Q1 2022 Astec Industries Inc Earnings Call
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Good day, and thank you for standing by welcome.
Welcome to the Aztec reports first quarter 2022 results call at this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
To ask a question during the session you will need to pass by one on your balance sheet.
Please be advised that this conference is being recorded.
If you require any further assistance please press star zero.
I would now like to hand conference over to your Speaker today, Mr. Steve Anderson. Please go ahead.
Welcome to the <unk> first quarter 2022 earnings conference call.
Joining me on today's call are Barry Ruffalo, Chief Executive Officer, and Becky Weyenberg Chief Financial Officer.
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.
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 could 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 U S. GAAP 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 are therefore unlikely to be comparable to the calculation of similar measures for other companies.
Management of the company does not intend these dod into to be considered in isolation or as a substitute for the related GAAP measures.
A reconciliation of GAAP to non-GAAP results are included in our news release and the appendix of our slide deck.
All related earnings materials are posted on our website at www Dot Aztec industries Dot com.
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.
We'll begin with a brief overview of the quarter followed by highlights of progress made on our continued strategic evolution and key messages from the quarter.
And then Becky will share details on our financial results and capital deployment.
I will then share more detail on what we're seeing in terms of demand and current market dynamics and conclude with a discussion of our recent acquisition and a reminder of our ESG priorities I will then open the call for Q&A.
Beginning with slide four.
End market demand remains strong for our product with services as evidenced by another quarter of sales growth and record backlog.
Looking back over the quarter, we saw the continuation of challenges from the fourth quarter continue in the first quarter.
With January being the most impacted.
Since then we have witnessed a steady progression of improving conditions in the environment in which we operate.
US confidence that future performance will improve.
Our entire organization is working hard to overcome the supply chain logistics and cost challenges, we face and I am proud of their progress as we gained traction on mitigating these challenges.
Pricing action, we have already implemented and are taking now should be realized in future quarters, giving us additional tailwind to support our margins.
Customers are anxious to get our products and we are on track to improve output to convert our backlog into profitable sales.
We are set up for steadily improving performance throughout the balance of this year and I'm confident in our team's ability to overcome the challenges we are facing.
As you can see in our key messages, we saw another quarter of top line growth driven by solid market demand positive customer sentiment.
First quarter sales increased two 4% compared to last year, and we grew backlog to record levels for the sixth consecutive quarter.
I continue to be extremely encouraged by conversations with customers and they are seeing robust demand and are eager to receive our industry leading solutions.
Second we continued to be impacted by supply chain and logistics constraints that are being felt across the industry.
It has limited our ability to meet strong customer demand has it has impacted our bottom line results.
In addition, the labor researches we experienced in Q4 related to the COVID-19 pandemic lingered into January.
<unk> operating models instrumental in mitigating the challenges, we face by driving price realization to offset inflation proactively addressing supply chain disruptions and onboarding new talent third.
We stand with the people in Ukraine, who have been impacted by the conflict in the region. We are in support of any compliance with U S sanctions against Russia, and hope for a quick and peaceful end to the violence in Ukraine.
Exposure to Russia, the material to our financial results other than that any indirect impact of the industry may feel from steel inflation customer sentiment or increased energy cost.
Fourth.
We remain well positioned to execute and grow with a strong balance sheet and continued focus on operational excellence, which enables us to operate in challenging macro environment and invest in growth.
We've made significant progress in building out and enhancing our technology platform with the addition of a chief Technology Officer, and our recent acquisition of mines.
I'll say more about the <unk> acquisition later in the call, but now I'd like to tell you about <unk>. The newest addition to our executive team.
As Chief Technology Officer, and is responsible providing strategic direction and formulated innovation plans strategic partnerships and technology investments.
He brings a wealth of experience in industrial systems and manufacturing cost.
And then our strategic digital vision and roadmap to drive technology innovation at Aztec Lastly, we are positioning our business for the future pursuing profitable growth that drives long term stakeholder value.
Guided by our simplify focus and growth strategy.
This focus provides us a stable framework to address the current macro trend headwinds we're now facing.
Turning to slide five we.
We continue to operate as one as a proven framework that gives our team the tools to navigate industry headwinds. This model is customer centric and focused on the rock the road value chain.
Integrated business is best positioned to deliver unmatched value, which is further illustrated on slide six with our portfolio of industry leading solutions.
The one Aztec approach touches everything we do from shallow retention and development operational excellence and efficiency.
Guided by common values, we're positioned to mitigate the supply chain and logistics disruptions being faced by our locations.
The actions, we're taking are driving greater efficiency, helping us identify multiple sources for critical components, and enabling us to better meet growing customer demand.
It does not always easy, but I remain confident that our continued focus on the <unk> model will serve us well through 2022 and beyond.
<unk> seven as I mentioned in my opening remarks demand remained strong for our products across both infrastructure material solutions, our commercial team and I continue to have conversations with customers who share a positive sentiment for their businesses, which in turn supports our optimistic sales outlook for 2022.
Our record backlog reflects continued strong demand for our solutions and we have numerous initiatives in place to help us expand capacity to meet higher demand.
The Federal Highway Bill is a long term tailwind for our business and can further augment existing demand growth across our markets.
We see significant near term demand for our products and we have a strategy in place to augment those market tailwind with incremental organic and inorganic growth initiatives.
We successfully established and implemented initiatives to address labor shortages, including actions to strengthen our recruiting process and actions to improve our engagement retention and attraction.
Doing so enabled us to both head count and challenging environment during 2021, which now positions us to better serve our customers.
Looking forward, we see additional needs to bring in talent to ensure we are meeting customer demand and believe the continuation of our current practices allow us to expand our workforce as needed.
Supply chain logistics disruptions remain a concern of note electrical components tend to be the most challenging.
Our sourcing team is working tirelessly to identify secondary supply sources and engage with partners, who understand our long term outlook and can meet our demand requirements.
We continue to deploy operational excellence initiatives and leverage our one Aztec business model to increase throughput and mitigate the impact of these challenges.
We also continued to invest capital for equipment to deliver product more effectively.
For an expansion of our footprint into low cost territories.
We are focused efforts to leverage pricing power in the market to pass through higher inflationary costs.
Anticipate elevated commodity transportation and logistics costs to continue across the industry through 2022.
As the price leader, we implement further price increases as needed to offset higher inflationary costs.
Taking a look at slide eight.
You can see our backlog trend over the last eight quarters. This quarter, we achieved our sixth consecutive quarter of record backlog really delve little levels seen this time last year.
We have confidence in our backlog as experience tells us that these orders tend to be sticky rarely canceled.
Our expectations are that these orders will be converted into sales would have been approximately three quarters.
We have several initiatives decrease capacity to meet higher demand such as increasing head count in our manufacturing facilities.
In addition, we now have manufacturing engineers to increased project management capabilities, and we are investing capital to expand facility output.
Leverage cross site manufacturing, where possible to continue our journey of further automation.
We believe these actions will accelerate the conversion of our backlog the sales and better enable us to deliver products to our customers at the desired time.
In summary, we achieved another quarter of sales growth and grew backlog to record levels. Once again, showing the strength in end market demand and the desire of our customers have for our high value products and services.
Our operating and commercial teams are responding to the dynamic macro environment. Following our playbook to mitigate supply chain disruptions rising costs and labor challenges in order to meet strong demand and serve our customers.
I remain optimistic that 2022 will be a positive year for us our customers and our shareholders.
With that I will now turn the call over to Becky to discuss our detailed financial results.
Thank you Barry and good morning, everyone.
As shown on slide 10, first quarter sales increased two 4% compared to the prior year quarter to $291 million parts sales are strong like a 9% increase and were.
Partially offset by a slight decrease in equipment sales of one 7%.
Domestic sales were up three 9% while international sales decreased three 6%.
Due to strong market demand, we once again reached record backlog levels.
98, 4% to eight.
Compared to $4 $7 million at quarter end, Kevin bypass carrier solutions and infrastructure solutions orders.
We're at 97% and 103, 3% respectively.
Order activity remains robust as customer demand continues to rise.
I'll start by strong commercial excellence initiatives that are positioning us to win more orders.
In parallel they are focused on deploying operational excellence initiatives across the organization to mitigate the macro challenges we are currently facing.
Some of the supply constraints are equal.
No.
Just like our more value added services products and solutions to our customers.
First quarter, adjusted EBITDA decreased 10% to $18 $8 million compared to the prior year period as cost inflation was slightly ahead of favorable volume price and mix and omnicom related manufacturing challenges, we incurred early in the quarter.
Continue to work to offset the inflationary pressures, we are slow to your pricing actions.
Adjusted SG&A expenses decreased three 5%.
$7 million, Kevin primarily by lower health care costs favorable deferred compensation expense.
These reductions were partially offset with increased activity for sales related activities as well as travel costs as our employees Reagan national face to face contact.
Adjusted earnings per share of 41 funds decreased nine cents compared to 50 cents in the first quarter of 2021 and included $5 $3 million of transformation restructuring and other costs.
Our adjusted effective tax rate for the quarter was 21%.
Reduced tax benefits from stock compensation, partially offset by the increased net benefit for foreign derived income.
On slide 11.
The key drivers of our year over year, adjusted EBITDA decline of $2 $9 million.
Negative impact from inflation was mostly offset by volume pricing and mix.
The impact for manufacturing with a slight headwind early in the quarter.
We expect to fully offset inflation with price increases higher volume and favorable mix and anticipate that manufacturing confessional Facebook can become a tailwind as we progressed through 2022.
Moving on to slide 12.
Our infrastructure solutions sales declined 2% to 197 $5 million in the quarter, primarily due to unfavorable net volume pricing and mix.
Domestic sales were up 1%, while international sales fell 15, 6%.
<unk> sales grew five 7% while equipment sales were down seven 2%.
Segment gross profit decreased 13, 1% to $41 $9 million and gross margin percent decreased 270 basis points to 21, 2% driven by the negative impact of higher inflation net of volume pricing and mix.
And manufacturing efficiencies.
Infrastructure installations backlog at the end of the quarter increased 100 train, 3% to $517 $7 million as we continue to see strong and increasing demand for highway and road construction products across the country.
Turning to slide 13.
Our material solutions sales increased 13% to $93 $7 million.
There to the same period, a year ago, driven by increased demand across product lines and regions with domestic sales up 11, 9%.
International sales up 16, 1% versus the first quarter of 2021.
Segment gross profit increased 19, 5% to $23 $9 million and gross margin percent increased 140 basis points on higher volume pricing and mix and manufacturing efficiencies offsetting the negative inflation and tax.
<unk> backlog at the end of the quarter increased.
7%.
$317 million, driven by continued dealer restocking and strong market activity.
Turning to slide 14, we continue to maintain a strong balance sheet with minimal debt overall, we have available liquidity of $259 million, including over $111 million of cash on hand, with only $5 3 million and total debt.
At the end of the quarter.
With reference to virtually zero, we are well positioned to maintain a strong and flexible balance sheet with ample liquidity that we believe will enable us to withstand a variety of economic situations.
Should we need to incur higher debt levels in the future, we will strive to operate between one and a half to two and half times net debt to EBITDA.
Turning to slide 15.
Our disciplined capital deployment framework remains consistent with what we have previously shared we are.
Following a targeted capital deployment approach within the context of our long term strategic objectives and related revenue earnings and cash flows.
In order to maximize shareholder value.
We estimate that our capital expenditures will be in the 40 million to $15 million range versus prior range of $30 million to $40 million for 2022.
Regarding acquisitions, our pipeline remains strong and our strategic approach remains consistent with our focus on acquisitions that align with our strategic filters and financial criteria to support our growth pillar. The mine's acquisition completed in early April is a good example of this as it positions us.
<unk> are taking our platform and better serve our customers, bringing in additional growth opportunities for us.
Lastly, we remain committed to delivering returns to shareholders.
Merrill Lynch funding, our 12 cents per share quarterly dividend.
With that I'll now turn it back over to Barry for his closing comments.
Thank you Becky slide 16 shows the various organic opportunities we're pursuing in support of our growth pillar and we expect to drive year over year organic growth over the long term.
In the first quarter international sales were slightly lower than one year ago and represented just shy of 20% of our total sales. However, we expect the longer term trajectory to be positive as we gain traction.
Further we are increasing our investment to expand our manufacturing footprint in low cost territories, which helps improve margins and strengthen our international presence.
Next opportunities to drive growth will continue in our parts and services business I would like to recognize the ASIC team for the achievement of a new quarterly record for part sales first quarter parts sales were $99 2 million up 10% year over year, reflecting the momentum we are gaining.
Opportunities related to dealer expansion cross selling strategic accounts and new product development road other organic growth initiatives.
Long term pursuits, and a dedicated team is working hard to realize their potential.
We are gaining momentum across these areas in our company and our related strategic initiatives will drive future profitable growth across their business.
Turning to slide 17, our strategic approach to M&A begins with a set of filters to ensure that the target company aligns with our growth strategy.
If a target meets those criteria then we look for financial characteristics that meet or exceed our long term metrics. It would achieve our goal of being accretive to EPS in the first full year.
With that as a backup I'm excited to share with you. Our most recent acquisition by the automation group illustrated on slide 18.
Most of the leader in plant automation control system to cloud based data management in the asphalt industry. This technology really complements the capabilities of the <unk> acquisition that we completed in late 2020.
Allows us to build a truly digital and connected platform with which we can better serve our customers to prove our efficiency utilization of our parts and service opportunity.
We're excited to welcome to minds team to Aztec and I'm excited about the opportunities that these two acquisitions will provide for us and for our customers.
Next on slide 19, I would like to remind you of our ESG journey in our areas of focus in 2022.
We continue to invest in resources to accelerate sustainability initiatives during.
During the process of establishing Kpis baselines are tracking for greenhouse gases emissions utility consumption.
Material factors.
Lifecycle assessments, a major product categories are being conducted and will further enhance our ability to design products and provide value for our customers.
Along with these investments and resources, we will continue to advance social initiatives with a focus on employee safety and Welfare addition to diversity equity and inclusion both internally and in their communities.
Lastly, we will focus on maintaining product governance practices through board oversight cyber security amount of discipline.
Turning to slide 20, you can see a summary of our key investment highlights.
These elements have been a consistent narrative for us and illustrates what distinguishes Aztec and the investment landscape.
We've developed leadership positions in attractive markets that are aligned with secular growth trends for.
Our commitment to innovation enables us to deliver high quality products and superior customer service. This has positioned us to further benefit by creating a reoccurring revenue stream for high margin aftermarket business.
The result is a strong balance sheet to create more shareholder value and enable us to face macro challenges.
All of this is supported by our team's progress aligns with our simplify focus and growth strategy leading to profitable growth.
In closing we are never satisfied and are always driving to improve our performance I am proud of what we are accomplishing and confident our strategy is leading us to a brighter future.
We are truly operating as one aspect that are bringing tremendous value to our customers across the <unk> value chain.
These accomplishments are the foundation for achieving our long term targets of 10%, 12% EBIT margin and greater than 14% return on invested capital.
And I'm optimistic for the future of Aztec and confident that we are on the right path to building sustainable long term stakeholder value.
Operator, we are now ready to open up the call for questions.
Thank you Sir at this time, we would like to take any questions you might have for us today.
As a reminder, if you would like to ask a question simply press star one on your telephone keypad.
Again that would be star one on your telephone keypad.
Our first question comes from the line of Mig debris Dan Your line is now open.
Hi, Good morning, guys, it's Joe Grabowski on for Mig This morning.
Good morning, Joe.
Morning can.
Can you talk about pricing on new orders this quarter, how did it compare to how did a comparative pricing in the second half of 'twenty, one and how does the price cost look going forward.
Hey, Joe This is Barry thanks for the question so obviously as.
We reported through to through most of 2021, we've been addressing the price cost.
Ratio throughout the course of the year, obviously trying to.
Pricing up and also the other things in the business offset as well regards to.
Manufacturing efficiencies solar and so forth.
As we look at Q1 of this year.
We're happy to say that.
When you look at the price cost ratio is basically being neutral.
In the quarter, we lump it into the bucket.
Slide with volume and mix.
Volume and mix actually pulled back.
Bar down a little bit, but on a price cost basis in Q1, we were neutral.
As we look forward into 2022, obviously, we expect more.
More inflationary pressure, but we also have pricing in our backlog that we haven't realized at this point. So we feel like we're well positioned at this point any way understanding of what we see for inflation.
A majority of that if not all of it offset by the pricing is set to come.
Got it okay. Thanks, guys.
And I guess my follow up question would be yes.
Gross margins in the quarter.
Rose strongly versus Q4.
Q4, obviously last year with the lowest quarter of the year for gross margin in each segment should we kind of consider those gross margins in Q4, an aberration and how do you expect gross margin to progress through 2022.
Yes, as we talked in mid Q4 earnings call Joe.
We were we were happy that up until that point really through Q3 of 2021, we were able to maintain that 23% to 24% gross margin average in Q4, obviously had lunch.
Unprecedented circumstances for us with regards to supply chain Covid related S&P is on soda so for it which as we also mentioned flowed into the first part of 2022.
So.
We do feel like that was.
An extraordinary set of circumstances as it has always done.
We feel good that the team has posted a good Q1 relative to Q4.
As you look at the results Joe you can see that material solutions gross margins, where we're good infrastructure solutions. We would look at that is that when you look at the <unk>.
Margin, because that's where we had the most difficulty in the first part of 2022 around Covid related absenteeism under absorption and supply chain issues and so and we've also seen some of those.
Issues resolve themselves as we went through Q1.
So we feel we feel better about how we're going to progress through 2022, obviously than we did in Q4 of 2021.
If I could maybe just sneak in one more quick one you've talked in the press release about elevated steel costs. Obviously, how are you how are you managing that.
The higher cost for term.
What what mechanisms are you using to maybe.
To reduce the.
Steel inflation.
What youre seeing right now.
Yes. Thanks for the question, Joe we meet on a monthly basis, if not more certainly at least monthly steel council and we looked at what's going on with without important material.
It was part of our Cogs.
Into our business and so.
Just from my experience over the years is not just one silver bullet in regards to how you really.
<unk>.
Your steel purchases or protecting the material margins.
So we use all the different options primarily.
You probably have heard or have been walking yourselves.
<unk> was higher as we entered into 2022.
Oil drop back off place stayed about where it was.
Since that point in time, we are seeing hot rolled coil go back up and now start to plateau. So we believe that the actions that we're taking are serving us well to manage and protect our material margins were.
We're certainly not speculative when it comes to steel and so we use things like forward buys.
<unk>.
We use a little bit of everything Joe in order to make sure that we're protected so we do feel good about.
Our visibility there and our ability to manage that both in how we buy and how we actually price to manage as well.
Okay perfect. Thank you very much.
Thanks, Joe.
Thank you. Our next question is from the line of Steve.
Zhang.
Your line is there anything.
Good morning. Thank you appreciate all the color on the call.
To follow up Joe's questions on the sequential improvement because I think it probably to a lot of us. It was it was a significant surprise knowing that Omar Khan.
Noted previously peaked in January so.
So I'm trying to get a sense one of the financial impact of OMA Q1 versus Q4 and weather matters and it was early in the quarter versus late.
And also we're getting a sense from other companies that the electrical component issue just in terms of supply chain, alright, if not getting better or actually maybe even getting worse and if you could talk touch on both those topics in terms of how you managed Q1 versus Q4.
Yes.
Steve Thanks for the question I would say.
In Q4.
We had about $11 million of under absorption in Q4 of 2021, we've seen we've seen an improvement in under absorption in Q1 of 2022 as I mentioned earlier, the biggest impact for us in the quarter of Q1 of 2022 is really the infrastructure solutions business.
That's where we saw in January the biggest impact from Covid.
That was a tough month for us, but as we look to as we look back and look at our performance in February and March we've seen improvement there so our COVID-19 related absentees.
Dropped off significantly after January .
Now we start to see and hear about more news Amazon a little bit of an escalation. In spite, we haven't necessarily seen that have any kind of material impact on our operations.
Recently.
We feel good that you know, maybe where maybe that part of the of the variances are behind us in regards to the Covid related absenteeism and now we can simply just focus on supply chain and logistics issues, which ultimately now are really our biggest constraint for us to continue to grow our volumes in and reduce that backlog and deliver.
Product to our customers as they continue to have a high demand.
For everything that we provide really across the board.
Okay and.
And when we think about the growing backlog and the time.
Completion and industry wide issues.
How much is that driving what was a pretty significant growth in your parts business, which I imagine is higher margin and how do you think about parts sales. This year, knowing that youre looking at three four quarter backlog and how much that can can drive that higher margin portion of sales.
Yes, great Great question, Steve I would tell you that I give more credit to the actual parts of the organization and the hard work that they've put into really driving execution on our strategic initiative to grow our aftermarket part sales.
They've done a lot in regards to using.
Using different systems, incorporating better data.
In that across the organization and inventories and availability better communication with our customers and so I really attribute our parts growth.
Really to the team and the work that they put in in order to make sure that that.
We're having good strategic deployment and good execution in the items that theyre actually items that they are driving so I would say more credit goes to them. Obviously, there probably is a little bit of.
Customers, who maybe wanted to trade out equipment.
To run them, a little longer because of the lead times in which they are dealing with and so there's probably a piece of that or maybe some protectionism in regards to making sure. They have the parts when they need them because of that but I think ultimately I give more credence to the the work. The teams there was a drive that parts growth.
Then maybe that market dynamic.
Great and if I could just squeeze one more in on in terms of SG&A expectations for the remainder of the year can you provide a little color there.
Yes, the SG&A reduction that we saw.
In Q1 was really driven by <unk> dot com compensation and also health care reduction.
Cost. So we were still holding to the previously announced range of SG&A that you talked to at the beginning of the year.
Great.
Thanks, Brian appreciate it.
Thank you.
Thank you again as a reminder, if you would like to ask a question.
Simply press Star one on your telephone keypad.
Okay.
We don't have any further questions at this time Mr. Anderson. Please continue.
Alright. Thank you <unk>. We appreciate your participation on this conference call and thank you for your interest in SA as today's news release indicates today's conference call has been recorded a replay of this conference call will be available through May 18, 2022, and an archived webcast will be available for 90 days the transcript will be available under the investor.
<unk> section of the <unk> industries website within the next seven days all of this information is contained in the news release distributed earlier. This morning. This concludes our call and as always I'm happy to connect do you have any additional questions. Thank you have a good day.
This concludes today's conference call. Thank you for participating you may now disconnect.
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