Ascent Industries (ACNT) Q3 2026 Earnings Call Transcript

Adjusted EBITDA rose $2.1 million to $3.5 million Sequentially, revenue increased 5.7%. Gross profit increased approximately 28.3% to $7.1 million and adjusted EBITDA increased approximately $2.1 million to $3.5 million Adjusted EBITDA margin expanded from 5.7 to 13%. We are improving the business and its ability to generate earnings. Through September, net sales increased 28.5% to $72.2 million. Notably, $11.9 million or 21.2% of the growth was delivered organically. Excluding the impact of the Midwest acquisition. Adjusted EBITDA improved by $3.43 million to $4 million On a trailing 12-month basis, continuing operations, including Midwest Graphic Sales generated $91 million of revenue. Increase of $16.7 million or 22.4% year over year.

Adjusted EBITDA was $2.86 million compared with $20 thousand in the prior comparable trailing 12-month period. These results should be viewed in the context of our business's built in seasonality. Portions of our legacy custom manufacturing portfolio experienced normal program turnover, and seasonal patterns. Particularly in the fourth and first quarters. We are working to grow out of that seasonality over time, but it remains a near term characteristic of the business. Customer schedules, product mix, and production timing can shift results between the quarters, making the trailing 12-month view Helpful in assessing our broader trajectory. Even with quarter to quarter variability from seasonality, and program timing, the broader results show that we are building a better business.

Not simply a bigger 1. We have delivered material year-on-year growth in a muted market. With significant contributions coming from new products and processes. Supporting that level of growth takes coordinated work across commercial, technical, quality, and operations from qualifying raw materials and establishing processes to preparing our systems and people to service our customers reliably. Our priority is to scale efficiently while executing flawlessly. Our Q3 business wins provide another measure of progress. During the quarter, we converted 12 opportunities across 8 customers into approximately $2.8 million of annualized revenue. Nearly half of the revenue came from our focused growth markets, 25% from coatings, and 25% from oil and gas.

Approximately 84% of that revenue came from sales, and half of the wins came from new customers. Our average win size is also increasing and is now north of $200 thousand of annualized revenue. Our 7.5-month average sales cycle reflects the technical challenges customers bring us and the time it is required to develop and validate solutions in the lab, in the plants, and in the field. For the quarter, our conversion rate was approximately 13%, within the specialty. Within the specialty chemical industry benchmark of 10% to 15%. Our active selling project pipeline ended the quarter at approximately $135 million near record levels. And nearly 60% higher than 1 year ago.

A strong pipeline creates potential disciplined conversion into profitable repeatable earnings create shareholder value. We are managing we are managing SG and A with while preferentially investing in market facing talent across sales, technical service, and product development, to accelerate growth in our focused markets. At the same time, we are aligning operational resources around the highest value opportunities to improve gross profit. Earlier this year, we set a goal of $3 million to $5 million of annualized gross profit improvement at run rate by year end. Measured against our first quarter 26 baseline. We remain on track, supported by actions already realized in initiatives in play.

Excluding Midwest, gross profit averaged approximately $5.8 million in the second and the third quarters as compared with $2.8 million in the first quarter. The improvement reflects disciplined pricing and mix management, strategic sourcing, process R&D, engineering, and network and logistics optimization. We are seeing these efforts translate into operating gains In Tennessee, process engineers reduce cycle time on a product line from 4.5 days to 4 hours. A 96.3% reduction. In Virginia, they improved yield by 14.7% on a specific process. These are examples of a broader pipeline spanning operations, logistics, quality, process R&D, and commercial initiatives. Our focus is to sustain these gains, and build on them to strengthen gross profit and earnings conversion.

We are beginning to apply our commercial capabilities and operating discipline beyond our legacy platform. In the third quarter, Midwest secured 2 new pieces of business expected to deliver more than $500 thousand of annualized revenue at full run rate. We are also seeing early benefits of Ascent's marketing capabilities. SEO is driving a surge in web inquiries and trade show preparation has generated dozens of promising prospects. Customers are committed to advancing several selling projects into lab and production scale trials. And a manufacturing transition into Ascent's network remains on schedule.

By combining Midwest application expertise, and customer relationships, with Ascent's marketing capabilities and broader manufacturing network, We are now pursuing opportunities that neither business could access on its own. Before I turn it over to Ryan, I want to leave you with 1 final thought. Our strategy has not changed. We remain focused on improving the quality of our business through stronger commercial capabilities, greater operational discipline, and disciplined capital allocation. The progress this quarter sequentially, year-to-date, and across our trailing 12-month performance shows that the capabilities we have built are translating into measurable results. Our next priority is to convert more of our growth into stronger margins, more consistent cash generation, and higher returns on invested capital.

We are not waiting on the market to improve our business. We are improving it through disciplined execution, continuous improvement, and thoughtful capital allocation. That is how we create lasting value for our shareholders. None of this would be possible without the dedication of our employees, the trust of our customers, and the confidence of our shareholders. To each of you, thank you for your continued support. And with that, I will turn it over to Ryan to review our financial results and capital allocation in greater detail.

Ryan Kavalauskas:Thanks, Brian. The third quarter gives us reasons to be encouraged. While also keeping our focus on the work still in front of us. Revenue and earnings improved meaningfully, and importantly, our cash profile improved as well. Our objective now is to make that progress more consistent and durable, converting more of the growth that is already in the business into margin, cash flow, and returns. Third quarter net sales were $27.1 million up 37.8% from the prior year. As Brian noted, that growth was broad based. With strong organic growth and sales excluding the Midwest Graphic Sales acquisition. Alongside positive contribution from Midwest. Adjusted EBITDA increased to $3.5 million or 13% of sales.

Compared with $1.4 million or 7% a year ago. We also continue to demonstrate SG and A leverage. SG and A declined to $5.3 million or 19.6% of revenue, from 31.7% in the prior year quarter. Over time, we continue to believe a run-rate SG and A level around 15% of revenue is achievable as we grow the revenue base standardize processes, and create additional operating leverage. Turning to gross profit. We generated $7.1 million in the quarter, an increase of 21.9% year over year while gross margin improved approximately 460 basis points sequentially to 26.2%. We are pleased with that progression, we are not viewing 1 quarter as a finish line.

Gross margin remained below the prior year period, driven primarily by higher material costs even as gross profit dollars increased and conversion costs improved as a percentage of revenue. Pricing and mix have been important contributors to the improvement we have seen. The opportunity from here is to complement that commercial execution with greater benefits from sourcing, process consistency, automation, productivity, and better utilization of our cost structure. As revenue and volumes continue to grow, we have a larger base over which to improve absorption and standardize execution. Which should help reduce the impact that customer schedules production timing, asset utilization can have on an individual quarter.

At the same time, as Brian noted, normal program turnover and seasonality remain part of the business as we move through year end and into the first quarter. For that reason, we continue to believe the trailing 12-month view is the clearest way to evaluate the direction of the business through normal quarterly variability. On that basis, continuing operations including Midwest, generated approximately $91 million of revenue. Up more than 22% year over year while gross profit and adjusted EBITDA improved. SG and A continued to leverage against the larger revenue base. On a trailing 12-month basis, SG and A declined to approximately 25% of revenue from approximately 31% in the prior year period.

An improvement of more than 600 basis points. Adjusted EBITDA increased to approximately 2.9 million from essentially breakeven in the prior year period. We believe that progression better reflects the underlying health of the business and the opportunity to convert a larger revenue base into stronger margins, cash generation, and returns over time. Turning to cash, we ended September with $28.7 million of cash and no borrowings under our revolving credit facility. With $21.1 million of remaining revolver availability. More importantly, operating cash flow turned positive during the quarter. Cash used in operating activities improved from approximately $7.7 million through June to $5.5 million through September. Meaning the business generated approximately $2.2 million of operating cash during Q3.

Improvement is particularly important when viewed alongside the capital we deliberately deployed earlier in the year. Through September, we used approximately $13.6 million for the Midwest acquisition, $6.9 million for share repurchases and $2.3 million for capital expenditures. Working capital remained a use of cash, led by receivables as revenue grew. But the operating cash inflection in Q3 is encouraging and the cash use rate has moderated materially from the first half. Subsequent to quarter end, we received the full $4.55 million Bristol Metals escrow holdback. Which is additive to the September 30 cash balance. We remain focused on further improving cash conversion, particularly through inventory discipline, vendor terms, and collections.

At our current scale, we continue to estimate that each 5-day improvement in the cash conversion cycle could release approximately $1 million to $1.5 million of cash depending on the mix of improvement. Consistent with the outlook we provided last quarter, the escrow release brings cash into the low to mid-30 million dollars range. Before any additional discretionary capital deployment. Together with more than $20 million of available borrowing capacity at September 30, That supports total liquidity in the low to mid-$50 million range, and preserves meaningful flexibility as we move through year end. That brings me to capital allocation. Our priorities remain the same and, importantly, remain in order first liquidity. Second, working capital.

Third, internal investments fourth, strategic M&A and fifth, opportunistic share repurchases. The order does not take M&A or buybacks off the table. Means we intend to protect the balance sheet improve the cash efficiency of the business and fund the investments and people, process, automation, maintenance, high return growth that can strengthen the earnings power of the platform. Before deploying incremental capital elsewhere. We believe that discipline is particularly important at this stage of its development. Third quarter demonstrated the earnings potential of the revenue base we have built and provided an encouraging improvement in cash generation. The work now is to make those results more repeatable.

Improve the quality of the conversion, and continue building the flexibility to invest when attractive opportunities arise. With that, I will turn it back to the operator for questions.

Operator:Thank you. Thank you. At this time we will conduct a question and answer session. As a reminder, to ask a question, you will need to press *11 on your telephone and then wait for your name to be announced. To withdraw your question, please press *11 again. Please stand by. Our first question comes from Mr. David Siefried. Your line is open.

David:Hello, guys. Nice quarter.

J. Bryan Kitchen:Thank you. Thanks, Dave.

David:For taking my call. that is good. Yeah. Pleased to see the legacy business. Having a good quarter and growing. Had a question about the Midwest acquisition. Why was there a negative $200 thousand adjusted EBITDA contribution in the quarter from that.

Ryan Kavalauskas:David, yeah, that is largely due to the-- the corporate allocation. That we burned the business with now. So if you remove that along with the escrow, that is also carrying on that business. it is roughly breakeven. So, that is-- you know, that is what is right.

David:Okay. And then the Midwest field trial, has that how is that. Is that advanced toward commercial production?

J. Bryan Kitchen:Yeah. We have actually had several field trials, David, with 1, 2, 3. At least 3 different customers, and we are progressing each of those projects through the sales cycle. So we are not. Well, we are commercial on 1 of them. We are not commercial on the other 2. So the pipeline continues to grow. I mean, we are we are incredibly pleased with how the pipeline is shaping up. There are opportunities over the past 2 weeks that we have gotten our eyes on that we did not even have access to. 2 months ago. So very pleased with how Midwest acquisition is beginning to shape up.

David:Got it. Now you did. I think if I looked at Q2, the pipeline was, what, 41? Yep. And then the Q3 pipeline, I think, was, like, 35. Conversion rate 26% Q2. Third. 13% in Q3. So, will you just expect a variable conversion rate going forward? Have you never really know how the customer's gonna accept you know, the formula or whatever that you have been working on?

J. Bryan Kitchen:Yeah. it is largely a function of the mix of the projects that we have in the pipeline at that point in time. I mean, what we are what we are seeing now, if you remember, what, 2 years ago, the selling project cycle time was much lower than what it is today, and it is it is expanded or extended largely because of the technical challenges that we are we are being presented with and the time that it takes to innovate a solution, develop that, put it through our lab, get it qualified to our customer's lab, then get it qualified in the field, and then take it to full commercials. Scale.

So it is it is really just a function of mix. Not to scurry for-- Yeah. Okay.

David:And then, you know, you talked about the legacy business having seasonality So not that I am asking for guidance, but do you think that you can consistently deliver, generate quarterly profit. Profitability going forward.

J. Bryan Kitchen:Yeah. I think from a revenue standpoint, David, I mean, I would look for Q4. This Q4 to be better than Q4 of 25, certainly. From a profitability standpoint, look. I mean, we are still gonna have that funky mix that we have built into the existing book of business that we are still trying to grow through. So margins will be compressed without question, in the fourth quarter. Ryan, I do not know if you wanna add any additional color to that.

Ryan Kavalauskas:No. I mean, I think, yeah, you are going to see until we are able to kind of build the business a little bit differently. You are always gonna have that ramp in Q2 that peaks in Q3 with some of the product mix that flow through. And like Brian said, I think we will see a little compression in earnings in Q4 compared to Q3 but I do not believe what we are seeing today is that it will be less pronounced than it was last year.

So we do believe ultimately that the profile we are building that we have shown in Q3 can be built upon. it is right now, we are just we are still seeing that Q3 bump, then we will always have that kind of Q4 until we can kind of build the business a little bit.

David:Got it. And is that a function of just needing to grow the revenue you know, $30 million a quarter, $35 million a quarter before you know, you could optimize the margins and, you know, kinda get rid of the seasonality.

J. Bryan Kitchen:it is part of it, certainly. I think 1 thing that we are we are encouraged by, I think, you know, like, referenced earlier in the script that, you know, we still have work to do. And I think 1 of the things that I am encouraged about is just how much improvement runway we have operationally to unlock additional earnings through optimization, things like cycle time, things like waste elimination, other structural costs. Like, we did a lot in the early days of the transformation, but there is still much more to be done. I mean, look at it through the through the lens of the. 1 of the examples I gave earlier.

We had a product at a 4.5 day cycle time. We were able to take that down to 4 hours. Now that might be an extreme example, but nonetheless, there are a number of opportunities that we have. Across the business to optimize. Good.

David:Yeah. And then, you know, SG and A. So I think you said 19% this Q3. The goal is 15% Is that something that can be achieved, get down to the 15% level Like, in 2027 as you grow your top line and optimize You think you can get there sometime in 2027?

J. Bryan Kitchen:I think what we flashed initially was, you know, when we are at that kinda 21 to 31 mark, should be in that 15% range. We are a little bit ahead of the curve right now. Like I mentioned earlier, we are. You know, anytime that we can, you know, find incredible sales folks, you know, we are gonna go out and we are gonna bring them on because that return on that investment is enormous. But I think we are we are we are growing into our SG&A. it is exactly what we said we were gonna do a couple of years ago. We are not quite where we wanna be yet.

And we are gonna have to grow into it. It. Yep.

David:And then, you know, just capital allocation. So it looks like share buybacks are essentially. You know, if you could be opportunistic, obviously, but protect the balance sheet, which is wise. Would you be opportunistic on a acquisition if the right 1 came along? I mean, is there anything you could talk about on that subject?

J. Bryan Kitchen:Yeah. I think we are. Go ahead, Roy. Sorry.

Ryan Kavalauskas:I mean, you could hear we were both aligned there. So. Yeah. Absolutely. I mean, that is that is kinda what we are we are focusing on right now. it is working it is working capital and, you know, we to win some business, we had to give some terms and that required a little bit more working capital than we have historically needed for the business. So we are comfortable knowing that is where it is at and they are right now. now. So it is really all about protecting the balance sheet and leaving us with optionality.

So if the right acquisition comes along, we are always looking and it supports the growth of the business. it is in our targeted markets. We. We have left ourselves the ability to go do that. So we will continue to look at that, and if the share price provides an opportunity too, we will be opportunistic there as well. So I think really it is about you know, focusing on that optionality and looking for internal investment. To drive the margin growth through process automation and things like that. it is really. Those are kind of the priorities we are looking at.

David:Got it. Okay. Well, thank you for the nice quarter. Thank you for the time. Appreciate it. You have a good day.

J. Bryan Kitchen:Great. Thanks, David.

Ryan Kavalauskas:Yep.

Operator:Thank you. Our next question is from Eric McCarthy with In Light Capital. Your line is open.

Eric McCarthy:Hi. Thank you, guys. And just to echo, David, great results. David did address a number of the questions that I had, but just to dig in on them a little bit more. When you quote the sales pipeline number, of, I believe, it is $112 million, $120 million Is that is that to be taken as something that is an annual number that could become recurring in the future?

J. Bryan Kitchen:Yeah. it is an absolute value of the overall selling project pipeline that we have built up. So, you know, the way in which we look at our pipeline, Eric, nothing makes its way into the selling project pipeline unless it is driven by an expressed customer need. And what does that mean? Well, we are not. We do not have projects in there just as fillers. We are not saying, well, we are gonna go develop a product and hope that we sell it to know, 50 different customers. These are very discreet product customer combinations where a customer has said, I have a need for x, y, and z. Can. Since you help us?

So, you know, there is ebbs and flows every month. You know, in and out of the pipeline. But what I would say right now, you know, 1 of the things that I am most encouraged about is the quality of the continues to improve. Month on month, quarter on quarter. We are starting to see the pipeline really begin to be structured around our focused growth markets. Versus buckshot. I am also encouraged to see that you know, our average new win is increasing in size and scale.

Eric McCarthy:You know, we are we are north of $200 thousand right now for each new win.

J. Bryan Kitchen:So, you know, for us, you know, the selling project pipeline, I mean, it is a 100-plus projects deep. there is gonna be some singles in there. there is gonna be some doubles in there. Triples, and then few and far between, they will be that, you know, that home run. So again, I am encouraged by how that thing is, you know, beginning to be developed and structured by the commercial team.

Eric McCarthy:Great. And then with respect to Midwest, and the integration of the acquisition, is there a particular portion of that pipeline that you could allocate to Midwest that shows the benefits of this acquisition and the potential that it still has in front of it.

J. Bryan Kitchen:Yeah. I mean, I guess there is a couple of things. So if you look at the overall pipeline itself, over $50 million of selling project pipeline is structured around Midwest. So those are relatively new entrants that we put into the pipeline. Post acquisition. Pipeline size is certainly important, but that conversion is also incredibly important. So we have already within this past quarter, we have already won 2 new pieces of business. That will generate over $500 thousand a year of annualized top line growth. So these are good-- good quality pieces of business. So, yeah, very exciting.

Eric McCarthy:Great. Thank you. And then just a last question to unpack some of the seasonality in the business, what is the primary driver of that? Is it the industries in which you serve the end customers? Is it some sort of inventory or restock/destock Phenomenon? What drives the seasonality?

J. Bryan Kitchen:Across the quarters? I mean, the primary driver for q. For the outside of Q2, Q3 versus Q1, Q4 is the built in seasonality around there is some ag business that we have, a couple, 2, 3 pieces of ag business. That, you know, squarely sit in Q2, Q3. there is also some legacy jet fuel additive business that is inside of Q2, Q3 as well. That coupled with normal Q4 destocking, especially when you are looking at it through the lens of contract manufacturing. Those are really the 2 primary drivers for that built-through seasonality. So our challenge is simple. Right?

We have got to grow out of it. it is not just grow with size and scale, but it is to find the right pieces of good quality business to put into the mix.

Eric McCarthy:Alright. Well, thank you, and keep up the good work.

J. Bryan Kitchen:Alright. Appreciate it, Eric.

Operator:Thank you for your question. As a reminder, if you would like to ask a question, please press 11 on your telephone and wait for your name to be announced. Please stand by for just a moment. We are showing no further questions at this time. So I would now like to turn it back to Brian Kitchen for closing remarks.

J. Bryan Kitchen:Alright. Great. Thank you, Therese. We would like to thank everyone for listening to today's call, and we look forward to speaking with you all again when we report our fourth quarter 26 results.

Operator:This does conclude today's conference. You may now disconnect.

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Ascent Industries (ACNT) Q3 2026 Earnings Call Transcript was originally published by The Motley Fool