Astec Industries, Inc.

Thank you and welcome to the Aztec Industries second quarter 2020 earnings conference call. My name is Steve Anderson, and joining me on today's call are Barry Ruffalo, our chief executive officer, and Becky Weinberg, our chief financial officer. In just a moment, I'll turn the call over to Barry to provide comments, and then Becky will summarize our financial results. Before we begin, I'll remind you that our discussion this morning may contain forward-looking statements that relate to the future performance of the company 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 and are subject to certain risks, uncertainties and assumptions. Factors that could influence our results are highlighted in today's financial news release and others are contained in our filings with the SEC. As usual, we ask that you familiarize yourself with those factors. You should also note comments made during today's call will refer to the non-GAAP results and a reconciliation of GAAP to non-GAAP results, and they're included in our news release and appendix of our slide deck. At this point, I'll turn the call over to Barry.

Thank you, Steve. Good morning, everyone, and thank you for joining us on the call this morning to discuss our second quarter 2020 results. I'm very pleased with how our team members have embraced and adapted to the COVID-19 situation as an organization and how we have safely and productively managed through this challenging environment. The health and safety of our employees, suppliers, and customers continue to be our top priority as we navigate through this and work to control the things within our control with a focus on driving long-term profitable growth. I'll start off today's call by highlighting key messages from the quarter and then provide an update on the COVID-19 response followed by an update on Aztec's operations. I will also discuss what we're seeing in terms of demand in our supply chain before turning the call over to Becky for details on our financial results. We'll also highlight progress made on our strategic transformation plan and then open the call for Q&A. Beginning on slide four, here are the key messages that we would like to share from the quarter. As a result of the actions that we took in 2019 to transform our company, and our continued focus on driving operational excellence, we were able to drive solid performance in the second quarter with a 47% increase in adjusted EBITDA and 350 basis points increase in adjusted EBITDA margin compared to the prior year, despite the challenging macro environment and a reduction in revenue. In the quarter, we continue to see resilient demand from our customers as our products are essential for building infrastructure and are used to facilitate the transportation needs of our communities. While our customers face near-term uncertainties, they are continuing to demand Aztec solutions and we will continue to support them and remain vigilant as we navigate through the ongoing pandemic. Our backlog at the end of July is slightly up, led by demand for plant-related products. We remain well positioned to execute in all market conditions with a strong balance sheet and liquidity, including, importantly, a net cash position. We also saw success in the quarter in improving our working capital turns and expect to make further improvement in the coming quarters. During the second quarter, we continued to make significant progress on our strategic transformation under our Simplify, Focus, and Grow pillars. With the closure of our Mequon, Wisconsin facility during the quarter, we were able to leverage our global footprint more efficiently as our Telsnip products are transferred to other Aztec facilities. Earlier this week, further supporting our transformation plan, specifically our growth strategic pillar, we announced two acquisitions, acquiring two premier full-line concrete batch plant manufacturers, Conoco and BMH, both of which will strengthen our infrastructure solutions group and provide our customers with access to the most robust line of concrete products in the infrastructure industry. We will continue to look for ways to grow in attractive markets to build upon our strong foundational product lines. Overall, we're focused on remaining agile and flexible to execute against any economic scenario. The good news is that with our transformation strategy, we also had a very advantageous head start to cost savings initiatives, which helped to drive margin improvement in the second quarter. Turning to slide five, as a reminder, as part of our continued transformation, beginning this year, we went from three to two segments. Under the two segment structure, our operations and organization is better aligned with the end markets we serve and our customer base. Positively, this is already leading to more efficient and effective sales. Our revenue mix during the quarter was 69% infrastructure solutions and 31% material solutions. The key here is that we refer to our businesses as being able to serve a rock to road value chain, which includes our two recent acquisitions. That value chain includes everything from crushing and screening in quarries to asphalt and concrete plants to our best-in-class road construction products. Now turning to slide six, we provide an update on our COVID-19 response. At the end of February, we put in place an executive council to ensure we connect on a daily basis, communicate effectively, and put the right policies in place. We continually monitor information from our sites, government agencies, and other sources. Again, I've been very pleased in regard of how we managed through the pandemic and all our organizations as part of Aztec did a phenomenal job resulting in no significant disruptions thus far. Turning to slide seven, as a result of the transformation progress we made prior to the COVID-19 pandemic, we were able to react more quickly and efficiently than would have been possible under our prior organizational structure. Through the crisis, we have been in constant communication with our customers and even in the current environment, most of our customers are still extremely busy for the backlog through 2020 and into 2021. However, as expected, COVID-19 related uncertainties resulted in some delayed orders and CapEx postponements. As a result, in the second quarter, we saw order reduction across both of our reporting segments. That being said, the situation remains fluid for the remainder of 2020 as we continue to see bipartisan support for U.S. infrastructure construction and are prepared to support our customers as they continue to work and require critical Aztec solutions. Regarding our operations, all of our Aztec facilities around the globe are now operating with ability to flex operations as needed. During the quarter, we temporarily closed two Aztec sites due to preemptive government mandates in South Africa and Northern Ireland. The South Africa site reopened on May 4th and the Northern Ireland facility reopened on May 11th. On the demand front, we continue to see near-term uncertainty from our customers as the pandemic persists. However, many of our customers remain cautiously optimistic for a rebound once the pandemic is contained. With respect to our supply chain, to date we have not experienced any significant disruptions, though we are constantly maintaining ongoing discussions with our suppliers to identify and mitigate risks. We have also expanded the depth of our supply chain to support our risk mitigation efforts. Before turning the call over to Becky, I'd like to make a few comments on the importance of diversity and inclusion here at Aztec. I recently communicated to all of our team members on this topic and how it aligns with our company's core values of respect and integrity. We will continue to focus on creating a diverse and inclusive culture as we grow our organization and understand that it's not only the right thing to do, but also critical to our continued success and growth. I'll now turn the call over to Becky to discuss our detailed financial results.

Thank you, Barry, and good morning, everyone. I am pleased to join you on today's call. Starting on slide 9, second quarter adjusted revenue decreased 6.8% to $265.3 million compared to the prior year quarter. Excluding the impact of foreign currency, adjusted revenue decreased 5.4%. Equipment sales decreased 6.5% while part sales fell 10.4% compared to the prior year period. Our backlog decreased 26% to $182 million at quarter end, driven by both materials and infrastructure solutions orders, which were down 17% and 31% respectively. Lower orders were driven by customer capital constraints resulting from COVID-19 uncertainties. The second quarter adjusted EBITDA increased 47% to $25.3 million compared to $17.2 million in the prior year period and adjusted EBITDA margin improved 350 basis points to 9.5% compared to the prior year period. As Barry noted, the margin improvement was driven by actions associated with our ongoing transformation and additional COVID-19 cost actions. adjusted SGA&E expenses declined 19% on a dollar basis driven by reductions in consulting fees, travel, and employee-related expenses. In relation to the company's efforts to simplify the organization, during the second quarter, we incurred $7.9 million of pre-tax restructuring and unusual costs. These items were excluded from adjusted earnings per share and the restructuring charges are related to asset impairment, inventory write down, reduction labor force, and the closing of our Mequon, Wisconsin facility. Of note, we've reduced our headcount nearly 16% year over year. Adjusted earnings per share rose 81% in the quarter to 67 cents compared to 36 cents in the second quarter of 2019. Overall, we reported strong second quarter results with limited COVID-19 disruptions despite the challenging macro environment. On slide 10, we highlight the key drivers of our year-over-year adjusted EBITDA margin expansion. Adjusted EBITDA margin expansion of 350 basis points was primarily driven by reduction in headcount and related savings in addition to savings from supply chain management and other transformation savings. This was partially offset by volume and mix and an increase in corporate and other expenses as we are investing in IT and ramping up back office support. Moving on to slide 11, our infrastructure solutions business revenue increased by 2.2% to $182 million in the quarter driven primarily by asphalt plant sales and COVID-19 related customer delays shifting orders from Q1 to Q2. Adjusted gross profit increased 6.3% to $40.2 million and adjusted gross margin expanded 90 basis points to 22.1% as a direct result of our restructuring actions, pricing initiatives, plant efficiencies and controlled spending. We continued to execute on cost savings initiatives and further right-sized our business during the quarter with a large focus on reducing and controlling SG&A. We remain focused on operational excellence to drive efficiencies as well as limiting discretionary spending. Adjusted EBITDA increased 81% to $22.6 million, primarily due to cost-saving actions. adjusted EBITDA margin increased 540 basis points to 12.4%. On slide 12, our material solutions business revenues decreased 21.9% to $83.4 million compared to the same period a year ago driven primarily by COVID-19. Adjusted gross profit declined 16.9% to $21.2 million while adjusted gross margin expanded by 150 basis points to 25.4% as part sales remained relatively stable in the quarter with positive margin contribution. Adjusted EBITDA increased 7.1% to $12.1 million primarily due to favorable mix and gross margin improvements from 2019 initiatives to right size operations to current market demand. adjusted EBITDA margin increased 390 basis points to 14.5%. We continue to make progress on our material solutions 2020 transformation plan in the quarter with the closure of our Mequon, Wisconsin location, which is where we build our Tell Smith products. As Barry noted, this closure will enable us to leverage our global footprint more efficiently as these products are transferred to different plants. The shift in production location is also in line with the strategy that we highlighted last quarter of moving key products to our South African, Brazil, and Northern Ireland plants in order to lower our cost basis, decrease our overall manufacturing footprint, and manufacture closer to our global customers. Overall, improved earnings performance in the second quarter demonstrates the traction of our initiatives to right-size operations to market demand. We remain flexible and committed to simplifying and focusing the business to continue to drive improved profitability. Now turning to slide 14, we continue to maintain a strong balance sheet with minimal debt and a net cash position of just over $119 million. Given the current environment, we remain focused on strong liquidity and cash preservation to withstand sustained periods of market uncertainty. Of note, accounts receivable was down 15% year-over-year due to decreased sales and a more focused effort on collections. Overall, we have available liquidity of $271 million including nearly $120 million of cash on hand with only $1.4 million in total debt as of June 30, 2020. We continued to make progress on our inventory reduction efforts as inventory decreased nearly $98 million in the quarter and we saw improvement in inventory returns. As Barry noted, we remain focused on maintaining a strong and flexible balance sheet with ample liquidity and believe that this will enable us to withstand a variety of economic situations. On slide 15, I will provide details on our capital deployment framework, which is consistent with what we have previously shared. We continue to have a disciplined approach to deploying our capital. When we consider the various avenues of capital deployment, we do so in the context of our long-term strategic objectives and related revenue, earnings and cash flows in order to maximize shareholder value. Our capital allocation priorities remain unchanged in the current environment. On internal investments in property, plant, and equipment, we will continue to target greater than 14% return on invested capital for new investments. Regarding acquisitions, we are only considering strategic acquisitions that align with our growth strategy and meet our internal financial criteria. Our strategy for M&A is to fill gaps that we see within our customer supply chain As we look to grow regionally in attractive markets, we seek to maintain the number one or two position within our rock to road value chain. We also believe that M&A is a mechanism that will potentially allow us to accelerate our investment in technology and innovation. Importantly, we remain committed to funding the dividend and we have not repurchased any shares since 2018 and do not expect to do so in the near term. out of an abundance of caution to preserve our financial flexibility. With that, I will now turn it back over to Barry.