Q2 2019 Earnings Call
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Ryan Hughley.
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Joining through December problem locations related to this plant.
It also ends our involvement in the wood pellet plant business and allows us to totally focus on our ongoing efforts.
To improve our products and services for our traditional customers and improve our performance for our shareholders and employees.
Our earnings lift the $20 million pellet plant sale or 36 cents per share, which was slightly below our expectations of 40 to 50 cents per share.
The lower than expected earnings are mostly due to lower volume and under absorption of production costs.
As adjusted sales were below expectations and below the second quarter of last year in all three groups.
As we have seen a weakening of demand for equipment and parts in all segments. During the first half of the year.
Resulting in reduced year over year backlog.
This was most noticeable in aggregate crushing and screening equipment.
Paving equipment and equipment for the oil and gas industry.
The reduced demand was most evident in domestic markets since 80% of our sales are domestic.
This has had a significant impact on our total volume.
As has been noted by several departments of transportation around the country.
Road construction was delayed in the first quarter due to unusually wet weather.
We believe the late start to the construction season has caused some customers.
To use existing equipment for the remainder of the construction season.
The nearly drought freight conditions across the country have also reduced demand for water well drilling equipment.
And low oil prices have reduced demand for high pressure pump trailers and process heaters used in oil and gas production.
We believe that the reduced demand is widespread and is also being experienced by our competitors.
Our gross margins for the second quarter and the first half of the year have also been impacted by the reduced volume and competitive pricing pressures.
Despite the market conditions, our backlog being improved during the quarter, thanks to orders on asphalt and concrete plants in the United States.
Improved international orders at to aggregate and mining group companies.
A large international order for asphalt terminal equipment and improved orders for wood chipping in grinding equipment.
And with that I'll, let David report on the second quarter results.
Our thanks, Rick and good morning, everyone. Our net sales for the quarter were $304.8 million compared to 272 and a half million.
In Q2 last year and 11.8% increase.
Sales for the quarter were as Rick mentioned positively impacted by the sale of the Hazelhurst wood pellet plant for $20 million.
Recall also that Q2 2018 was impacted by pellet plant activity. We've provided a glossary of the press release to assist in comparing the results as adjusted for Wood pellet plant activity in all periods presented.
So for the quarter adjusted sales within $284.8 million compared to $347.1 million last year that is a decrease of 17.9%, which is slightly above our Q2 guidance of 5% to 15%. This decrease.
As adjusted then infrastructure sales for the second quarter of 19 or $113.2 million compared to $157.7 million in Q2 of 18, a decrease of 28.2%.
International sales were 59, and a half million dollars compared to $69.1 million in Q2 last year, a 14% decrease in that decrease occurred primarily in Canada in Mexico.
In South America outside of Brazil, Japan in Africa, and those decreases were offset by increases quarter over quarter in Europe in Central America in Asia and in Russia.
For the quarter International sales decreased in the energy and infrastructure groups and remained flat in the AG and mining group.
Domestic sales were $245.3 million in Q2 compared to $203.4 million Q2 last year, an increase of 20.6%.
For the quarter domestic sales increase in the infrastructure group and decrease in the AG and mining group and in the energy group. So as adjusted domestic sales were $225.3 million compared to 277.9 million in Q2 of 18, a decrease of 19%.
And adjusted domestic sales were down in each of the groups primarily in the infrastructure group.
Part sales were $74.1 million in the quarter compared to 78.7 last year and at four a decrease of 5.9% for the quarter part sales decrease in the infrastructure and the energy group and were flat in the AG and mining group.
For FX had a negative impact of $2.7 million on sales quarter over quarter.
For the first half sales were $630.5 million compared to $598 million in the first half last year, an increase of 5.4%.
And as adjusted sales were $610.6 million compared to 672.8 million half versus half.
And that's a decrease of 9.2%.
As adjusted the infrastructure sales for the first half of 2019 or $268.2 million compared to $305.1 million for the first half of 18, a decrease of 12.1%.
International sales for the half for $122.4 million compared to $124.5 million in the first half of 18, a decrease of 1.7% net decrease.
Half versus half occurred primarily in Africa.
In South America outside of Brazil, and Mexico, and in Russia, and those decreases were offset by increases in Asia.
In Canada and Australia.
For the first half international sales decrease in the energy group and AG and mining group and increased in the infrastructure group.
Domestic sales were $508.2 million for the first half compared to 473 and a half million dollars in the first half of 18.
7.3% increase.
So for the first half domestic sales increase in the infrastructure and energy groups and decrease in the AG and mining group.
And as adjusted domestic sales were $488.2 million for the first half of 19 compared to $548.2 million for the first half of 18, an 11% decrease.
Parts sales remained flat.
At $166.7 million for the first half of this year compared to $166.8 million in the first half of last year for the first half part sales decreased slightly in the infrastructure group and were offset by slight increases in the AG and mining and the energy groups.
Forex had a negative impact of $6.1 million on sales first half versus first half.
Gross profit for the quarter was 83, and a half million compared to $1.1 million in Q2 of 2018.
The gross margin was 27.4% for the second quarter of 19 compared to 8.4% in Q2 last year. However, as adjusted gross margin for Q2, 19 was 22.3% compared to 23.6%.
For Q2 of 18.
Our Q2 19 guidance was for a gross margin of 20, 223%.
The absorption variance in the second quarter of 19.
Was six and a half million dollars under absorbed compared to the second quarter 18 variants of over absorption of $800000.
That's a negative change in the absorption variance of $7.3 million.
The as adjusted gross margin for the infrastructure group was 20%.
In Q2 of 19 compared to 21% in Q2 of 18.
For the first half gross profit was $160 million compared to $79.1 million in the first half of 18.
And $80.9 million increase.
The gross profit percentage was 25.4% for the first half compared to 13.2% first half last year.
However, as adjusted consolidated gross margin.
For the first half of 19 was 22.9%.
Compared to 24.3% for the first half of 18.
The absorption variance for the first half of 19.
This $13.8 million of Unabsorbed overhead.
Compared to $3.6 million of Unabsorbed overhead for the first half of 18, a negative change of $10.2 million.
That will make the as adjusted gross margin for the infrastructure grew 21.7% for the first half compared to 22.9% for the first half of 18.
As any for the quarter was $53 million compared to $51.3 million for this second quarter of 18, 3.3% increase.
That increase was driven primarily by consulting fees and R&D costs and was offset by some reductions in payroll and related benefits.
As she and they for the first half was $111.3 million compared to $103.3 million.
In first half 18, 7.7% increase.
That increase was driven primarily by consulting fees exhibit expense.
R&D costs, and some legal and professional costs.
Sequentially SG any is down.
$5.4 million compared to Q1 of 19 and.
Those drivers for that decrease or primarily payroll and related benefits.
And exhibit expense and.
Other.
Server.
Expenses related to compensation plans.
We expect the run rate on ESG and knee to remain at this more normalized level in the second half.
Operating income for the quarter was 30, and a half million dollars compared to.
Operating loss of $50.2 million in Q2 of 18.
As adjusted operating income for the quarter was 10 and a half million dollars.
Compared to $30.8 million adjusted operating income for Q2 of 18.
An income from operations for the first half was $48.7 million compared to $24.2 million operating loss last year for the first half.
However, as adjusted operating income first half was $28.7 million compared to.
$60.1 million of operating income in the first half of 18.
We do have interest expense as we have shown on the income statement related primarily to our current debt that we have in the us.
And we do have other income in interest income primarily related to investment income at our captive insurance company.
The effective tax rate for the quarter was 23.1% compared to 17.3% for the quarter last year and for the year to date period.
The effective tax rate was 22.3% compared to at a rate of 10.8% last year and we expect the full year run rate for 2019.
To be in that 20% to 23%.
Effective rate range.
Earnings for the quarter.
Net income was $23.4 million compared to a loss last year of $40.7 million.
And that's an increase of $64.1 million.
And that made income per diluted share for the second quarter dollar three compared to $1.76 loss per share in Q2 of 18.
As adjusted net income this year for the quarter was $8.1 million or 36 cents per diluted share.
Compared to $24 million or one dollar three per diluted share in Q2 of 18.
Earnings for the first half were $37.7 million compared to a $20.4 million loss last year.
And then income per diluted share was $1.66.
Compared to a loss of 89 cents per share in the first half of 18.
And as adjusted net income was $22.4 million or 99 cents per diluted share in the first half of this year compared to $46.9 million.
Of income or $2.02 per diluted share in the first half of 18.
EBITDA for the quarter was $37.1 million or 12.2% of sales compared to.
Negative EBITDA in Q2 of last year $42.4 million and as adjusted Q2, 19, EBITDA was $17.1 million or 6% of sales compared to an adjusted EBITDA in Q2 of 18 and $38.6 million or 11.1% of sales.
And for the first half.
The EBITDA was $62.1 million.
Our 9.8% of sales compared to.
Negative EBITDA last year of $9.2 million.
As adjusted it was $42.1 million for the first half of 19 or 6.9% of sales.
Compared to $74.4 million for the first half with 18 or 11.1% of sales.
Our backlog at June 30 is $246.1 million compared to $302.9 million at June Thirtyth 18, a decrease of $56.8 million or 18.8% decrease the international backlog was $84.5 million compared to $85 million.
At June 30 of last year.
And our domestic backlog at June 30 of 19.
As a $161.6 million compared to $217.9 million at June 30 of 18, Ptcs $56.3 million decrease or 25.8%.
Decrease.
Implied orders for the quarter were $314.3 million compared to 130, and a half million in Q2 of 18 $183.9 million increase however, as adjusted.
Implied orders for the quarter were $294.3 million compared to $269.6 million in Q2 of $18 million to $24.7 million or 9.2% increase.
Implied orders were up sequentially.
$97 million or 44.6%.
And as adjusted implied orders were up 77 million or 35.4%.
For FX had a negative 3 million dollar impact on backlog year over year.
On the balance sheet, our receivables are at $139.2 million compared to 144.2 million last year of $5 million decrease in our days outstanding are 41 point warm this year at June 30, compared to 47.6 last year at June 30.
Inventory of $360.9 million this years compared to $394.8 million last year.
A nearly $34 million decrease but recall that during Q2 of this year, we sold the Hazlehurst wood pellet plant.
Which was included in the June 32018 balance sheet at approximately $60 million, so as adjusted inventory increased $26 million.
In 19, we saw two and a half turns year to date compared to 2.4 turns.
Year to date at this time in 2018.
We owe to $28.1 million on our $150 million domestic credit facility.
And we had $24.9 million in cash and cash equivalents on the balance sheet, primarily in our foreign subsidiaries.
Letters of credit or $8.6 million outstanding at June 30, making our borrowing availability $113.3 million.
Capex for the quarter.
It was $4.9 million compared to 10.6 and $10.6 million on a year to date through June 30 basis for 19.
We're forecasting around $25 million for the full year of 19.
Depreciation for the second quarter was $5.3 million for the quarter of $10.7 million for the six months.
And we are forecasting depreciation of around 23, and a half million dollars for the full year of 2019. That's the end of my prepared remarks, and I'll turn it back over to Rick.
Thanks, David.
While we remain cautious in our outlook for the third quarter and the remainder of the year.
We believe that exiting the pellet wood pellet plant business and our performance improvement efforts, we will continue to provide benefits in the second half of the year and beyond.
We also expect to see our ASG any revert to more normalized levels in the second half.
In terms of the financial results, we expect the third quarter to look much like the second quarter of this year as adjusted.
For the remainder of the year, we expect the second half results to be in line with the first half results as adjusted.
Regarding our performance improvement activities, we have reduced manpower at the company's most affected by lower volume.
Total manpower was reduced by 161 during the second quarter.
And has been reduced by a total of 402 over the last year.
We just concluded our engagement with the consulting firm on strategic procurement.
And sales and operational planning.
We are beginning to see savings from the strategic procurement effort and believe that the savings will continue to grow throughout the rest of the year as we complete engineering validation of new vendors and components and deplete inventory of existing components immaterial.
Our new sales and operational planning procedures are producing changes in our build schedules.
And we will make a difference in cash generation going forward.
As we do a better job of building equipment and controlling inventory to match more accurate forecasts.
As part of our centrally led operational excellence plan.
All our companies either have or are in the process of hiring and operational excellence leaders.
These leaders meet as a group on a monthly basis via web in our.
To discuss operational improvement plans.
They also all participate in an online training program and have regional face to face meetings with their peers to share best practices and benchmark with each other.
Our strategy of increasing emphasis on international sales through the establishment of new regional international sales offices.
And the design of products for international customers.
Is validated by the impact of the drop in domestic sales this year.
Our new product development is also continuing in all three groups will be introducing new or improved products before the end of the year.
Some of the products will fill gaps in our portfolio.
Some will make us more competitive internationally and some will make us more competitive domestically.
Over the past year, we have invested time money and effort into projects that will improve our performance for our customers our shareholders and our employees.
Some of these projects require a little time to provide returns that we are excited about the future of Astec and believe that our current initiatives as well as the perspective of a new CEO will make us a stronger and more profitable company going forward.
Thanks for your interest in Astec.
All right. Thank you Rick Sherri, if you would open the lines for questions, we'll be glad to answer those.
Great. If he would like to ask a question. Please press star one on your telephone keypad, a confirmation tele indicate your line is in the question queue.
You May press Star two if you like to remove your question from the Q.
And for participants using speaker equipment may be necessary to pick up your handset before pressing the sorry Keith.
Our first question is from Maine, Dupre with Robert W. Baird and company. Please proceed.
Hi, good morning, everyone, it's drug or Balsky on for Mig. This morning, good morning World out there.
Yeah. Good morning, Hi, maybe I'll start out with the appointment of Mr., Russell, our CEO and and maybe expand a little bit about what his experience and skill sets are that make him.
The right person to lead Astec.
Hey, Joe Steve Anderson here.
Yep.
Barry graduated from the University of Wisconsin has got a Bachelor of science in bio mechanics, and Master of Science in industrial Engineering and has a lot of publicly traded.
Company experience most recently with Belmont as you saw on the news release, which is about a $2.5 billion company and also some experience with Lynsey Corp. So with his engineering background and his rolls up in management positions of.
Operational excellence and change the engineering.
Support structures energy and mining the good fit with our company.
Great. Okay. Thanks, Mike for the color on that and then.
Hey, good day.
Getting to getting back to Q2 sales.
Obviously, a little bit below the guidance range provided.
Rick Rick gave some good color on some of the businesses that were a little softer in the quarter, but.
And maybe kind of expand on where the sales came in below what the expectation for 90 days ago.
I think the biggest impact was that our.
Aggregate and mining company dealers.
Have rental fleets that.
Are not in not being utilized and not converting to sales utilization did improve a little bit during the second quarter, but.
Converted conversions to sales just haven't been as good as what.
They have in the past and what we expected.
Got it okay.
And I guess on the bright side infrastructure orders were pretty good in the quarter.
The backlog grew sequentially.
And again I think Rick you kind of mentioned a few big orders that came through in the quarter.
But maybe talk a little bit more about what had just a couple of big orders or does it feel like underlying demand improved how important was.
What's the Bauma show for orders, maybe talk about that a little bit.
The Bauma show isn't.
Typically a good.
Show for for Us for receiving orders, but.
That.
The big impact in the second quarter in the infrastructure group was sale of asphalt plants.
Bookings on asphalt plants.
We're much better in the second quarter.
So that that was the big difference I think.
In the infrastructure group.
Got it okay. Thanks.
A few more a few more for me on the procurement project you mentioned kind of the consulting part of the project is over how do you see the savings kind of flowing through over there.
The next few quarters are you starting to see any savings yet.
And how will they kind of come through.
Second half of the year and into 2020.
We are seeing some savings now we did get some just direct.
Price reductions from existing vendors and we are recognizing some of those savings now.
But a big part of the savings that we expect.
I have to go through engineering validation, where we are switching components or vendors and we have to validate those new components and make sure that they will perform like we need them to.
And so that's what we're doing now.
Obviously, the price downs and price reductions.
We will continue on through the rest of the year and.
Through the third quarter and the fourth quarter, probably by the end of the year, we will have all of our engineering Validations complete and.
Should start seeing savings on all of that by the end of the year.
Got it okay great.
Two more two more for me.
The guidance with a little more qualitative. This this time than the last couple of quarters.
Do I understand it Q3 kind of Q3 sales and EPS similar to Q2 and second half.
Sales and EPS similar to first half is that kind of the right way to think about it and I guess does that kind of work out to about roughly $2 the bps for the year.
Thats correct.
Got it Okay and last question.
Great U.S. construction.
Spending numbers that come out every month.
Hi, I believe year to date.
Public Street and highway construction spending is up 18%.
Probably the strongest start to the year that we've seen in over a decade, and how does that kind of jive with what you're seeing as far as you know you mentioned construction delays because of weather and and maybe some of your customers are just going to kind of get by with the equipment. They already have how does how does that.
Footwear based numbers, we're seeing that show that public.
I guess, specifically public construction spending on street and highway up by nearly 20% year to date.
Yes, I mean, we we hear from our customers that they are busy and they have been busy but.
You know it just hasn't converted to orders for the most part.
And.
Typically you know in the year ahead of the expiration of a highway bill we start seeing some.
Pull back from contractors on their capex spending.
We're a little bit early for that but could be that we're seeing some of that because the the fast Act does expire in October of 2020.
So so even though.
Our customers are busy they have been holding off on on orders.
And we're seeing it with our competitors to their therapy, given quicker deliveries and.
Same kind of things that we're seeing.
Perfect. Okay. Thanks for taking my questions guys.
Our next question is from Stanley Elliott, Let's say from <unk>. Please proceed with your question.
Hey, good morning, guys. Thank you for taking the question you are running very well.
Pardon me, Rick sorry, well good to hear your voice on the call.
Going forward, maybe they'll let's just make it up.
On the sourcing plan to end the savings that you're talking about there one point, you're talking about kind of a 26% gross profit by year end.
Is that still achievable with kind of the lower volume run rate, we have now or or or where does all the all of that stand.
No we don't expect that based on our lower volume.
To date, the savings that we're seeing through procurement and what we're doing with our operational excellence and the other initiatives.
I believe are really what's helping us maintain our margins where they are at.
With reduced volume increased under absorption like so.
Had our volume been up obviously, our margins would be better, but I think that the things. We're doing are helping us maintain our margins where they are at.
And.
You mentioned pricing being tough on the marketplace can you help us with.
With kind of what's going on in terms of pricing.
You know it seems like you've had higher steel costs. The whole industry has right you guys are market leaders and a lot of your product categories. Why do you think pricing has not been.
As realizable as as.
Maybe it would have.
Would've hoped.
The the markets just more competitive.
We are we're having to discount a little bit higher than what we have in the past.
Because of the competitive situations in the market.
And you mentioned it with some of the kind of the push out on.
Some of the customers are busy, but maybe not necessarily ordering right now.
Do you think that that is because of weather do you think thats because of.
Uncertainty at the federal level in terms of funding and then I guess than as a tack on what does the budget deal end up doing for fund the funding environment into a 2020.
Well I think I think that the weather did push.
Or delay some orders that.
Could end up being.
Delayed until next year, just because the season started so late that.
It's not likely that contractors will want to.
By piece of equipment that they can only used for part of a season in NAFTA.
Leave it until the next year.
And I do think there there probably is some concern about the.
The federal spending because they seem to.
President and.
Speaker of the house seemed to be making some progress on a bill but then it it died.
And there hasn't been much said about it recently so I think there is some concern about that.
Could cause some delay in ordering until that's resolved.
As far as the budget deal.
You know I don't really know how that that will affect it.
They need to to come up with a plan for.
Funding the highway program and.
That still has to be worked out there doesn't seem to be much progress on it yet although they are talking about it.
Yes.
Great guys Thats. It for me Thank you very much.
Thanks, Steve.
As reminder to star one on your telephone keypad. If you would like to ask a question. Our next question is from Larry de Maria with William Blair. Please proceed.
Hi, Thanks.
Good morning, everybody just staying on the.
I guess, the domestic infrastructure cycle vis-a-vis highway bill.
Obviously as you know what if things start to tend to get a bit more uncertainty you're certainly year beforehand.
Quote had a decent upgrade cycles, where are we in this upgrade cycle and historically these bills have obviously been delayed as you know so should we have low expectations for the next.
Got it all year or two on domestic infrastructure replacement and have much replacement already occurred.
Or is there.
Good prospect for renal recovery in this in the next 612 months and how do we just think about this from a higher level of the next few years. Thanks.
Hey, Larry This is Steve I'll start by saying even though.
We're a little over a year out on renewal of the Federal Highway Bill there is a lot of bipartisan support both the presidents speaker hub.
Listed it as a top priority certainly border control and other different things can come into play.
In tariffs and things like that but there is at least bipartisan support of the thing that could be different in this cycle versus prior cycles. This.
Over 20 states have increased their state gas taxes after living through the 30, plus continuing resolutions at the renewal of the former highway Bill So that state spending is.
Real estate markets have been good state budgets are in good shape and the states have stepped up with highway gas tax increases that are indexed so.
That should be positive going this time plus lessons learned from that decade of continuing resolutions previously.
I guess put another way that Steve is as if we've been largely renewed at this point and at this point. We can go a couple of years that replacement demand and maybe where his replacement demand compared to where we are now.
Yes, I think we said the renewal of the federal Bill as you know in the December 2015, we did see some release of pent up demand, which is consistent with prior cycles in early 16 and had some good comp numbers coming through in 16, and 17 and now we're on a more normalized pattern and as we get closer to the renewal typically as Rick mentioned that that can have some impact. So some of that's yet to be seen.
Okay.
Something else on the how about the.
On the pricing you guys talked about.
Hi is it really pervasive in the market across the board or is that a result of maybe that you're working deal or just talk a little bit more broadly your pricing and.
Expectation for any kind of net pricing in the second half. Thanks.
I don't think I don't think that Deere work in deal.
Is a factor working was always competitive.
Prior to the Deer acquisition. So I don't think that has anything to do with it.
I think the.
Where we have seen the the.
The most pricing pressure is in paving equipment and in.
Aggregate, a crushing and screening equipment.
It's pretty widespread but those are the areas, where we've seen it the most.
It's a little bit the improvement in demand, obviously will help help pricing and I think we could get that.
Later in the year and early next year.
But.
We are just not just not seeing it at this point looking at our forecast.
So then does this item you guys are adjusting your.
Pricing and your cost structure through what you guys referenced in your obviously intended remarks about the consultant being done and doing the engineering et cetera.
Does that put you in a position to get positive net pricing next year from a lower base.
Or how do we think about that going into next year.
I would say that's accurate yes.
Okay. Thank you very much good luck guys.
Thanks, Larry Thanks.
We have reached the end of our question and answer session I would like to turn the conference back over to management for closing remarks.
Thank you Sheri and we just appreciate your participation on the second quarter conference call and thank you for your interest in Astec as our news release indicates today's conference call has been recorded a replay of the conference call will be available through August six 2019, and an archive webcast will be available for 90 days a transcript will be available under the Investor Relations section of the Astec industries website within the next seven days all of that information is contained in the news release that was sent out earlier today.
Sherri mentioned this concludes our call. So we thank you all and have a good week.
Thank you. This concludes your conference you may disconnect your lines at this time and thank you for your participation.
Yeah.