Astec Industries Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 7, 2024

There are 7 speakers on the call.

Operator

Hello, and welcome to Adtech Industries Second Quarter Earnings Call. As a reminder, this conference call is being recorded. It's my pleasure to introduce your host, Steve Anderson, Senior Vice President of Administration and Investor Relations. Mr. Anderson, you may begin.

Speaker 1

Thank you, and welcome to the Astec's Q2 2024 Earnings Conference call. Joining me on today's call are President and Chief Executive Officer, Jakob Lundermurve and our Interim Chief Financial Officer, Einrich Jocherd. In just a moment, I'll turn the call over to Jaakko to provide comments and then Heinrich 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, and these statements are intended to qualify for the Safe Harbor liability established by the Private Securities Litigation Reform Act. Such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions.

Speaker 1

Factors that could influence our results are highlighted in today's earnings release and others are contained in our filings with the SEC. As usual, we ask that you familiarize yourself with those factors. I'll also note that the company refers to various U. S. GAAP and non GAAP financial measures, which management believes provide useful information to investors.

Speaker 1

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 of other companies. The company does not intend these items to be considered in isolation or as a substitute for the related U. S.

Speaker 1

GAAP measures. A reconciliation of GAAP to non GAAP results is included in our earnings release and the appendix of our presentation. All related earnings materials are posted on our website at www.astecindustries.com under the Investor Relations and Presentation tabs. And now, I'll turn the call over to Jakub.

Speaker 2

Thank you, Steve. Good morning, everyone, and thank you for joining us. Before I begin, I would like to thank our employees for their hard work and engagement. It is through their effort and dedication we stay focused on our customers and provide industry changing solutions. Our 2nd quarter highlights are summarized on Slide 4.

Speaker 2

While we continue to face some industry headwinds that impacted our results, we are encouraged by the trajectory of our 2nd quarter performance. Our Infrastructure Solutions segment saw continued solid performance in the quarter with an increase in implied orders due to high demand for asphalt and concrete plants. Strength in the infrastructure construction market is anticipated through the beginning of 2025. We also saw improvement from the Q1 in Material Solutions with solid dealer quoting for future bookings and sales. With our backlog continuing to stabilize, we are confident in our ability to meet current and future demand for our products.

Speaker 2

We anticipate more conversions and solid performance in the latter half of the year. Additionally, we've been focusing on inventory management and reduced our inventory by 5.9 percent or $28,700,000 versus the Q1 of 2024. Moving to our headline results. In the 2nd quarter, we delivered $345,500,000 in net sales and gross margin of 23.5 percent with consolidated implied orders up 5.9% sequentially. As I mentioned, the healthy demand in infrastructure solutions for asphalt and concrete plant deliveries helped to drive positive results with implied orders up 3.4% sequentially.

Speaker 2

Material Solutions were impacted by longer product conversions from rental to buy and continued finance capacity constraints due to the current interest rate environment. Despite this, implied orders for material solutions were up 11.8%. Our backlog levels continue to stabilize at $531,100,000 due to solid performance in Infrastructure Solutions and support our view for continued performance in the second half. Turning to Slide 5, we give an update on our strategic roadmap. As you will recall, we introduced this new strategic framework last quarter as we aligned the organization's focus on 3 core pillars: empowered, enabled and engaged employees customer focused and industry changing innovation.

Speaker 2

I've been pleased to see that this framework has been embraced by our employees across the company and we are all working together to execute across the 3 pillars. At the same time, we believe that achieving goals requires accountability, which is why we have taken the next step to define key metrics to track our progress towards our long term goals. The progress we've made on operational improvements over the past several quarters gives us confidence in our ability to execute on these three strategic pillars. Turning now to Slide 6 to look at current business dynamics. We start with Infrastructure Solutions.

Speaker 2

We are confident in the strength of the segment overall and are focused on driving efficiency, ensuring strong inventory control and cost reduction. We saw net sales of $221,400,000 an increase of 11% year over year. As I mentioned earlier, this increase was due to strong performance from equipment sales and pricing actions we've taken while the infrastructure construction market remains strong. We also saw segment operating adjusted EBITDA margin of 12.3 percent, which decreased 60 basis points, primarily due to manufacturing inefficiencies and higher SG and A costs that were partially offset by positive net volume and mix and pricing net of inflation. On the Material Solutions side, we reported net sales of $124,100,000 which decreased 17.7 percent year over year.

Speaker 2

This reflects lower equipment sales due to longer product conversions and continued finance capacity constraints with contractors and dealers. Our segment operating adjusted EBITDA margin of 8.2% decreased 3.90 basis points. Results were impacted by lower net volume and mix, manufacturing inefficiencies and higher SG and A costs, partially offset by pricing net of inflation and other period cost. We also wanted to provide a brief update on domestic road building, a foundational element to our business, With total state budgets up 12% year over year, we are seeing increased activity in the domestic road building market. We expect continued strong demand for asphalt road building and concrete production equipment moving forward, supporting strength we are seeing in implied orders.

Speaker 2

Looking at a macro level, total federal highway funding allocations totaled $350,000,000,000 through 2026 with committed funds to date achieving 130 $3,700,000,000 $73,400,000,000 in funding reimbursed to the states. We believe the continued allocation of this funding provides stability for our industry and we are confident in our ability to capitalize on consistent spending. On Slide 7, you will see our implied orders are up 5.9% sequentially at $317,000,000 in comparison to $299,000,000 last quarter. We saw increases for both Infrastructure Solutions and Material Solutions. This aligns with our continued expectations for steady momentum for the rest of the year and into 2025.

Speaker 2

Infrastructure Solutions saw an increase of 3.4% sequentially to $217,000,000 in comparison to $210,000,000 last quarter. And Material Solutions saw implied orders increase by 11.8 percent sequentially to $100,000,000 versus $89,000,000 last quarter. We are encouraged by solid dealer quoting for future bookings and sales. Slide 8 shows our historical backlog trends. We are seeing backlog stabilizing, supported by strong performance in Infrastructure Solutions.

Speaker 2

Total backlog of $531,000,000 as of June 30, 2024 is returning to the historical range. Our backlog for Infrastructure Solutions was $369,000,000 a decrease of 16% year over year and our backlog for Material Solutions was $163,000,000 a decrease of 35.1% year over year, while net sales were strong at $345,500,000 As I stated earlier, consolidated implied orders were up in both segments. We remain focused on delivering for our customers and expect increased conversions in the back half of the year. Slide 9 showcases Astec's presence at Hillhead 2024, the UK's largest quarrying, construction and recycling exhibition. During the event, we had the opportunity to highlight new products and do live demonstrations to current and potential customers.

Speaker 2

On display, we showcased 16 products and unveiled 3 of our new Aztec products. Visitors spend more time at the show than ever before with over 19,000 attendees, a record number across the exhibition's 42 year history. We were excited to present live in front of this audience and showcase how product development and innovation is a central component of our strategy. At the show, Astec made a meaningful statement to the market with our significant presence and new products on display. Just last week, I had the opportunity to visit our sites in Brazil and Chile.

Speaker 2

The new products being displayed at the OLED will be instrumental for our success in these regions. To complement this, I am encouraged by the skill and enthusiasm of our employees and how they service and interact with our customers. With that, I will now turn the call over to Heinrich to discuss our detailed financial results.

Speaker 3

Thank you, Jakku, and good morning, everyone. Diving into the numbers on Slide 11, net sales decreased slightly by 1.3% to €345,500,000 in the quarter, after a record Q2 in 2023. As Jakku shared earlier, we continue to see strong demand for asphalt and concrete plants and an increase in implied orders for both infrastructure and material solutions. By region, net domestic sales were down across our markets with a decrease of CAD14.3 million or 5%. As for international sales, we saw an increase of CAD9.8 million or 15.4 percent, primarily due to increased activity in Canada, Mexico, Africa and Europe.

Speaker 3

As a reminder, the U. S. Represents about 80% of our consolidated sales. Additionally, while part sales decreased 3,400,000 or 3.7 percent year over year, they are up 7,300,000 or 3.7 percent in the first half of twenty twenty four compared to the first half of twenty twenty three. Finally, equipment sales increased CAD13.2 million or 5.8 percent in the quarter.

Speaker 3

Both adjusted EBITDA and adjusted EBITDA margin declined in the quarter with a decrease of 14.3 percent to 27,600,000 and a decrease of 120 basis points to 8% respectively. Adjusted EBITDA margin decreased due to lower manufacturing efficiencies at select sites and higher SG and A cost. Adjusted EPS was CAD0.61 compared to $0.87 in the prior year, a decrease of 29.9%. Adjusted EPS excludes transformation and other costs of $1.22 in the Q2 this year, dollars 0.89 of which is related to goodwill impairment. Our adjusted effective tax rate was 23.9%.

Speaker 3

On Slide 12, I highlight specifics of Infrastructure Solutions. Net sales increased 11% to CHF221.4 million which as I mentioned was a result of strong performance from equipment sales and pricing actions. We saw strong performance in domestic sales, international sales and equipment sales, which increased 9.5%, 39.2% and 32.2%, respectively, while part sales were down 4.6%. Segment operating adjusted EBITDA increased 5.8 percent to CAD27.2 million and segment operating adjusted EBITDA margin decreased 60 basis points to 12.3%, primarily due to manufacturing inefficiencies and higher SG and A costs, which were partly offset by positive net volume and mix, pricing net of inflation and other period cost. Moving to slide 13.

Speaker 3

Material Solutions net sales decreased 17.7 percent to CHF124.1 million driven by lower equipment sales, which were attributable to fewer product conversions and continued finance capacity constraints with contractors and dealers. Domestic equipment and parts sales were down 33.4%, 23.4% and 2.3% respectively, while international sales were up 10.9%. Segment operating adjusted EBITDA decreased 44.3% to CHF10.2 million and segment operating adjusted EBITDA margin decreased 390 basis points to 8.2%, primarily due to lower net volume and mix, manufacturing inefficiencies from lower volumes and higher SG and A costs, partly offset by pricing net of inflation and other period cost. Turning to our adjusted EBITDA bridge. On Slide 14, as I said before, we had a decline in adjusted EBITDA of 14.3 percent to CAD 27,600,000 and a decline in adjusted EBITDA margin of 120 basis points to 8%.

Speaker 3

We saw a benefit of CAD 10,500,000 from volume, pricing and mix with a CAD 3,700,000 impact from inflation and impact of $7,600,000 from manufacturing inefficiencies partly offset with other period cost and $3,800,000 impact from SG and A. The decrease in our adjusted EBITDA margin is due to lower volumes which affected manufacturing efficiencies at select sites and higher SG and A, partly offset with pricing net of inflation and other period cost. On Slide 15, you can see we ended the quarter with cash and cash equivalents of CAD60.6 million, available credit of CAD115.2 million and total available liquidity of $175,800,000 which decreased 25% as compared to December 31, 2023. Our operating activities were a CAD10.9 million source of cash for the Q2. Slide 16 shows the execution of our balanced capital deployment framework.

Speaker 3

We returned cash to shareholders by issuing a dividend of $0.13 per share in the Q2 and we spent $7,600,000 on capital expenditure to increase capacity and improve efficiency. Our approach to M and A continues to closely align to our overall growth strategy and we have a $116,000,000 remaining in our authorized share repurchase program. Turning to Slide 17, I will turn the call back over to Jaakou.

Speaker 2

Thanks, Heinrich. While various market dynamics continue to present challenges, we are confident in the fundamentals of our business and our ability to capitalize on opportunities as market conditions improve. We are focused on delivering consistent results for our customers and are working to drive further cost efficiencies. In support of these efforts, we implemented a restructuring program across our segments during the quarter to address manufacturing inefficiencies across the organization. The Infrastructure Solutions segment remains strong underscored by the healthy demand in the infrastructure construction markets that we highlighted today.

Speaker 2

As noted earlier, Material Solutions continue to face near term headwinds. However, our long term outlook is encouraging due to Q2 increased implied orders demonstrating solid dealer interest for future bookings and sales. We will continue to drive margin improvements through cost efficiencies and pricing actions. As backlog further stabilized during Q2 and implied orders turned positive, we expect full year sales to be flat or grow low single digits versus 2023. Concluding with Slide 18, as I mentioned before, I am proud of the dedication and hard work of the employees of Astec.

Speaker 2

Their efforts enable us to be recognized as the trusted source for high quality solutions we provide to our customers. As you know, domestic road construction is foundational to our business model. Consistent federal government and state highway funding continues to provide strength and resilience for our company, customers and shareholders. Over the past several months, I've spent a lot of time with customers by visiting their facilities and attending trade shows. They have strong backlog stretching into 2025 and remain positive about the future.

Speaker 2

Our improved rate of orders this quarter and year to date growth in our aftermarket parts business supports their sentiment. I'm also encouraged by our major transformational efforts. We are changing the pace of deployment of future site conversions to add enhancements and reduce business disruptions at each manufacturing site. With these modifications, we now expect the annual expense to decrease after 2024 and any implementations after 2027 to be completed with internal resources. I'm especially excited about the new product offerings initiated during my 1st 18 months in the role of CEO.

Speaker 2

We will celebrate the 52nd anniversary of Astec this week, but I have no doubt the best is yet to come. With that, we are happy to take your questions.

Operator

We'll go first to the line of Mitch Dobre with Baird.

Speaker 4

Yes. This is actually Mitch Dobre with Baird. Good morning, everyone. How are you?

Speaker 5

Hey, good morning, Mick.

Speaker 4

How you're viewing the back half. But if we're looking at Material Solutions specifically, how do you think about revenue here relative to what you were able to put up in the Q2 that $124,000,000 figure?

Speaker 5

Yes, Mig, I mean, for us to reach that level same to last year or the low single digit upside. We see the MTL Solutions sales more or less in line with what we had in the beginning of the year. We still need some orders to convert in order for us to reach that level. So we don't have everything in backlog at the moment. But as we mentioned on the call, our activity and quoting activity is strong and supplemented by really good activity coming from our international sites.

Speaker 5

Keep in mind that we do about maybe about $35,000,000 to $40,000,000 in parts on the Material Solutions side as well per quarter. And we've seen some really nice activity on the parts side here so far this year and even into July already.

Speaker 4

So I'm sorry, just to make sure that I'm clear on this, are you saying that the second half revenues are going to be similar to the first half or similar to the second quarter?

Speaker 5

And then let's see what did we have in the first and second quarter. We had $124,000,000 in the second quarter. And for us to reach that level, Material Solutions need to do about $260,000,000 in H2. So Nick, we're fairly comfortable that we will be in that range for the next couple of quarters.

Speaker 4

Okay. And as we're thinking about margins here, that in the Q2 on the $124,000,000 of revenue, you delivered a little north of 8% EBITDA margin in this segment. Is that a good run rate as we think about the second half if you achieve these levels of revenues? Or are there some specific inefficiency that you think you're going to be able to wind down and have different looking margins in the back half?

Speaker 5

Yes. Actually, if you look at our Material Solutions side of the business, the guys have done a really good job actually to minimize our under absorption in our factories. So we feel confident that the margin outlook for the rest of H2 will be in line with what we've seen in Q2. We are also utilizing some of the facilities to manufacture components for our asphalt plant business. As we mentioned, that business is doing really well and we're using that capacity that we have available in certain of the Material Solutions sites.

Speaker 4

Got it. And then last question on EBITDA bridge that you presented on Slide 14. I'm sort of curious when we're thinking about this $7,600,000 drag from inefficiencies and maybe also included in this the drag on SG and A. Can you kind of give us a sense in terms of what are you doing to try to generate savings to offset some of these drags? And at what point in time should we start to see normalization?

Speaker 4

Is that a 2025 event? Does it stretch even beyond that? So, yes, a little bit of handholding here would be helpful.

Speaker 5

Yes. No, absolutely. And there's 2 things here, Mick, that we can talk about. 1, we talked about the restructuring efforts that we've put in across the company. That will give us a run rate savings of about $1,500,000 to $1,800,000 a quarter.

Speaker 5

And then the majority of this is actually coming from one of our facilities that we are doing our major transformation in. So this is a facility where we combined 2 facilities that was announced a couple of years ago. That execution is coming to a close now, although it's been a real challenge for us. We've also invested quite a bit of money into new equipment there, manufacturing equipment. It's been taking us a while to get the utilization up on that equipment.

Speaker 5

And when we combine these sites, obviously, we brought in manpower to overcome the inefficiencies by just bringing the lines together. We made some adjustments in our manpower here

Speaker 2

in the past quarter.

Speaker 5

And we feel that by H2 of 2025, this will be something that will be contributing instead of detracting the way it does at the moment.

Speaker 4

Great. Thank you so much.

Speaker 5

Thanks, Dane.

Operator

Your next question is from Steven Farazani with Sidoti.

Speaker 6

Good morning, Jakob, Heinrich. Thanks for all the detail on the call. I wanted to ask

Speaker 2

a follow-up on

Speaker 6

the margin morning. I want to follow-up on the margin question because you had been indicating gross margin should be in the 24% to 25.5% range for the year. You're in the middle of that range last year, but clearly you're tracking lower through the first half of this year to last year. Do you want to adjust that target?

Speaker 5

Yes. We've actually done a really deep dive in that, Steve. And at this point in time, we feel comfortable to keep that range. We obviously had a big shift in the mix in capital and parts here in Q2. I mean, in total, there was about a $90,000,000 shift between capital and parts.

Speaker 5

And we feel that the teams have a lot of good work that will position us to still get to that 24% to 25% range or 25.5% range by year end. So we still feel comfortable that we can get to that level.

Speaker 6

So the lower than target margins mix primarily?

Speaker 5

Yes, yes. For Q2 definitely. I mean if you look at it, we had about what was about $70,000,000 $60,000,000 higher capital sales in Q1 and we had about 20 $5,000,000 lower part sales than Q1.

Speaker 2

Okay. How much

Speaker 6

of that was I know when you reported Q1 or a couple of I believe it was either asphalt or concrete plants that pushed into Q2 because of some issues with electronic components. Was that resolved? And at that time, you also indicated it could also push some orders into Q3 such that Q3 would not be as seasonally weak as maybe it traditionally is?

Speaker 5

Yes. So I will say the electronic component issue we talked about in Q1 is largely resolved. We don't think that it will affect any deliveries going forward. And we didn't push much over to Q3 as we indicated in Q1.

Speaker 6

So you would expect more of a traditionally seasonally soft Q3?

Speaker 5

Yes. I mean you can say that Q3 will be softer than the other 2 quarters so far this year. Although, if you think about what we said, flat to low single digit sales growth for the year, we do expect a fairly strong H2.

Speaker 6

Yes, because if Q3 is really seasonally soft, then you would have to have to get to that number, you would have to have a massive Q4.

Speaker 5

Yes, absolutely. So it just depends on exactly when customers will take deliveries. The one thing that is highly dependent is when our customer sites are ready take plans. And right now, obviously, we see the outlook for H2. One thing to remember is that we cannot bolt everything just in 1 quarter.

Speaker 5

Manufacturing will actually be pretty strong in the Q3, even though let's say sales might be seasonally soft because for us to deliver We

Speaker 6

have deliveries.

Speaker 2

I think through outlook,

Speaker 5

we will have pretty strong production in the Q3 as well.

Speaker 6

I'm assuming people don't necessarily want deliveries of plants in Q3, right? Fair?

Speaker 5

No, I mean that's the peak season. Our customers are all running and but we obviously have some deliveries planned into Q3 because some customers will run right through the year depending on where they are in the country And especially when it goes to greenfield sites, it doesn't disrupt productions.

Speaker 2

Okay. Just you mentioned a couple

Speaker 6

of times on the call and I just want to get a clear reference point. You talked about concrete and asphalt demand being really strong and expected into Q1 of 'twenty five. Can you sort of break that down for us a little bit about how healthy demand for your sort of core business and your market leadership business? How strong that is? What backlog is like?

Speaker 6

Can you break out that business specifically how that's looking and how far out you can have some visibility?

Speaker 5

Yes, absolutely. So that part of the business, we have the backlog at hand to deliver the sales that we have in our outlook for H2. So it's full for what we included in our outlook could be. On the concrete side, we have certain of our product lines that we're well into 2025 already. On the asphalt side, the guys are busy filling up Q1 of next year.

Speaker 5

So it's a really good position to be in. I will also say our guys in that part of the business from a manufacturing point of view has done a really good job to improve our capacity and output. And as we mentioned earlier, we're also using some of our material solutions facilities to further improve our capabilities for that product lines or for those product lines.

Speaker 6

Because that was really the concern, Jaakko, right, was that a lot of the asphalt and concrete plant demand was going to come in the early first couple of stages of the infrastructure spending bill. Would you say that you have clarity now that that's just not the case?

Speaker 5

Yes. So I will say if you look at where we are on the bowl, we're right in the middle basically. And actually 2 weeks ago, we were at the National Asphalt Paving Association where we got some great updates on the status of funding and spending. And so from a federal point of view, funding is maybe in the 3rd year from an actual flow of money, it's probably maybe in the 2nd year. And then the states are following with their matching.

Speaker 5

So we still believe that 2025 on the asphalt and concrete side should be relatively strong. Although we think that the spending next year will be in line with this year from a federal funding point of view.

Speaker 2

Okay. That's helpful. Thanks, Jakob. Okay.

Operator

There are no further questions in the queue at this time. I would like to hand the call back to Steve Anderson for closing remarks.

Speaker 1

All right. Thank you, Tamika. We appreciate your participation on our conference call and thank you for your interest in Astec. As today's news release indicates, this conference call has been recorded. A replay of the conference call will be available through August 21, 2024, and an archived webcast will be available for 90 days.

Speaker 1

The transcript will be available under the Investor Relations section of the Astec Industries website within the next 7 days. All of that information is contained in the news release we distributed this morning. And so as we said, this concludes our call. I'm happy to connect with any of you later on. And thank you all for your time and have a good day.

Operator

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

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Key Takeaways

  • Astec delivered Q2 net sales of $345.5 million with a 23.5 % gross margin, saw consolidated implied orders rise 5.9 % sequentially (3.4 % in Infrastructure Solutions and 11.8 % in Material Solutions), and reported a stabilized backlog of $531.1 million.
  • The Infrastructure Solutions segment grew net sales 11 % year-over-year to $221.4 million, driven by strong asphalt and concrete plant demand, though its adjusted EBITDA margin dipped 60 bps to 12.3 % due to manufacturing inefficiencies and higher SG&A.
  • The Material Solutions segment faced a 17.7 % sales decline to $124.1 million and an EBITDA margin contraction of 390 bps to 8.2 %, citing longer product conversions and finance constraints, but dealer quoting and aftermarket parts activity remain robust for H2.
  • Through focused inventory management, the company reduced inventory by 5.9 % (approximately $28.7 million) versus Q1 and expects further cost savings from restructuring initiatives, targeting $1.5–1.8 million in quarterly run-rate benefits.
  • Astec is executing a three-pillar strategic roadmap (empowered employees, customer focus, industry-changing innovation) with defined metrics, and anticipates completing major manufacturing site transformations by H2 2025 to drive future efficiencies.
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Earnings Conference Call
Astec Industries Q2 2024
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