfer of production, and carrying costs. We also expect to incur non-cash charges of approximately $2.5 million-$10.3 million in asset impairments, inventory write-downs, and other non-cash restructuring charges for 2023. Through the Q2, we have incurred approximately $2 million of the pretax cash charges and approximately $6.4 million of the non-cash charges we expected. With that, let's talk about the Q2. Net sales from continuing operations were $60.7 million, compared to $84.6 million in the prior year period. The decrease is due to lower overall sales volumes within both Tubular Products and Specialty Chemical segments.

Gross profit from continuing operations was $3.2 million or 5.3% of net sales, compared to $20.2 million or 23.9% of net sales in the Q2 of 2022. The decrease is primarily attributable to the previously mentioned decline in net sales, as well as increased raw material and labor costs. Net loss from continuing operations was $2.7 million or $0.37 diluted loss per share, compared to net income from continuing operations of $10.8 million or $1.04 diluted earnings per share in the Q2 of 2022. The decrease is primarily attributable to the aforementioned decline in gross profit and higher interest expense. Adjusted EBITDA was negative $1.5 million, compared to $14.8 million in the Q2 of 2022.

Adjusted EBITDA margin was -2.4%, compared to 17.4% in the prior year period. Lastly, looking at our liquidity position as of June 30, 2023, total debt was $54.5 million, compared to $71.5 million at December 31, 2022. As of June 30, 2023, we had $45.4 million of borrowing capacity under our revolving credit facility, compared to $37.6 million in 2022. During the Q2 of 2023, we repurchased 18,843 shares at an average cost of $9.34 per share for approximately $176,000, bringing total year-to-date repurchases for 2023 to over 51,000 shares. We currently have 628,823 shares remaining under our share repurchase authorization.

With that, I'll now turn it back over to the operator for Q&A.

Operator (participant)

Thank you. If you'd like to ask a question, please press star one, one. If your question has been answered and you'd like to remove yourself from the queue, please press star one, one again. Our first question comes from Vincent Anderson with Stifel. Your line is open.

Vincent Anderson (Equity Research Analyst)

Yeah, thanks. Good evening, guys. Just thinking through the chemicals business, I mean, everywhere else in the industry, we've seen a lot of pressure, specifically on ag and personal care, purely from destocking. Just wondering if you saw something similar this quarter, and if not was it something specific to your positioning that insulated you? or could it be that you're earlier in your customers' lead times, that this is something to be mindful of heading into the next order cycle for those products?

Chris Hutter (President and CEO)

Hey, Vince. Yeah, this is Chris here. The primary issue on the chemical side is more so related to a site-specific customer that was making a product that's significantly having volume impacts, and it's more on the personal care side. We're working through that on refilling that volume, but it's, it's really... Two of our sites are performing above expectations. One of the sites is being the anchor right now.

Vincent Anderson (Equity Research Analyst)

Okay, all right. That, that's helpful and makes sense. Actually, you're already addressing my next question to some degree, but when you have an asset that large that is really tied to a specific customer, by and large maybe just walk us through how you adjust your planning when you lose demand that suddenly, and particularly this early in the year, from a planning perspective.

Chris Hutter (President and CEO)

Yeah, no, it's, it's really more of a commercial effort in turning over more stones. I mean, the equipment is state-of-the-art. This is specifically related to one of our dedicated customers and working through the process with this customer on: okay, well, if you're not going to use all of the volume of that plant, what are, what are our abilities to backfill that with other customers' products? It's a little bit of a contract negotiation, but as we're coming to the tail end of that we feel like we'll be able to make headway and discuss openly us using that volume for other customers.

Vincent Anderson (Equity Research Analyst)

Okay, excellent. That's helpful. then this is probably a little bit more of a longer-term view, and we were sorry to see John go. When you think about a replacement for him, are you approaching that from kind of a traditional recruitment effort, something you want to get filled immediately? Is that a job opening that potentially you could take your time on and address via M&A?

Chris Hutter (President and CEO)

Well, yes and no. I mean, we're, we are actively searching for an individual. We have a, a very capable interim person that's leading the charge there, and he's doing a great job and is uncovering things that are, are immediately accretive to the business. No, we, we have strong views of, of where, where we want to see our Specialty Chemicals segment grow to, and we think we're not going to wait for an acquisition to bring someone in. We need to recharge the energy sooner versus later.

Vincent Anderson (Equity Research Analyst)

Okay. , you've managed inventory really pretty well, given the volume headwinds. Are you comfortable where you are now with your current raw material inventory on a mark-to-market basis? Is there going to be some residual impact to margins through the balance of the year as you continue to turn that over?

Chris Hutter (President and CEO)

We talking on which segment?

Vincent Anderson (Equity Research Analyst)

Either.

Chris Hutter (President and CEO)

I, I don't see any, foresee any issues on the, on the chemical side. On the tubular side, we mostly burned through. That's what you're seeing negatively impact the margins. All of the product that was brought in last year for that large customer we've talked about on prior earnings calls.

Vincent Anderson (Equity Research Analyst)

Mm-hmm.

Chris Hutter (President and CEO)

likely brought in at the highest prices of all time in terms of nickel surcharges as well as raw material price. As we're burning through that, we burned through the majority of that material through the first half of this year. There's a little bit of hangover to burn through in Q3. Our working capital position was, I would say, not optimal last year, and we also didn't forecast the loss of that customer or the surcharge falling as fast as it did.

Vincent Anderson (Equity Research Analyst)

Sure. Okay. If I could just a couple more quick ones on the steel front. Maybe you can talk about this, maybe you can't. When you think about the impact of imports, particularly in this demand environment the burden of a trade case would probably be a bit large for Ascent to go at alone. Are you aware of any efforts or general industry discontents and, and potential plans to address these imports that you might be able to throw your support in for?

Chris Hutter (President and CEO)

Yeah, I mean, we're actively engaged in the Committee on Pipe and Tube Imports, which is effectively a collaboration of domestic pipe and tube producers. We're looking at various countries that I would argue, are dumping material into North America and weighing our options. To your point, to go to trade case alone is expensive, and , they're actually actively surveying which groups would want to pursue trade cases as a team. No, we've done that in the past and continue to explore all options. Alternatively, I think we need to be a little more creative, and , there may be a chance where we're an importer of record, where we can import and distribute at a lower price than we can produce it for on some of the smaller OD stuff.

We're really understanding our value proposition today more so than in prior years. I think, hey, imports could be an opportunity also, if, if we look at it through a different lens.

Vincent Anderson (Equity Research Analyst)

That's, that's an interesting thought. I'll probably need to think about that and come back to it. I think for now, my last one would just be on, on Munhall, and you gave some ranges for the charges, and, and maybe this question relates to where you fall in those ranges over the balance of the year. , how are you thinking about residual value on that facility at this point, whether shifting operations or assets, to defer future CapEx, outright sale? Just kind of walk me through that and how that might kind of lead you to one end of your cost guidance versus the other, the other end.

Chris Hutter (President and CEO)

I would say we're exploring all options, and our goal is to minimize the, the impact of the business and maximize the return we can get out of the residual value of the asset. We're actively having conversations with, I would say, all the above is from equipment to moving equipment to liquidating equipment, to subleasing the facility, to joint venturing something potentially. There's a lot of things in queue, but it is discontinued ops, and we need to make sure that we have a, an exit there that maximizes value.

Vincent Anderson (Equity Research Analyst)

Sure. Probably fair to assume that the high end of the cost would be if you reclaimed the least amount of residual value out of this and, and had to just kind of work through the facility kind of keeping it around a bit longer than you wanted, things like that.

Chris Hutter (President and CEO)

Yeah. I mean, we obviously... it's been an anchor since the day it was acquired, so we're, we're trying to cut the anchor.

Vincent Anderson (Equity Research Analyst)

Gotcha. Fair enough. All right, that's all from me. Thanks, and best of luck on the rest of the rest of the Q3.

Chris Hutter (President and CEO)

Okay, thanks, Vince.

Operator (participant)

As a reminder, to ask a question, please press Star one one. Our next question comes from David Siegfried. Your line is open.

David Siegfried (Research Analyst)

Hey, good afternoon, and thanks for taking my call.

Chris Hutter (President and CEO)

Hey, David.

David Siegfried (Research Analyst)

Just a question. What obstacles kept the company from buying back more shares than it did in the Q2? Is there anything you could talk about?

Chris Hutter (President and CEO)

Yeah. If you recall, we were later filing our 10-K in Q1 than we liked. Even though the late filing of the 10-K didn't necessarily move into the Q2, that was a late Q1 event, but it did prevent us from getting our 10b5-1 in place in the open window that we would have liked to have done. That's why we weren't able to utilize the entirety of the Q2 to buy back stock. Once we put that 10b5-1 in place and the window opened, post the Q1 results, which was the middle of the Q2, we were able to buy back shares every day.

so long as we continue to get our filings out on time and get the 10b5-1s in place and the open market purchases prepared, I don't see an issue in continuing to be in the market every day from a, a legal mechanic standpoint.

David Siegfried (Research Analyst)

Okay. Yep, got it. Thanks. Good to see the debt pay down this quarter. How much lower do you think you can get that in 2023, this year?

Ben Rosenzweig (Executive Chairman of the Board)

We don't have specific guidance on that, but we do think we can still continue to make some headway there.

David Siegfried (Research Analyst)

Okay. How is the internal controls progressing?

Ben Rosenzweig (Executive Chairman of the Board)

A whole lot better now than it was with our prior auditor. I, I think, this was a very smooth quarter from our perspective. , there's never gonna be perfect, but we feel like the processes and the communications are in place now that enable us to be a lot more productive with our time and, and, and the, the, the ability to, to get the filings out and processed and have the feedback that we need in order to make sure that we're going through, in a more systematic way, everything that needs to be done.

David Siegfried (Research Analyst)

With the Tubular being restructured, and I would say earnings becoming more predictable here in the future with Tubular and with Chemicals being a little more stable, do you see a point where the company can begin to offer guidance, because there'll be less volatility in your earnings?

Ben Rosenzweig (Executive Chairman of the Board)

It's possible. I mean, I think our guidance for the near term is gonna be more directional than with a specific number. Most of it is not so much a function of the of the industry, right? Of the, of the type of business we're in. I think a lot of it is a function of the size as well. It's very difficult for businesses of this size kind of sub-$1 billion or so, to give very specific quarterly or yearly guidance. We'll, we'll do our best to help investors better understand where we're thinking and what our, our views on the future are.

David Siegfried (Research Analyst)

Right. It did seem like we hit an inflection point in the Q2, where there should be improvement in the back half.

Ben Rosenzweig (Executive Chairman of the Board)

Yeah.

David Siegfried (Research Analyst)

-in your prepared comment.

Ben Rosenzweig (Executive Chairman of the Board)

Yeah, I think that's fair.

David Siegfried (Research Analyst)

, the team has been fairly vocal over the years about the need to grow the chemical business, and I know Ascent would hope to consolidate chemical manufacturing. When you advertise your intent to buy and sellers know that you need to buy something to grow, does that artificially keep the asking price high?

Ben Rosenzweig (Executive Chairman of the Board)

No, I don't think so. I think it's more of a supply-demand issue, right? It's just, . We've clearly shown our willingness to walk away from deals that don't make economic sense. I think there's just a number where a deal lives with, for both the buyer and the seller, and that's ultimately where we consider transacting.

David Siegfried (Research Analyst)

Yeah. Okay, one last question. it's no secret it's been a tough Q3, right? The management turnover, customer destocking, maybe, maybe Ascent has lost some credibility, maybe with Wall Street, I don't know. What would you say to individuals, investors who are watching the story on the sideline? They've seen all the stock volatility. What would you say to those guys who are waiting on the sidelines?

Ben Rosenzweig (Executive Chairman of the Board)

I think it's clear that we need to execute better, right? We, we, we manage the business right now for our current shareholders, of which, you we are the largest ones, we have a responsibility to them to improve our execution and hopefully reward their investment and their patience. For people who are on the sidelines it's their job to determine the risk-reward in their investments and where this compares to the other things that they can do with their capital.

Obviously, at these share prices and our view of the future, the potential of the business, what's already in motion and what we see happening at the company, that hopefully will manifest itself in the results, we think it's a very compelling investment, and we're willing to put our capital as well as the company's capital into the stock at these prices.

David Siegfried (Research Analyst)

Yep. Good. Well, thanks for the time. I appreciate the feedback, and thank you. Well, you have a good day.

Ben Rosenzweig (Executive Chairman of the Board)

Thanks, David.

David Siegfried (Research Analyst)

Yep.

Operator (participant)

Thank you. There are no further questions. I'd like to turn the call back over to Chris Hutter for any closing remarks.

Chris Hutter (President and CEO)

Thank you, Michelle. 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 Q3 2023 results.

Operator (participant)

Thank you for your participation. This does conclude the program, and you may now disconnect. Everyone, have a great day.