Q2 2021 Astec Industries Inc Earnings Call
Hello, and welcome to the Aztec Industries, Inc. Second quarter earnings call. As a reminder, this conference call is being recorded it is my pleasure to introduce your host Steve Anderson Senior Vice President of administration and Investor Relations. Mr. Anderson you may begin.
Thank you and welcome to the <unk> second 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.
Just a moment I'll turn the call over to Barry to provide highlights 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. 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 as usual, we ask that you familiarize yourself with those factors.
In an effort to provide investors with additional information regarding the company's results. The company refers to various GAAP, which are United States generally accepted accounting principles and non-GAAP financial measures, which management believes provides useful information to investors. These non-GAAP financial measures have no standardized meaning prescribed.
Alright 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 to 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.
Including our presentation, which is under the Investor Relations presentation tabs and now I'll 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 second quarter earnings results.
I'll begin by acknowledging our team for another quarter of strong execution against the backdrop of evolving market dynamics, including increasing customer demand inflationary pressures in a disrupted supply chain and a tight labor market.
I continue to be impressed by their ability and dedication as we provide our customers with superior service and innovative industry, leading technology solutions.
Today, I will start by discussing key highlights and drivers of our performance and then provide an update on our operations and supply chain.
I'll also discuss what we're seeing in terms of demand and current market dynamics before turning the call over to Becky for details on our financial results.
Then we will highlight progress made on our strategic transformation and open the call for Q&A.
Okay.
Yeah.
Turning to slide 4 we had solid second quarter performance with sales up nearly 5% and adjusted gross profit up approximately 9% compared to the second quarter of 2022nd quarter also marked another period of record backlog, which was up 140% year over year.
We were able to achieve these results while dressing many headwinds.
We remain focused on mitigating these headwinds through the pricing accounts initiatives, we have in place.
Second we continue to provide our customers with industry, leading technology solutions to deliver value through our 1 ASIC approach from Rocky Road.
We are focused on delivering differentiated solutions to meet strong and increasing customer demand and sentiment remains positive through 2021 and into 2022.
Third we are positioned for future growth with our streamlined organization structure and strong balance sheet, our ability to execute through a variety of economic situations is a testament to the foundation, we have built and our focus on driving operational and commercial excellence across the organization.
Fourth.
Our strategic journey to simplify focus and growth continues with our transformation program, which now also includes digitizing the company.
Our primary goals of this program are to reduce complexity improve productivity and embed continuous improvement in processes across Aztec.
Looking forward, we will leverage the strong foundation, we have built under our simplified focus pillars to further grow our business a number of organic growth initiatives are underway and I will share more details about these later in the call.
Lastly, we remain focused on executing our strategy of driving a culture of operational excellence and sustainable profitable growth.
This in turn will create long term stakeholder value.
We are still in the early innings of this transformational journey and have many opportunities ahead of us.
Okay.
Moving on to slide 5.
As many of you know during the quarter, we launched a rebranding initiative to unify our organization and make it easier for customers and dealers to do business with Aztec.
Our rebrand as more than just a look at it.
<unk> us to build strength together under 1 common name that purpose of being built to connect or.
Our rebranding its shape is in line with our strategy to simplify focus and grow assets as we service our customers more effectively and provide them with value in a more sustainable way.
Our Aztec rebrand initiative coincides with our 1 AD Tech business model, which we show on slide 6 our business model is a competitive advantage, enabling us to provide a strong value proposition serving our customers from rock the road there.
Optimizing revenues within our footprint leveraging global capacity to reduce lead times and maintain flexible operations to adapt to changes in demand.
We actively manage our supply chain for constraints and volatility and have ongoing conversations with our suppliers to manage long term risks. Despite these efforts we are not immune to disruption caused by the recent surge in global demand and we continue to identify multiple supply sources and the anticipation of further tightened its going forward.
Moving on to slide 7 I will discuss some of the key industry dynamics, we're seeing impacting our business and what we are hearing from our customers.
As a strengthening economy indicate we continue to be in an up cycle in North America strong residential real estate demand is often followed by gains in nonresidential construction, which creates the opportunity for our customers to build more roads bridges parking areas.
We continue to see strong demand for our products driven by favorable industry dynamics, including pent up demand from the pandemic customer sentiment remains positive through the remainder of 2021 and into 2022.
We see growing optimism for increased U S infrastructure spending given the recent bipartisan support for a multi year infrastructure built well.
Infrastructure Bill will provide a tailwind to our business as I've mentioned before we're not a company that's waiting around for a bill to be passed we.
We see significant near term demand for our products and we have initiatives in place to drive organic and inorganic growth.
As expected labor shortages and inflationary pressures persisted during the second quarter, though challenging we have made progress in our labor front and have enacted numerous initiatives to retain and attract employees.
Our team is core to who we are here at Aztec and we know the investments we make in our people will pay dividends into organization and our stakeholders.
Regarding inflation, we continue to see higher commodity costs, particularly in steel and logistics to mitigate the impact of steel inflation, we continued to drive our operational excellence programs and strategically pass on price increases where necessary.
Okay.
Turning to slide 8 here, we highlight some of our key environmental social and governance initiatives.
<unk> continues to have prominent across Aztec beginning to talk with continued support from our board of directors.
We are still in the early days of our journey I'm excited and proud of the progress we've made to date.
In summary during the second quarter, we continued to see strong customer demand along with the headwinds of inflation in tight labor markets. We have taken actions to mitigate the headwinds, which we expect to persist through 2021.
I am encouraged by the positive sentiment of our customers and the resilient demand for our products is showcased by our record backlog.
We continue to adapt to the changing market situations remain positioned to serve our customers as 1 Aztec.
Well in the early stages of our transformation I am proud of our team's accomplishments and look forward to the future of assets as we continue to provide profitable growth long term stakeholder value.
With that I will now turn the call over to Becky to discuss our financial results.
Thank you Barry and good morning, everyone I am pleased to join you on today's call.
Starting on slide 10, second quarter revenues increased 4.8% to $278 million compared to prior year quarter.
Equipment sales increased 3.6%.
<unk> sales increased 18, 9% compared to the prior year period net.
Sales increase was primarily in the materials solutions segment, driven by higher parts and internationally Clinton sales with increased activity in Europe, Canada, Mexico and Australia.
Our backlog increased an impressive 140% to over $436 million at quarter end, driven by higher materials and infrastructure solutions orders, which were up 200% and 99% respectively.
Higher order stricter from by strong demand, both domestically and internationally.
Adjusted EBITDA decreased 14, 2% to $21.7 million compared to $25.3 million in the prior year period, and adjusted EBITDA margin declined 170 basis points to 7.8 per cent compared to the prior year period.
The margin decline was primarily driven by increases in personnel costs travel commissions and transformation initiatives, which were partially offset by manufacturing efficiencies.
As noted in our news release this morning, beginning with the second quarter of 2021, we will exclude certain costs associated with our simplify focus and growth initiatives from the presentation of adjusted net income attributable to controlling interest adjusted earnings per share and adjusted EBIT.
Yeah.
Adopted this change to remove costs that are not representative of our ongoing.
Operations.
Adjusted SG&A expenses increased 23, 1% on a dollar basis, primarily due to an increase in personnel travel commissions and transformation initiatives.
Adjusted earnings per share decreased 26, 9% in the quarter to 49 cents compared to 67 cents in the second quarter of 2020.
Net of tax second quarter adjusted earnings per share included a $2.2 million per 10 cents of transformation restructuring and other costs, including $2.1 million of costs associated with our ongoing transformation program.
Our adjusted net effective tax rate for the quarter was 21, 1% driven by the timing of tax credits, which resulted in a 3% negative impact to our earnings per share.
Our expectations for the full year tax rate in 2021 are in the 19% to 20% range.
On slide 11.
Detail the key drivers of our year over year, adjusted EBITDA margin contraction of 170 basis points.
<unk> mentioned previously adjusted EBITDA margin contraction was primarily driven by inflation centralization and transformation efforts.
Barry mentioned earlier, we have implemented price increases to help offset the impact of inflation.
We anticipate further price increases through 2021 to continue to offset rising costs.
Moving on to slide 12.
Our infrastructure solutions business revenue decreased slightly to $182 million in the quarter, mainly due to manufacturing challenges. This was mostly offset by a 97% increase in international sales and the added benefit from last year's acquisitions.
Profit decreased 1.5% to $39.6 million and gross margin decreased 10 basis points to 22%, primarily driven by product mix and commodity inflation.
Backlog at the end of the quarter increased 99, 4% to $108.5 million as we continue to see strong demand for highway and road building construction products.
Turning to slide 13.
Materials solutions business revenues increased 17, 3% to $97.8 million compared to the same period, a year ago, driven by increased demand across product lines and regions with international sales up 51% and domestic sales up 6% versus the second quarter.
2020.
We were very pleased with the performance of the group this quarter as they build momentum operating that's 1 aspect.
Gross profit increased 29, 2% to $27.4 million and gross margin increased by 260 basis points to 28% cash.
And by improved volumes and factory absorption.
Backlog at the end of the quarter increased 200% to $145.7 million driven by strong market activity.
And on Slide 14, I won't go over the details, but we highlight the year to date results and provide some color for your reference.
Moving onto slide 15.
We have a strong balance sheet with minimal debt, we continue to generate positive cash flow from operations and have a net cash position of over $174 million.
Overall, we have available liquidity of $325 million with only $1.6 million and total debt as of June 30 of 2021.
As a reminder, while we are not leveraged today, we will strive to operate in the range of 1 and a half day, 2 and a half times debt to EBITDA on a long term basis and there could be times, and we will be leveraged over or below this range.
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.
Slide 16, as a reminder, on our capital deployment framework and when we consider the various avenues of capital deployment, we do so in the context of our long term strategic objectives from related revenue earnings and cash flows in order to maximize shareholder value.
Importantly, we remain committed to funding the dividend.
On slide 17, an overview of our strategic and disciplined approach to M&A has provided.
We remain focused on acquisitions that align with our strategic filters and financial criteria to support our growth pillar.
With that I'll now turn it back over to Barry for his closing comments.
Thanks, Becky on slide 18, we highlight the 3 pillars of our strategy for profitable growth simplify focus and growth over the past few years, we've made significant progress to simplify our business and focus on value creation. These actions have enabled us to unify organization make it easier for our customers do business with us.
US leverage our global footprint and flex operations as needed to help meet increasing demand.
Second the actions we've taken to focus the business have enabled us to strengthen our customer centric approach drive commercial excellence streamline processes and it's still like performance based culture.
We are leveraging the strong foundation, we have built under the simplify and focus pillars to grow the business.
We are positioned to capitalize on global growth opportunities as we continue to reinvigorate innovation and leverage technology to unlock internal synergies and enhance the customer experience.
Continuing with our growth pillar on slide 19, we highlight some key organic growth opportunities, we see across our business.
We expect our initiatives for these opportunities will drive approximately 5% year over year organic growth over the long term.
We see organic growth opportunities in our international business and continues to gain traction as evidenced by international sales up 76% year over year.
Secondly, we see opportunities to drive growth in our parts and services business, our second quarter results demonstrate our progress with parts sales up 19% year over year.
We are focused on new product development to drive organic growth, we have a streamlined effective process to bring products to the market that add value for our customers recent product launches such as the shuttle buggy 3000 have shown a great success.
And our teams clearer vision around new product development.
Other examples of organic growth opportunities include expanding our dealer distribution cross selling our products and enhancing relationships with strategic accounts, we will expand these relationships with our 1 Aztec rock the road value proposition.
Slide 20 highlights all of our major milestones we are executing against in our transformational journey and the progress we have made to date.
I mentioned previously we made progress on our simple by pillar during the second quarter as we launched a rebrand of our organization. This will make doing business with us easier for dealers and customers.
Under focus our operational excellence initiatives drove results and helped mitigate headwinds presented by inflation and a challenging labor market and positioned us for growth moving forward.
As I mentioned previously we continue to have a number of organic opportunities to grow our business. We are driving innovation and technology to provide our customers with industry, leading technology solutions that provide value.
Significant progress has been made on our transformation strategy. However, we are still in early stages of our journey I look forward to updating you as we move forward.
I'll conclude on slide 21, where their key investment highlights our solid second quarter results are a testament to the dedication and adaptability of our entire Aztec team I am proud of our team's accomplishments during the quarter and in the midst of evolving market dynamics, we continue to execute our strategy.
As we transform and positioning our business for growth, we remain focused on providing our customers industry, leading solutions to deliver unparalleled value.
Further our superior customer service leadership positions within attractive niche markets and a culture of continuous improvement to position us well to capture future growth opportunities.
Lastly, we remain committed to our 2023 targets of 10% to 12% EBITDA margin and greater than 14% return on invested capital as highlighted at our December 2020 Investor day.
I'm excited for the future of bad debt as we continue to focus on driving profitable growth and long term stakeholder value with that operator, we're now ready to open the call for any questions.
Thank you the floor is now open for questions. If you do have a question. Please press star 1 on your telephone keypad at this time, if you're using a speaker phone we asked it while posing your question you pick up your handset to provide the best sound quality.
Ladies and gentlemen, if you do have a question or comment. Please press star 1 on your telephone keypad at this time, we will take our first question from Mick Dupre with Baird. Please go ahead.
Thank you for taking the question good morning, everyone.
Good morning Mig.
Right.
You you spent quite a bit of time talking about.
The inflationary environment and obviously there are there is challenges from the supply chain.
I guess I'm looking for maybe some context in terms of how you see things developing going forward.
The back half of the year and.
22 are things getting more challenging or worse are they getting better and as it pertains to slide 11, the adjusted EBITDA margin bridge.
You called out nearly 700 basis points of inflation, obviously, that's quite a bit I'm curious as to how you think.
This progress is in the back half of the year.
Hey, good morning again this is Barry.
Thanks for the question.
I would say looking forward to Q2 for us from a.
Kind of a supply chain perspective was certainly rougher than Q1.
I think that you know what it looks like moving into Q3 and Q4.
2022 is really yet to be determined.
There's a little bit of.
I think what I will tell you is that we've because we've put into procurement group you know starting in 2019 and strengthen that.
Professional level.
Has helped us quite a bit as we've entered in these times, so I really applaud the team and the procurement group in the operations folks in.
Allowing us to get to the results that we have I mean in some cases, it's a day to day fight for them.
But I think the good news is we're looking forward, we're staying engaged with our procurement.
Partners suppliers and suppliers in and making sure that we're getting as much of a view on a long term basis, and obviously ended it added in redundant type supply chain partners, where necessary and critical opponents. So.
I don't have a real good crystal ball to be able to explain you know what's going to happen moving forward, but I am.
I am convinced and I'm confident that our team is.
Got to a good level of visibility and we're managing through it to the best of our ability.
Hopefully I think as you know the part of the World opens up or I think there is.
There's going to be more demand for components as well so.
But I think we're I think we're in the right spot we're dealing with it.
We're not immune to you know a big disruptions, but like everybody else, but I am proud of the team and the effort, they're putting into it when I think about the.
The inflation piece make the majority of that is really steel related still.
Steel related and in transportation and logistics logistics and another other components.
And.
So I don't see that necessarily changing anytime soon.
Obviously, you can read other reported like we do Megan do you see that there is some sentiment that maybe does the steel drops off in 2022.
That's quite a ways away today, and obviously with a potential infrastructure Bill what does that do for demand and then what happens with steel then I think ultimately we need to continue to drive our operational excellence programs, we need to continue to drive.
Through that to become more efficient in our facilities.
And manage our cost structure and we've got a lot of projects already underway and for over the last year and a half day, we'll do that and then obviously continued to manage our pricing and I think if we continue to do that.
As witness really within the material solutions group this last quarter.
We can find ways to stay profitable at the right levels and so that's what our team is focused on and.
We're keeping the relative visibility in and have a good action plans in place to mitigate and offset.
But do you have.
On slide 12, you call out manufacturing challenges impacting infrastructure sales. So I'm trying to understand if there are.
You know things like component shortages and the like that are actually impacting your ability to convert your backlog into revenue and deliver right is this dynamic based on what you're hearing from your supply chain people is this dynamic getting getting worse into Q3.
Or or not.
Yes, I would say that the biggest constraint on us converting backlog right now is labor and.
We've had improvement from Q1 into Q2.
But it still continues to be our biggest constraint.
Yes, we are talking more about supply chain type items.
It's more of a topic in our conversations and our in our different meetings, we're having big but its not necessarily.
Something has constrained our ability to produce to convert backlog to revenue at this point in time.
Okay. It probably hasn't made it probably has a bigger impact maybe on the margin profile than it does on our revenue. Our revenue is really constrained by our ability to get product through the facilities due to labor.
Yeah.
I see so it's labor availability and then obviously the raw material inflation would you kind of call out that said that you were you were sort of having to deal with.
On on the pricing side, maybe you can provide a little bit of commentary as to what you've done thus far this year I'm curious if there are differences between the 2 segments and kind of how you're thinking about pricing going forward because again looking at the adjusted EBITDA margin bridge, Yeah, 500 basis points from volume pricing and mix I mean, there is.
It's not just price that's in there and at this point, it's still kind of lagging inflation.
So how are you thinking about this going forward and at what point in time do you think youre going to be caught up with with with inflation.
Yeah. Good question. Thanks, Nate when I look at that column with volume and price and I would say, it's pretty equally split between volume and pricing.
I think we've said I've said this before you know when would we see steel through an example go up and in our in our cost structure. I mean, we're not we're not worried about that if it's a gradual.
But as you know that's.
It's been it's been it's fight and.
It's hard for anybody, but certainly I'll speak to us to get ahead of that when it spikes. So fast so obviously with the backlog that we have an end.
So we're catching up I feel pretty good about where we're at.
We talk about steel on a regular basis.
You know there is we're trying to be smart about how we actually buy steel to try and protect our margin material margins and to make sure. We had built into our price pricing and through our reporting processes and so I feel like we're in a pretty good place right now make in regards to that.
That and of course as I said earlier you know we are.
Driving a lot of operational excellence continuous improvement to try and help offset the GAAP that we have from a pricing and cost perspective.
So sorry to press day on this but when when do you expect to be to be caught up is this a 2022.
Dynamic and it happens sooner than that and I'm, just not clear as to how flexible your pricing is through the year. I mean do you do you just have 1 price increase at the beginning of the year or are you are you more dynamic than that.
Now, we're a lot more dynamics that Meg we've done.
5 price increases year to date, and so you know and I think when you look at the price increases and how we manage pricing from infrastructure solutions to material solutions. There is a little bit of a different twist. There in regards to the metro solutions as all through a dealer.
Neither situation, obviously theyre looking at.
Filling out their fleets and their inventories on their yards.
And and also having retail so you know anything that doesn't have a customer name on it.
We've been pretty.
Adamant that we've taken prices up on those types of orders.
Even some that did have customers names, we've done as well. So I think we're pretty dynamic Meg in regards to where we're able to pass through.
And then the and infrastructure solutions side, a big component of that would be more of our direct sales and.
We've been pretty successful there as well.
Passing through pricing and also managing our discount structures at the same time, but I will say that we are dynamic.
We're going to continue to be dynamic and everything we've done is really price list changes no surcharges, if that helps with color as well.
No it does.
I'll get back in the queue. Thank you.
Thanks, Nick.
Our next question comes from Steve <unk> with Sidoti. Please go ahead.
1 Gary Becky.
Hey, Steve 1 follow up a little bit on some of your comments to the previous question specific to labor.
This is gonna be a hard 1 to answer but can you quantify at all how much revenue you can generate in the quarter simply because you didn't have the labor to fulfill orders because what I'm trying to think through is once you do catch up from that front.
What's simply that can do that.
Generate higher quarterly revenue in the future.
Yes.
Morning, and thanks for the question that is a difficult 1 for us to answer I mean, we.
It's tough in because if if we were able to put a whole shifts on for example, Steve at a time that would be 1 answer if we're able to incrementally go up by $5.10 heads you know.
Within a department that's different so it is very it's a difficult 1 I can tell you that.
You know obviously, we are driving.
1 hand, we'd love to have the backlog, but the other hand, I'd, rather have that backlog converted into our customers' hands and so were striving to try and make that happen as efficiently and effectively as we can buy.
I think 1 thing that's helped US Steve quite honestly is now that we've gone to 1 AD tech business structure and operating model we share capacities in.
And resources much more effectively today than we have in not only just in the United States, but globally and I think that's helped us offset some of the.
The long lead times, and so I'm really proud of the teams it.
It wasn't that long ago, we were 16 independent companies.
Now that we're sharing capacities.
And moving material between sites and moving people.
It has helped us tremendously and I think that will only get better as well, Steve. So I think there's some good positives for us as we continue to kind of build out that won't Aztec operating model.
Okay.
And.
That's helpful. But how are you in terms of labor recruitment and retention now versus 3 months ago getting any easier because you get people through the door are you able to keep them and train them.
If you can just walk through that process, a little bit because obviously, we're hearing mixed across the board.
Yes, so we're up about 240 people on a year over year basis Q2 to Q2's, Steve.
So we've had some success.
You know there is a I.
We say the turnover is higher than we'd like.
It is hard to retain people.
And it's also as you know hard to hire people so.
Yeah, I think we're making progress we're trying to stay up where we're trying to also do it in ways that doesn't necessarily change our cost structure on labor. So most of that is through incentives and bonuses.
For attracting and retaining people.
So.
I can't give you a lot of detail on that but no that whether it's the way we advertise the way we.
To attract people through other different.
Methods.
And the way we're using R. R.
Cash to bring them in its should be at this point in time anyway, more onetime expense versus something we're going to live with for ever in regards to salaries and and.
And pay wages, but that's where we're at today.
As I talked to different Ceos and different members of Congress I mean, obviously the idea is that when some of the.
I just had a conversation of the day with it.
It was a democratic and Republican progression.
Congressional members together and they both agreed that as some of the stimulus goes away people will go back to work. So we're trying to do the best we can now and looking forward to the time when when that Labor force is ready to get to work in and it is really kind of spotty. Steve. So we've got some sites that are able to hire more than others.
But every 1 of our sites have have a significant backlog today. So.
We got to keep pushing on all of our sites to try and continue to get as many people as we can train as many people as we can we're going into high schools.
You know our regulated programs in order to try and find a.
Folks I want to start working and starting to build a career at Aztec you know as they come out of high school. So we're doing things with the local everything locally that we can in order to attract and retain and train people as part of our workforce.
Great. Thanks, guys I appreciate the time.
Yep Thanks, Steve.
Our next question comes from Larry de Maria with William Blair. Please go ahead.
Thanks, Greg.
I wanted to check in on the ERP costs I think it's up to 5.3 for the year millions I think its little higher than expected. So.
Can you just give us an idea of what to expect for this year and really frankly for it to get from 'twenty 2.
I think this is a multi year journey and then related to that is 55 million SG&A run rate into the back half force should revert back to the lower that 52 to 54.
Originally expecting.
Hello, This is mackie I'll I'll tackle that 1.
I spent 3 million year to day is very much in line with our expectations and we actually see that growth were pretty high.
Our arms around the totality of the overall program over multiple years that this will be rolled out this will be rolled out delays. So we don't have that number for you today, but it's more than just the ERP. There's multiple enhancements that are in this program.
And so we should expect that the run rate will continue to remain at the current range and so you can see our centralization and infrastructure efforts, which will create efficiencies of various to create scale. It keeps sites coming online.
I'm just happy anyway, so we're being very thoughtful I think bringing site and so we're making sure we have the right manpower and structure in place to make it.
It is possible.
Yes.
Okay. Thank you.
And then 2 other ones here the macro facility is that I didn't hear you mentioned that but I know, there's obviously a day. So labor issues, we just talked about but broadly if not quite sorted out or is that still an overhang and then to the original question about <unk>.
And the backlog that you went through some color, but can you give us a handle on how exposed we are a price in the backlog. If it you feel good about half 3 quarters of it and we're exposed on a quarter to fluctuating prices or are we mostly locked in we just want to understand the risk of the backlog, which is obviously growing significantly.
Hey, Yeah, Larry Good morning. This is Barry on the next 1.
Restructuring, yes, we have.
We've been out of that side, we've actually sold the site.
We've moved the production to 2 or 3 different locations.
You know as we mentioned to you reference Larry in Q1 that was a little bit of a drag on us as we move material in such an in demand and not having the labor So I feel.
That would have that obviously shows up in our material solutions business and so we feel good about our performance Q2 materials solutions and.
So I think the team has done a phenomenal job.
Certainly from Q1 into Q2 to really leverage that as best as possible. So I'd say that we're in much better shape now relative to that.
Our facility transition than we were in Q1, which is great on the pricing in backlog.
Our backlog is pretty long.
In some cases, we're out a year and so we're not fully covered but.
You know, we we were using every mechanisms we can to try and make sure that we're buying steel at the right price and then using our price initiatives to go out and cover as much of that true increase as possible. So there is some exposure there to be very transparent with you.
But quite honestly there has been some exposure through the first half of the year as well and I think we've done a good job of managing that.
Thanks, Barry if I could just follow up on that then if we get infrastructure Bill and we get it re upping of the highway bill, but presumably and strong market for yourself going forward. This book.
Backlog that goes into next year will you revisit surcharges in pricing if the demand is that strong.
At some point, obviously as they shouldn't have to eat it all right.
Yeah, I think we're really sensitive obviously you know.
<unk>.
Our customers have been long term customers, we've got a good.
<unk> history, and a lot of respect with them both directions and.
They're very they're very wise, you know so I think that.
We've been successful so far I would expect that that would continue and certainly you know as in your buyer in the environment. You just explained obviously theyre doing well too.
But we want them to continue to be profitable and make money and they want us to be the same. So I think we've been able to work through those tough those tough conversations pretty effectively.
And as I mentioned, Larry that's what we're going to continue to do moving forward.
Okay. Thank you all.
Thank you, Sir ladies and gentlemen, if you do have a question or comment you May press star 1 on your telephone keypad at this time again, that's star 1 on your telephone keypad to queue up for a question or a comment.
Just 1 moment.
I'll return to make <unk> with Baird. Please go ahead.
I just couldn't get enough guidance, so I figure I'd come back from them.
We look forward to your questions May go ahead.
[laughter].
Can you talk a little bit about demand I mean, you know.
I'm looking at your infrastructure orders and.
Yes, your backlog is up year over year, that's true if I'm looking at implied orders now.
Down sequentially quite a bit and really only up about 8% relative to the second quarter of 2020. So.
Give us a sense for how you sense demand evolving here.
Why we're sort of seeing this sequential.
Volatility where sequential.
Sequential decline rally.
Relative to the prior quarter is this lumpiness is there something else or going back to that question on on infrastructure is there enough uncertainty surrounding this bill and surrounding the fast Act.
That you know youre simply seeing some hesitation in terms of where your customers that.
It might be at this point.
Okay makes sense. Thanks for the question. So I would say customer sentiment is very positive our dealer sentiment is very positive and some of what we saw in the quarter that implied order line was really around some seasonality sequentially.
Typically you'll see you know a little bit of softness in Q2 is.
It which you know I guess historically made you know equates typically into Q3 being a little bit lower on a revenue basis for us as well.
And so there's a little bit of a back going on I mean, our customers are busy.
Not only that but as I've talked to them.
In my visits to customers you know.
With many customers over the last couple of weeks and they're all talking about range and you know what.
Marine does is it starts to put pressure on them that theyre trying to get everything done as they can when it's not raining. So there is a heightened level of activity in the market right now in regards to getting projects completed and in process.
I'm not worried about a lower implied order rates in Q2, the sentiment is very strong and I expect it to be healthy you know for a period of time I think when it comes to the infrastructure Bill make these customers I mean, they are generational businesses and so they've been around long enough to know.
And been part of you know going back and forth and infrastructure builds in and I think as we've said a couple of times now make our customers had a record 2019 and with the pandemic. They had a record 2020 on top of 19, and they're doing well in 2021. So they are well positioned to continue to.
Spend that capital and we're you know.
You know with a Rocky road value chain do we get to participate in all aspects of it from the crushing screening in the plants and all the accessory equipment and then obviously with the road construction.
Equipment as well, so we're well positioned.
Okay. So it's more of a timing issue.
I mean I'm I'm.
Implied to me from your comments that you expect the orders here or 2 to get better.
At a point in time and book.
Before year end.
I think that the order flow I mean take out to Q2 blip in the infrastructure I think it will they will continue to be in good shape I'm not worried about a decline in orders at this point in time.
Okay.
You you mentioned that revenue in.
In infrastructure.
Would be perhaps a bit down sequentially in Q3.
I'm sort of curious as to how you're thinking maybe provide a little more perspective. There Q3 Q4 revenue because you do have a good amount of backlog.
Presumably it's just about kind of conversion here and some of the labor issues you talked about earlier.
Can you can you help us out how you're thinking about revenue.
Yeah, I would just look at it this way Mig.
When it comes to Theres, a couple of different ways to look at this depending on which product line and which parts of the business you know when it comes to the material solutions side in our dealer network.
Really about throughput and how you know just getting product through our facilities and to our customers and dealers hands.
And when it comes to the road construction equipment of course, that's very much the same.
It's really around throughput when it comes to the plant's Mig that becomes a little bit different story, because that's just not US you know putting the products through our facilities, but it's also has to do with our customers' readiness, whether that's due to permitting or a resource capable capability of availability on our sites.
So we're a little bit.
Handcuffed, you know with our customers, if they're not ready to receive a plant or they're not ready to do a drum replacement than we just can't ship to them and so that's a little bit.
What happened in Q2, along with the.
The throughput issues that we talked about but when you look forward in Q3, and Q4 Q3 for them from a plant perspective is.
It's typically a softer revenue quarter for us because of what I, just said theyre not theyre not interested in doing installation.
Plant equipment in Q3 that would start to pick up again in Q4 and certainly into Q1. So I think we'll still see a little bit of that seasonality may, especially on the plant side.
But it may not be as much as we would in our history.
A legacy type of year, because we do have that backlog and some of that will shift and we'll be able to produce more of that than we maybe would.
You know in previous years, if that makes sense.
No I think it does so I.
I appreciate the color there my final question is on non.
Materials solutions gross margin in the quarter.
28% quite good and really good contribution margin on that revenue growth.
Is there anything that we need to be aware of in terms of 1 time items that might have helped this quarter.
Mix any any anything that needs to be called out.
The follow up here is.
There's not anything that's onetime in nature than wood.
This level of gross margin be sustainable in the back half of the year and that's it from me. Thank you.
Alright, Thanks Mig.
I'll start on that and basically everything that you can jump in.
First I wanted to I want to take this time to really.
I applaud our team because this is a you know up until.
So year and a half ago. This was a very.
A decentralized part of our business.
You know we've had to make some tough decisions within that part of our organization and so I really applaud the teams in regards to their effort to continue to really drive the 1 Aztec.
<unk> operating model and then I mean this is a part of our business is probably had to do that more than others and for different reasons and so they've done a great job of sharing backlog sharing demand sharing resources and I think all of that starts to roll up and on top of the pricing actions and operational excellence programs, we have in place to really start.
To show you know a little bit of what that capability and what the value is of that so.
You know that's been a bin and adjusted for organization, but I'm proud of the fact that they've adopted it and are starting to see some of the awards from the from the hard work and buy in you know are we going to run 28% margins you know for the rest of the year I am not going to commit to that because there's too many unknowns relative to.
Back to the supply chain and labor turnover in those types of things, but I think it starts to show you that the efforts and the transformation that we're going through as a company.
It can really get some legs when it when it comes together so.
I'm not ready to commit to that.
On a short term basis, but I'm excited about what that opportunity really represents on a long term basis, and really helps us get towards that 10% to 12% EBIT margin goal that we've put in 2023.
You may have looked like.
Yes.
1 added piece of color. There you know they do have they plan for fluctuations.
Quarter to quarter based on volume, so what really gave Ben.
Record gross profit per month was the extra volume and some of that as a link to the first quarter. So when you look at Q1 and Q2 together, they're right in line with our expectations and we expect that.
They say, we couldnt see some nice Q3 Q4 quarter to quarter, but on a full year basis, they're very much in line with with.
Our expectations.
And then to clarify there was.
There was nothing unusual in this 28% margin if volume is call. It close to $100 million of revenue you should be able to generate these sorts of gross margins all else equal.
Yeah.
Staying equal yes.
Okay. That's it for me thank you.
Yeah.
Our next question turning to Steve <unk> with Sidoti. Please go ahead.
Thanks for taking a couple more questions.
I wanted to ask about the the interest on the international front last quarter, you had highlighted the negative impact some of those orders had on margin because it was sort of those lower margin projects as you try to enter a new market or expand into new market. We saw international.
Sales and backlog up this quarter did you see that sort of stabilize in terms of margins and how you're thinking about those international orders moving forward.
Yes, that's a great question and yes, I mean as I as I talked about the impact on Q1.
Really saw that as a onetime event and so we are happy that in Q2.
You know as we grow our international business as you can see in our backlog and and and our revenues I mean that is a very attractive part of the business for us.
We're going to continue to drive growth there.
Both in the products specification side of it but also making sure we have the right supply chain and really happy with the team's performance there to take care of international customers and see some good value creation from that part of our business.
Great and just just to get 1 last 1.
In terms of how you think about prioritizing backlog.
Is it is it purely a matter of where the where the order is that the plant where they have time, where you have components or is there any sort of priorities prioritization based on.
The importance of per customer or the margins you can get out of certain orders.
Yes, that's a good question.
I would say our first and foremost is when we sign an agreement and a purchase order with the customer there is typically a expected delivery date and that's what drives our priority and we typically do.
Don't really sway from that.
I think obviously, our customers know that our our capacity at this point in time is limited and yes, we do hold some slots for things that come up you know.
To make sure we can take care of urgent type of needs, but generally you know our customers recognize now that if theyre interested in replacing an equipment or plants that they have to get the orders in in order to get that slot and so.
We don't do a lot of moving around based on prioritization.
There's always things that are plant guys will do to try and optimize what they see as part as far as parts availability and those types of things, but there we need to make sure that we're doing a good job of communicating with our customers that that may move them in or out but generally.
That's about as far as we go in regards to any kind of prioritization.
Thanks, Barry I appreciate it.
I think in 1 other comment I mean, just to kind of give you some more perspective.
With the inflation that we've seen on steel.
Typically when you're when you're quoting a project or a plant or a piece of equipment. You have made some assumptions on what that steel cost material cost is going to be so certainly it behooves us to actually get that units shipped.
With that with that with that.
With the steel price, we use and so we don't want to get out of line in regards to pricing and material pricing.
Which should get us upside down pretty quickly if we were moving stuff around to the to great extents.
That makes sense.
There are no further questions in the queue I'd like to hand, the call back to Steve Anderson for closing remarks.
Thank you Darren we appreciate your participation on this conference call and thank you for your interest in as day as today's news release indicates today's conference call has been reported.
A replay of the conference call will be available through August 18, 2021, and an archived webcast will be available for 90 days. The transcript will be available under the Investor Relations section to the <unk> industries website within the next 7 days.
All of that information is contained in the news release distributed earlier. This morning. This concludes our call, but I'm happy to connect with you. If you have additional questions going forward. Thank you all have a good day.
Ladies and gentlemen, this does conclude today's teleconference. Thank you again for your participation you may disconnect. Your lines at this time and have a wonderful day.
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