Q2 2022 Astec Industries Inc Earnings Call
Right.
Good morning, My name is Dennis and I will be your conference operator today at this time I would like to welcome everyone to the Aztec and second quarter 2022 earnings conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If he would like to ask a question simply press Star then the number one on your telephone keypad to withdraw your question Press Star One again I would now like to turn the conference over to Steve Anderson Senior Vice President of Investor Relations. Please go ahead.
Thank you and welcome to the <unk> second quarter 2022 earnings conference call. Joining me on today's call are Barry rollout Chief Executive Officer.
And Becky Weyenberg Chief Financial Officer.
And just a moment I'll turn the call over to Barry to provide his comments and then Becky will summarize our financial results before we begin I'll remind you that our discussion. This morning. They 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 and 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, which are generally accepted accounting principles.
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 to be considered in isolation or as a substitute for 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.
A reconciliation of GAAP to non-GAAP results are included in our news release independent of our slide deck.
All related earnings materials are posted on our website at www Dot Aztec industries dot com, including our presentations, which is under the Investor relations presentations tabs.
And now I'll turn the call over to Barry Thank.
Thank you Steve Good morning, everyone and thank you for joining us I will begin with a brief overview of the quarter followed by highlights of progress made on our continuous strategic evolution and key messages from the quarter.
I'll then share what we are seeing in terms of demand and current market dynamics and Becky will share details on our financial results and capital deployment.
Then open the call for Q&A.
We are well diversified industrial company as shown on slide four with two segments, providing valued equipment parts and digital solutions to our customers and infrastructure and materials markets.
As a leader in our space, we have significant coverage across the Rocky road value chain, allowing us to provide a wide range of our customers' needs.
I'll begin with a brief overview of our business because I believe it is helpful backdrop to understand the strong demand. We are seeing as described in our key messages on slide five second quarter revenue grew nearly 15% year over year with strong growth across both of our segments as robust end market demand for our products and services continued.
Customer sentiment and economic drivers in the markets. We serve generally remained positive.
Strong market demand has resulted in record backlog positions. Despite strong sales I'm disappointed we are not able to deliver better profitability second quarter financial results were negatively impacted by several factors that reduced our margins.
Long term, we're continued deflation and manufacturing inefficiencies associated with industry wide supply chain logistics constraints and the temporary absorption of expenses in order to support customer needs.
Based on our demand outlook for the rest of 2022 and into 2023, we believe the long term benefit of taking care of our customers outweighs. The short term cost and we are confident the investments we are making will generate a positive return.
We continue to make progress in better lean supply chain challenges, let's fight continues.
It's a point with macro headwinds normalize our actions to align costs with revenue and employ our one <unk> operating model will ensure we are truly adding value to our shareholders.
Financial results that were below our expectations, we maintained a strong balance sheet that remains able to support our growth initiatives to facilitate investments in operational excellence. In addition, our balance sheet can support our business in times of potential economic recession.
With end market demand strong balance sheet and accompany United around one Aztec operating model positions, our business to pursue profitable growth to drive long term stakeholder value guided by our simplify focus growth strategy.
Focus provides a stable framework to address the near term macro driven headwinds we continued to face.
Going to slide six I would like to review current business dynamics and how last seconds responding in response to industry wide strong demand, we are implementing strategic actions to expand capacity increased throughput.
One action as capital investment.
This quarter capex of $7 million, bringing our.
Year to date Capex to $19 billion as a reminder, the full year 2000, and total capital spend was $20 million.
Incremental spend in 2022 is driven by automation and additional cost sufficient capacity.
Additional capital investments, we are successfully hiring and training employees to position our workforce for higher levels of production.
Unfortunately, this is creating a near term headwind as we worked through supply chain challenges. We believe however, these will pay off longer term as we deliver solutions to our customers.
It's worth noting that todays strong demand environment is not fully impacted by the federal Highway Bill and we are not relying solely on this four optimistic outlook.
Do believe this will be an added benefit and currently expect it to begin seeing demand from funded projects beginning in 2023.
Disruptions in supply chain and logistics continue to be a source of focus for us as we were impacted during the second quarter.
Our one <unk> operating model and focus on operational excellence are helping us mitigate these challenges we expect cost inflation to impact commodity purchase logistics expenses for the rest of 2022, our focus on pricing is better positioning us to offset inflation.
And we are successfully leveraging our pricing power to pass through higher costs and capture value we offer to customers.
We expect on realized pricing in our backlog to be recognized in the second half of the year.
Yeah.
I would also like to note we continue to execute our strategy to simplify focus and grow there was initiated in 2019.
The company is transitioning from a decentralized business model to a one ASIC approach for systems and processes are consistent across the company.
This approach Leverages the scale of the company better meets the needs of our customers and creates better career opportunities for our employees.
The company has invested to build capabilities and product management engineering and operations and sales while maintaining resources in the business to ensure continued focused support to serve our customers you can see our growing and record backlog on slide seven. This is a true testament to the strength of our end markets and our customers desire for our solutions. However, it is.
Challenge in that we want to ensure our customers are satisfied which means we are striving to convert these orders into deliveries.
I've already spoken about a number of these initiatives, including Capex investments for facility expansion and automation and additional head count.
We're also beefing up our manufacturing engineering group to allocate project management skills that help ensure we are effectively inefficiently solving the most pressing needs.
In addition, cross site manufacturing better utilizes our capacity, but one aspect business model shown on slide eight is the guiding framework for our company enables us to better address the industry headwinds.
<unk> focused our efforts in unites us with our core values.
So challenges at present I am confident that one out of <unk> business model is a key to moving forward and instilling a true performance culture building on the model, we follow or S. Fg's growth strategy on slide nine.
Part of the business focused on excellence in everything that we do and grow across the Rocky road value chain.
This is an ongoing process for us and we are always striving to improve.
I am proud of the progress we have made and I'm confident that the strategy is the right one for us.
By staying focused on critical objectives in effectively managing these things within our control I am confident we are heading in the right direction and I remain optimistic that 2022 will be a positive year for Aztec 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 11 sales increased to 300 local clients.
In the second quarter.
14 points.
6% compared to the same period as last year.
Equipment and parts sales increased 18, 5% and nine 1% respectively.
23, 3% increase in domestic sales was partially offset by an eight 4% decline in international sales.
As Barry mentioned demand remains strong and we maintained record backlog, increasing 92% from the second quarter of 2021 to 837 $24 million.
Backlog increased in both segments with infrastructure solutions searching, 161% and mature solutions growing 22, 5%.
Activity remains robust globally with our commercial clubs connecting with customers and matching their needs with our solutions.
Second quarter, adjusted EBITDA decreased 36, 5% to $13 $2 million compared to the prior year period.
Adjusted EBITDA margin decreased to four 1% as cost inflation more than offset volume price and mix this quarter inclusive of $2 7 million unfavorable foreign exchange.
We do.
This to improve in the second half of the year as previously priced backlog continues to work through the system and pricing actions are realized.
Adjusted SG&A expenses decreased one, 3% driven primarily by leverage and solid topline growth and controlling expenses.
Adjusted earnings per share was <unk> <unk>.
27, <unk> from the second quarter of 2021, and excludes $10.6 million or <unk> 47 cents of transformation restructuring and other costs.
<unk> $6.4 million of costs associated with our ongoing simplify focus and grow transformation program.
Our adjusted net effective tax rate for the quarter was 27, 1% due to the mix of international income relative to the last decade.
Moving on to slide 12.
Infrastructure solutions sales increased 16, 6% to $296 million in the quarter, primarily due to favorable net volume pricing and mix domestic sales were up 26, 8% while international.
Sales fell <unk>, 6%.
Equipment sales were up 20% and part sales grew 11%.
Gross profit was essentially flat at $38 $4 million and gross margin decreased 330 basis points to 18, 3% driven by the negative impact of translation supply chain and logistics challenges on manufacturing efficiencies.
Infrastructure solutions backlog at the end of the quarter increased 161% to $568 $3 million as we continue to see strong and increasing demand for highway and road building construction products globally.
Turning to slide 13.
Our material solutions sales increased 8% to $107.4 million compared to the same period, a year ago, driven by increased domestic demand and favorable net volume pricing and mix equipment sales grew 14, 4% and part sales were up five 8%.
Domestic sales were up 16, 2%, while international sales fell four 2% versus the second quarter of 2021.
Segment gross profit decreased <unk>, 8% to 21 $9 million and gross margin decreased 750 basis points.
<unk>, 4% due to the combination of a strong comparison in Q2 of 2021 cost inflation and manufacturing inefficiencies.
Mature solutions backlog at the end of the quarter increased 22, 5% to $267.5 million driven by a strong demand environment.
On slide 14.
Highlight the key drivers of our year over year, adjusted EBITDA declined to $32 million from $28 million.
The negative impact from inflation offset positive contribution from volume pricing and mix you can also see the impact from manufacturing efficiencies and higher SG&A.
SG&A, excluding research and development cost was higher in dollars, but declined as a percentage of sales from 16, 5% in Q2 'twenty one to 14, 6% in Q2 'twenty two we expect further leverage in SG&A as sales continue to grow we also expect our price.
Cost position to improve as we move forward.
You are taking to improve profitability should begin to reap benefits in the second half of 2022, turning to slide 15, our cash position was lower as we are investing in growth included an increase in working capital.
Our balance sheet. However remains solid we expect cash position to improve during the balance of 2022.
We have available liquidity of $195.4 million and essentially no debt at the end of the quarter.
Willing us to withstand a variety of economic situations.
We need to incur higher debt levels in the future we will strive to operate between one five to two five times net debt to EBITDA.
Slide 16 highlights our disciplined capital deployment framework.
We are following a targeted capital deployment approach within the context of our long term strategic objectives to maximize shareholder value.
This includes identifying internal investments that meet our 14% return on invested capital hurdle rate complemented by our strategic approach to acquisitions that align with growth objectives and financial criteria.
In addition to capital expenditures of $40 million to $50 million for the year. We are focused on the ERP implementation with an estimated $25 million to $30 million of spend in 2022.
This will replace much of our existing disparate core systems, allowing for standardized processes and integrated technology solutions that enable us to better leverage automation and process efficiency.
We believe that given our long term growth prospects that the year to date downturn in our stock price implies a discounted valuation of our rail worse and therefore, we remain committed to delivering returns to shareholders through funding, our 12 cents per share quarterly dividend and conducting opportunistic share repurchase.
Says.
Subject to market condition under the 2018 authorization of which $126 million remains available.
With that I will now turn it back over to Barry for his closing comments. Thank you Becky.
We remain committed to achieving our long term goals as shown on slide 17. This built on decades last slide it's a disciplined approach to investing our capital. It was a key driver to achieving these goals.
In addition, we must remain focused on operational excellence and the one asset operating model to drive consistent and sustainable profitability across the organization.
Finally on slide 18, you can see a summary of our key investment highlights the begins with our leadership positions within attractive markets that are aligned with secular growth trends enabled by innovation high quality products and superior customer service.
Our established position in the market and the global installed base drives a predictable and recurring revenue stream for high margin aftermarket business.
Our strong balance sheet enables us to withstand macro challenges and further create shareholder value.
All of this supports our team's progress towards a simplified focus growth strategy, which leads to profitable growth and closing we serve strong markets with solutions our customers want their sentiment has been positive leading to strong order flow and record backlog.
Continue to invest in our business at the same time supply chain challenges had been a headwind this quarter.
We believe positive results will be generated as we deploy operational excellence through our one <unk> operating model and further realized pricing actions taken to offset the impact of inflation.
I am confident we will be able to achieve our long term targets and build sustainable long term shareholder value.
With that operator, we're now ready to open the call for any questions.
At this time I would like to remind everyone in order to ask a question simply press Star then the number one on your telephone keypad.
And your first question is from the line of Stanley Elliott with Stifel. Please go ahead.
Hey, good morning, everyone. Thank you guys for taking the question.
Can we start off on the margin side, I mean with <unk>.
We had the the margin Miss and it felt a little bit like there was similar.
Getting.
Manufacturing and labor up to speed. In addition to the inflation seem to have kind of right side.
<unk> in the first quarter, and then kind of we're back here again in the second quarter, maybe talk I guess start off kind of what happened sequentially from the first quarter. The second quarter I know, it's seasonally a bit of a weaker quarter, but would love to hear kind of.
What drove that.
The downside on the margins.
Hey, good morning Stanley This is Barry.
Yes. Good question. Thank you.
I think when we look at the sequential.
Progress we've made from Q1 to Q2, obviously, we did see inflation.
Spike up a little bit higher in Q2 versus Q1.
Good news there is that we were able to offset pretty much the spike in inflation with pricing.
From a pricing volume mix.
Pricing.
Sorry pricing volume mix inflation race.
The ratio, we were able to maintain that.
The manufacturing variances, we've had supply chain issues that actually drove more manufacturing inefficiencies.
In the in the quarter.
Said before let me think about the supply chain I would say generally the supply chain has shown some improvement for us, but the things that we're left with Stanley are very complicated there are things that our supplier.
Can't get rectified on their side and so therefore, the things that we're driving to.
Improve that with them, sometimes includes reengineering of different components or trying to test other brands and configurations in there in order to put on our equipment. So it takes us a little bit longer a little bit more work to actually get those things in place.
Think that when we look at the quarter over quarter. Those are the things that are really different.
And I would just also remind you that in Q4 the thing that really drove the Q4 performance is really.
Covid, we saw a huge spike in Covid cases, ultimately impacted our labor in Q4, so the things that we dealt with in Q4 relates to Q T. R difference in that Covid has not really.
Packed in our labor.
The supply chain.
And some of that inflation is really what's driven us no.
Alone.
Called out the currency piece, which is also a good thing that.
We've dealt with now in Q2, which in the past it's been more of a good guy for US as we went through 2021.
So that said, it's a little bit in the quarter as well.
Probably for the rest of the year two would be my guess.
Drill down to the segment so within.
Looking at kind of the the differences.
With the kind of the.
Cereal solutions business down, let's call it 800 basis points.
With that having more of a distribution kind of band versus the infrastructure side.
Is something changed there.
I understand you have a lot of retail orders and you can't really move price, but yeah. We certainly wanted to depression that you had a little more flexibility to push price and debt <unk>.
I wouldn't necessarily see a margin delta of that.
We'd expect it to have to be at a little more stable quarter to quarter.
Yes, Thanks Stanley I would point out that the Q2 of 2021 was.
A really great quarter for the mature solutions.
As you pointed out we did see that the gross margin drop.
Think about that there's elements of pricing and inflation or inflation to go with that.
Any factory variances are.
And one area that is also due to the supply chain issues that have impacted us in that part of the group so as much as we've seen.
As a company our absorption actually improve Q4 to Q1 to Q2.
It still is a driver for us in the business.
We have had a lot of success in pricing.
We've taken recent pricing actions within that part of our business.
So I think that we've shown and good pricing power in our mature solutions segment.
And Thats as you'd mentioned daily that's where we have the best ability because it mostly in the Ips side of the business infrastructure business. It's really a lot of direct orders. So there we're dealing directly with the customers and that becomes a little bit harder obviously, when the dealer organization with material solutions. Some of those orders are <unk>.
And the stock Reorders for sure we've been working with our dealers to continue to take price up.
And then lastly, Barry you mentioned some unrealized price in the backlog in the second half and you have some benefits you would expect to see how should we think about the second half of the year versus the first half either price cost or.
Absolute pricing anything there that could help us.
Yes, Thanks Stanley So as we've talked about in Q1 as well.
We see and as mentioned in our opening we see that the price cost situation will continue to improve as we go through the rest of the year end.
That's still where we stand today. So from Q1 to Q2, we stick with that statement that we will continue to see that and as we go through the rest of the year.
We should see that parity continue to stay where it is or improve across Q3 and Q4.
Perfect I'll turn it over thanks, guys best of luck.
Yes.
Okay.
Once again, ladies and gentlemen, if you would like to ask a question simply press Star then the number one on your telephone keypad again press Star one if you would like to ask a question.
Okay.
Yes.
Your next question is from the line of Brian spot Hymer with Gabelli. Please go ahead.
Hi, Good morning, Barry how are you.
Good Brian how are you.
I wanted to talk a little bit further down the road you mentioned some.
Revenue coming in 2023 from Federal Highway Bill I'm, just curious what those conversations are like with your customer base, given maybe some of the volatility that theyre seeing as far as.
Just within their own within their own businesses and what from a project standpoint.
Is.
Is more concrete that youre going to be able to within 12 months see.
Your equipment, you can put into play.
Play for.
Yeah, Hey, Brian Thanks for the question. So I've spent a lot of time here in the last.
<unk> with customers and.
Most of our customers have a backlog today that takes them at least a year out and many of them more than a year out.
They are dealing with margin pressures just like everyone else is.
And that's impacted in different ways, where they have projects in states, where there is indexed.
Bidding that theyre able to maintain their margins in some states where there is there is not.
They are actually taken the margin hit.
Gone through there.
Cycle generally, though I would tell you Brian that the customer sentiment is still very positive.
And they see work being bid in.
And so.
As we talked about we.
You really haven't seen any money really flow from the infrastructure Bill.
And we also know that when that's passed its typically about 18 months before we start to see work naturally flow.
And so we're still within that timeframe in regards to where we would naturally expect a little bit of a pause before some of that starts to flow to the market. So generally I would say, Brian that our customers really across the board whether thats.
In different parts of the United States are really globally are generally very positive obviously in the European region is a little bit of concern, but thats really a small part.
Historically of our revenue stream, Brian So we don't necessarily see.
Those types of impacts you have an adjustment on our performance as we move forward in time.
And I appreciate that color I'm also curious as to the <unk>.
Permitting.
And.
Start to finish time frame that.
Is it truly easier with this federal highway bill to actually get a project with shovels in the ground and.
And moving along.
Yes, good question and I know, you've probably read as well, Brian Federal governments working on permitting and regulations to try and allow these types of projects to become more shovel ready.
Looking forward, but I would say in today's environment. It hasnt really changed very much from what we had historically from our customers pick store historically realized so I would say that's not really had any type of impact yet.
On our customers' ability to perform work.
Okay I appreciate the color and best wishes for a successful back half.
Thank you Brian .
And at this time there are no further questions I will now turn the call back to Steve Anderson for any closing remarks.
Alright. Thank you Dennis again, we appreciate your participation on this conference call and thank you for your interest in Aztec as today's news release indicates today's conference call has been recorded a replay of this conference call will be available through August 17, 2022, and an archived webcast will be available for 90 days the transcript will be available.
Under the Investor Relations 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, but I'm happy to connect if you have additional questions. Thank you all have a good day.
This does conclude the <unk> second quarter 2022 earnings conference call. Thank you all for participating you may now disconnect.
[music].
Okay.