Q2 2023 Astec Industries Inc Earnings Call

Hello, and welcome to the Aztec industry 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 Mister Anderson you may begin.

Thank you and welcome to the <unk> second quarter 2000 twenty-three earnings conference call.

Today's call for Jacobo into Berkley, Chief Executive Officer, Becky Weinberg Chief Financial Officer.

Just a moment I'll turn the call over to Jaco to provide comments Becky will summarize our financial results.

Before we begin I'll remind you that our discussion. This morning. They contained forward looking statements that relate to the future performance of the company and these statements are intended to qualify for the safe Harbor liability established by the private Securities Litigation Reform Act.

Any such statements are not guarantees of future performance that are subject to certain risks uncertainties and assumptions fat.

Factors that could influence her results are highlighted in today's financial news release and others are contained in our filings with the S. E C.

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 gap, which are 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 gas and are therefore likely to be comparable to the calculation of similar measures of 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.

Reconciliation of gap to non-GAAP results are included in our news release, an appendix of our slide deck.

All related earnings materials are posted on our website at Www Dot S Tech industries Dot com, including our presentation, which is under the Investor Relations and presentation tabs and now I will turn the call over to Jaco.

Thank you Steve Good morning, everyone and thank you for joining us.

I would like to begin my comments with a key messages somewhat iPhone slide for.

We achieved record sales during the second quarter.

Strong ain't market demand and improved output of our products.

Building on a solid start to the is the ethic team deliver unique solutions, an outstanding service to our customers.

Positive customer outlook continues to be <unk>.

By demand for asphalt concrete.

And machinery to support the rock to the road value chain.

Out of exciting new products have been well received by our customers four.

Date expanding projects.

Due to the team stylus efforts, we deliberated adjusted EBITDA margin expansion of 510 basis points.

Improvements in operational excellence.

Helped that always throughput and.

And further realization of previously implemented price increases contributed to revenue and profitability.

I am proud of the contribution from everyone across out organization and.

And optimistic about the momentum we have built going into the second half of 280 283.

Internally we.

We are elevating outperformance to achieve objectives, and we are United by our one aspect operating model.

As I mentioned in our queue. One earnings goal in mind, we went live with the successful launch of the article clouds AARP at one of our major manufacturing sites.

Additional incremental improvements are expected as we do.

Do you need to complete the integration of the ERP solutions throughout our organization.

As expected our T manage the European implementation, well, causing minimal production disruptions from the launch.

The ethic team is excited preparation continues to launch additional sides in 2024 and 2025.

Crucially implementation will allow us to improve upon the outperformance excellence and continued to simplify focus and grow across our entire organization.

Becky will provide an update on our progress against our strategy later Nicole.

Our priorities for 2023 are shown on slide five.

I would like to remind you of these and update you on the progress we are making.

First.

Value throughout simplify focus and grow strategy.

As our second quarter results demonstrated our new focus on execution is beginning to show results.

As we start to build a track record of stability and profitability.

Value creation is dependent on consistent results and we are creating a performance culture.

That reliably delivers against strategic objectives.

Data is still work to be done, but I am proud of the progress we are making.

The second priority is dedication to employees customers and shareholders.

During the call. We further expanded out a distribution network in North America are entering into an agreement with a dealer for the distribution of our forest and environmental recycling equipment in California and better Zona.

This agreement will enable us to provide additional customer service in the region and then harnessed the customer experience.

Driving sustainable shareholder value creation.

Required leadership with that in mind I am pleased to take a moment to announce in addition to our executive leadership team.

In July we welcome <unk> as group raise it and we will.

We'll see in our infrastructure solutions group.

With over 25 years of executive experience in the mining capital equipment industry, including time with Joy Global and then Komatsu.

<unk> brings knowledge that will greatly support out of the Eiffel performance and help our customers succeed.

We are thrilled to have been on board.

Third we are but I'm in continuous improvement.

Emotion of our one ethic operating model.

I mentioned, the ERP implementation earlier.

As an important step for us as an organization.

In addition, we are using operational excellence to improve box full rights and to help convert backlog into sales.

Finally.

<unk> core values will always be a priority for us.

You will see many examples of the core values and action, including our commitment to safety in our in <unk> corporate sustainability at a board.

Landfill distribution later this year.

Turning to slide six.

I would like to spend a few minutes discussing our simplify focus on gross strategy and update you on the progress we might.

The three of our strategy are designed to create the performance culture and provider organization with a common framework to fully unlock the value we can deliver.

We continue to make progress on our simplified Butler.

As we optimize our organizational structure and operations.

As you know we have might footprint in product rationalizations and earlier this year, we streamlined our executive leadership team and some other areas of our business.

We are now realizing the benefits of these actions and will continue to do so going forward.

The operational excellence improvement I mentioned earlier <unk>.

For an example of the focus puller being.

Being able to satisfy demand for products and off the market requirements, but.

Increasing manufacturing throughput of balls.

Finally, as we achieve that.

Stiff listed on the slides, we grow profitably demonstrating that we are going in.

The right way and being recognized by our customers for the value we provide.

Overall or simplify focus on growth framework is driving the right behaviors.

I'm convinced that this will enable us to create sustainable value for employees.

Thomas partners and shareholders.

Turning to slide seven.

I would like to provide an update on current business dynamics and how we are responding.

Demand from an infrastructure market, we serve remains strong.

And conversations with our customers. They continued to say is that a positive business environment is driving demand for the equipment thoughts and solutions we provide.

This is not a short term observation rather view based on the long range outlook full day businesses.

We are selectively investing in capacity and completing projects to increase throughput to dis customer needs.

In addition to strong market amount.

Funding for the Federal Highway Bowl is being deployed.

Project activity supported by these funds is ramping.

As reported by the American roads, and Transportation Bolus Association.

Contracts awards that afflict at 15% year over year increase for June 2023, and year to date totals are hired as well.

We view that federal funding mechanism as providing long term stability for our customers and into an ethic.

The viewing external challenges we have faced over the last few years. The overall environment has improved.

Like the markets have stabilized and wage inflation is normalizing although at elevated levels.

Supply chain of logistic constraints are easing however, long lead times on certain purchase components continues to be a challenge.

Finally, inflationary Frazier are stabilizing and our efforts to mitigate rising costs are proving effective restoring profit margins.

The bottom line is we are performing better and improving profitability, while near term headwinds ease.

Our initiatives are proving effective in driving the desired outcomes.

We show our historical backlog on slide eight.

Backlog labels, while below last year's historically elevated big remain above our three year average and are supportive of our positive outlook.

We were encouraged to see implied orders improve sequentially in the second quarter.

Also we continued to successfully execute against our operational excellence initiatives, which is late late to improved output.

Additionally, dealer inventory remains below optimal levels, which creates additional demand.

Further stability is provided by the Federal Highway program, which has been in place for several decades.

You are comfortable with our current backdrop labels as we continue to see strong customer demands in both of our segments.

As I speak to our customers. They continued to see very strong demand and a robust pipeline for projects.

Turning to slide nine.

Sustainability is built into our business model with a focus on our product and operations.

We are committed to our environmental social and governance initiatives as we continued to create value for our employees customers and shareholders.

The early in the journey, we are making progress.

Due to the devotion of numerous employees through ethic, we will be proud to say the company's first corporate responsibility to port light of this year.

We introduced our aesthetic digital suite of solutions highlighted on slide 10 to the Con Expo attended East last quarter were very positive reaction.

This is an exciting initiative for us as it greatly enhances the customer experience.

Ethnic digital provides us with data that can be used to improve product performance and drive standardization across the rough road value chain for our customers.

We continue the process of upgrading and integrating our software.

Telematics connectivity controls and equipment to create actionable intelligence.

We are creating a core competency of data analytics and plan to introduce this disruptive technology across our platform to thrive transformation.

I look forward to what we are achieving.

As we create value in a competitive advantage for both our customers and stick.

With that I will now turn the call over to Becky to discuss our detailed financial results.

Yeah.

Good morning, everyone.

Give me a second quite a retail satisfied 12.

Sales were $350 million 10 per cent with credit and both segments, especially my carry on solutions, which increased 21.2% year over year.

Hi region strong domestic sales protest, 15.3% more than offset softened international sales.

Okay equipment and parts sales grew 5.8% and 7.1 per cent respectively.

Backlog decreased at the end of the second quarter down, 17.7% every year and 13.9% sequentially.

Awesome peak levels backlog remains elevated and that's off our three year average.

Can I stick backpack was down 16.6% in international down 24%.

And see I mentioned earlier like viewers supply chain disruption customer order patterns higher normalizing and we continue to make <unk> and operations to increase output.

We anticipate converting more backlog ticket sales S. These initiatives are implanted in a supply.

[noise] supply chain constraints continue to east L.

Oh and extended the times on certain purchase components continues to access.

They have started to come down and that's a slight moderation in our backlot.

We posted a strong bottom line is adjusted EBITDA increased 143.9% to $32.2 million expanding adjusted EBITDA margin 510 basis points to 9.2%.

We expanded gross margins by 390 basis points to 23.7% as we achieved further price realization and higher volumes with favorable next.

A fourth consecutive corner gross margins have exceeded 20 per cent and your ticket gross margins at 24.7 per cent.

Hi, Justin SG&A increased slightly due to hire personnel costs has to be invested in our business and increase consulting project costs.

I just took SG&A expenses declined as a percentage of sales.

We are pleased with the progress on adjusted EBITDA margins and let's continue driving improvements.

Adjusted earnings per share increased to 87 cents from 19, the prior year <unk>, let's driven by our improved operating margin.

Just taking an effective tax rate for the quarter was 19.4% lower due to changes in their relative waiting jurisdictional encounter loss.

We expect Abnormalize snack effective tax rate to continue to be in the 23% to 24% range for the remainder of the year.

That would be nine to 513.

Infrastructure solutions net sales increased 4.1% to $218.1 million and strong domestic performance <unk>.

10.7%.

<unk> sales were up 8.8% as we were able to fulfill parts orders for aftermarket demand.

<unk> decreased 16.9%, primarily due to the normalization of customer order patterns and fewer supply chain disruption is notify jaco.

I just did EBIT margin for this assignment expand at 460 basis points to 12.2% gross margin, partially offset by higher operating expense.

Turning to slide 14.

<unk> solution sales increased 21.2% to $130.2 million driven by strong domestic demand and strong increase in equipment sales.

Favorable pricing and next also contributed to the increase in segments sales.

Equipment sales for 29.6% in parts are up 4.5%.

<unk>, 24.9% and international sales increased 11.6%.

Backlog was down 19.7%.

As a reminder, or annual gallery think takes place in the farm early indications shall order activity in line with the prior two years.

Adjusted EBITDA margins for the segment increased 530 basis points to 14.1%.

This was largely due to that positive volume next and pricing, partially offset by higher inflation or materials labor and overhead costs as well as manufacturing any efficiencies.

On <unk>, we highlight the key drivers of our year over year adjusted EBITDA branch at.

Justin EBITDA improved 143.9% to $32.2 million, an expansion of 510 basis points to 9.2%.

A positive contribution from volume pricing and mix more than offset the impact of inflation.

Manufacturing efficiency headwinds due to supply chain disruption are still having a link or any fact.

S G&A expenses or slightly higher due to hire personnel costs.

Looking ahead, we continue to expect further benefit from the implementation of our transformation strategy check.

<unk> increased EBITDA tend to live on a longterm targets.

Turning to 516.

Cash and cash equivalents stood at $41.4 million.

With ampulla quiddity, another cat our balance sheet remains solid can we expect our cash position to cry with continued profitability and the normalization of inventory levels.

We have the financial strength to withstand a variety of economic situations as well as support investment plans and returned cash to shareholders.

Our current net leverage ratio is awhile, which we think is prudent Kevin rising interest rates.

Our target leverage range over cycles is between 1.5 to 2.5 times.

<unk> 17, we.

We maintain a disciplined capital deployment framework balancing and fast been synchronized with returning cash to shareholders.

We spent $9.1 million nine capex in the second quarter to maintain and improve operationally.

Range for a full year capital expenditures is $25 million to $35 million.

It's jaco mentioned earlier.

Went line with Oracle cloud ear P. At one of our major manufacturing sites. This corner, that's part of our call implementation shown on slide 18.

We are currently in the process of fine tuning. These activated systems as we move closer to an organization wide implementation.

Ah corporate systems also went live on May 1st after a successful launch of our human capital management system on January 1st.

I'm very pleased with the launch thus far and the progress we've made since our journey began in early 2021, <unk> planning and data napping.

We expect to see progressive benefits from the implementation and I'm proud of our tech team as we were able to minimize the anticipated production discretion. This corner.

Elaborate rollout successes to date as we continue implementations throughout the entire organization.

I will now turn it back over to Jaco for his closing comment.

Thank you Becky.

Turning to slide 19.

Would like to summarize our key in basement highlights.

We have both bleeding positions.

Oh would attracting new smokers.

Our markets are benefiting from long term secular screens, including population Grove and aging infrastructure.

Government spending on U S. Infrastructure has also been in place for decades, when the national Interstate and defense highways was put into place in 1956.

Federal funding continues to provide a core level off of work so what I'll do a mix of the customers.

Leading positions in materials and infrastructure solutions, we are delivering based in class products and services.

We have both the reputation for innovation, which is carrying forwards without <unk>. These are those solutions.

Combination of these factors has helped us grow our installed base.

We will continue to drive out off the market thoughts initiative to serve our customers and go this reoccurring they've been used three.

As a top and bottom line.

We further strengthen our balance sheet to provide the liquidity needed to fund argued over initiatives, including a return to shareholders.

Simplify focus on drugs strategy is driving sustainable profitable Grove as we progress towards our long term goals shown on slide 20.

We have a good start to 2023.

Domestic about the second half of this year.

I'm grateful to our employees for their dedication and hard work and through our customers for the loyalty and support.

With that operator, we are now ready to open the call for questions.

At this time I would like to remind everyone in order to ask a question. Please press star followed by the number one on your telephone keypad.

Your first question will come from Stanley Elliot with your.

Your line is now open.

Hi, Good morning. This is Brian <unk> for Stanley just wanted to ask one on backlog can you give us sense on how how you're thinking backlog is gonna try and from here and where we might where we might expect things to bottom out what what kind of level do you do you guys feel as normal.

Yeah, I I'm wondering Brian this is <unk>.

Uhm.

As I mentioned.

In the cold so far we still feel positive about the mortgage.

Customers have a really strong pipeline.

During last year, we had the.

The order I D for material solutions group during August and this year, we are expecting that to happen E. Q4. So you know we see that stolen afflicting in the backlog for Q3.

If you look at these strictly we we we always would running one and a half to two quarters of backlog.

And we'll we'll feel comfortable if we can stabilize around those labels going forward.

We are still continues continuing to drive down balch backlog, ensuring that we can provide our customers with the with the service they need from us. So that's a V. D V D specific a for that we have in place.

Okay. Yeah. That's that's helpful and then pointed.

I wanted to ask one on capital allocation. Obviously, you guys are getting close to a net cash position below your leverage targets.

Share repurchases have taken a little bit of a pause here I guess, how how are you guys thinking about capital allocation what are the M&A pipeline looking at what are some of the priorities on M&A.

Any thoughts of it would be helpful.

Yeah.

Our focus so far this year was too giddy alright, good stability email results and and have a good transition from from the year before so I think we are we are well positioned now too solid to shift our focus do the garage side and and obviously that will.

Include potential acquisitions, Brian .

We are always looking although we will not active in the last six months or so.

And we believe that these various opportunities for us do full do full pipeline.

Two full gaps in our product portfolio.

You know things like Sandy purchases and and dividends are obviously something that the board reviews every time and he was a <unk>. We will we will also look at those.

Okay. Thank you and then one.

One other one you guys introduce a handful of new products at Connex Bo.

Some categories you guys hadn't been competing in to my understanding in the past I guess I'm curious as to what initial customer reception has been on some of those new products you introduced.

Yeah. So you know you are specifically, referring to the products that we have on our mobile equipment side.

We will we will actually the least those products for sale, yeah that'd be in September and October .

You know the customers who've been tasting the proto thoughts of being very very complimentary of the new designs.

So we are we are really excited about taking those to market and.

You know, we expect to see those.

Those orders to come through in the fourth quarter for those products.

Great. Thank you I will pass it on.

Thank you.

Your next question comes <unk> with your.

Your line is now open.

Hey, good morning, I ever wanted to <unk>. This morning.

Good morning, So I was surprised to see the infrastructure equipment sales were down 7%. You know backlogs are still elevated in conflict throughput levels are improving which was just driven by lumpy shipments or anything else going on there.

Yeah. So.

If I look at if I look at the data it looks like.

Numbers reflects a little bit higher sales for infrastructure solutions yet over here. We we obviously did go live Joe in one of the biggest size <unk> infrastructure solutions.

<unk> and we planned for lower output uhm during during May and July may and June .

I'm glad to say that all deems.

The better than what we add <unk> internal plans. So you will see you will see you know that's all put in the sales and obviously that comes from that.

Going back to normal levels you are in the next couple of months. So you know that was the biggest the biggest that I'll ever and we most probably had you know a few machines that didn't show up at the end of the quarter and specifically we add some thoughts.

But that was still lifted the docks so the D. Ms.

<unk>, we've done a much better job yet in the last.

Months to work through some of the small tweaks, we add in the system.

So that's the biggest the biggest that either for that.

Alright, I C. N N was that implementation was that our international with <unk> did that impact the.

The international sales, which were I guess down 25% year over year.

Yeah, So I'm, a big piece of our international sales come from mobile equipment. It comes from the the large sides, we had yet in the U S. So so obviously they they didn't have all the machines that they have in backlog to invoice during the quarter.

I see okay, and then I guess on the flipside, you talked about any infrastructure segment strong domestic service and installation revenue can you maybe expand upon that and are those positive trend sustainable.

Yeah, I mean, we we that's one of our focus areas is to improve the service and the construction work, we do for our customers and our team has done a really good job <unk> capabilities over the last year or two so yeah. So it's intentional and and we will.

Continue to do.

<unk> go that as obviously as we install more equipment that business should go go accordingly.

Got it Okay, and then last question sticking with the infrastructure segment.

It looks like implied orders were kind of stable Q1 versus Q too you know.

Just lay down somewhat from the past two years, but cause it kind of feel like we've we've sort of stabilized there and the kind of the run rate. We've been on the last couple of quarters of is maybe the run rate will will be on for awhile here.

Yeah, we definitely seen a stabilizing so you're correct. Dave we you know he's starting to you. If you look at is basically the the asphalt loans related business.

<unk> two is he's a very busy season for our customers as <unk>. So it's typical for us to see lower the oldest using those two.

<unk> a lot of our customers are now going into the budgeting process as well.

So we we fully expect yet in the latter part of Q3 and then the majority of the order writing for next year is the Liberty will be you know like.

<unk> early Q4.

I see okay, great. Thanks for taking my questions I appreciate it.

Thanks, Joe.

Again, if you would like to ask a question. Please press star followed by the number one on your telephone keypad.

Your next question comes from even Connie What's <unk>. Your line is now open.

Good morning, Good morning, Becky I, just want to follow up with some of my questions around back log in and orders.

Obviously, you've had to really strong quarters, particularly topline as you've converted a lot of this just elevated backlogs and.

When we think about this this cycle and it's a new spending plan clearly some of your order should be front end loaded around the asphalt plants.

When we think about what were your order trends are going in the fact that you've converted really strongly over the last two quarters are you thinking. These two quarters are peak revenue in this cycle or can you grow top line from here.

Yeah, Let's you know we we obviously had a very strong bookings sees in the last 12 to 24 months.

And you know without teams have done a really good job Katie I think additional capacity associated anticly, our factories have the capability to deliver a higher numbers.

Even you know compared to what we've delivered yet in H D.

We we stole you know we still have Stoneback clock and you know, we we feel pretty confident that that's H two will be <unk>.

More or less in line with what we have in in each one.

Okay, Sir thanks.

Last quarter and I don't want to put words in your mouth, but you were you were targeting sort of 24 25 per cent gross margin for the year. So it looks like you're still tracking there you still feel good about that.

Yes, we do you know just a reminder, that typically the third quarter is the lowest <unk> yep mm of the year. So that will that will weigh a little bit on overall margins.

But we we feel that that that I can say is is is is is definitely a <unk> right now.

Alright.

And then you know we haven't talked a lot about the.

Given everything else has been going on sort of state some margin improvement you can make through the one Aztec model.

Reduce branding and reduce queues and a lot of that stuff I know took a back seat but over the next two to three years. You know you have that 12 per cent plus EBIT margin target I know, we've had inflationary pressures through.

But when we start thinking about 24 25 were parts should theoretically be a stronger percentage of sheriff sales, which should be higher margin and just those other efforts that maybe come back to the forefront do you think that there's margin you have substantial margin lift from here.

Two three plus years.

Yeah, I mean, I I do I will say you know first of all I think we've both a really strong operational theme.

<unk> <unk> I did some good structure symptoms of manufacturing engineering quality engineering.

You know, we've we've really put a good investments are in place in our factories and those things are all starting to to deliver results.

So you know <unk> will be disappointed if we don't see the expand over.

Over the next couple of years and and but of course, you know the <unk> the market is dynamic and and we're gonna. We're gonna watch the market very closely in terms of movements around pricing and and continuously to keep an eye on inflation you know, we still see some somebody and that's what I <unk>.

So we are we are definitely.

<unk> closely at the moment.

Thanks, Yeah.

There are no further questions and thank you I'd like to hand, a call back to Steve Anderson for closing remarks.

Alright, Thank you <unk>.

We appreciate your participation in this conference call and thank you for your interest in Instinct is today's news released indicates today's conference call has been recorded a replay of this conference will be available through August 16th 2023.

Webcast will be available for 90 days the transcript will be available under the industrial relations section B S Tech 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 up and I'm happy to connect with any of you have additional questions. Later. Thank you all have a good day.

Ladies and gentlemen, this does can.

Today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.

[music].

Mmm.

[music].

Mmm.

[music].