Ascent Industries Co. (NASDAQ:ACNT) Q4 2023 Earnings Call Transcript

Ascent Industries Co. (NASDAQ:ACNT) Q4 2023 Earnings Call Transcript March 28, 2024

Ascent Industries Co. misses on earnings expectations. Reported EPS is $-0.73 EPS, expectations were $-0.08. ACNT isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, 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 31, 2023. Joining us today are Ascent’s Executive Chairman of the Board, Ben Rosenzweig; CEO, Bryan Kitchen; CFO, Ryan Kavalauskas; and the company’s outside Investor Relations Adviser, Cody Cree. Following their remarks we will 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.

Cody Cree: Thanks, Lateef. 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 webcast link that is also posted on the Investors section of the company’s website. With that, I’d like to turn the call over to Ascent’s Executive Chairman of the Board, Ben Rosenzweig. Ben?

Ben Rosenzweig: Thank you, Cody. Good afternoon, everyone. The broader macro environment proved to be a challenge for much of 2023. Specifically, the fourth quarter was more difficult than originally expected as we navigated the impacts of some poor execution on our part, including unplanned downtime at our Bristol facility, along with continued destocking trends throughout both segments. Despite this, we’ve continued to make notable progress towards our long-term strategic goals. Most importantly, we feel very good about our management team, both strategically and operationally. Chris has been a fantastic strategic leader for the organization, but the turnover we experienced in 2023 showed that we did not have the right operational team in place to fully complete the execution of our strategic vision that began in 2021.

In a short time, Bryan and Ryan have proven that they not only share our vision, but they can execute it at the highest levels and extend it to future value creation. We must make sure that the mistakes that the organization has made in the past do not cloud our judgment or patience from turning Ascent into the business we all know it can become. I expect that we’ll begin to see some tangible progress in the coming months with meaningful improvement in results during the back half of the year as key components of our cost reduction and product line management efforts take full effect. These efforts do not rely on a strong market recovery nor a significant strategic shift in either segment. So we’re confident in our ability to produce improving results in line with these expectations.

In the fourth quarter, we completed the sale of Specialty Pipe and Tube or SPT within our Tubular segment. This was an all cash transaction for a purchase price of approximately $55 million, which we used to fully pay down our line of credit. Our improved balance sheet will provide us with the necessary financial flexibility to invest in opportunities that are better aligned with our long-term strategy. We’re certainly proud of what we were able to accomplish with SPT under our stewardship, and it proved to be a valuable asset over the past three years within our Tubular segment. However, we believe the inherent cyclicality in its operations makes it a better fit for the private markets, and we’re pleased that we were able to achieve a favorable outcome for all parties involved while delivering significant value to Ascent shareholders.

The remaining assets within our Tubular segment include Bristol Tubular Products, which is the largest domestic manufacturer of welded pipe from stainless steel, and American Stainless Tubing, which is a producer of premium ornamental stainless steel tubing. While these businesses have not been performing at acceptable levels over the past 12 months, which is a combination of both difficult market conditions and shooting ourselves in the foot, we’re working tirelessly to replicate and implement strategies that we believe can positively impact the near-term results. Our top priority remains capitalizing on attractive long-term growth opportunities in the Specialty Chemicals segment. Our confidence in this segment grows every quarter, and we continue to believe this industry can deliver more profitable and predictable revenue streams, resulting in better value for our shareholders over the long term.

Our capital priorities for 2024 and beyond remain unchanged. We’ve been repurchasing shares in the open market as much as possible, and we’ll continue to do so as long as our stock trades meaningfully below our expectation of the company’s intrinsic value. The 10b5 program that we implemented in Q3 has allowed us to continue our repurchases, and our Board is also evaluating other options to accelerate accretive capital deployment. In terms of M&A, while we remain opportunistic on this front, our resources and focus are currently dedicated towards stabilizing both of our segments. We firmly believe that we have to get our own house in order before we embark on pursuing additional larger acquisitions. So, while we continue to believe there’s a large value creation opportunity through inorganic growth, M&A is not a near-term priority.

Though 2023 was a major challenge operationally, and some of that difficulty has bled into the opening months of 2024, we feel the sale of SPT at an attractive price, and the recruitment of Bryan and Ryan are both things that move the needle in a big way towards cementing durable shareholder value creation. We now sit here with no debt, ample availability from our revolving credit facility, and an actionable plan underway to return to positive and growing EBITDA. As always, we deeply appreciate the patience of all of our stakeholders and we look forward to delivering results. Now, I’d like to pass the call over to Bryan to provide in-depth details on our operations across both segments. I’ll be available later on to answer any questions. Bryan, over to you.

Bryan Kitchen: Thanks, Ben, and thank you all for joining today’s call. It’s a pleasure to be on my first earnings call as CEO of Ascent, and I’m eagerly anticipating our conversations in the years ahead. When I first joined Ascent in September of 2023, I saw a strong foundation in the Specialty Chemical segment, a foundation that boasts multi-decade relationships with blue chip customers, an untapped product portfolio, diverse manufacturing capabilities, and redundancy across our sites that provide incredible reliability for our customers. At the same time, I knew that transformational change was going to take both time and reinvestment in talent, processes, tools, and capabilities. After digging in over the past six months, I’m pleased to report that there’s even more value to be unlocked.

With our success in identifying, attracting and recruiting top talent, my confidence in our potential grows every single day. Before I dive deeper into the progress we’re making within our Specialty Chemicals business, I wanted to give you a bit more detail on our current stabilization initiatives within the Tubular Product segment. There is no doubt that our Tubular segment has faced a number of challenges over the years, but as Ben talked earlier, we’re proud of the value we were able to generate through the sale of SPT. The rest of the segment faced challenges during the fourth quarter as we were still heavily affected by destocking and customers being over-inventoried. These macro trends combined with our make-to-order focus significantly impacted the profitability of the segment.

While the initial rationale to pursue a make-to-order model had some validity, we found ourselves chasing demand for lower margin, higher volume products. Valuable lessons were learned, but our efforts will shift towards a more profitable and a more predictable business model moving forward. Coupled with that, we’re seeing signs of optimism throughout our end markets, and it seems like destocking trends are beginning to reverse. Within our ASTI business, we’re even starting to hear that some of the downstream markets for premium ornamental steel, like the marine industry, are slowly beginning to bounce back. We are seeing positive signs that indicate that we have turned the corner in the macro environment, so we are focused on positioning the segment to profitably capture the right opportunities.

Our team is attacking all aspects of our cost structure while working to optimize our product mix. Through these efforts, we believe that we will start to see an improvement in our operational margins and see a more stable year for the Tubular Product segment. Looking at the bigger picture, our primary objective is to stabilize the business while preferentially allocating our capital to pursuing growth within the Specialty Chemical segment. Let’s delve into that segment next. Much like the Tubular segment, we encountered challenges stemming from inventory destocking and a general downturn in industry demand. However, we managed to implement widespread price increases, mitigating some of the decline in demand and ongoing cost escalation. Operationally, we’ve established and activated a very strong cost reduction pipeline throughout the segment, set to bolster our profitability in 2024 and beyond.

While there’s considerable amount of work ahead, we’re identifying numerous opportunities, both commercially and structurally, to achieve substantial cost savings. As we think about our long-term positioning, it’s our mission in Specialty Chemicals to become a natural extension of our customers’ operations, consistently delivering high-quality products on time and at a reasonable cost. In order to do so, we’re recapitalizing our segment-level SG&A to unleash the fullest growth potential of our current asset base while working with our customers to improve the quality of our existing book of business. Without question, we have pockets of capacity that are not fully utilized. However, our goal is not simply to fill up this capacity. Much of our current demand-driven challenges stem from a strategic choice between volume and value.

Our goal is to occupy our capacity with healthy margin business. This requires a deliberate shift in our product-sales mix, moving more towards ratable and predictable branded product sales. Fortunately, we’re not starting from scratch. Our starting point is to dust off our current branded product portfolio rather than needing to invest heavily into R&D. Our new team is beginning to develop an exciting pipeline of new opportunities across both branded product sales and custom manufacturing. We’re beginning to spread the word, and I look forward to sharing positive updates with you throughout 2024. Overall, across our entire business, we are working diligently to continue stabilizing our core foundation before we embark on any other inorganic growth initiatives.

We are committed to creating predictable reliability for our customers, our shareholders, and our employees. While transformational change does not happen overnight, I firmly believe we are on the right path and have the potential to create significant value over the long term through measured and focused approach. I look forward to serving you as CEO going forward and unlocking the true potential of Ascent. I’d like to now turn it over to our CFO, Ryan Kavalauskas, to walk us through our fourth quarter and full year financial results in more detail. Ryan, the floor is yours.

Ryan Kavalauskas: Thank you, Bryan, and good afternoon, everyone. It’s a pleasure to be participating in my first earnings call as CFO of Ascent. I’m truly excited about the opportunity to contribute to our company’s journey and look forward to engaging in meaningful conversations with all of you in the years to come. Thank you for your trust and support as we continue to navigate forward together. Before we jump into it, on March 18, we filed for a 15-day extension with the SEC to file our 2023 annual report. We currently expect to file by end of day Monday, in compliance with that deadline, so be on the lookout. Now let’s talk about our financial results starting with the fourth quarter. Net sales from continuing operations were $41.2 million compared to $54.2 million in the prior year period.

This decrease was primarily due to lower end market demand and destocking trends across both segments. Gross profit from continuing operations was negative $2.1 million compared to $4.9 million in the fourth quarter 2022, while gross margin was negative 5.2% compared to 9% in the prior year period. The decrease was primarily a result of unfavorable product mix and working capital initiatives. Net loss from continuing operations in the fourth quarter was $7.5 million or negative $0.73 diluted loss per share compared to net income from continuing operations of $4.5 million or $0.43 diluted earnings per share for the fourth quarter of 2022. The decrease was primarily attributable to the aforementioned lower net sales, unfavorable product mix, along with increased investments related to efficiency optimization efforts.

Adjusted EBITDA in the fourth quarter was negative $5.9 million compared to $1.7 million in the same period last year, and adjusted EBITDA margin was negative 14.4% compared to 3% in the same period last year. The decrease was primarily attributable to the aforementioned lower net sales. Now turning to our full year 2023 results, net sales from continuing operations were $193.2 million compared to $262 million in 2022. The decline was primarily due to decreases in volume throughout the year as a result of industry-wide destocking trends and challenging end markets resulting in decreased selling prices. Gross profit from continuing operations was $1.5 million compared to $43.3 million in 2022, while gross margin was 0.8% compared to 16.5% in the prior year.

The decrease was primarily attributable to the aforementioned decline in net sales across both segments, along with increased input and labor costs and an unfavorable product mix compared to the prior year. Net loss from continuing operations was $34.2 million or negative $3.37 diluted earnings per share compared to net income from continuing operations of $17.6 million or $1.69 diluted earnings per share in the prior year due to the aforementioned decline in net sales and gross margin. Adjusted EBITDA was negative $15.9 million compared to $25.6 million in the prior year and adjusted EBITDA margin was negative 8.2% compared to 9.8% in the prior year. The decline is primarily attributable to lower operating margins across both segments compared to the prior year.

Lastly, looking at our liquidity position as of December 31, 2023, we ended the year with zero outstanding debt and access to $61.8 million in availability under our revolving credit facility. We were able to fully pay off our debt with the proceeds from the sale of SPT in late December 2023. During the year, we also repurchased a total of 143,108 shares for approximately $1.3 million through our share repurchase program. With that, I’ll now turn it back over to the operator for Q&A.

Operator: Thank you, sir. [Operator Instructions]. Our first question comes from the line of Vincent Anderson of Stifel. Please go ahead, Vincent.

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Q&A Session

Vincent Anderson: Yeah, thanks. Good evening, gentlemen. So I just wanted to kind of talk about the fourth quarter sales cadence. You had a pretty good sequential reduction in inventories yourself. So if I think about your commentary on destocking, was there anything proactive on your side as well to kind of, correct your own inventory levels, and maybe some of that created more one-time pressure in gross profit margins than we would have seen otherwise?

Ryan Kavalauskas: Yeah, I mean, we definitely took a look at our inventory over the year, and we made a concerted effort to either commercially attack some of the aging inventory we had or write-it off. So we did see some margin compression in the fourth quarter due to kind of cleaning up some of the inventory we had on our books. So going forward, Bryan and I will take a look at exactly what these inventories need to look like when we shift some of our commercial strategies, but some of the cleanup efforts definitely had a margin compression in the fourth quarter.

Vincent Anderson: Okay. All right. Now that’s helpful. And then you might have touched on this already, so I apologize if I missed it, but the top line on chemicals, I think when we get the K, we’ll see volumes versus price, but we had some pretty easy volume comps in the fourth quarter. Was there a bit more of a mix towards price coming back in with raw materials and volume stabilizing in 4Q, or was it still mostly driven by volumes?

Ryan Kavalauskas: Volumes definitely played a larger role in the compression in the fourth quarter. We did see some pricing headwinds, but it was largely volume-related.

Vincent Anderson: Okay. And then just kind of sticking with chemicals then, I mean, I know it’s tough, but everywhere else we look, the commentary on end markets is generally stable. I mean, still some first-half weakness in crop chemicals, a little bit of weakness in care chemicals, but nothing too dramatic. Is that more or less the feedback that you’re getting from customers, year-end working capital management aside? And if so, are you expecting better visibility on order patterns as we move through 2024?

Bryan Kitchen: Yeah, this is Bryan Vincent. So overall, from a market perspective, we’re seeing a favorable tick-up related to ag. We’re seeing a favorable tick-up related to water treatment. We’re seeing, what I would say, stabilized demand in comparison to Q4 looking out into at least the first half of 2024.

Vincent Anderson: Okay. Excellent. And then, Bryan, you actually, you brought it up already, but branded products. So, it sounds like, you like the impact on capacity utilization relative to the SG&A investment or headache, depending on how you look at it. But how should we think about where the low-hanging fruit is in the existing Ascent portfolio, especially if we’re talking about, like, speed to market, access to distribution, or if these are going to be direct product sales? I know it’s early, but I’m guessing you’ve seen something in the portfolio already that has you talking about it.

Bryan Kitchen: Yeah. I mean, when you look at it from an overall sales cycle time standpoint for custom manufacturing or total manufacturing, you’re looking at, 6 to 18 months from the time you uncover a prospect to when you actually commercialize that opportunity. Certainly, there are exceptions, but that’s generally the norm. From a branded product sales standpoint, the qualification timeline is much, much smaller, much, much shorter. So that could be in the range of, one month to three months. The interesting thing about our existing portfolio that we have is it has a runway into a wide array of different market applications. And so, things like water treatment, things like oil and gas, things like textile chemicals, these are all capabilities that we have inside of our business today.

And we just need to breathe a little bit of life back into it, right? And it comes through an increase in SG&A allocation, as well as a reallocation of SG&A as well, to really pivot and go after that book of business, because along with that, not only will we see an improved margin profile, but that ratability and that predictability is often much better when we’re in control of our own branded product sales.

Vincent Anderson: Fair enough. And as you think about your kind of your contract business, are those logical customers to bring branded products to right away? Or kind of coming back to that sales channel question, what’s kind of your easiest path to market with what you have right now?

Bryan Kitchen: Yeah, it’s really market dependent. And if you look at kind of where we’re focusing initially, there’s not a lot of overlap with our existing customer base. And therefore, there’s not a lot of conflict either. So that’s really where we’re running and gunning right out of the gate. Looking forward to reporting more favorable outcomes here in the coming quarters on that.

Vincent Anderson: All right, beautiful. And then actually, you already addressed the M&A strategy quite clearly. So I won’t — I’ll leave that alone. And I think that’s all from me. So thanks.

Bryan Kitchen: All right, great. Thanks, Vincent.

Operator: Thank you. [Operator Instructions]. Our next question comes from the line of private investor David Siegfried. Your question, please, David.

Unidentified Analyst: Hey, congratulations, Bryan and Ryan, on your appointment to the management team. Welcome. Yeah. So, impressive pay down in debt this year at $72 million in debt reduction. That’s really good. Does that give the team flexibility to reinvest where you need to without extra expense?

Ryan Kavalauskas: Yeah, I’ll take this one. It does, right? I think it allows Bryan and I to kind of refocus. And I think a lot of what we’re looking at right now is how do we get back to the fundamentals across both segments? And how do we reallocate some of our capital to growing and growing and restabilizing the business? So coming in with a clean slate on the debt side, definitely gives us a lot of options. As Ben alluded to, M&A is far out in the future. We think we have a lot to do to kind of stabilize things and get the business to be more predictable, more ratable, as we said. So having that slate clean right now does allow us to strategically reinvest internally and commercially and things like that. So we will look at the opportunities there. But yes, having a clean slate is definitely helpful for us right now.