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spk00: Hello, and welcome to Aztec Industry 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.
spk01: Thank you, and welcome to the Aztec Second Quarter 2024 Earnings Conference Call. Joining me on today's call are President and Chief Executive Officer, Yaku Gunder Merva, and our interim chief financial officer, Heinrich Yocker. In just a moment, I'll turn the call over to Yocko 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. 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 US GAAP and non-GAAP financial measures, which management believes provide useful information to investors. These non-GAAP financial measures have no standardized meaning prescribed by US 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 US 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.aztechindustries.com under the investor relations and presentation tabs. And now I'll turn the call over to Jakob. Thank you, Steve.
spk03: 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 second quarter highlights are summarized on slide four. While we continue to face some industry headwinds that impacted our results, we are encouraged by the trajectory of our second quarter performance. Our infrastructure solution 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 first quarter 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. 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% for $28.7 million versus the first quarter of 2024. Moving to our headline results, in the second quarter we delivered $345.5 million in net sales and gross margin of 23.5%. 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. 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 $531.1 million due to solid performance in infrastructure solutions and support our view for continued performance in the second half. Turning to slide five, 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 three core pillars, empowered, enabled, and engaged employees, customer-focused, and industry-changing innovation. 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 three 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 six to look at current business dynamics. we start with infrastructure solutions. 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 221.4 million, 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%, which decreased 60 basis points, primarily due to manufacturing inefficiencies and higher SG&A costs that were partially offset by positive net volume and mix and pricing net of inflation. On the material solution side, we reported net sales of 124.1 million, which decreased 17.7% year over year. 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 390 basis points. Results were impacted by lower net volume and mix, manufacturing inefficiencies, and higher SCNA costs, vastly offset by pricing, net of inflation, and other period costs. 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 demands for asphalt road building and concrete production equipment moving forward, supporting strength we are seeing in implied orders. Looking at a macro level, total federal highway funding allocations total $350 billion through 2026, with committed funds to date achieving $133.7 billion and $73.4 billion 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 seven, you will see our implied orders are up 5.9% sequentially at $317 million. in comparison to 299 million 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. Infrastructure solutions saw an increase of 3.4% sequentially to 217 million in comparison to 210 million last quarter. and material solutions saw implied orders increase by 11.8% sequentially to 100 million versus 89 million last quarter. We are encouraged by solid dealer quoting for future bookings and sales. Flight 8 shows our historical backlog trends. We are seeing backlog stabilizing, supported by strong performance in infrastructure solutions. Total backlog of 531 million as of June 30, 2024, is returning to the historical range. Our backlog for infrastructure solutions was $369 million, a decrease of 16% year-over-year, and our backlog for material solutions was $163 million, a decrease of 35.1% year-over-year, while net sales were strong at $345.5 million. 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 Aztec'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. On display, we showcase 16 products and unveiled three 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. The new products being displayed at ELEAD 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.
spk02: Thank you, Jacco. And good morning, everyone. Diving into the numbers on slide 11, Net sales decreased slightly by 1.3% to $345.5 million in the quarter, after a record second quarter in 2023. As Yaku 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 14.3 million, or 5%. As for international sales, we saw an increase of 9.8 million, or 15.4%, primarily due to increased activity in Canada, Mexico, Africa, and Europe. As a reminder, the U.S. represents about 80% of our consolidated sales. Additionally, while part sales decreased 3.4 million, or 3.7% year-over-year, They are up 7.3 million or 3.7% in the first half of 2024 compared to the first half of 2023. Finally, equipment sales increased 13.2 million or 5.8% in the quarter. Both adjusted EBITDA and adjusted EBITDA margin declined in the quarter. with a decrease of 14.3% to 27.6 million 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&A cost. Adjusted EPS was 61 cents compared to 87 cents in the prior year, a decrease of 29.9%. Adjusted EPS excludes transformation and other costs of $1.22 in the second quarter this year, 89 cents of which is related to goodwill and payment. Our adjusted effective tax rate was 23.9%. On slide 12, I highlight specifics of infrastructure solutions. Net sales increased 11% to 221.4 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% to $27.2 million and segment operating adjusted EBITDA margin decreased 60 basis points to 12.3%, primarily due to manufacturing inefficiencies and higher SG&A cost, which were partly offset by positive net volume and mix, pricing net of inflation, and other period cost. Moving to slide 13, material solutions net sales decreased 17.7% to 124.1 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 part 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 10.2 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&A costs, partly offset by pricing, net of inflation, and other period costs. Turning to our adjusted EBITDA breach, on slide 14, as I said before, we had a decline in adjusted EBITDA of 14.3% to 27.6 million and a decline in adjusted EBITDA margin of 120 basis points to 8%. We saw a benefit of 10.5 million from volume, pricing, and mix with a 3.7 million impact from inflation an impact of 7.6 million from manufacturing inefficiencies, partly offset with other period costs, and 3.8 million impact from SG&A. The decrease in our adjusted EBITDA margin is due to lower volumes, which affected manufacturing efficiencies at select sites and higher SG&A, partly offset with pricing net of inflation and other period costs. On slide 15, you can see we ended the quarter with cash and cash equivalents of 60.6 million, available credit of 115.2 million, and total available liquidity of 175.8 million, which decreased 25% as compared to December 31st, 2023. Our operating activities were a 10.9 million source of cash for the second quarter. Slide 16. shows the execution of our balanced capital deployment framework. We returned cash to shareholders by issuing a dividend of 13 cents per share in the second quarter, and we spent 7.6 million on capital expenditure to increase capacity and improve efficiency. Our approach to M&A continues to closely align to our overall growth strategy, and we have 116 million remaining in our authorized share repurchase program. Turning to slide 17, I will turn the call back over to Jacco. Thanks, Heinrich.
spk03: 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 solution segment remains strong, underscored by the healthy demand in the infrastructure construction market that we highlighted today. As noted earlier, material solutions continue to face near-term headwinds. However, our long-term outlook is encouraging due to Q2 increase 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 turn 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 Aztec. 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 backlogs stretching into 2025 and remain positive about the future. 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 first 18 months in the role of CEO. We will celebrate the 52nd anniversary of Aztec this week, but I have no doubt the best is yet to come. With that, we are happy to take your questions.
spk00: If you'd like to ask a question, press star one on your telephone keypad. If your question has been answered and you'd like to remove yourself from the queue, press star one. We'll go first to the line of Midge Debray with Baird.
spk04: Yes, this is actually Midge Debray with Baird. Good morning, everyone. How are you?
spk03: Hey, good morning, Midge.
spk04: Good morning. Quick question, appreciate all the color in terms of 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 second quarter, that $124 million figure?
spk03: Yeah, Mick, I mean, you know, for us to reach that level same to last year or or the low single digit upside, we see the material 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 is strong and supplemented by really good activity coming from our international sites. Keep in mind, you know, that we do about, you know, maybe about 35 to 40 million in parts on the material solution side as well per quarter. And we've seen some really nice activity on the part side here so far this year and even um into um into july already 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 um and then let's see what did we have in the first and second quarter uh we had 124 million um in the second quarter um and you know For us to reach that level, material solutions need to do about $260 million in H2. So we're fairly comfortable that we will be in that range for the next couple of quarters.
spk04: Okay. And as we're thinking about margins here, you know, in the second quarter on the $124 million of revenues, 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 inefficiencies that you think you're going to be able to wind down and have different looking margins in the back half?
spk03: Yeah. Actually, if you look at our material solutions side of the business, the guys have done a really good job actually to minimize our underabsorption in our factories. So we feel confident that the margin outlook for the race staff 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 As we mentioned, that business is doing really well, and we're using that capacity that we have available in certain of the material solution sites.
spk04: Got it. And then last question on EVA.Bridge that you presented on slide 14. I'm sort of curious, when we're thinking about this 7.6 million drag from inefficiencies, and maybe also included in this, the drag on SG&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? Is that a 2025 event? Does it stretch even beyond that? So yeah, a little bit of head holding here would be helpful.
spk03: Yeah, no, absolutely. And there's two things here, Mick, that we can talk about. One, we talked about the restructuring efforts that we've put in across the company. That will give us a run rate savings of about 1.5 to 1.8 million a quarter. 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 two facilities that was announced a couple of years ago. That execution is coming to 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. And when we combine these sites, obviously we brought in manpower to overcome you know, the inefficiencies by just bringing the lines together. We made some adjustments in our manpower here in the past quarter, and we feel that by H2 of 2025, you know, this will be something that will be contributing instead of detracting the way it does at the moment.
spk04: Great. Thank you so much. Thanks, Ben.
spk00: Your next question is from Steven Farazani with Sedoti.
spk05: Good morning, Jocko Heinrich. Thanks for all the detail on the call. Wanted to ask a follow up on the margin. Morning. I wanted to follow up on the margin question because you had been indicating gross margin should be in the 24 to 25 and a half percent range for the year. You were 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?
spk03: Yeah, 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 million shift between capital and parts. And we feel that, you know, 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, you know, by year end. So we still feel comfortable that we can get to that level.
spk05: So the lower than target margins mix primarily?
spk03: Yes, yes, for Q2, definitely. I mean, if you look at it, you know, we had about, what was about 70, 60 million higher capital sales in Q1, and we had about 25 million lower part sales in Q1.
spk05: Okay. How much of that was, I know, when you reported Q1, there are 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.
spk03: Yeah. Yeah. So I will say the, you know, the electronic component issue we talked about in Q1 is is largely resolved. We don't think that it will affect, you know, any deliveries going forward. And, you know, we didn't push much over to Q3 as we indicated in Q1.
spk05: So you would expect more of a traditionally seasonally soft Q3?
spk03: Yeah, I mean, you can say that Q3 will be softer than the other two quarters so far this year. Although, if you think about what we said, flat to low single digit sales grow for the year, we do expect a fairly strong H2.
spk05: Yeah, 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.
spk03: Yeah, absolutely. So, you know, it just depends on exactly when customers will take deliveries. You know, Steve, one thing that is highly dependent is when our customer sites are ready to take plants. And right now, obviously, we see, you know, the Outlook 4H2. One thing to remember is that, you know, we cannot build everything just in one quarter. So, you know, manufacturing will actually be pretty strong in the third quarter, even though, you know, let's say sales might be seasonally soft because, you know, for us to deliver, you know, we will have pretty strong production in the third quarter as well.
spk05: I'm assuming people don't necessarily want deliveries of plants in Q3, right? Fair.
spk03: No, I mean, that's the peak season. You know, our customers are all running, but we obviously have some deliveries, you know, planned into Q3 because some customers, you know, will run right through the year depending on where they are in the country. And especially when it goes to greenfield sites, you know, it doesn't disrupt productions. Okay.
spk05: You mentioned it a couple 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 25. Can you break that down for us a little bit about how healthy demand for your core business and your market leadership business, how strong that is, what backlog is like? Can you break out that business specifically, how that's looking, and how far out you can have some visibility?
spk03: Yeah, absolutely. You know, 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 basically full for what we included in our outlook view. On the concrete side, you know, we have certain of our product lines that we well into 2025 already. On the asphalt side, the guys are busy filling up Q1 of next year. 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, you know, we're also using some of our material solutions facilities to further, you know, improve our capabilities for that product lines or for those product lines.
spk05: Because that was really the concern, Jaco, 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?
spk03: Um, yeah, so I will say, you know, if you look at, if you look at where we are on the bowl, we we're right in the middle. Um, basically, and actually, you know, you're two weeks ago, we were at the national asphalt paving association where, um, you know, we get, we've got some great updates on, on the status of, of funding and spending. And so from a federal point of view, funding is maybe in the third year. From an actual flow of money, it's probably maybe in the second year. And then the states are following with their matching. 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, you know, will be in line with this year from a federal funding point of view.
spk05: Okay. That's helpful. Thanks, Jakob.
spk03: Okay.
spk00: 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.
spk01: All right, thank you, Tamika. We appreciate your participation on our conference call, and thank you for your interest in Aztec. As today's news release indicates, this conference call has been recorded. A replay of the conference call will be available through August 21st, 2024, and an archived webcast will be available for 90 days. The transcript will be available under the investor relations section of the Aztec Industries website within the next seven 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.
spk00: 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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