Q3 2022 Ascent Industries Co Earnings Call
Good afternoon, everyone and thank you for participating in today's conference call to discuss.
Financial results for the third quarter ended September 32022.
Joining us today are a since executive chairman of the board, Ben Rosenzweig, President and CEO , Chris Hutter, CFO , Aaron Tam and the company's outside Investor Relations advisor Cody Cree.
Following their remarks, we'll open the call for your questions.
Before we go further I would like to turn the call over to Cody Cree as he reads the company's safe Harbor statement within the meaning of the private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward looking statements Cody. Please go ahead.
Thanks, Andrew before we continue I would like to remind all participants that the discussion today may contain certain forward looking statements pursuant to the safe Harbor provisions of the Federal Securities laws. These statements are based on information currently available to us and are subject to various risks and uncertainties that could cause actual results to differ.
<unk>.
<unk> advises all those listening to this call to review the latest 10-Q and 10-K posted on its website.
Many of these risks and uncertainties.
<unk> 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.
Conciliations can be found in the earnings press release issued earlier today and posted on the investors section of the company's web site at <unk> Dot 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 <unk> Executive Chairman of the Board Ben Rosenzweig, Ben over to you.
Thank you Cody and good afternoon, everyone.
How much of the third quarter saw a higher price environment compared to 2021 pricing for stainless steel began to stabilize mid quarter or galvanized pricing has come down at a much faster rate.
But with demand remaining consistent and a healthy backlog of work, we were able to deliver our sixth consecutive quarter of year over year revenue growth.
Looking ahead, we do see the pricing environment continuing to normalize by the end of the year and into 2023, but we expect demand to remain stable across both of our segments.
I'd like to remind everyone that we also have several ongoing initiatives aimed at improving our overall operational efficiency and the profitability of our platform some of which accelerated in Q3 impacting our throughput and are reflected in our Q3 adjusted EBITDA.
In our tubular segment, we had some missteps during the quarter, but I am confident we will have these mostly worked through the impacts of our system as we enter 2023.
Specifically in early Q3, we began building high priced premium inventory as part of a specific high margin order for a current customer with the influx of lower cost import products accelerating into the market over that same time, we unfortunately did not win that order.
Separately, though related the prevalence of imports coincide with some destocking in our distribution channel, which temporarily impacted overall demand.
This confluence of events led to our inability to quickly fill our newly opened capacity with business that compared to our expected margins on the last order, resulting in much lower absorption of our fixed costs in our recent track record and capabilities would imply.
At the same time, we also had some planned operating expenses and decided to allocate additional resources to execute various operational initiatives that are part of our continuous improvement roadmap. These.
These expenses, which we expect will benefit our earnings power in the long term had a further negative impact on our results.
I want to be perfectly clear that the degradation in our bottom line. This quarter was meaningfully related to discrete lost orders are missteps and quickly adapting to fill the unexpected open capacity and what we believe to be transitory supply demand imbalances, rather than the result of a negative trend in overall demand.
While we do expect these impacts both on the revenue and cost side to continue into the fourth quarter. We believe our Bottomline will return to more normalized run rates beginning in 2023.
Switching gears to our inorganic growth initiatives, we're making notable progress identifying several attractive acquisition opportunities that we believe will make an instant impact to our platform.
As the state of the market has affected some of the buyer demand for our target companies, we're hopeful that their valuation expectations will reset a bit and we're already seeing some evidence of this as.
As a reminder, we've been looking at opportunities around the 5% to $30 million of EBITDA range.
Is that a existing synergies with our production capabilities and organizations with expertise and talent that we would expect to improve our platform.
While we are keeping our eyes open across both segments, we're putting the majority of our efforts towards acquisitions that fit within our chemical segment.
Our chemical segment wins business through a very technical sale, providing an inherently stickier customer set. This business also generates excellent free cash flow conversion and has high returns on invested capital.
Through both organic and acquisitive growth, we see a pathway to expanding our chemical segments EBITDA contribution closer to a 50 50 split but the tubular segment within the next two years.
That being said, we will remain disciplined in identifying the right long term fit for acquisitions instead of solely focusing on getting a good deal.
We have a strong relationship with our lender and at only one four times LTM leverage possess ample debt capacity to execute on accretive transactions with the success of our acquisition of the income we were able to instantly add differentiated reactor capacity and leverage John Zebra team and expertise we've set a high bar for ourselves, but based on what we.
Seen so far we're confident there are more opportunities like Dan come out there.
So inorganic growth is critical to our value creation strategy. There arent many opportunities we can pursue that or more prudent uses of capital and continuing to repurchase our own stock at recent trading levels.
As I stated in our last call. We plan on taking advantage of our existing share repurchase program and bought over 30000 shares in the open market in the third quarter of 2022.
At current levels, we expect to remain highly opportunistic with our repurchase program. We believe our share price is well below industry is trading multiples of our normalized earnings power as well as the private market value of our assets and future cash flows our balance sheet remains strong and we intend to continue to invest in growth and create value through prudent capital allocation.
To wrap up we expect to generate midterm value through the following focal areas first execute on our refined commercial sales strategy, leveraging our refreshed unified brand platform.
Drive automation projects to achieve efficiency and incremental margin and third progress highly complementary acquisition opportunities that will further expand our footprint and production capacity to better service our customers.
This will obviously be coupled with continued operational execution and prudent expense management.
Our success won't proceed in a linear fashion, we've achieved significant milestones over the past few quarters and I'm proud of what our team has accomplished so far.
As always I'd like to thank them for their hard work and dedication to helping us transform us.
And to a leading provider of tubular products and chemicals.
Confident that our team will adapt to changing market conditions execute on our priorities and drive significant value for our shareholders now I would like to pass the call over to Chris to provide in depth details on our operations across both segments, but I'll be available later on to answer any questions Chris.
Thanks, Ben and thank you all for joining today's call.
Dive into what drove our third quarter results.
As Ben discussed earlier in our tubular segment, we had some missed opportunities to generate additional revenue that would have allowed us to better meet our margin expectations.
We're taking proactive measures to support our team's ability to better forecast and react in a dynamic environment at.
At the same time, we increased our spending to provide the necessary operational enhancements to drive us towards long term success.
These are not initiatives that have been unknown to us in fact, they were critical opportunities that drew us to invest in the company. However in the environment, we've experienced over the past few quarters, where demand has outstripped supply our ability to take some of these right sizing actions has been constrained in favor of allocating resources to restore our presence and reputation.
Our customers.
For example, as the broader macro economy continues to evolve we are focused on improving our sales processes to promote deeper relationships with our customers, especially those that are purchasing our products for specific projects.
Working closer with our customers will result in more accurate forecasts that allow us to maintain a leaner inventory model without sacrificing our promised delivery times for product availability.
In turn this will free up additional working capital needs for investments into our infrastructure equipment and automation projects.
The outsized impact of these costs in the back half of this year is not expected to repeat into 2023.
We believe this investment period of lower margins as transactional part of our journey.
The current environment is something that we expect to be able to capitalize on in the long run.
As our enhanced processes and streamlined organization will position us to perform better across all market environments.
With pricing beginning to stabilize our ability to consistently manage inventory and material ordering will improve.
A key highlight in our commercial strategy this quarter, which rings true across both segments has been our investment in marketing following our rebranding.
We've rolled out unified marketing collateral across our sites, a new website with much needed updates to our core value and service capabilities and we've begun building awareness about our brand and culture through outbound communication, including being much more active on social media.
With our branding and go to market strategy fully aligned we were able to host three successful open houses at our tubular facilities and munhall Statesville in Bristol.
Hosted over 100 customers and vendors to showcase our new rebranded identity.
Our sales team used our new brand to further explain the depth of our capabilities to our existing customers, while gaining lead surrounding our supply chain and new projects.
The events exceeded our expectations.
With the success, we experienced you can expect us to develop additional commercial events in the future.
As we navigate the shifting market environment, we are continuing to position our plant in Mont Hall to optimize for the right relationship between throughput and maximizing margins through product mix <unk>.
<unk> is the most obvious example of what we're analyzing and moving toward throughout our system.
She is working quickly to flex our output and cost structure to preemptively positioning the company to capitalize on the potential weakness of less nimble competitors as we pursue market share gains.
As a reminder, this is a meaningful departure from what has been done at this company in the decade prior to our arrival in as many major undertaking to alter that mentality.
I'm pleased with our progress and the results we see on the horizon.
It is also important to note that we had another productive quarter, improving our safety measures and on time delivery rate.
Quarter entered ended with a total recordable injury frequency rate of two 7% on time delivery rate of 82%.
And looking at our progress since 2020. This represents a 210% improvement which has led to a 488% improvement in our total recordable incidents and a 227% improvement in our on time delivery rates.
A major <unk>.
Kudos to the team for those two milestones are.
Our safety measures are critical in creating an employee.
Work environment, and we are proud of how far we've come in a relatively short amount of time the added benefits of fostering a safe work environment go beyond the health of our team members directly benefits our ability to hire employees retain our best ones and lower our total cost since day, one our priority has been to reduce the risk of our team members and moving forward we will be continue.
<unk> re evaluating and developing additional procedures that ensure we remain diligent and avoid complacency regarding the safety of our team.
In the near term, we will be working down our excess inventory position, while we focus on our commercial efforts last quarter. We saw unfavorable cash used due to a large raw material receipts and vendor pressures from large suppliers that we expect to resolve in the upcoming months.
Through the reduction of our material spend to reflect the stabilizing environment and improving upon our billing and collection processes will free up additional working capital to further delever our balance sheet.
I am proud of what our tubular team has accomplished this quarter were identified growth projects dove deeper into our commercial relationships with the <unk> mentality and improved our customer experience.
Well as the safety for our workers.
I believe we are setting ourselves up for sustained success and I'm excited for what's in store for tubular.
Shifting the focus to our chemical segment.
Through aggressive pricing strategy and improved customer relationships, we drove a 70% year over year increase in net sales in the third quarter.
2022 and.
And the bottom line, we drove 55% year over year growth in EBIT dollars through the acquisition of <unk> and revitalized and unified strategy, leading to a more effective cost management through our supply chain.
Chemicals remains a stable workhorse for us and it is.
Been able to withstand the shifts of the broader macro economy, while providing us with the opportunity to continue to better utilize our assets and labor to steadily drive margin improvement.
We continue to leverage our scale and unique assets to progress our commercial strategy. We hired two new sales managers to help develop our sales funnel and drive onshore opportunities.
As our existing sales teams work closer with our core customers to develop the additional opportunities and provide data for more efficient inventory forecasting we expect to bring on additional talent that will be highly focused on winning new customers and projects.
Our expanded sales team has seen early success.
Driving deeper penetration within our existing customer base and we are confident they will be able to point to our exemplary track record and our competitive standard versus our competition has been hot for new opportunities.
In Virginia, we finalize the plan and agreement to outsource our wastewater treatment as part of our strategic investments in our infrastructure.
Provide us with long term stability at the site for the next 10 to 15 years, while allowing us to further invest in additional capacity, while eliminating previously required downtime due to issues related to a wastewater treatment.
South Carolina, we finalized multiple client agreements, allowing us to move to a higher value and margin mix than the company has experienced in the past.
Top of that we see line of sight to future margin improvement as we began filling our funnel with higher value added projects that can utilize our facilities unique mix of assets.
Longer sales cycle opportunities that we expect to bear fruit over the coming quarters.
Our objective is heading into the fourth quarter of 2023 or simple commercially we're going to be focused on building a robust sales funnel and helping potential customers better understand the range of high value added products. We can provide for them, we have the capacity to grow and with the establishment of our new brand. Our commercial team has the right tools they need.
To capitalize on our leads and find new revenue streams.
Operationally, we see potential further reduce off quality batches to drive lower operating costs.
<unk> will have an immediate impact on margins.
Plan to achieve this through our recently augmented quality assurance team to drive quality improvement we.
We will also be re optimizing our supply chain to ensure that we are finding the best quality materials at the lowest possible cost.
Sounds simple, but this organization has traditionally accepted nearly every product that just showed up for.
We're now a little more seriously scrutinize, our supply chain to improve the quality of our deliverables as our footprint grows. We also expect to open up larger scale vendor partners, thereby lowering our material costs through volume and freight levels.
Finally, we see the opportunity to further accelerate our high performance culture focused on Kpis training talent development and retention.
We wanted to take another step forward to create an environment, where we can grow and foster channel, while keeping our workers accountable and avoiding complacency.
As the labor market studies, we believe we can improve our employee churn, which I expect will increase our production capacity and overall efficiency as we reduce training costs and preserve institutional knowledge.
Overall chemicals as a strong foundation to begin capitalizing on the opportunities. We've identified for 2023. We believe there is potential for the segment to find rapid growth and I'm confident that we have a team in place to capture it.
I'd now like to turn it over to our CFO and Tim to walk through our third quarter financial results in more detail then I'll return to answer any questions. You may have earned before as yours.
Thank you, Chris and good afternoon, everyone, let's jump right into our third quarter financial results.
Net sales increased by 16% to $100 2 million compared to $86 2 million in the prior year period due to the relatively favorable pricing environment and an ongoing shift to a more favorable product mix also it's important to note that our net sales included $8 $3 million in Danville site sales that weren't in the prior year period.
However, it is not relevant to compare to current Danville, Virginia site results to pre acquisition, Dan Kim as we have fully integrated that site and continuously move projects throughout our footprint to produce the best possible results for our over all enterprise.
Gross profit was $11 6 million compared to $18 million in the third quarter of 2021, while gross margin was 11, 5% compared to 29% in the prior year period.
<unk> raw material labor and freight costs more than offset competitive price increases.
Net income in the third quarter was <unk> 6 million or <unk> <unk> diluted earnings per share compared to net income of $8 2 million or <unk> 87 cents diluted earnings per share for the third quarter of 2021.
The decrease is primarily attributable to the increased operating expenses within the tubular product segment and higher corporate expenses invested in internal process improvements.
The third quarter of 2022 also included a 0.7 million net loss from the acquisition of the Virginia site.
Adjusted EBITDA in the third quarter was $5 6 million compared to $14 8 million in the year ago quarter, and adjusted EBIT margin was five 6% compared to 17, 2% in the year ago quarter for referenced Danville contributed <unk> 5 million in adjusted EBITDA for the third quarter of 2022.
Lastly, looking at our liquidity position as of September 32022, total debt was $72 6 million compared to $70 4 million at December 31, 2021 as of September 32022, we had $36 7 million of borrowing capacity under our revolving credit facility compared to 39.
$4 million as of December 31, 2021.
As Ben mentioned earlier, the company repurchased 30200 shares in the quarter at an average cost of $16 29 per share totaling approximately $5 million with that I'll now turn it back over to the operator Andrew.
Hey.
Thank you Sir.
Ladies and gentlemen to ask a question you will need to press star one one on your telephone.
Once again to ask a question. Please press star one one on your telephone please.
Please standby, while we compile the Q&A roster.
And our first question comes from the line of David Siegfried.
Your line is now open.
Hey, guys how are you doing today.
Hey, David Good how are you.
Good congratulations on the brand refresh that was well done yes I can.
I'll tell you it's been extremely well received in the market a lot of effort went into that.
I can tell yeah, that's good good to hear.
So the higher corporate expenses it sounds like they will remain a little bit elevated through fourth quarter, and then dropping offered tailing off some in 2023 is that correct.
Yes, I would say, we've obviously invested heavily in process and procedures.
Upgraded some of the staff.
We're seeing.
The benefits of that through some reduced health care via the team that negotiates things. So it's I'm not sure what the exact number will be it is a little elevated but I forecast.
Cost savings going into 'twenty three.
Okay.
And then the increased imports that happened in this quarter from competitors or from other countries do you see that as a problem affecting <unk>.
Future quarters.
Well, it's something we're discussing internally I mean, we really can't control the flow of imports the flow of imports has increased significantly, but that's more on the smaller diameter tubing.
On the large diameter tubing, we've seen somewhat of a not a pause, but a slowdown in the approval rate of projects with the infrastructure spending bill.
So we fully anticipate.
Plenty of demand on the large project scale, it's just getting them through the system and approved so we can start making material for it.
But I am surprised at the level of imports that have been flushed through in the last 12 months compared to even the prior three years to five years.
So it is something that Tim Lynch, who runs our tubular segment. He is on the committee for pipe and tube imports. So it is something that third discussing actively.
Is it could become a challenge for many companies if they continue to just allow us to flow and freely.
Got it now isn't it true that the part of the infrastructure program is designed to.
Turbo.
Product built here in the U S. So there is the <unk>, which is the domestic requirement for made melted in and produced here in the United States.
So and Thats larger scale stuff.
I say imports do you think of imports going into many different applications, whether it be ornamental or mechanical.
The appliance or <unk>.
Automotive there is.
<unk> historically has been a part of our business and it's tough to compete with very inexpensive Taiwanese Chinese Korean Vietnamese product that comes in extremely cheap.
Makes sense.
You mentioned that your can you become a supplier of choice.
And gone from a bottom tier to the top tier.
So.
That will help you with the larger diameter pipe.
Being a supplier of choice as.
Demand stabilizes or whatever.
In a good spot with that going forward.
Well, we've been playing about 18 months of catch up I think I mentioned, our on time delivery was in the 30% now it's in the eighties. So that was always the challenge. The business had was if you are a project based consumer of our product say your.
Contractor supplying off methane or natural gas facility and you need our product, while it's hard to rely on us for that job because if we only shipped 30% of what you needed.
The tough business model.
So that was the driver of the open houses was to truly show 100 plus customers.
Which the majority of them somewhere distributors, but a good portion of them are direct OEM end user customers that when you give us a purchase order here's our processors. Our procedure here is how we manage quality. This is how we flow through the system here is our material applicator here's the entire team that takes this from a coil form too.
Finished good.
And this is why youre going to get it on time.
So we've laid out a tremendous amount of foundation. This year, that's going to finally prove to the market that we can deliver that and we are winning a fair amount of that business.
Good to hear.
You mentioned in August stat.
The team was diversifying into personal care products and specialty chemicals, So how is that progressing.
You could add further than that yes.
Yes, I mean, obviously in the.
Personal care side, we've got certain segments that we compete in one household.
And that is a segment of area of growth that we've identified and it's just applying our reaction capabilities to best fit.
The sales funnel and the opportunities we're seeing.
We're still seeing a very strong demand from construction adhesives, and sealants and we see a very robust demand there and are winning some very large opportunities.
To produce.
Specialty chemicals for those customers.
Good to hear.
Did I hear that correctly in the remarks that.
In two years.
The goal is EBITDA and tubular to be equal in EBITDA in chemicals, yes.
<unk>.
On the tubular side youre going to.
There will be periods of ups and downs, it's not as consistent in my opinion of our chemical business, our chemical business tends to be extremely sticky think Ben mentioned that it's.
The sales cycles, a little longer there is it's definitely a more technical sale.
With quality and labs and Chemistries.
Approvals in the depending on what applications going into.
You have to have that quality team to continue to deliver 99, 9% defect free material.
So it's once once you get committed is that outsource specialty chemical partner you tend to keep that business for years, not just one po.
Sure.
Yes, that's good I'm glad working in that direction and something and something to note that's to share with everyone from the <unk> acquisition, we're now starting to see it and you're effectively one year later.
We're now starting to see business that and it is hard to just compare Denton Dan come to Dan Ken because we've shifted a fair amount of business to other facilities based on the needs and wants of our customer base that came out of band count and we acquired.
Significant level of high caliber customers that Dan <unk> had they had other needs in South Carolina, and Tennessee and now the sales process. There is getting those locations qualified to produce.
Creating a specialty chemical formula So you have to.
That facility approved by that customer now, we're expanding those tentacles into the customer base and we're seeing all while we were doing business with customer X and Danville will now we're doing business with customer X and fountain in Cleveland, Tennessee.
So I would say the.
The expand the customer base through the locational needs and the needs of the customer are definitely coming through now.
Good to see well you could see the $27 $3 million in chemicals this quarter. So.
It was 27% of your revenue is from chemicals.
High watermark that I've seen since I've been following the company for a few years so good.
Good afternoon.
Definitely a focus that Ben and I have we are.
Not only organically, but looking for the right strategic fits to bolt onto the business yes.
Yes.
And when that thing.
I appreciated the color on the buyback and good to see some shares repurchased this quarter I think that sends a message.
And I appreciate that thank you. Thank.
Thanks, David I appreciate appreciate it thanks David.
Thank you.
And as a reminder to ask a question you will need to press star one one on your telephone.
At this time this does conclude our question and answer session.
I would now like to turn the call back over to Mr. Hunter for closing remarks.
Thank you Andrew we'd like to thank everyone for listening to today's call and we look forward to speaking with you again, when we report our fourth quarter and full year 2022 results.
Ladies and gentlemen, this does conclude today's conference call.
You may have.
This guidance.
You for your participation.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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Sure.
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