Q3 2019 Earnings Call
Greetings and welcome to the Astec industries third quarter 2019 earnings call. At this time, all participants are in listen only mode.
Brief question and answer session will follow the formal presentation.
Hey, what's your acquire operator systems during the conference. Please press Star zero on your telephone keypad.
As a reminder, this conference is being recorded it does now my pleasure to introduce your host Mr., Steve Anderson VP director of Investor Relations. Thank you Sir you may begin.
Thank you Michelle good morning, and welcome to the Astec Industries Conference call for the third quarter that ended September Thirtyth 2019, as Michelle mentioned my name is Steve Anderson also on todays call are very rough below our chief Executive Officer.
And David Silvious, our Chief Financial Officer.
As you may have noticed in our earnings release. This morning. Our presentation includes a slide deck that can be accessed by using the webcast link in the release in the deck is also on our website under the Investor Relations section and then the conference call Tab. We also filed an 8-K with it got a presentation. This morning.
And just a moment I'll turn the call over to Barry and David to share their comments on the quarter, but before we begin I'll remind you that our discussions. This morning may contain forward looking statements that relate to the future performance of the company.
These statements are intended to qualify for the safe Harbor liability established by the private Securities Litigation Reform Act and any such statements are not guarantees of future performance and are subject to certain risks uncertainties assumptions factors that could influence. Our results are highlighted in today's financial news release and others are contained in our angel.
And our filings with the FCC as usual, we ask that you familiarize yourself with those factors. So at this point I'll turn the call over to Barry.
Thank you Steve Good morning, everyone I'm pleased to be speaking with you on my first conference call as President and CEO of ethic industries I've met several of you and look forward to getting to know all that I haven't seen in the near future.
[noise] since joining the company in August of this year I've spent a significant amount of time, beating the astec team talking to customers and distributors.
Well visiting every aspect site I had the pleasure and media the top 100 leaders of our great organization in many of our teammates.
My interactions confirmed what I already knew when joining the company. That's tech team is passionate about our business and our customers.
The liver core values day in day out and have a strong desire to win and create value for shareholders.
Our team members they've been exemplified the values and culture that I'm proud to be part of it.
Their dedication and passion for our customers was validated as I spent time in the market talking to the men and women who own and operate our equipment.
I heard over and over that our equipment is best in class and better services support repeatedly earns a trust ever most demanding customers.
Let's now turn our attention to the slide deck.
For those of you that are less familiar with that tech data glance slide is a great representation of who and where we are.
Moving to the summary of the third quarter financial results you can see that our revenue on a year over year basis was flat.
Softer North American market was offset by growth in international sales I know from discussions with their customers that they are busy but had to have more recently held off on capital equipment buying decisions. I also know that our dealers have a healthy amount of inventory on hand and that their lease fleets, although busy have been slow to convert to retail sales.
Those factors in the fact that we are working hard to drive down or inventory lead to less product flowing through our factories.
We had been slow it to rightsize, our capacities and that caught up with us in the third quarter with that said, we've taken actions to do so by reducing our workforce by 9% year to date, which includes the decision to close two of our sites one in Germany, and one in southwestern United States.
I am confident we will continue to optimize our capacity moving forward with better utilization of our sales and operating finding tools.
I want to let you know that we continue to have sharp focus on executing the Aztec strategic procurement initiative.
We will realize between $2 million to $3 million the savings in 2019 with intent of realized in $25 million in savings on a full year basis in 2020.
I'm pleased that are international sales help offset lower sales in North America.
Our global growth strategy investments are paying off but we still have a long ways to go.
We have exciting opportunities ahead of us and I have all the confidence that our strong global team and our leadership to be able to execute our strategic plan.
Now turning our attention to the balance sheet you can see that we've done a good job of managing and growing to that's just part of our DNA and we'll continue to be a strength as we move forward and sharpen our focus on key metrics like return on invested capital and free cash flow.
Our strong balance sheet gives us the flexibility to pull many levers, which we intend to use to drive increased shareholder value moving forward.
I'll now turn it over to David.
Thanks, Mary and good morning, everyone. Thanks for joining us.
Our revenues for the quarter were relatively flat with Q3 of 2018 and as Barry noted the U.S. market is down relative to the prior year right International efforts are able to make up for the domestic softness.
Forex impacted our sales by six tenths of a percent for the quarter.
Increased parts and service sales, especially domestically offset softness in capital equipment sales and is also evidenced that our customers are working and using their equipment.
Our dealers have high inventories, including rental fleets that have historically converted to retail sales by this time in the year.
The many of those rental to retail conversions have yet to occur in 2019.
Our backlog decreased by 21%.
The entire decline was domestic and reflects the softness in the domestic capital equipment market.
Backlog decreased primarily in oil and gas equipment.
We get production equipment and road building equipment.
While backlog fell in aggregate equipment and pod orders are up due to historically, how backlogs in that in that equipment in Q1 in Q2 2018.
Leading to an easy comp in Q3 of 2018, when backlogs fell off.
Implied orders are down in oil and gas equipment as well as road building equipment.
Adjusted EBITDA was impacted by the decline in gross margin $6.4 million.
An increase in Unabsorbed overhead.
$3.8 million over Q3 of 18 was the primary detracted from gross margin.
With the remainder of the decline being a combination of primarily pricing pressure and also some product mix.
As she a and he was down during the quarter due to reductions and consulting fees payroll and related benefits and professional fees.
Our long term goal was to reduce as she a in the expenses to a run rate in the low teens.
Obviously this will take some time, but we have begun to take the necessary steps.
Adjusted earnings per share of 17 cents for the quarter excludes $875000 of restructuring costs related to Rightsizing. The infrastructure group to reflect the post pellet plant business level as well as costs to finalize the disposal of our German operations, which we plan to complete by the end of this year.
Our infrastructure group grew revenues slightly during the quarter, primarily in domestic equipment in parts international equipment parts decrease during the quarter in that group.
Sales increase in asphalt production equipment, while decreasing and rather building equipment.
Asphalt production equipment to sell direct Kuala majority of road building equipment is sold through dealers and as discussed previously.
Most dealers have full inventories are also experiencing longer term rentals that have yet to convert to retail sales.
Infrastructure gross margin was impacted by $1.7 million of additional underabsorbed overhead compared to Q3 of 2018.
We were focused on reducing inventory within soft markets during the quarter that resulted in fewer production hours through our factories and that also put additional pressure on pricing.
Adjusted EBITDA decreased due to the gross margin compression and excludes $875000 of restructuring costs previously mentioned.
Reductions in SG, a anywhere a benefit to a bit.
And the infrastructure group in the core.
Our aggregate mining group.
Experienced a slight decline in sales the largest contributor was the decline in domestic capital equipment sales.
This decline was offset by an increase in international capital equipment and international parts sales during the quarter.
Most of our AG and mining group sales go through dealer distribution and again as previously mentioned dealer inventories are high and.
Rental to retail conversions are down relative to last year, resulting in softer demand.
The reduction in domestic sales volume in this group reduce production hours through our factories, which led to an increase in unabsorbed overhead of $2.1 million in the group driving the reduction in gross margin.
EBITDA was down primarily due to the decline in gross margin decrease in ESG and they have a million dollars in the group benefited EBITDA during the quarter and was related to reductions in headcount along with consulting and professional fees.
Our energy group sales were consistent with Q3 of 28 team.
Sales of oil and gas equipment were down but were offset by increased sales of concrete production equipment.
And heating equipment.
The group increased its gross margin modestly as unabsorbed overhead remained flat relative to Q3 of 18.
An increase in sales of parts relative to the total energy group sales contributed to the gross margin increases they carry a slightly higher margin.
EBITDA in the energy group increased during the quarter due to the slight margin increase as well as a reduction in SG, a and e. of $1.2 million from reduced headcount and reduce consulting fees.
We continue to maintain a strong balance sheet.
With minimal debt. This provides us a platform to launch our longer term strategic initiatives.
We have a net cash position and ample liquidity to execute our plans.
We've also made progress on working capital initiatives over the last year and that has improved our inventory turns as well as unlocking additional cash.
As we go forward and we will continue to have a disciplined approach to deploying our capital.
And when we consider the various avenues of capital deployment, we do so in the context of our long term strategic objectives, and a related revenues earnings and cash flows in order to maximize shareholder value.
I'll now turn it back over to Barry for additional comments.
Thanks, David.
As mentioned earlier after spending time with the AD Tech team it in the market with customers and our distribution channel I had the following observations to share.
I'm excited to be part of it had the privilege to lead a team that has a large set of deep foundational strength.
All of them had been validated over my first two and a half months, where the company.
I'm also excited to build on that moving forward by taking a fresh look at how we're organized.
Since August we have flatter organization by choosing not to backfill the chief operating officer role with his recent retirement.
We added the role of senior Vice President of innovation, which will allow us to leverage our engineering resources and R&D spend along with the sharpening our focus and execution on new product development.
We also added the role of senior Vice President of operational excellence.
This role will lead our efforts to leverage our global manufacturing and supply chain strategy and performance.
We are in early days are lean transformation in this position will accelerate these initiatives as we continue to drive more value for our customers and our shareholders.
Finally, we added the position of Chief Information Officer, this position will build and drive our centralized ERP strategy as well as improve our data analytics and IP platforms.
I am confident that the three pillars of simplify focus and grow our the perfect elements to define our transformation of the company.
We are complex business and that complexity makes it difficult to build strategies and leverage resources.
We need to find the parts of the business to create value and focus on them and invest in them as platform for growth.
Conversely, simplifying the business will also in highlight non strategic and noncore businesses that we will just continue if it doesn't enhance long term shareholder value.
Moving forward, we will temporarily stopped the practice of giving quarterly and annual guidance.
We have instead identify long term targets that are tied to shareholder value creation.
These metrics will stand through the cycles over industry that are also tied to our incentive plans.
We will measure ourselves against these targets report our progress to you our shareholders on a regular basis.
These targets, we'll continue to be evaluated and updated over time based on our ability and consistency of retaining them.
I will conclude the presentation by leaving you with Astec the key investment highlights.
We have a strong foundation and I'm excited about the opportunities that lie ahead of us.
I look forward to sharing further details of our new strategy and our transformation progress in future communications.
We now welcome the opportunity to take your questions.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad. It confirmation tone one indicate your line is in the question Q. You May proceed starts to if you'd like to move your question from the Q for participants using speaker equipment, maybe necessary to pick up your handset before pricing.
Starkey is one moment please pull for your questions.
Our first question comes from the line of Meg calibrate with Robert W. Baird. Please proceed with your question.
Hey, good morning, guys, it's Joe Grabowski on for make this morning.
Good morning, Joe Hi, Joe Hey, good morning, and very welcome aboard.
Megan I look forward to meeting your one person at our conference next week.
As you visited all of the Astec facilities over the past several weeks what are your initial thought how did the facilities compare to once you've dealt with during your career and then maybe more specifically your thoughts on AD Tech.
Decentralized structure.
Yes, I tell you that the visits that I had.
Did I was happy that I could actually get to every single one of the sites in a very relatively short period of time after starting with the company.
I think first and foremost the people is what really struck me in regards to the passion and the pride They really had for what they did in the company's they represent and to me that really represents a.
Great foundational block for us to build off of.
I would tell you that as I walk through the different facilities.
There is an array of.
Of progress relative to lean transformation I saw some there were no I would put best in class and some I think where we have lots of room for improvement and so.
Not that we get down on that if we look at that as a huge opportunity for us to be able to build off of and try to raise all of our sites in to that top level. So theres more work to do there and I think bring it on.
Our new senior Vice President of operational excellence that will allow us to focus not only on our lean transformation, but also performance.
Yes utilization of assets footprint those types of things I think that from a decentralized model perspective.
I think I go back to my comments around.
No.
There's really no stones, or we're not going to turn over to try and find value and so therefore, it's less about centralized decentralized there's about where can we actually make investments to grow profitably and where the areas where we probably are.
Destroying value potentially and so we should stop doing that I think the key for us moving forward as well as that we want to be able to stay close to our customers I think thats been a real strength of Aztecs over the.
The number of years and we want to make sure that we maintain that and do that better than our than our competition, but we also want to find a way to be able leverage there were a $1 billion global company that has a lot of leverage points as well across different parts of our company and back offices.
I think with the addition of the engineering lead position or innovation lead position, that's going to allow us to leverage your energy engineering resources more.
Appropriately so I think that.
We're looking at the whole company and from many different lenses and try and find ways, where we can get value for our shareholders.
Excellent great. Thanks for the color on that.
And maybe just growing in Q3 results.
David you talked a lot about the reason for gross margin being down year over year, but it seems to me when sales are flattish, it's surprising to see gross margin down 400 basis points and infrastructure 300 basis points and.
Aggregate in mining here, maybe talk about the dynamics, there and where those under absorption variances come from when sales again sales are relatively flattish year over year.
Yeah, that's a great question so.
In the infrastructure group, specifically, we can address that would with mobile paving equipment.
We were selling out of inventory as you know weve had a lot of inventory. They are built lot over the past couple of years and were had had a very strongly effort to reduce that inventory during the year end during the quarter, especially and that put pressure on both pricing and on hours through the shop in the.
Rest of the company you had.
Other inventory reduction efforts, but you also had low demand in the AG and mining group due to.
The lack of the rental conversions in Q1 in Q2, which.
Typically drives orders in Q3 to be fulfilled and those reduced hours in the shop as well and so we have been slow as Barry mentioned to respond to that reduction in demand in our shops are SLP program that is in place and has gone through several iterations year to date.
It.
Is helping us understand where the demand is we're not building the wrong thing of the we're not buying too much but also that we're producing the right number of hours through our shops and so as we continue on this journey to lean out these factories.
We've got to get the.
Got to get the right number of hours in the right place and make sure that the capacity is used and again, we've got to rightsize the capacity fill it with a number of man hours and build the right equipment I think thats, the that's where the journey of this as an LP process, but.
Unabsorbed overhead was a huge contributor during the quarter.
Got it okay, alright, thanks for that.
A couple more couple more questions from me.
So I understand your discontinuing guidance, but I guess I have to ask any any color dollar you can give on on Q4, it perhaps how this.
The quarter has started here or just any kind of top level.
On.
Q4.
Yes, I would say that you're right we are going to temporarily.
Discontinued given guidance.
So I think with that being said for probably.
Pulled back from giving you too much color around Q4.
Okay, Yes, where now we hope that we hope that we get to the point here in the short term Joe that we can have the confidence to be able to give you guys a little bit more information about what we look like moving forward I think but until then it.
Behooves us too to continue to work on our processes before we come back to that point.
Yes, fair enough and I guess last question for me.
As you mentioned your customers are busy we see the monthly construction data and street in highway spending is still up double digits on us.
But we are approaching an election year, we're now less than a year away from.
The fast act expiring and obviously things are pretty good functional in Washington, DC. These days.
How do you kind of see the highway bill playing out here over the next year and.
With that expiring right before the election are your customers worried about that are you guys worried about that about that how how do you think it all plays out.
Yes, I think that I mean, obviously, that's an important part of the drivers within this space that we operate.
No.
There's a lot of puts and takes to a lot of moving pieces to the answers and even into question. You just that I would tell you that we're more focused on trying to be is profitable and his in his strong of a business that we can be in this cycle that we're in today and the market the Robert in today, so that if those types of.
Drivers within our market uplift the market that we're in a favorable position an advantage position relative to competition can add value to our customers as quickly as possible and and take advantage of that on the.
Earning side.
Yep makes sense. Thanks, Thanks for taking my questions look forward to senior guys on Chicago next week.
Yep same here. Thank you.
Thank you. Our next question comes from the line of Stanley Elliott with Stifel. Please proceed with your question.
Hi, Good morning. This is Brian Brophy on for Stanley just had a question around the S.G.A. any expenses it looks like it was lower year on year in a little bit below awareness, but what we were expecting I was hoping you could give us a little bit of color on what's driving that.
The primary drivers Hey, this is David.
Brian This is.
This quarter was.
Was.
Consulting fees, we had the ASV program, what we called the as take strategic purchasing program that we began last year and it was in full swing in Q3 of 2018. So there were a lot of consulting fees that we were paying in that quarter that program is complete as of.
The June July timeframe this year and so those fees are no longer in SG a in a in addition, we've we've reduced some head count now that head count reduction as both in the shop and in the back office. So.
Those reductions do impact the the ongoing SG a in a and.
And again, we had some some higher professional fees last year as well. So those reductions are all baked into the SG a in a that we have now.
The run rate.
We can't we want to target the lower teams, we think we should be there and we've got to get there. So you know to.
Maximize shareholder value and to make this company run the way should so.
Those were the Adams that we're in there it was about.
A million dollars.
Give or take on each of those items.
Got it that's helpful and the low teens as a percentage of sales obviously that's a.
Decently large move from where you guys are today, how do you get there as it is it sales growth is it cutting these expenses further help us kind of bridge that gap, whether there. There are two things I think obviously, you've got addresses a sales growth number one and that's.
Certainly will help impacted but from a spending standpoint, we need to create more efficiencies in the business as a as a.
You know as Joe mentioned earlier, we are decentralized and that creates some inefficiencies that has some advantages we're closer to the customer but it also creates inefficiencies in the business and we need to take advantage of.
Our mass are as we go forward and be able to.
Standardize processes and back office anything that's.
Anything where we can take cost out we will so that's it's not necessarily cutting heads and that kind of thing it is about creating efficiencies and processes.
Got it Thats really helpful. I guess switching gears, a little bit past couple quarters. If I remember correctly, you guys talked about a little bit more pricing pressure from peers I didnt hear any of that commentary.
In the release or in your prepared remarks, just wondering.
If something has changed there if you guys are still seeing some competitive pressures.
Let's see what's the environment like.
Yeah, Hey, Brian This is very rough low and I would tell you that that has not changed I think that with the market conditions that we're in today there's.
There's there's the same amount of pricing pressure and competitive.
Competitiveness in the marketplace.
I think got it any do you think the David alluded to when we looked at that the margin decrease.
With a big part of that coming from under absorption. There was also an influence from pricing and mix as well.
Which made up the other part of it.
That's helpful. One last one from me and then I'll pass it on I'm curious.
What you're seeing from a market share standpoint, how are you guys feeling given that these competitive pressures are recurring and I'm wondering if there's any differences.
Between product type such as like asphalt plants versus the mobile road building equipment et cetera.
Yes, I would say in at a general sense, we don't feel like Theres been any shift really in market share across the board certainly you know from quarter to quarter in from product line to product line, we'll see movement here in there.
But nothing specific that we're going to comment or can comment on today.
Okay. Thank you I'll pass it on.
Thank you once again as a reminder, if you would like to ask a question. Please press star one on your telephone keypad for participants using speaker equipment may be necessary to pick up your handset before pressing the star Keys. Our next question comes from the line of Joe Mondillo with Sidoti. Please proceed with your question.
Hey, good morning, everybody. This is Brian lie on for Joe This morning.
Hey, Brian modem.
Maybe just talk about the guidance I understand what kind of spending that temporarily but maybe retroactively.
Based on the qualitative guidance last quarter, obviously results a little weaker than expected. What's generally your visibility look like and then what kind of changed through this quarter.
Yes, I think the visibility again is a little different.
Product line by product line in some cases, we have backlog that takes us well into Q1, others are a little bit more hand to mouth. So it's a mix.
I would tell you that when you just generally when you look back at our history of being able to meet the guidance that we actually gave it's not very stellar and so therefore I think it's maybe more of my.
Initiative just to pause to.
To make sure that we have a real good grasp on the markets that we're operating in the the trends of the customers and and can then projected into our sales and operating.
Planning process, and then make sure that we can look forward far enough to have a sound forecast and so we've made a lot of progress over the last couple of months really I would give the team credit for making a lot of progress over the course of the year as we started to introduce the use of some of these tools.
What we've got a little bit of ways to go in order to get confidence to be able to come back and and give you that give you the guidance again.
All right. That's it from me appreciate the color. Thanks, Thanks, Brian .
Thank you there no further questions at this time I'd like to turn the call back over to Mr. Anderson for any closing remarks. Thank you Michelle again, we appreciate your participation on this third quarter conference call and thank you for your interest in Astec as our news release indicates todays conference call has been recorded a replay of the conference call will be available through the nope.
Number 11 in an archive webcast will be available for 90 days, a transcript will be available under the Investor Relations section of the Astec industries website within the next seven days all of that information is contained in the news release that was sent out earlier today. This concludes our call. Thank you all have good week.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.