Q1 2021 Astec Industries Inc Earnings Call
Hello, and welcome to the Aztec Industries incorporated first quarter earnings call. As a reminder, this conference call is being recorded.
My pleasure to introduce your host Steve Anderson Senior Vice President of administration and Investor Relations. Thank you. Mr. Anderson you may begin.
Thank you and welcome to the Aztec first quarter earnings Conference call. My name is Steve Anderson and joining me on today's call are very rough below our chief Executive Officer and.
Becky Weyenberg, our Chief Financial Officer.
And just a moment I'll turn the call over to Barry to provide comments and then Becky will summarize our financial results.
Before we begin I'll remind you that our discussion. This morning may contain forward looking statements that relate to the future performance of the company and.
And these statements are intended to qualify for the safe Harbor liability established by the private Securities Litigation Reform Act.
Any such statements are not guarantees of future performance and are subject to certain risks uncertainties and assumptions.
Factors that can influence our results are highlighted in today's financial news release and others are contained in our filings with the SEC and as usual, we ask that you familiarize yourself with those factors.
And in an effort to provide investors with additional information regarding the company's results. The company refers to various GAAP with the U S. Generally accepted accounting principles and non-GAAP financial measures, which management believes provide useful information to investors.
These non-GAAP financial measures have no standardized meaning prescribed by U S. GAAP and therefore are unlikely to be comparable to the calculation of similar measures for other companies.
Management of the company does not intend these items should be considered in isolation or as a substitute for the related GAAP measures.
Management of the company uses both GAAP and non-GAAP financial measures to establish internal budgets and targets and to evaluate the company's financial performance against such budgets and targets.
You should also note comments made during today's call, we'll refer to non-GAAP results and a reconciliation of GAAP to non-GAAP results are included in our news release.
All related earnings materials are posted on our website at www Dot Aztec industries Dot com include.
Concluding our presentation, which is under the Investor relations and presentations tabs.
And now I will turn the call over to Barry.
Thank you Steve.
Good morning, everyone and thank you for joining us on the call. This morning to discuss our first quarter earnings results.
I want to start out by thanking the entire Aztec team for their hard work and dedication during a busy quarter marked by a significant ramp up and demand and a tight labor market.
While our results were challenged this quarter our team continued to serve our customers and drive operational excellence across the organization through our one AD Tech business model for continuous improvement.
As we continue to navigate through the pandemic, the health safety and wellbeing of our employees suppliers and customers continues to be our top priority.
And my remarks today I will begin by discussing key highlights and drivers from the quarter and then provide an update on our operations I'll also discuss what we're seeing in terms of demand and our supply chain before turning the call over to Becky for details on our financial results.
We will highlight progress made on our strategic transformation and then open the call for Q&A.
Starting on slide four here today's key messages first we had a challenging start to the year as we experienced commodity inflation and a tight labor market, which hampered our ability to leverage the restructuring actions taken as part of our transformation to simplify focus and grow the company.
Positively we are seeing improvement and the flow through our facilities and we continue to see significant demand for our products achieving record backlog with orders up 72% year over year.
He will address this topic in more detail later on the call.
Second we continue to position our business to meet strong and increasing customer demand.
Our sentiment remains positive through 2021, and many of our customers are seeing the order books fill up into 2022.
We are focused on providing our customers with industry, leading technology solutions to deliver value and support a rocky road initiatives.
Third we are well positioned for future growth with a streamlined organizational structure strong balance sheet and ample liquidity, we continue to drive operational and commercial excellence across the organization.
Fourth during the first quarter, we continued to execute against our transformation strategy to simplify focus and grow the business as I mentioned during our last earnings call. We will prioritize the growth pillar in 2021 with a focus on both organic and inorganic strategic growth opportunities.
We have a number of organic growth initiatives underway and I'm excited to share more details with you later during our call.
Lastly, as we move forward into 2021, and our increased focus on growth will allow us to build upon our strong foundation.
We are transforming our business with a focus on operational excellence and profitable growth to drive long term stakeholder value creation.
It's an exciting time here at NASDAQ and we continue to have a long runway ahead of us.
Turning to slide five this is a business segment breakdown our revenue mix during the quarter was 29% mature solutions and 71 per cent infrastructure solutions and.
This structure, we serve the rockwood value chain.
Our one ASIC business models on slide six our focus on operational excellence has enabled all of our factories to operate throughout the pandemic with little disruption and we are flexing our operations to meet the current spike in demand.
Further we are leveraging our global capacity to reduce lead times and manage costs, while optimizing revenue within our footprint.
Lastly, we have not experienced any significant supply chain disruptions to date. However, we are not immune from supply chain disruptions caused by the recent surge and world demand.
That being said, we are constantly maintaining and ongoing discussions with our suppliers to identify and mitigate these risks.
We have also expanded the depth of our supply chain with multiple supply sources and anticipation of a potential tightness going forward.
Turning to slide seven I will highlight some industry dynamics that we're seeing and what we're hearing from our customers.
We are seeing a spike in demand across our businesses driven by favorable industry dynamics and pent up demand from the pandemic.
We believe we are in the early innings of an up cycle and North America as we see strong residential real estate demand typically followed by gains and nonresidential construction.
Optimism for increased U S infrastructure spending and as prevalent as there is bipartisan support for an infrastructure Bill in 2021 day.
And if approved this would provide a tailwind to our business for years to come.
During the first quarter, we saw labor shortages and inflation, we expect these headwinds to continue through 2021.
And the labor front, we are starting to see improvement from early 2021 and are taking actions to improve the flow of products through our facilities.
To mitigate the impact of steel inflation, we're utilizing strategies and include forward contracts and advanced steel purchases to ensure supply and minimize the impact of price volatility.
As the leader and many of our markets, we are taking pricing actions as needed.
Now moving on to slide eight where we highlight some of our ESG initiatives, we're working to elevate our initiatives and drive them across the organization.
We have a long history of conducting businesses ethically and responsibly with a focus on sustainable products to drive energy efficiency and conserve resources.
We have and internal focus on reducing the carbon footprint of our products and facilities.
I recently sign the CEO action for diversity and inclusion pledge.
Which evidences our commitment to advance diversity and inclusion within the workplace.
Further we empower our employees to support communities, where we operated live.
I am proud that our team is willing to give back.
We continue to gain traction or ESG initiatives throughout the organization and our team is excited and engaged for this company wide focus we look forward to updating you on our progress.
In summary, our first quarter results were challenged by inflation and tight labor markets. During a period of strong customer demand for some of these factors will continue to the second quarter. We have taken actions to help mitigate these issues and a full year basis.
As I mentioned previously demand for our products remains resilient as demonstrated by our record backlog and positive customer sentiment.
Also of note. We believe these factors will balance from the seasonality, we typically evidence and the third and fourth quarters.
We are adapting to this new environment and continuing to serve our customers. While also executing our strategy and driving commercial and operational excellence across the organization.
Put in by the team over the last 20 months to build a strong foundation throughout our company will pay dividends to our customers employees and shareholders over the long run.
While we are still in early innings of our transformation. We are pleased that we drove change at a good pace and an effort to place ourselves and the best possible position to leverage what we earn from the market.
With that and we'll now I'll turn the call over to Becky to discuss our detailed financial results.
Thank you Barry and good morning, everyone I'm pleased to join you on today's call.
Starting on slide 10, first quarter revenues decreased one 5% to $284 million compared to the prior year quarter.
Equipment sales decreased slightly while part sales decreased 2% compared to the prior year period.
Excluding used equipment sales, our first quarter sales are slightly up compared to the prior year quarter.
Our backlog increased an impressive 72% to nearly $421 million at quarter and drill.
And by higher materials, and infrastructure solutions orders, which were up 91% 60, and 1% respectively.
Our orders for Katherine by Pent up customer demand after COVID-19 uncertainty and 2020.
The backlog growth is also tariff and by our strong commercial excellence initiatives, including and <unk> are one ask tack organic cross selling efforts.
The sales teams continues to build momentum and demonstrating the rock to relative value that we bring to customers.
First quarter, adjusted EBITDA decreased 24% to $18 million compared to $23.7 million in the prior year period, and adjusted EBITDA margin fell 190 basis points to six three per cent compared to the prior year period.
The margin decline was driven by unfavorable sales mix, primarily due to softness and material solutions sales as a result of our strategic footprint rationalization and and infrastructure solutions by the decision to competitively price and I've got to penetrate targeted markets.
She and a more global supply chain offset this margin pressure and the future.
Adjusted SG&A expenses increased 4% on a dollar basis, primarily due to increased costs for centralization and infrastructure efforts associated with our transformation initiatives three.
$3.6 million higher software licensing costs, including a 1.5 million dollar out of period expense recorded during the first quarter of 2021 incurred and the fourth quarter of 2020.
$2.2 million from incremental expenses for acquired businesses and.
800000 of higher amortization and cost primarily related to accelerated amortization of certain of our intangible assets.
These increases were partially offset by decreases associated with.
$4.5 million and flower trade channel and promotional expenses.
$4 million operating expenses for closed locations and one.
<unk> $9 million of lower travel expenses due to continued travel restrictions.
Our Q1 results include $4.5 million and period costs that will not repeat in 2020 one.
Adjusted earnings per share decreased 58% and the quarter to 41 cents compared to 97 cents and the first quarter of 2020.
Of note first quarter 2020 adjusted earnings per share included a 42 cents benefit from the cares Act. Excluding this benefit first quarter 2021 earnings per share declined approximately 25% share over here.
Our adjusted net effective tax rate for the quarter was nine 7% driven by stock compensation tax deductions, our expectations for the full year tax rate in 2020 one are in the 16% to 17% range.
Turning to slide 11.
Highlight the key drivers of our year over year, adjusted EBITDA margin contraction of 190 basis points and.
And Q1, we realized benefits from the Mac, one facility closure and the second half of 2020. However, this was offset by sales mix and manufacturing variances.
Regarding the product mix, we realized more international sales and normal where our emergence on some products are lower at that and won't be realized domestically.
I mentioned earlier efforts to build our global supply chain will improve and international margins as we call. It that's part of the business.
Further during the quarter, we saw a negative margin impact from manufacturing variance is mainly due to these same product lives. They received and locations continue to ramp up with the significant influx of new Labour and check month over month improvement during the quarter day.
And the Fisher sales that come from training, new employees and proving out processes on these new product lines will taper off as the year progresses.
As previously mentioned higher corporate costs were driven by investments related to automation as well as the integration of the three acquisitions, we completed during 2020.
Yeah.
Moving onto slide 12.
Our infrastructure solutions business revenue decreased slightly to $201.5 million in the quarter, driven primarily by lower domestic sales due to a strategic reduction in used equipment during 2020.
And this was partially offset by strong international sales, which grew 22 per cent compared to the prior year period.
Gross profit decreased 7% to $48.5 million and gross margin decreased 170 basis points to 24, 1% driven by commodity inflation and a larger than normal international sales levels. We.
We continue to support our customers. During this time as we are seeing strong and increasing demand for highway and road building and construction products across the country.
Yeah.
On slide 13, our material solutions business revenues decreased three 8% to $82 $9 million compared to the same period, a year ago, driven primarily by the transition of our <unk> product lines to other Aztec sites.
As previously mentioned manufacturing efficiencies are improving as the work force gains experience with our new products.
Gross profit declined four 8% to $20 million, while gross margin decreased by 20 basis points to 24% driven by softer volumes as well as under absorption related to the closure of some that quant facility.
Despite the lower year over year results and material solutions, we saw strong backlog, which increased nearly 91 per cent compared to the prior year period, driven by increased dealer restocking and strong market activity.
As mentioned in previous calls our dealers reduced their inventories throughout the pandemic to protect their balance sheets justice. Many companies that they are now and the process of rebuilding them as they see the strong market demand.
Turning to slide 14.
We continue to maintain a strong balance sheet with minimal debt and net cash position of over $164 million given the current environment. We remain focused on strong liquidity and cash preservation to withstand sustained periods of market uncertainty.
Overall, we have available liquidity of $319 million, including nearly $165 million of cash on hand, with only $1.7 million and total debt as of March 31st 2021.
We are not leveraged at all today, and we know that and the future there will be times or if we will be leveraged over this range, but on a long term basis, we will strive to operate between one and a half to two and a half times debt to EBITDA.
As Barry noted, we remain focused on maintaining a strong and flexible balance sheet with ample liquidity and believe that this will enable us to withstand a variety of economic situations if needed.
Now on Slide 15, just a reminder, on our capital deployment framework, which is consistent with what we have previously shared.
Our capital allocation priorities remain unchanged and the current environment.
And we consider the various avenues of capital deployment, we do so and the context of our long term strategic objectives and related revenue earnings and cash flows and order to maximize shareholder value.
Importantly, we remain committed to funding the dividend, we have not repurchase steady share since 2018, and do not expect to do so and the near term price.
Serve our financial flexibility.
On slide 16.
And we summarized our strategic and disciplined approach to M&A, which helps to support our growth pillar.
And we're only considering strategic acquisitions that align with our growth strategy and meet our internal financial criteria.
And our strategy for M&A is to fill gaps that we see within our customer supply chain as we look to grow regionally and attractive markets. We also seek to maintain the number one or two position and the product lines that we have we believe M&A is a mechanism that will allow us to accelerate our investment and technology and innovation.
With that I will now turn it back over to Barry for his closing comments.
Thanks, Becky now moving on to Slide 17, I'll provide a quick overview of the three pillars of our strategy for profitable growth simplify focus and growth.
First simplify.
During the first quarter, our organization and benefited from actions that we have taken to consolidate and rationalize our footprint and product portfolio during 2019 and 2020.
As a result of these actions we were able to leverage our global footprint and flex operations to help meet increased customer demand.
Second focus we continued to strengthen our customer centric approach driving commercial excellence streamlining processes and instilling a performance based culture.
Finally grow we remain well positioned to capitalize on global growth opportunities in 2021, and this pillar remains a key focus area for us this year.
We have reinvigorated and innovation leveraging technology to unlock internal synergies, while also enhancing the customer experience exploring global growth opportunities and carefully allocating capital to maximize shareholder value.
While the first quarter had its challenges we continue to simplify the business focused on opportunities and position the company for growth.
And I am confident our team will be able to continue to execute on our strategy throughout economic cycles.
And two new where their growth opportunities and slide 18, I would like to highlight some key organic growth opportunities, we're seeing across our businesses.
Our long term year over year organic revenue growth target is 5%, which we expect to be driven by these opportunities highlighted on this slide.
What I like about these areas of opportunity is that they're all intertwined with each other and.
As we execute and one of these areas you will multiply the impact that we get from another and overall.
This is really the power of the one asset business model.
First we see organic growth opportunities and our international business and for our first quarter International results demonstrate we are gaining traction on this front.
Secondly, we see opportunities to drive growth and our parts and services businesses. We remain focused on new product development to continue to see expansion where their dealer network.
Another example of and organic growth opportunities or cross selling of concrete and asphalt plants were over 30 per cent of our customers own and operate both types.
Well, we have mentioned this opportunity and the past we're now starting to see our plan and turned into reality is cross selling is driving growth.
Lastly, we are focused on enhancing relationships with our strategic accounts as I mentioned in my earlier remarks, we've been focused on one of your competitors partnerships and accounts, particularly in international markets, We're gaining traction with these new customers and expect them to drive growth and the future.
Slide 19, and aligning some of our major milestones we are executing against our transformational journey and the progress we have made to date.
During the first quarter, we made progress centered and simplified pillar as we continue to optimize our footprint by relocating products from one location to other aspects sites.
We expect to further drive simplification and consolidation of our facilities through the relocation of our Tacoma products to other ASIC sites and late 2021.
Under focus we are focused on driving operational excellence across the organization through our one Aztec business model.
We continue to see progress and our operational excellence initiatives across the organization.
For example value stream mapping and was used by one of our sites to optimize product flow and reduced cycle times by 25 per cent.
Underground as I mentioned previously we have a number of organic growth opportunities across our businesses, we remain committed to providing our customers with industry, leading technology solutions that provide value and support a rocky road initiatives. We are confident our innovation and technology, particularly telematics will support future organic growth.
Opportunities across the businesses.
During the quarter, we hired a senior vice president of corporate development and strategy. This role will help drive the growth pillar of our transformation strategy.
The cost savings from the actions taken and are being reinvested in our businesses to drive profitable growth to maximize shareholder value.
I'll conclude on slide 20, with our key investment highlights.
The first quarter of 2021 was marked by a ramp up and demand and accompanied by commodity inflation and a tight labor market. We continue to position our businesses to adjusted these evolving market dynamics, while executing our strategy.
And I'm proud of the work our team accomplished as we continue to strengthen the organization and position ourselves for growth, but we can and will do better and the future.
We remain well positioned and the market due to the superior customer service leadership positions with the niche attractive markets and a culture of continuous improvement.
We remain committed to our 2023 targets of 10% to 12% EBITDA margin and a greater than 14% return on invested capital as highlighted in our December 2020 Investor day.
I am optimistic and excited about the future for us and I'm confident and our ability to continue to build upon a strong foundation.
With that operator, we're now ready to open the call for any questions.
Thank you, ladies and gentlemen, we will now be conducting a question and answer session.
To ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is and the question queue and you May press star two if you'd like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
And then we'll play that we poll for questions.
Our first question comes from the line of Mig <unk> with Robert W. Baird. Please proceed with your question.
Yes, Thank you and good morning, everyone.
Good morning, Inc.
And.
Yeah.
A lot to talk about today, but I guess, where I would like to start is maybe with the bridge that you provided on slide 11, and maybe we can talk a little bit about some of the elements that are on this bridge.
And.
No.
And I'm curious to get a little more perspective on the 127 basis points of erosion from sales mix and international.
That's about $3 $6 million on my math.
So I mean clearly this is this is a pretty material figure for it for a quarter can you give us a sense for all that transpired here and maybe more importantly, based on what's in and backlog right now.
What should we expect in Q2 and beyond in terms of a similar type of headwind.
Hey, good morning. Thanks for the question this is Barry.
I'll take a shot at this and enter the leftovers and Sarah but he can pick it up.
And.
And so I'm on slide 11, as you can see you know the good news there is and we are seeing some favorable impact relative to the efforts we've put in across 2020 with the.
With the manufacturing efficiencies and head count related type of savings relative to and we expect to see that continue to grow as we go through 2021.
Relative to the international sales.
As we've looked at the opportunities.
And when we think about.
Asphalt plant type sales yeah, one of the biggest sellers, we have actually as references and the marketplace is.
And as much as we are a leader in this space there are pockets certainly even in the United States and around the world, where we don't necessarily have a deep penetration.
And in the first quarter of 2021, what we realized was a significant increase and those types of targeted sales and we were trying to grow our presence and.
And you know as we look forward for the rest of the year make and we look through our backlog, which we've done a nice job of really pricing for inflation and managing we do not see this type of reoccur as we move forward throughout the course of the year. So I look at this as kind of a.
Bump Unfortunately, one debt.
We're not pleased with.
But just to be very transparent with you and the restaurants and our shareholders. That's what we realized in Q1. So you might say why why would we have taken those types of sales as I said a lot of the asphalt plant type equipment sales are really based on customer reference.
And the other part of it is that as we deepen our penetration and some of these GAAP markets and also allows us to go back out and realize more parts sales from the future, which I think is really and important part of our strategy moving forward as we've mentioned before we continue to find ways to grow our parts revenues.
You can imagine and our margins, obviously and parts revenues are quite quite healthy. So those are all the reasons debt.
We've actually.
Took those actions made those decisions and unfortunately realize that result, and then and really and material way and in one quarter and I'll also comment that these types of sales are not new for US. This is a this obviously is a strategy that we use moving from where we've used and the path to go in and try and deepen our penetration in certain markets.
Across all of our product lines and just so happens in Q1 and 2021.
Who was materially more revenue perspective, and what we would have normally realized on an ongoing basis and again I'll reiterate that we do not see that type of an impact as we move forward through the course of 2021.
Okay I appreciate the context there.
And you you talked about pricing and in the backlog and Hum you also highlighted a number of inflationary headwinds.
Talked about steel and talked about labor.
<unk>.
Can you maybe provide some context on how you were thinking about the price versus cost dynamic as the year progresses. I believe I heard you say that Q2 was going to be a bit of a challenge, but you're expecting to be neutral on a full year.
And that would imply to me that the back half you're you'd have to be that.
And then neutral you'd have to be positive to make up for Q2. So if you can maybe parse out these elements and essentially help us get a better sense for what our expectations should be for Q2 since.
You know you, you're saying, there's 127 bps of.
And I've headwind goes away.
Obviously, we have to deal with with with potentially other headwinds near term.
Yes, no. Thanks, Thanks, Meg and edge.
Appreciate your perspective on that I can tell you that as we've alluded to and it past the company and the group and the teams have done a really nice job of sales.
Staying abreast of what's going on with inflationary type items, specifically steel and so.
And as we've moved really early parts of 2021 and we've been stayed active active on this I feel good that the organization has done a nice job of taking pricing actions.
Yes.
Much of this as we can onto our customers.
Day, that's actually gone quite well for us and.
And we haven't seen a lot of cancellations or pushback relative to that I think our customers are wise enough to understand what's going on in general.
Economic aspect of inflation and obviously, they see some strong and they've had record years and so we haven't had too much of a problem passing that on you know, we we've even gone as far maybe on pricing.
And specifically and a mature solution side to actually look at our backlog and determine which one of those orders are our retail order and which one of those are stocking order for dealer and we've actually taken and we took we took price up for every backlog debt as a stock order for dealers and so we're not just well.
Not even really.
Per se and protecting the backlog, we're trying to find ways to be proactive and passing that along as well. So as we move forward across the year I think the only exposure that we typically would see as relate and Q2, although our analysis shows that while there is some exposure that it's not.
Ladies and materials, so we feel good.
Generally good about that and certainly we feel even better about Q3, and Q4 from a pricing perspective Meg and.
So I hope that answers your questions and gives you some more color around that.
And your interest.
So then if I'm looking at the gross margin that you put up in Q1 based on your comments is it fair for me to infer that gross margin improves.
And in subsequent quarters relative to Q1 is there some sort of seasonality here that we need to be aware of how would you frame that.
Yeah, Great question and make them.
As we look forward and the two things that really impacted our gross margin in Q1. Unfortunately was the targeted market.
Revenue that we've already talked about.
In addition, and the other gross margin impact that's really worth speaking to.
As you know Mig and we made a decision in 2020 to take a restructuring action to close down our mequon, Wisconsin facility and move that production from that location and it's other Aztec sites that was absolutely still the right thing to do.
As we've made that action.
We ran into unfortunately was as we move the product the labor market and are receiving and locations was much tighter than what we would have anticipated and so therefore, we had a hard time trying to find.
People to come in and go to work and obviously theres inherent type training and inefficiencies and those types of things as you can imagine that go with that type of a move as well so.
And as stated in the opening part of the call me, we've seen improvement from January to February to March and into April and regards to our performance and and our improvement and absorption and our sites and receive insights and we feel like we're on the right track.
We'll work through that as we go through Q2 with the intent of as we get into Q3, and Q4 that will really be able to leverage that volume more effectively but again, we feel better about Q2 than we did for Q1 results and so I think that's all heading in the right direction day.
Alright, I do have more questions, but I'll be back in the queue and maybe come back on follow ups. Thank you.
Thanks, Mike.
Thank you and reminder, if you'd like to ask a question. Please press star one on your telephone keypad. Our next question comes from the line of Stanley Elliott with Stifel. Please proceed with your question.
Hey, good morning, everybody. Thank you guys for taking the question.
Good morning, you all mentioned and backlog is projecting out to 2020 is there any color you guys can provide on what sort of projects or how would you characterize maybe those lines of businesses is it more highway from focus residential focus just curious.
Yeah. So I think the real question is what's driving the the backlog growth and I would tell you you know as we've talked about before Stanley you know our customers primarily had a record year in 2019.
Even with the pandemic they had another record year in 2021 and <unk>.
And so they've had some good years and as they look forward.
And from my conversations with with all of them and they look forward into 2021 and 2022. Their order books are basically full for this current year and theyre starting to fill into 2022 keep in mind. Our family. This this is obviously without an infrastructure bill So we believe that.
You know were and are very healthy market at this point and time and that'll be you know give us an opportunity to really leverage that volume as you've moved through the rest of the year and into 2022, one other element that I think it shouldn't be Mr. Stanley is that you know when you think about a dealer and and.
And our company and and other companies as we went through the pandemic. The uncertainty that comes with that pandemic really supports actions from people to protect their balance sheets and so what we saw in 2020 was that a lot of our dealers if not all of our dealers took action to try and reduce their.
Tories to protect their balance sheets, and so as the as the sentiment and the activity and the markets and the orders increase that's what really drove the restocking of their inventories.
Really drove a large part of our backlog as we win at the end of 2020 and continue to realize in 2021.
And what's interesting about that is as those orders were placed and more of a stocking order for their inventory.
Are you seeing many of them convert into retail orders before the rebid shifts. So we those are all things that support to me are strong.
Backlog and I guess, one other comment and <unk>.
Moving on the asphalt plant side of the business.
We're already starting to see customers want to talk about orders that go into 2022. So I really think on all fronts of our business, we see a lot of market activity a lot of work flow and.
Which is obviously supporting our increase and backlogs.
And how our dealer inventory levels now and we would you say that there still kind of lean at this part of the construction season kind of given where we were last year or you know with this big rush and orders that we've seen here in Q4, and then in Q1 kind of get them back up to a more normal level.
Yeah, Great question, and I would tell you that theres still lean and.
And as just mentioned you know as that as those stocking orders you know really convert to retail before they even receive the product.
And that's going to continue to put pressure on them to read.
The order and order to try and get their their fleets up to the level that they expect to get to nurse support from market activity, which obviously is a good driver for us.
And then lastly, just kind of go back to the international business and the release you'd also mentioned some higher.
<unk> cost was it really all logistics and you know where these products.
Products bid it kind of lower price at a lower margin as a way to get into the door I'm. Just curious if you could kind of parse out the differences between those two.
Yeah. So Stanley I'll, just reiterate we and we are a pricing leader certainly we have price leading position in North America and quite honestly, even when you go outside of the United States, We're still a price leader, we sell all of our products at a premium.
As we identify these targeted markets and he will take some pricing action because you know as a premium and most of these markets if not all of them.
That's the.
And in order to kind of win that deal we have to get more of the market price perspective, and regards to how we see those types of transactions flow through when we do that Stanley you can imagine are on these types of products and I'm speaking specifically to asphalt plant type products to build that product and the United States and then ship it.
Some places in the world and logistics costs become you know quite high.
Because there's a lot of space that goes with that type of a shipment. So so those things are all the elements that really contribute to that large larger than normal a block of orders and the margin compression and that really came with it. We are you know as I mentioned and being in these markets is important and family as we continue to build out.
And our supply chain globally, which allows us to be closer to these customers.
Which allows us to have reduce lead times for these customers. You know these investments that we've made now will pay dividends and the future. Both in regards to the references and we get when it comes and selling more of those types of products in those markets now that we're there and also the reoccurring revenue that comes from our parts revenues and our high margins and also come with those types of.
Sales and so as much as we are disappointed with the impact that we saw in Q1 we.
We do like the fact that it positions us well for future earnings opportunity.
Perfect guys. Thank you very much I appreciate it thank you.
Thank you. Our next question comes from the line of Steve Zaccone with Sidoti. Please proceed with your question.
Hey, good morning, everyone and again.
And that's it.
So I think back to I think you did a pretty good job and walking through the impact to SG&A.
You did such a great job with cost containment last year and really over the last year and a half we did see the uptick this quarter just trying to get a sense of how much of that is one time and sort of how we should think about.
Run rates with SG&A and moving forward can you continue the trend of sort of lower obviously with revenue higher sales cost, but just sort of can you give us a basic trends on SG&A.
Hey, Steve This is Barry I'm and I'm going to take a shot at that first and then I'll turn it over to back to sort of day cleanup.
So when we think about SG&A and here's how we look at it if you build off of the run rate that we had in 2020 and SG&A dollars. You know there are adverse to that as we move into 2021 and.
As we've said all along you know theres parts of our business, Steve that we've underinvested in for many years and we feel it's important to make those investments in order to continue to build our foundation in order to be able to grow off of that so the areas that we've seen and you've obviously now seen and our Q1 results.
And are is as we moved into 2021, we had the recharge and really our AIP and commissions Inc.
And our plan and commissions for the for 2021 is as we expect to have higher sales and better performance than we did in 2020.
And we do see some of the travel entertainment costs starting to come back now we're not factoring in all of those costs, we're factoring and a portion of our of our of those realizing that we're probably not going to certainly start the year traveling as much as we are maybe.
And we would've liked to and certainly we don't necessarily see all of it coming back and we.
We go through 2021.
We also have made and investment and a new product development.
And as we become closer to our customers we've put in product management type capability, where we can actually understand the voice of the customer and and and develop products that are like the shuttle buggy 3000, and we've launched that product, we listened to our customers and our backlog is very strong and that product. The lead times are very long and that.
And then longer than we'd like but it just is a testament to when you listen to customers and and develop products and appropriate way, we can actually generate a lot of revenue margin from those types of investments so and P. D is another one that we've that.
And we've made and investment and it's probably more than what we have and 2020 as we move into 2021 and then the last one and maybe comment on as you know.
We are doing some things around one Aztec rain and initiatives and so there is some expenses there that will offset some of the reduction that we would see from a con Expo type of a spend and so what I mentioned that as well. So those are the areas that really take us from that run rate of 2022 are two a higher spend in SG&A.
For 2021, obviously offset by what Becky alluded to it and this and the earnings script really around the four and a half million dollars onetime impact. So as you kind of net that all out I think that gives you a little bit of a sense of what to expect as we go through 2021 with the understanding that you know the whole team is working hard to reduce those cost.
And as much as we can and on a forward looking basis and then you went to everybody and thank you got it.
Yes.
No that's great. That's that's very helpful.
Just another question and I'd like to add on was in terms of your backlog and obviously everyone's having to lay up her and supply chain issues, but how what's your sense of the stickiness of backlog. If some of these get stretched out and delayed have you had to go back to customers.
In terms of.
Some of these projects some of these are equipment orders getting delayed and what's the reaction be.
Yeah. So great question, Steve and I would tell you that what's really great is that our backlog is very sticky and we haven't seen much of any cancellations, even with a long lead times.
I think where we would probably see.
The impact of the long lead times really upon and quoting process and that's whether or not the customer is willing to wait for our products.
And that obviously have a lot of value for them and you realize that and that just even though the initial sale, but on the service and support that we are a industry leader and so I think that once it gets into our backlog.
And it's we've found and and we see now currently.
It's a really good order and so that's how I'd maybe to answer your questions are helpful.
That is helpful. Thanks.
And your time this morning, Perry and thank you. Thanks.
Thanks, Steve.
Thank you. Our next question is a follow up from mid to upper and with Robert W. Baird. Please proceed with your question.
Alright, thank you.
Thank you for taking a follow up.
I'm a little bit confused beckie. So maybe you can set me straight here and you were talking about and aggregated $4 $1 billion of costs that were incurred in Q1 that are sort of you know Q1 specific.
That was on the SG&A line am I, correct and my understanding there.
Yeah, that's correct that with SG&A.
Okay. So you know ex that and we're talking about $54 million of SG&A, you've done 56 and change in Q1 of 'twenty.
You know Barry you kind of highlighted some of the some of the things that will be add ons in terms of all the investments.
But you know you're obviously starting the year.
Excluding this onetime item with SG&A and lower year over year yeah.
Yet I also know that.
In Q2 through Q4 of 2020, there was some pretty extraordinary things happening with COVID-19 and maybe some.
So the temporary savings and whatnot.
So maybe kind of going back to the prior question that was asked here and trying to understand.
The potential outcomes here for SG&A for the full year as we're looking at that figure and we're using the full year and number of 2020 call it $189 million.
What's sort of and appropriate inflation on top of that.
Can you can you help us understand is it is it a factor and 5 million and a $10 million do we go back to where we were in 2019, how do you guys think about it.
Yeah, I think the the major elements there and make are the ones that I've already ran through without giving you. The sizes of those types of investments and I would tell you that.
You know when you look at our projected.
Run rate on dollars spent and SG&A for the rest of the year you know take out that one time cost.
And Q1, and you're probably pretty close now and there's going to be some puts and takes there as we go through the year as you can imagine and as I mentioned earlier as well, we're going to continue to drive that as low as we can and realizing that we still do need to make investments and this company, where we've been underinvested. So I.
Think that that should get you pretty close to a dollar value that we would expect and certainly we will continue to keep you updated on that as we move through the course of the year.
Okay, So barry to be clear, what you're saying here is that excluding this $4 million.
Item and in Q1, the annual run rate and would essentially be 216 million. So you are annualizing above where you were in 2019.
Given given all these incremental costs and investments. So I guess my question is this.
Do you have comfort.
That from a gross margin standpoint, you can generate enough lift in order to be able to generate margin expansion for the full year, giving given given what you sort of outline here.
That's my final cash break even.
That's a great question, Megan and I think generally your analysis.
Analysis on SG&A is not far off you know without Canadian jobs.
Haven't giving guidance, but I think generally you're very close and regards to the SG&A spend and relative to the gross margin you know even in a challenged Q1 and regenerated just above 24, let's call it 24% gross margins.
All the actions that we've taken in 2020 and as I talked about the two major impacts from the Q1 of 2021 relative to the larger than normal targeted sales margin compression and then the margin compression that we.
Our realized with the restructuring activities.
And that is actually improving certainly even up to a year to date, we do see.
We do and we would expect that we will have margin growth as we move through the rest of 2021.
And I just wanted to make a take a second.
If you don't mind and just to call out you know these day the employees and the teammates that we have and AD Tech have worked their tails off really through the first quarter of 2021 and order to get product to our customers as effectively and efficiently as possible. So as much as we're disappointed with the margin compression does come with that I couldnt be more please.
So the organization, regardless of the efforts that they put forth to get us to the point that we did it didn't certainly go without a lot of a lot of hard work and.
And certainly some overtime to support that as well. So I just wanted to take the chance to thank all the sick employees and could be listening to the call.
Thank you, ladies and gentlemen, and I would now like to turn it back to Steve Anderson for closing comments.
Alright, Thank you Jim and we appreciate your participation on this conference call and thank you for your interest and Aztec yesterday's news release indicates todays conference call has been recorded a replay of this conference call will be available through May 19 2021.
Transcript will be available under the Investor Relations section of the <unk> industries website within the next five business days.
Again, all of that information is contained and the news release and out this.
This morning. This concludes our call. So thank you and as always glad to have a follow up calls for additional questions as we progressed throughout the quarter.
And I much.
Thank you ladies and gentlemen. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.