Astec Industries, Inc.
Q4 2020 Earnings Call Transcript

Published: 1 Mar 2021

[Operator:]

Hello and welcome to the Astec Industries Inc. Fourth Quarter 2020 Earnings Call. As a reminder this conference call is being recorded. It is my pleasure to introduce your host Steve Anderson, Senior Vice President of Administration and Investor Relations. Thank you, Mr. Anderson. You may begin.

[Steve Anderson:]

Thank you, and welcome to the Astec Industries fourth 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.

[Barry Ruffalo:]

Thank you, Steve. Good morning, everyone and thank you for joining us to discuss our fourth quarter 2020 results. I would like to thank the entire Astec team for their hard work and continued focus on our core values to serve our customers during an extraordinary and unprecedented year. As I mentioned before, the health and safety of our employees, suppliers and customers continue to be our number one priority, as we continue to navigate through the pandemic. Our fourth quarter results demonstrate our ability to execute and perform well with a focus on continuous improvement in driving operational excellence through our OneASTEC business model. I'll begin with key highlights from the quarter and then provide an update on our 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 further progress made on our strategic transformation and then open the call for Q&A.

[Becky Weyenberg:]

Thank you, Barry and good morning everyone. I am pleased to join you on today's call. Starting on slide 10, fourth quarter adjusted revenues decreased 15.6% to $238.9 million compared to the prior year quarter. Equipment sales decreased 14.7%, while parts sales increased 10.3%. Our backlog increased 36.7% to $360.5 million at quarter end driven by higher materials solutions and infrastructure solutions orders which increased 92% and 15.1% respectively. Higher materials solutions and infrastructure solutions orders were driven by improved customer demand.

[Barry Ruffalo:]

Thanks Becky. On Slide 19, I'll provide a quick overview of our three pillars of our strategy for profitable growth

[Operator:]

Thank you. At this time, we will be conducting a question-and-answer session. Our first question from the line of Mig Dobre with Robert W. Baird. Please proceed with your question.

[Mig Dobre:]

Thank you. Good morning, Barry, Becky, and Steve. I guess, the first question for me, maybe we can talk a little bit about your slide 15 the 2020 adjusted EBITDA margin bridge. I'm sort of curious, if you can help us understand, which one of these buckets has any element of cost savings that you think might be temporary in nature or reaction basically to the pandemic that could potentially reverse in 2021? Maybe we can start there.

[Becky Weyenberg:]

Sure. Hi Mig, good morning. The first piece of it is on the headcount-related savings. We showed 110 basis points improvement, and a lot of that was tied to incentives, which we hope not to repeat, but it's a factor of our sales being down almost 11% on a full year basis. So obviously, that impacted incentives. So there was an adjustment in the quarter. But we do expect round about 20 basis points to stick of that savings. Supply chain -- the supply chain savings should stick, but we are seeing some pressure from steel that's definitely up year-over-year. We're seeing in Q1 roughly 77% increase on steel. So we're managing our way through that. So -- but there might be some deterioration there just due to that. But the other transformation savings also should stick and then we'll see some more expenses for corporate going forward, as we roll out our systems and focus on innovation versus product rationalization.

[Mig Dobre:]

I see. So just to clarify here, you're saying that incentive comp could be 90 basis points headwind in 2021?

[Barry Ruffalo:]

Yes. Mig, you got cut off there for a second. Can you repeat that question please?

[Mig Dobre:]

Sorry about that. I want to make sure that I understand this. You're saying that incentive comp could be a 90 basis point headwind in 2021, normalizing incentive comp that is?

[Becky Weyenberg:]

Not on a full year, no. On a full year, we expect it to be fairly flat overall. But -- I'm sorry and I was talking to the quarter, not the full year. So I apologize for that. It was just an adjustment in the quarter.

[Mig Dobre:]

Okay. But again I'm talking about the full year. So slide 15, if we're looking at these buckets, it sounds like incentive comp is going to be flat for the full year. Then the only headwind you're going to have is related to material cost. Is there a way for us to understand the magnitude of the headwind based on what you know today, right? Current pricing and the way you've scheduled your purchasing?

[Barry Ruffalo:]

Yes. So, I'll take a shot at that Mig. This is Barry. Good morning. So maybe another way to look at it is, we've seen steel actually go up 77% on a year-over-year basis at this point in time of 2021. We have taken pricing initiatives to the tune of about 5% across the board. And we see steel today being roughly about just under 20% of our total cost with everything all in. And so that's probably the amount of detail that we give you. I think that, we continue to meet regularly to talk about how do we pull the levers, relative to our steel buys and to try and understand what that means from a material margins perspective. And certainly, we like to think that we're buying better than what the spot price is actually realizing. But we certainly do -- we take price initiatives based on spot price more than we do on what we buy. So with all that being said, we think that steel could have an impact on our material margins because as you know Mig, when it goes up as quickly as it has, it's tough to keep up with it. And we're not afraid of steel going up gradually and slowly. But when it spikes like this, there is some pressure. So, we're going to have to manage through that as we move through 2021 as effectively as possible.

[Mig Dobre:]

Understood. Maybe moving away from raw materials and just asking a pure SG&A question. In 2020 your SG&A declined on an adjusted basis I think a little north of $20 million. Is there -- I mean you've invested a lot as you said you remedied some of these material weaknesses which I know was not an inexpensive task. I'm curious as to how you think about SG&A going forward. Do you think the current run rates are sustainable in 2021 or to Becky's point earlier, should we factor-in some level of inflation?

[Becky Weyenberg:]

Yes, hi Mig, I can take a stab at that. So certainly, there are several puts and takes on SG&A. However, we do expect the dollars to be up slightly year-over-year. So you're right. Certainly the remediation costs were significant but that will go away and we are deploying our Oracle, which pretty much offsets it. So just basically we think we'll be flat to slightly up.

[Barry Ruffalo:]

Yeah. And some other things that will actually drive it to a little bit higher than what we had in 2020 is spend on engineering and innovation. That's an area where we've underinvested for a while and we want to continue to drive that in order to really be a market leader on the products and solutions that we provide. And we do expect to have some level of travel come back in 2021, which will be a greater spend than in 2020 but not as high as it was in 2019.

[Mig Dobre:]

Understood. Final question for me, I'm curious where you are right now in terms of capacity utilization. I guess, maybe asking a question from a hypothetical standpoint here, let's just say that demand expands 20% from current levels. Do you have the capacity currently to convert on that opportunity, or would that require either additional CapEx or additions to footprint in general capacity?

[Barry Ruffalo:]

Yeah. So Mig this is Barry. I'll just tell you that our constraint right now relative to capacity is really manpower. We do not believe that we have to increase anything around brick-and-mortar. Obviously as you know we've taken action to try and reduce our footprint capacity, but we're confident that with the improvements that we've started to already see in our operational excellence initiatives that we should be able to achieve any type of -- any additional spike in demand with the brick-and-mortar that we have today. Obviously in 2020, we only spent I think around $15 million in CapEx, which is lower than what we wanted it to be. And so as we start to beef-up our operational excellence initiatives, obviously, we want to invest in creativity over capital first, but we know that there's things that we can do more of relative to automation and efficiencies through more capital expenditure. And so we've worked very closely and continue to work closely with our manufacturing engineering and operational people in order to really identify those areas of opportunity that will help us with the demand we see today but with additional demand that we see in the future.

[Mig Dobre:]

I don't know if this is how you look at the business Barry, but I'm curious if you can help us understand. With the current footprint and what you have in place, what revenue base do you think the business can support? Are we talking something 25% higher, 50%? I mean how should we think about that? That's my final question. Thank you.

[Barry Ruffalo:]

Yes. Thanks Mig. We aren't going to give that type of detail but we can certainly -- we feel comfortable with the reductions that we made in the footprint that, obviously, we could sustain our recent historical highs plus some more. And, obviously, with the operational excellence initiatives we have going on, we believe that there's opportunity to plow more material and more products through our facilities than we have ever and so we're going to continue to invest in that. So without giving you exact answer Mig, we feel comfortable that we've got quite a bit of room of expansion in capacity than what we've experienced in recent history even with less facilities.

[Mig Dobre:]

Understood. Thank you for the color.

[Barry Ruffalo:]

Yeah. Thanks Mig.

[Operator:]

Thank you. Our next question comes from the line of Stanley Elliott with Stifel. Please proceed with your question.

[Stanley Elliott:]

Hi, good morning, everyone. Thank you all for taking the question. Very nice work in the backlog. Can you talk anything about maybe anything product specific? And then with the big jump we saw in the materials solutions, curious if there was something happening within the channel in terms of some of the rent-to-own customers are actually needing to refleet or restock or how you would think about that? But just curious about the dynamics within that backlog?

[Barry Ruffalo:]

Okay. Good morning, Stanley this is Barry. Thanks for the question. Yeah, I would tell you this that if you look at 2019 and most of 2020, our customers had record years. Really even with the pandemic most of our customers had a record year in 2020 on top of a record year in 2019. When you look at the demand that's flowed through our business, it hasn't really matched their performance. And so, therefore, when you take that into consideration, when you also take into consideration that at the end of 2019 and into 2020 early days, we put a big effort into trying to rightsize our dealer inventories, we rightsized our finished goods inventories and through that timeframe, we saw the rental duration increase. And so people weren't converting them into retail sales. As we got through 2020 and really into the last -- beginning of the last quarter, we do an annual order writing period or a program at that point in time. And we saw a record number of -- a record revenue level actually come through in that program. And I think that just shows that there's a little bit of catch-up in regards to the demand relative to what the dealers are seeing, what we see from a customer perspective. And so therefore, as we talked about some of the early drivers as we move into 2021 there's some positive aspects there. Now certainly, I'd preface everything we're still in a pandemic and you never know what's going to happen there. But when you look at what the states have done in early January around gas tax. The miles are starting to come back on driven miles, which helps that as well. The renewal of the FAST Act, which has already happened. There's been some other smaller supplemental bills passed as we stay close to our colleagues in D.C. There's been a lot of positive conversations around a longer-term infrastructure build. So we feel good that obviously, we're close to the market relative to our inventories. Our dealers are starting to restock. We're seeing that flip over even now quicker to retails from a conversion perspective from rentals. So I think that's what's really driven the Materials Solutions piece as a lot of those different elements put together.

[Stanley Elliott:]

That's great. And maybe if you could also kind of talk a little bit about some of the technology uptake that you're talking, maybe even some things beyond telematics. And then curious if that has makes you think that maybe parts and services could ultimately be a higher percentage of the revenue mix whatever this cycle is going to end up looking like?

[Barry Ruffalo:]

Yes. So a couple of pieces to that. You're absolutely right. And so not just on top of telematics, but as we look at the Rock to Road value chain, as we talked about in the Investor Day in December, we're in the works of starting to build a platform in which our customers have really -- in many cases 30% of our customers have a value chain where they have quarries, they have plants and they have rope construction crews. And so giving them a chance to actually use one platform to see all of their equipment and understand how to manage that internal supply chain more effectively we see a benefit there. And yes, that absolutely will give us a tighter connection into service and parts related types opportunities. We've been typically running between 25% and 30% of our sales being from parts and we think there's a huge opportunity to make that a bigger portion of our revenue. On top of the technology, we've also changed the structure of our leadership team. And so now we actually have someone who reports to me that is directly accountable for our strategy around parts sales as the overall company versus having someone individually for groups or sites. And so we think that with that type of a focus that will also help improve our parts sales.

[Stanley Elliott:]

Perfect, guys. That’s it for me. Thank you. Best of luck.

[Barry Ruffalo:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Steve Ferazani with Sidoti. Please proceed with your question.

[Steve Ferazani:]

Hi. Good morning, everyone. I wanted to ask about you noted the acquisitions perhaps outperforming your expectations so far and then the bigger contribution from aftermarket this quarter. Can you give any kind of sense of how much the bigger aftermarket piece and the acquisitions contributed to your gross margin?

[Barry Ruffalo:]

Yes. I would -- we haven't given the detail on the acquisitions, Steve. And by the way, it's nice to meet you and nice to talk to you. Look forward to meeting you in-person in a few days.

[Steve Ferazani:]

Absolutely.

[Barry Ruffalo:]

When we completed the two concrete plant acquisitions, we alluded to the fact that on a full year basis, they would typically realize about $55 million in sales and they would be immediately accretive to our overall company's performance. And I can tell you that on an annualized basis, we already are seeing that if we projected forward that they're going to be a greater contributor to our revenue than what they've already what we quoted in the -- when we actually closed the two acquisitions. And we've found a lot of synergies relative to procurement. And so we expect on the margin side, they'll continue to be accretive as well. So without giving you the details since we haven't and we're not going to, I just wanted to let you know that relative to those statements that we made at the closing, they're in good shape.

[Steve Ferazani:]

Okay. And then, as we've gotten through earnings season, certainly, a few weeks ago, it was all about steel prices. But as we've gotten further along, some companies have certainly sounded -- I don't want to say sounded the alarm, but increasing concerns on supply chain, whether it be shipping containers, accessing components. Have you seen a shift over the last month? And at this point, would you say there's rising concern or no?

[Barry Ruffalo:]

Yes. I would say that, to-date we haven't seen -- it hasn't affected us too negatively Steve. I would tell you that, we do see it as a risk and therefore we stay on top of it and we have many conversations and we've done several things as far as deepening our supply chain and having the redundancies, making sure we're looking at our inventories. So we're doing -- I feel comfortable, we're doing the right things to protect us to getting too exposed to those risks. But as you and I both know, whether it's the cost of container or the availability of a container, those are all things that could have an impact on us as we move forward. So we'll stay very close to that. We have seen in maybe one of our sites in South Africa. We've seen a little bit of an impact. But I'd say, on an overall basis to the company, it's not really material at this point in time and we're continuing to work our way through that. So we feel good that we've done a great job of managing our supply chain and our procurement through the pandemic and I think it ultimately, is going to continue to make us sharper as we move forward to ensure that we're not exposed to any risk.

[Steve Ferazani:]

And then, last one for me. During the Investor Day you sort of ran through some of the new international products that you figured that are aligned with demand from international markets. Can you talk a little bit about traction in terms of introducing some of those new products the low -- say, lower-priced mobile plants, et cetera?

[Barry Ruffalo:]

Yes. So we've made great traction there. I would say that on some of those product lines we're just getting to the launch phase with the prototypes. We've seen great acceptance and excitement around us launching them. So some of our first units are already sold into international markets, which is great. Obviously, as you and I both know, a lot of times when you introduce something that you think is just for international, you also find that it could be of use and have an application in the domestic market. But when you look at -- if I were to show you today our roadmap relative to new product development, there's a fair share of those products that are really focused on the international market, which in some cases, we don't really participate at all. And so, we're doing that by, obviously, understanding the specifications, understanding our competitive position, understanding the footprint and so, what I think has really been great, as you look at some of our spike in the backlog, is it's also supported our -- or maybe accelerated our movement to use the footprint that we have today, whether that's Northern Ireland, whether that's Brazil, our site in Johannesburg. We're trying to find ways to look at all the capacity, all the landed costs and improve our position relative to supply and margins through the whole situation also continue to look at outsourcing initiatives. In the past, we have been very vertically integrated. And if you walk through one of our facilities, maybe versus our competition that may be more assembly, we've been very vertically integrated. So we're looking at what is the mix, how do we use our capacity and our square footage more effectively in the future to ensure that we're doing things that really add value from our perspective versus things that we can get from someone else through a global supply chain.

[Operator:]

Thank you. Our next question comes from the line of Larry De Maria with William Blair. Please proceed with your question.

[Larry De Maria:]

Okay. Hi, thanks. Good morning, everybody. Hey, Larry.

[Larry De Maria:]

Hey, guys. I just want to clarify some of the comments earlier around material cost. In doing the math right, the 5% increase in price doesn't really offset a 77% increase in steel. So, could we just cut down to like how much of a headwind do we expect on an annual basis? And how protected hedged material costs are we now? And when did the price increase going?

[Barry Ruffalo:]

Yes. So the price increases have already been put in place Larry, and that's not an average. So I would say that in areas where we have a bigger content of steel, we probably have done more. We won't go into all those details here. But I would tell you that we've done a good job of protecting our material or steel buys, certainly through first quarter in the second quarter. And I feel confident that we have a team of people, including myself, to look at this on a regular basis since it is an important part of our cost structure to ensure that we're on top of it. We're not saying there's not any exposure. We're not going to I think identify what that dollar value of exposure is today on this call. But I just want to give you a rest assured that we're on top of it. We're looking at it. And we're doing that where we can to minimize it in some cases maybe even take advantage of it as we've done a good buy and we can pass some of that spot price increase to the customers.

[Larry De Maria:]

Okay. So, we're fairly protected on the near-term, and obviously could be flexible with price, et cetera, as the year goes on. And so far, price increases have held obviously. It sounds like ...

[Barry Ruffalo:]

Larry, let me just give you a little bit more color maybe. So in the past we've talked about our backlog lasting a quarter or so. With the backlog increase that we've seen here over Q4, we're a little bit further out than a quarter. So I just want to give you some perspective that we do have some exposure past the quarter on some of those material price increases, but we're doing everything we can to manage it.

[Larry De Maria:]

Okay. Thank you. And then, the second question was around backlog. What kind of backlogs did the customers have now that FAST has been renewed and we're post-election, et cetera? And curious, how they've changed and how your backlog has changed in 2021 so far obviously finished 2020 on a strong note.

[Barry Ruffalo:]

Yes. So as I spent a lot of time talking to customers and stay close to the market Larry, I can tell you that most of the customers I talk to have a full book of work for 2021 and they're already starting to book projects into 2022. So their backlog is very strong. I would tell you that from a quality as they quoted projects in one project through the back half of 2020 to some of the margins that they would see in that backlog starts to get a little bit compressed as you go through the year 2021, if that helps you a little bit. But generally, I think they're in pretty good shape. I would say that as we've moved from 2020 where we did see a spike in backlog, we've been pleased with some of the order activity and certainly quoting and order activity that we've seen in early days of 2021.

[Larry De Maria:]

Okay. Thank you very much. Good luck, guys.

[Barry Ruffalo:]

Thank you.

[Operator:]

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Anderson for any final comments.

[Steve Anderson:]

All right. Thank you, Melissa. Again, we appreciate your participation on this conference call. Thank you for your interest in Astec. As today's news release indicates, today's call has been recorded. A replay of the conference call will be available through March 15, 2021. The transcript will be available under the Investor Relations section of the Astec Industries website within the next five business days. All of that information is contained in the news release that was sent out this morning. Again, this concludes our call. So thank you all for your time and attention, and be glad to connect with you as the week goes on. Thank you very much.

[Operator:]

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.