Ascent Industries Co. (ACNT) Q2 2023 Earnings Report, Transcript and Summary

Good afternoon, everyone. Thank you for participating in today's conference call to discuss Ascent's Financial Results for the Second Quarter Ended June 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 Cree. Following their remarks, we'll open the call to 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 meaning of the Private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward-looking statements. Cody, please go ahead.

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 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.

Thank you, Cody, and 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 second quarter, 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 in Bristol. All of this has unquestionably been a distraction for our ability to execute on the core business, but it has 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 and we feel very confident in who we'll be bringing on to next lead that segment. So stay tuned. We're very focused on empowering leadership to further scale the chemicals 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 continue 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 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 second quarter, we authorized a 10b5 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 than 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 interest of our shareholders, and we continue to believe in our ability to execute the long-term goals we've set for ourselves. 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.

Thanks, Ben, and 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 second quarter, 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 under cutting 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. And 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 experienced more delays and cancellations as overall macro uncertainty has caused customers to delay projects that we were assured and will ultimately move forward, but there has been more of a focus on derisking. Overall, we believe the long-term viability of our end markets for tubular products remains intact, and 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 fourth quarter. And turning to our specialty chemicals segment. We remain confident in this part of our business despite headwinds persisting in Q2 with continued destocking and 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 have made 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 have 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 micro dynamics 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 second quarter financial results. And then I'll return to answer any questions you may have. Bill, the floor is yours.

Thank you, Chris, and 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 primarily 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, and 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 pretax cash charges of approximately $2.8 million to $6.7 million in 2023 which is expected to include $2.6 million in severance costs and $0.2 million to $4.1 million in other restructuring costs that come with the facility shutdown processes, contract termination, transfer production and carrying costs. We also expect to incur non-cash charges of approximately $2.5 million to $10.3 million in asset impairments, inventory write-downs and other noncash restructuring charges for 2023. Through the second quarter, we have incurred approximately $2 million of the pretax cash charges and approximately $6.4 million of the noncash charges we expected. With that, let's talk about the second quarter. 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 chemicals 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 second quarter 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 second quarter 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 second quarter of 2022. Adjusted EBITDA margin was negative 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 [Audio Gap] 2022. During the second quarter of 2023, we repurchased 18,843 shares at an average cost of $9.34 per share or 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 Instructions] Our first question comes from Vincent Anderson with Stifel.

So 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 inflated you? Or could it be that you're earlier in your customers' lead times that this is trying to be mindful of heading into the next order cycle for those products?

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

That's helpful and makes sense. And 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.

Yes. It's really more of a commercial effort in getting -- turning over more stones. I mean the equipment is state-of-the-art. It's a great -- 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 our abilities to backfill that with other customers' products. So 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.

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

Well, yes and no. I mean, we are actively searching for an individual. We have a very capable interim person that's leading the charge there, and he's doing a great job and is uncovering things that are immediately accretive to the business. But we have strong views of 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.

Okay. And then 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? Or is there going to be some residual impact to margins through the balance of the year as you continue to turn that over?

We're talking which segment?

Either.

I would say -- I don't see any -- foresee any issues on the chemicals side. On the tubular side, we mostly burned through, and 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, likely brought in at the highest prices of all time in terms of nickel surcharges as well as raw material price. And 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, but that's -- we were -- 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.

Sure. Okay. And if I could, just a couple of more quick ones on the steel front. Maybe you can talk about this, maybe you can't. But 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 a loan, but are you aware of any efforts or general industry discontent and potential plans to address these imports that you might be able to throw your support in for?

Yes. I mean we're actively engaged in the Committee for Pipe & Tube Imports, which is effectively a collaboration of domestic pipe and tube producers. And we're looking at various countries that I would argue are dumping material into North America and weighing our options. But to your point, to go to a trade case alone is expensive and they're actually actively surveying, which groups to want to pursue trade cases as a team. So now -- we've done that in the past and continue to explore all options. But 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. And I think imports could be an opportunity also if we look at it through a different lens.

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 Munhall and you gave some ranges for the charges and maybe this question relates to where you fall in those ranges over the balance of the year. But 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 end.

I would say we're exploring all options, and our goal is to minimize the impact of the business and maximize the return we can get out of the residual value of the asset. So frankly, having conversations with, I would say, all of 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 an exit there that maximizes value.

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

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

Got you. Fair enough. All right. That's all for me. And best of luck on the rest of the third quarter.

[Operator Instructions] Our next question comes from [David Sifford].

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

Yes. So if you recall, we were later filing our 10-K in the first quarter. [indiscernible] even though the late filing of the 10-K didn't necessarily move into the second quarter. That was a late first quarter event, but it did prevent us from getting our 10b5 in place in the open window that we would have liked to have done. And so that's why we weren't able to utilize the entirety of the second quarter to buy back stock. But once we put that 10b5 in place and the window opened post the Q1 results, which was the middle of the second quarter, we were able to buy back shares every day. So as long as we continue to get our filings out on time and get the 10b5s in place in the open market purchases prepared, I don't see an issue in continuing to be in the market every day from a legal mechanics standpoint.

Okay. Got it. So good to see the debt pay down this quarter. How much lower do you think you can get that in 2023 this year?

We have no specific guidance on that, but we do think we can still continue to make some headway there.

Okay. How is the internal controls progressing?

A whole lot better now than it was with our prior auditor. So I think this is a very smooth quarter from our perspectives. There's never going to be perfect, but we feel like the processes and communications are in place now that enable us to be a lot more productive with our time and the ability 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 needs to be done.

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 the earnings?

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

Right. It did seem like we hit an inflection point in second quarter, where there should be improvement in the back half in your prepared comments.

I think that's correct.

So 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. So 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?

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

Yes. Okay. One last question. So it's no secret. It's been a tough three quarters, right? And the management turnover, customer destocking, maybe Ascent has lost some credibility maybe with Wall Street, I don't know. But 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?

I think it's clear that we need to execute better, right? So we manage the business right now for our current shareholders of which we are the largest ones. And so we have a responsibility to them to improve our execution and hopefully reward their investment and their patience. And so for people who are on the sidelines, that's their job to determine the risk reward in their investments, [indiscernible] to the other things that they can do with our capital. But obviously, at these share prices in 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.

Yes. Good. Well, thanks for the time. I appreciate the feedback. Have a good day.

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

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 third quarter 2023 results.

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