Astec Industries Inc Q2 FY2021 Earnings Call

Hello, and welcome to the Astec Industries Inc. Second Quarter 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. Mr. Anderson, you may begin.

Thank you, and welcome to the Astec second quarter earnings conference call. My name is Steve Anderson. And joining me on today's call are Barry Ruffalo, our Chief Executive Officer; and Becky Weyenberg, our Chief Financial Officer. In just a moment, I'll turn the call over to Barry to provide highlights, and then Becky will summarize our financial results. Before we begin, I'll remind you that our discussions this morning may contain forward-looking statements that relate to the future performance of the company. 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 can 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. In an effort to provide investors with additional information regarding the company's results, the company refers to various GAAP, which are United States Generally Accepted Accounting Principles and non-GAAP financial measures, which management believes provide useful information to investors. These non-GAAP financial measures have no standardized meaning prescribed by U.S. GAAP, and therefore, are unlikely to be comparable to the calculation of similar measures for other companies. Management does not intend these items to be considered in isolation or as a substitute for the related GAAP measures. Management uses both GAAP and non-GAAP financial measures to establish internal budgets and targets and to evaluate the company's financial performance against such budgets and targets. You should also note comments made during today's call will refer to non-GAAP results and a reconciliation of GAAP to non-GAAP results are included in our news release. All related are posted on our website at www.astecindustries.com, including our presentation, which is under the Investor Relations and Presentation tabs. And now 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 earnings results. I'll begin by acknowledging our team for another quarter of strong execution against the backdrop of evolving market dynamics, including increasing customer demand, inflationary pressures in a disruptive supply chain and a tight labor market. I continue to be impressed by their ability and dedication as we provide our customers with superior service and innovative, industry-leading technology solutions. Today, I will start by discussing key highlights and drivers of our performance and then provide an update on our operations and supply chain. I will also discuss what we're seeing in terms of demand in current market dynamics before turning the call over to Becky for details on our financial results. Then we will highlight progress made on our strategic transformation and open the call for Q&A. Turning to Slide 4. We had solid second quarter performance with sales up nearly 5% and adjusted gross profit up approximately 9% compared to the second quarter of 2020. The second quarter also marked another period of record backlog, which was up 140% year-over-year. We were able to achieve these results while addressing many headwinds. We remain focused on mitigating these headwinds through the pricing and talent initiatives we have in place. Second, we continue to provide our customers with industry-leading technology solutions to deliver value through our OneASTEC approach from Rock to Road. We are focused on delivering differentiated solutions to meet strong and increasing customer demand, and sentiment remains positive through 2021 and into 2022. Third, we are positioned for future growth with our streamlined organization structure and strong balance sheet. Our ability to execute through a variety of economic situations is a testament to the foundation we have built and our focus on driving operational and commercial excellence across the organization. Fourth, our strategic journey to simplify, focus and grow continues with our transformation program, which now also includes digitizing the company. The primary goals of this program are to reduce complexity, improve productivity, and embed continuous improvement in processes across Astec. Looking forward, we will leverage the strong foundation we have built under our simplify and focus pillars to further grow our business. A number of organic growth initiatives are underway, and I will share more details about these later in the call. Lastly, we remain focused on executing our strategy of driving a culture of operational excellence and sustainable profitable growth. This, in turn, will create long-term stakeholder value. We are still in the early innings of this transformational journey and have many opportunities ahead of us. Moving on to Slide 5. As many of you know, during the quarter, we launched a rebranding initiative to unify our organization and make it easier for customers and dealers to do business with Astec. Our rebrand is more than just a look. It enables us to build strength together under one common name and purpose of being built to connect. Our rebrand initiative is in line with our strategy to simplify, focus and grow Astec as we service our customers more effectively and provide them with value in a more sustainable way. Our Astec rebranding initiative coincides with our OneASTEC business model, which we show on Slide 6. Our business model is a competitive advantage, enabling us to provide a strong value proposition, serving our customers from Rock to Road. We are optimizing revenues within our footprint, leveraging global capacity to reduce lead times and maintain flexible operations to adapt to changes in demand. We actively manage our supply chain for constraints and volatility and have ongoing conversations with our suppliers to manage long-term risks. Despite these efforts, we are not immune to disruptions caused by the recent surge in global demand, and we continue to identify multiple supply sources in anticipation of further tightness going forward. Moving on to Slide 7. I will discuss some of the key industry dynamics we are seeing impacting our business and what we are hearing from our customers. As the strengthening economy indicates, we continue to be in an upcycle in North America. Strong residential real estate demand is often followed by increased non-residential construction, which creates the opportunity for our customers to build more roads, bridges, and parking areas. We continue to see strong demand for our products, driven by favorable industry dynamics, including pent-up demand from the pandemic. Customer sentiment remains positive through the remainder of 2021 and into 2022. We see growing optimism for increased US infrastructure spending, given the recent bipartisan support for a multi-year infrastructure bill. While the infrastructure bill will provide a tailwind to our business, as I've mentioned before, we are not a company that's waiting around for a bill to be passed. We see significant near-term demand for our products, and we have initiatives in place to drive organic and inorganic growth. As expected, labor shortages and inflationary pressures persisted during the second quarter. Though challenging, we have made progress on our labor front and have enacted numerous initiatives to retain and attract employees. Our team is core to who we are here at Astec, and we know the investments we make in our people will pay dividends to our organization and our stakeholders. Regarding inflation, we continue to see higher commodity costs, particularly in steel and logistics. To mitigate the impact of steel inflation, we continue to drive our operational excellence programs and strategically pass on price increases when necessary. Turning to Slide 8. Here, we highlight several of our key environmental, social, and governance initiatives. ESG continues to have prominence across Astec, beginning at the top with continued support from our Board of Directors. While we are still in the early days of our journey, I'm excited and proud of the progress we've made to date. In summary, during the second quarter, we continued to see strong customer demand, along with the headwinds of inflation in tight labor markets. We have taken actions to mitigate the headwinds, which we expect to persist through 2021. I am encouraged by the positive sentiment of our customers and the resilient demand for our products as showcased by our record backlog. We continue to adapt to the changing market situation to remain positioned to serve our customers as OneASTEC. While in the early stages of our transformation, I am proud of our team's accomplishments and look forward to the future of Astec as we continue to provide profitable growth and long-term stakeholder value. With that, I will now turn the call over to Becky to discuss our financial results.

Thank you, Barry, and good morning, everyone. I am pleased to join you on today's call. Starting on Slide 10. Second quarter revenues increased 4.8% to $278 million compared to the prior year quarter. Equipment sales increased 3.6%, while parts sales increased 18.9% compared to the prior year period. The sales increase was primarily in the Materials Solutions segment, driven by higher parts and international equipment sales with increased activity in Europe, Canada, Mexico, and Australia. Our backlog increased an impressive 140% to over $436 million at quarter end, driven by higher Materials and Infrastructure Solutions orders, which were up 200% and 99%, respectively. Higher orders were driven by strong demand, both domestically and internationally. Adjusted EBITDA decreased 14.2% to $21.7 million compared to $25.3 million in the prior year period, and adjusted EBITDA margin declined 170 basis points to 7.8% compared to the prior year period. The margin decline was primarily driven by increases in personnel costs, travel, commissions, and transformation initiatives, which were partially offset by manufacturing efficiencies. As noted in our news release this morning, beginning with the second quarter of 2021, we will exclude certain costs associated with the simplify, focus and grow initiative from the presentation of adjusted net income attributable to controlling interest, adjusted earnings per share, and adjusted EBITDA. We've adopted this change to remove costs that are not representative of our ongoing operations. Adjusted SG&A expenses increased 23.1% on a dollar basis, primarily due to an increase in personnel, travel, commissions, and transformation initiatives. Adjusted earnings per share decreased 26.9% in the quarter to $0.49 compared to $0.67 in the second quarter of 2020. The net of tax second quarter adjusted earnings per share included $2.2 million or $0.10 of transformation, restructuring, and other costs, including $2.1 million of costs associated with our ongoing transformation program. Our adjusted net effective tax rate for the quarter was 21.1%, driven by the timing of tax credits, which resulted in a $0.03 negative impact to our earnings per share. Our expectations for the full year tax rate in 2021 are in the 19% to 20% range. On Slide 11, we detail the key drivers of our year-over-year adjusted EBITDA margin contraction of 170 basis points. As mentioned previously, adjusted EBITDA margin contraction was primarily driven by inflation, centralization, and transformation efforts. As Barry mentioned earlier, we have implemented price increases to help offset the impact of inflation. We anticipate further price increases through 2021 to continue to offset rising costs. Moving on to Slide 12. Our Infrastructure Solutions business revenue decreased slightly to $180.2 million in the quarter, mainly due to manufacturing challenges. This was mostly offset by a 97% increase in international sales and the added benefit from last year's acquisitions. Gross profit decreased 1.5% to $39.6 million and gross margin decreased 10 basis points to 22%, primarily driven by product mix and commodity inflation. Backlog at the end of the quarter increased 99.4% to $108.5 million as we continue to see strong demand for highway and road building construction products. Turning to Slide 13. Our Materials Solutions business revenues increased 17.3% to $97.8 million compared to the same period a year ago, driven by increased demand across product lines and regions, with international sales up 51% and domestic sales up 6% versus the second quarter of 2020. We were very pleased with the performance of the group this quarter as they built momentum operating as OneASTEC. Gross profit increased 29.2% to $27.4 million, and gross margin increased by 260 basis points to 28%, driven by improved volumes and factory absorption. Backlog at the end of the quarter increased 200% to $145.7 million, driven by strong market activity. And on Slide 14, I won't go over the details, but we highlight the year-to-date results and provide some color for your reference. Moving on to Slide 15. We have a strong balance sheet with minimal debt. We continue to generate positive cash flow from operations and have a net cash position of over $174 million. Overall, we have available liquidity of $325 million with only $1.6 million in total debt as of June 30, 2021. As a reminder, while we are not leveraged today, we will strive to operate in the range of 1.5x to 2.5x debt-to-EBITDA on a long-term basis, and there could be times when we will be leveraged over or below this range. 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. Slide 16 is a reminder on our capital deployment framework. 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. Importantly, we remain committed to funding the dividend. On Slide 17, an overview of our strategic and disciplined approach to M&A is provided. We remain focused on acquisitions that align with our strategic filters and financial criteria to support our grow pillar. With that, I'll now turn it back over to Barry for his closing comments.

Thanks, Becky. On Slide 18, we highlight the three pillars of our strategy for profitable growth, simplify, focus, and grow. Over the past two years, we have made significant progress to simplify our business and focus on value creation. These actions have enabled us to unify our organization, make it easier for our customers to do business with us, leverage our global footprint, and flex operations as needed to help meet increasing demand. Second, the actions we have taken to focus the business have enabled us to strengthen our customer-centric approach, drive commercial excellence, streamline processes, and instill a performance-based culture. We are leveraging the strong foundation we have built on the simplify and focus pillars to grow the business. We are positioned to capitalize on global growth opportunities as we continue to reinvigorate innovation and leverage technology to unlock internal synergies and enhance the customer experience. Continuing with our grow pillar on Slide 19, we highlight some key organic growth opportunities we see across our business. We expect our initiatives for these opportunities will drive approximately 5% year-over-year organic growth over the long term. We see organic growth opportunities in our international business and continue to gain traction as evidenced by international sales up 76% year-over-year. Secondly, we see opportunities to drive growth in our parts and services business. Our second quarter results demonstrated our progress with parts sales up 19% year-over-year. We are focused on new product development to drive organic growth. We have a streamlined effective process to bring products to the market that add value for our customers. Recent product launches, such as the Shuttle Buggy 3000, have shown great success, and I'm confident in our team's clear vision around new product development. Other examples of organic growth opportunities include expanding our dealer distribution, cross-selling our products, and enhancing relationships with strategic accounts. We will expand these relationships with our OneASTEC Rock to Road value proposition. Slide 20 highlights some of our major milestones we're executing against in our transformational journey and the progress we have made to date. As I mentioned previously, we made progress on our simplified pillar during the second quarter as we launched a rebrand of our organization. This will make doing business with Astec easier for dealers and customers. Under focus, our operational excellence initiatives grow results and help mitigate headwinds presented by inflation in a challenging labor market and position us for growth moving forward. As I mentioned previously, we continue to have a number of organic opportunities to grow our business. We are driving innovation and technology to provide our customers with industry-leading technology solutions that provide value. Significant progress has been made on our transformation strategy. However, we are still in early stages of our journey. I look forward to updating you as we move forward. I'll conclude on Slide 21 with our key investment highlights. Our solid second quarter results are a testament to the dedication and adaptability of our entire Astec team. I am proud of our team's accomplishments during the quarter and in the midst of evolving market dynamics. We continue to execute our strategy. As we transform and position our business for growth, we remain focused on providing our customers industry-leading solutions to deliver unparalleled value. Further, our superior customer service, leadership positions within attractive niche markets, and a culture of continuous improvement position us well to capture future growth opportunities. Lastly, we remain committed to our 2023 targets of a 10% to 12% EBITDA margin and greater than 14% return on invested capital, as highlighted at our December 2020 Investor Day. I'm excited for the future of Astec as we continue to focus on driving profitable growth and long-term stakeholder value. With that, operator, we're now ready to open the call for any questions.

We'll take our first question from Mig Dobre with Baird.

You spent quite a bit of time talking about the inflationary environment and obviously, the various challenges in the supply chain. I guess I'm looking for maybe some context in terms of how you see things developing going forward in the back half of the year and into '22? Are things getting more challenging or worse? Are they getting better? And as it pertains to Slide 11, the adjusted EBITDA margin bridge, you called out nearly 700 basis points of inflation. Obviously, that's quite a bit. I'm curious as to how you think this progresses in the back half of the year.

Looking ahead, I would say that Q2 was tougher for us from a supply chain perspective compared to Q1. What the situation will look like as we move into Q3 and Q4 is still uncertain. Since we established the procurement group in 2019 and improved its professional level, we've seen a positive impact as we navigate these challenges. I commend the team, especially those in procurement and operations, for their efforts in achieving our results. There are times when it feels like a daily struggle for them, but the good news is that we are proactive, maintaining engagement with our procurement partners and suppliers to gain long-term insights. We're also looking to add alternative supply chain partners for critical components as needed. While I don't have a clear vision of what’s to come, I’m confident that our team has a solid understanding of the situation and is managing it as best they can. As the world begins to open up, I anticipate an increase in demand for components. While we're not insulated from significant disruptions, I’m proud of our team's dedication. Regarding inflation, the main drivers are related to steel, transportation, and logistics. I don't expect these issues to change anytime soon. There are some reports suggesting that steel prices may decrease in 2022, but that's far off. Additionally, a potential infrastructure bill could affect demand and subsequently impact steel prices. We need to continue enhancing our operational excellence programs to improve efficiency and manage costs, and we have numerous projects underway to support this. If we maintain focus on these areas, as evidenced by our Materials Solutions group this past quarter, we can remain profitable. That is our goal, and we are equipped with the necessary visibility and action plans to manage and mitigate challenges.

Do you have any insights regarding the manufacturing challenges impacting infrastructure sales mentioned on Slide 12? I'm trying to understand if issues like component shortages are affecting your ability to convert backlog into revenue and deliver. Is this situation based on feedback from your supply chain, and is it worsening as we move into Q3?

I would say the biggest constraint on us converting backlog right now is labor. And we've had an improvement from Q1 into Q2, but it still continues to be our biggest constraint. Yes, we are talking more about supply chain type items. It's more of a topic in our conversations in our different meetings we're having, Mig, but it's not necessarily something that's constrained our ability to produce and convert backlog to revenue at this point in time. It probably has the bigger impact, Mig, on the margin profile than it does on our revenue. Our revenue is really constrained by our ability to get product through the facilities due to labor.

Labor availability continues to be our biggest constraint. While we are discussing supply chain issues more frequently, they haven't significantly hindered our ability to produce and convert backlog into revenue at this point. However, these challenges likely have a greater impact on our margin profile than on our revenue, which is primarily limited by our capacity to process products through our facilities due to labor shortages. Regarding raw material inflation, can you share what you've done on the pricing front this year? I'm interested to know if there are variances between the two segments and your thoughts on pricing moving forward. It's clear from the adjusted EBITDA margin bridge that there are 500 basis points from volume pricing and mix, indicating that it's not solely price that is influencing this. At this point, we're still somewhat behind in addressing inflation. How do you envision this evolving, and when do you expect to align with inflation?

When I review the volume and pricing, it seems to be evenly divided between the two. I’ve mentioned before that while we don’t mind gradual increases in steel costs, the recent spikes have been challenging. It’s difficult for anyone, including us, to stay ahead of rapid increases. We have a backlog that we are working through, and I feel optimistic about our current position. We regularly discuss steel and are being strategic about our purchasing to protect our material margins, ensuring we account for this in our pricing and quoting processes. Overall, I believe we are in a strong position regarding this issue. Additionally, we are focused on driving operational excellence and continuous improvement to help mitigate the gap between pricing and costs.

I'm sorry to press you on this, but when do you expect to be caught up? Is this 2022 dynamic and does it happen sooner than that? I'm just not clear on how flexible your pricing is throughout the year. Do you only have one price increase at the beginning of the year, or are you more dynamic than that?

We're a lot more dynamic than that, Mig. We've done five price increases year-to-date. And I think when you look at the price increases and how we manage pricing from Infrastructure Solutions to Materials Solutions, there is a little bit of a different twist there in regards to the Materials Solutions is all through a dealer. In a dealer situation, obviously, they're looking at building out their fleets and their inventories on their yards and also having retail. So anything that doesn't have a customer name on it, we've been pretty adamant that we've taken prices up on those types of orders, even some that did have customers' names we've done as well. So I think we're pretty dynamic, Mig, in regards to what we're able to pass-through. And on the Infrastructure Solutions side, a big component of that would be more of our direct sales. And we've been pretty successful there as well as passing through pricing and also managing our discount structures at the same time. But I will say that we are dynamic. We're going to continue to be dynamic. And everything we've done is really price list changes, no surcharges, if that helps with color as well.

Our next question comes from Steve Ferazani with Sidoti.

I want to follow up a little bit on some of your comments to the previous question, specific to labor. And I know this is going to be a hard one to answer. But can you quantify at all how much revenue you didn't generate in the quarter simply because you didn't have the labor to fulfill orders? Because what I'm trying to think through is once you do catch up on that front, what simply that can do to generate higher quarterly revenue in the future?

That's a challenging question for us to address. It's difficult because the answer would vary depending on whether we could deploy entire teams at once or scale up by adding a few more employees to a department. We would like to have a significant backlog, but ultimately, I'd prefer to see that backlog turned into actual sales for our customers. We are working hard to make that happen as effectively as possible. One factor that has really helped us is our transition to the OneASTEC business model, which has allowed us to share resources and capacities more effectively than before, not just in the U.S. but globally as well. This change has played a key role in mitigating some of the long lead times we experienced. I'm very proud of our teams, especially considering that we were once 16 independent companies. Now that we are collaborating more closely by sharing resources and moving materials and personnel between sites, we've seen significant improvements. I believe this trend will continue to improve as we further develop the OneASTEC operating model.

But how are you in terms of labor, recruitment, and retention now versus three months ago? Getting any easier as you get people through the door? Are you able to keep them and train them? If you can just walk through that process a little bit because, obviously, we're hearing this across the board.

We have increased our workforce by about 240 people compared to the same quarter last year. Although we are experiencing some success, turnover is higher than we would prefer, making it challenging to retain and hire staff. We believe we are making progress and are focusing on strategies that do not significantly alter our labor cost structure. Most of our efforts involve providing incentives and bonuses to attract and keep talent. While I can't share too many specifics, our advertising methods and cash incentives should primarily represent one-time expenses rather than long-term salary commitments. In conversations with various CEOs and members of Congress, there is a consensus that as stimulus measures diminish, more people are likely to re-enter the workforce. We aim to make investments now to prepare for when more people are ready to work. Currently, our hiring capabilities vary by location, but all of our sites have a significant backlog that we need to address. We are actively encouraging our sites to hire and train as many people as they can. We are also engaging with local high schools through regulated programs to identify and recruit young individuals who are interested in starting a career at Astec. We are doing everything possible at the local level to attract, retain, and train our workforce.

Our next question comes from Larry De Maria with William Blair.

I wanted to ask about the ERP costs, which seem to have reached $5.3 million for the year. This appears to be slightly higher than anticipated. Could you provide guidance on what we should expect for this year and also for 2022, as I believe this is a long-term process? Additionally, is $55 million the expected new SG&A run rate for the second half, or should we return to the previous estimate of $52 million to $54 million that was initially anticipated?

$5.3 million year-to-date is very much in line with our expectations, and we actually should see that grow. We're putting our arms around the totality of the overall program over the multiple years that this will be rolled out. This will be rolled out in waves. So we don't have that number for you today, but it's more than just the ERP. There are multiple enhancements that are in that program. And so we should expect that the run rate will continue to remain at the current range as we continue our centralization and infrastructure efforts, which will create efficiencies. So we're able to create scale with each of the sites coming online. As I said, this loss has happened in waves, and we're being very thoughtful as we bring in each site. And so we're making sure we have the right manpower and structure in place to make it as soon as possible.

I have a couple of additional questions. Regarding the Mequon facility, I didn't hear you mention it, but I know there are ongoing labor issues that you discussed generally. Is the situation at Mequon resolved, or does it still present a challenge? Also, referring to the earlier question about pricing the backlog, you provided some insights, but can you clarify how much of the backlog is exposed to price fluctuations? Do you feel secure about half or three-quarters of it, with only a quarter being at risk, or is most of it locked in? I'm looking to understand the risks associated with the backlog, which is significantly increasing.

On the Mequon restructuring, yes, we've been out of that site. We've actually sold the site. We've moved the production to two or three different locations. As we mentioned to reference, Larry, in Q1, that was a little bit of a drag on us as we move material and such in demand and not having the labor. So I feel that obviously shows up in our Materials Solutions business. And so we feel good about our performance, Q2 Materials Solutions. And so I think the team has done a phenomenal job, certainly from Q1 into Q2 to really leverage that as best as possible. So I'd say that we're in much better shape now relative to that facility transition than we were in Q1, which was great. On the pricing and backlog, our backlog is pretty long. In some cases, we're out a year. And so we're not fully covered, but we're using every mechanism we can to try and make sure that we're buying steel at the right price and then using our price initiatives to go out and cover as much of that material increase as possible. So there is some exposure there to be very transparent with you. But quite honestly, there's been some exposure through the first half of the year as well. And I think we've done a good job of managing that.

If I could follow up on that. If we receive the infrastructure bill and the highway rebuild is renewed, along with a strong market for your products going forward, will you reconsider surcharges and pricing with the backlog extending into next year? If demand is that robust, Astec shouldn't be affected negatively, correct?

I believe we are very aware of our customers' needs. They have been with us for a long time, and we have built a strong and respectful relationship. Our customers are quite knowledgeable, and I feel we've had a successful partnership so far, which I expect to continue. Given the current environment, they are performing well too. However, we want them to maintain their profitability, just as they want us to thrive. I think we've navigated challenging discussions quite effectively, and as I mentioned, we will keep doing that moving forward.

I'll return to Mig Dobre with Baird.

Can we discuss the demand situation? I'm reviewing your infrastructure orders, and while it's true that your backlog has increased year-over-year, the implied orders have decreased significantly quarter-over-quarter and are only up about 8% compared to the second quarter of 2020. Can you provide insight into how you see demand changing? What explains this sequential decline compared to the previous quarter? Is it just fluctuations, or is there another factor at play? Additionally, is the uncertainty surrounding the current bill and the FAST Act causing some hesitation among your customers?

Customer sentiment is very positive. Dealer sentiment is also strong. What we observed this quarter, particularly regarding implied order lines, was largely due to seasonal factors. Typically, there's a slight dip in Q2, which historically means Q3 revenues are a bit lower for us. There's some of that happening now. Our customers are quite busy. During my visits in the last couple of weeks, many of them mentioned the impact of rain. It causes them to feel pressure to complete tasks when the weather is clear. Consequently, we are witnessing an increased level of activity in the market focused on project completion. Therefore, I am not concerned about a lower implied order rate in Q2. The sentiment remains robust, and I anticipate it will stay strong for some time. Regarding the infrastructure bill, our customers are established businesses with a long history that allows them to navigate the ups and downs of infrastructure funding. As we've noted, our customers experienced a record year in 2019, followed by another record year in 2020, and they are performing well in 2021. They are in a good position to continue investing capital. With our Rock to Road value chain, we have the opportunity to engage in all aspects, from crushing and screening to plant and accessory equipment, as well as road construction equipment. Thus, we are strategically positioned.

It seems to be more of a timing issue. From your comments, it appears that you expect orders to improve at some point before the year ends.

I believe that the order flow is looking good, especially if we disregard the Q2 spike in the infrastructure sector. I am not concerned about a decrease in orders at this moment.

You mentioned that revenue in infrastructure might be slightly lower sequentially in Q3. I'm curious about your thoughts on Q3 and Q4 revenue since you have a significant backlog. It seems to be mainly about conversion and some of the labor issues you've previously discussed. Can you share your perspective on revenue?

I would approach it this way, Mig. There are several perspectives to consider, depending on the specific product line and business area. For the Materials Solutions segment and our dealer network, the focus is on throughput and efficiently delivering products to our customers and dealers. The same applies to road construction equipment—it’s all about throughput. The situation with the plants, however, is slightly different. It involves not just our ability to process products but also our customers’ preparedness, which includes aspects like permitting and resources at the sites. This can limit our operations if customers aren't ready to receive a plant or proceed with a drum replacement. That was part of what we experienced in Q2, along with the throughput challenges we mentioned. Looking ahead to Q3 and Q4, Q3 is usually a slower revenue quarter for us due to the reasons I outlined. Customers tend to delay installations of plant equipment during this time. However, activity should pick up in Q4 and into Q1. There will still be some seasonality on the plant side, though it may be less pronounced than in previous years because we have a backlog that will help us ship and produce more than we could in the past.

No, I think it does. So I appreciate the color there. My final question is on Materials Solutions gross margin in the quarter. 28%, quite good and really good contribution margin on that revenue growth. Is there anything that we need to be aware of in terms of one-time items that might have helped this quarter mix? Anything that needs to be called out because the follow-up here is, if there's not anything that's one-time in nature, then would this level of gross margin be sustainable in the back half of the year? And that's it for me.

I'll start and then Becky can add anything if she wants. First, I want to take a moment to commend our team because up until a year and a half ago, this aspect of our business was very decentralized. We've had to make some difficult decisions within that part of the organization. I really appreciate the teams for their efforts in driving the OneASTEC operating model. This part of our business has had to adapt more than others for various reasons. They have done an excellent job of sharing backlog, demand, and resources. All of this contributes to our pricing actions and operational excellence programs, helping to highlight our capabilities and the value we offer. This has been an adjustment for our organization, but I'm proud of how they have embraced it and are starting to see the benefits of their hard work and commitment. As for maintaining 28% margins for the rest of the year, I can't guarantee that due to uncertainties around supply chain and labor turnover. However, it indicates that our efforts and the transformation we are undergoing can yield positive results when they come together. While I'm not ready to commit to that level in the short term, I'm excited about the long-term opportunities it represents and how it can help us achieve our goal of a 10% to 12% EBITDA margin in 2023.

I want to emphasize that they anticipate fluctuations from quarter to quarter based on volume. The record gross profit for the month was driven by increased volume, partly due to a lag from the first quarter. When analyzing Q1 and Q2 together, they align with our expectations. We do expect to see some variability in Q3 and Q4, but for the full year, they will remain consistent with our forecasts.

Then to clarify, there's nothing unusual in this 28% margin if volume is, call it, close to $100 million of revenue, you should be able to generate these sorts of gross margins, all else equal?

Yes, all else being equal, yes.

Our next question comes from Steve Ferazani with Sidoti.

I wanted to ask about on the international front. Last quarter, you had highlighted the negative impact some of those orders had on margin because it was sort of those lower-margin projects as you try to enter a new market or expand in the new market. We saw international sales and backlog up this quarter. Did you see that sort of stabilize in terms of margins and how you're thinking about those international orders moving forward?

Yes, I mean, as I talked about the impact on Q1, we really saw that as a one-time event. And so we are happy that in Q2, as we grow our international business, as you can see in our backlog and our revenues, I mean, that is a very attractive part of the business for us, and we're going to continue to drive growth there, both in the product specification side of it, but also making sure we have the right supply chain and really happy with the team's performance there to take care of international customers and see some good value creation from that part of our business.

And just to get one last one in. In terms of how you think about prioritizing backlog, is it purely a matter of where the order is at the plant where they have time, where you have components or is there any sort of prioritization based on the importance of a customer or the margins you can get out of certain orders?

Our main focus is on fulfilling agreements and purchase orders with customers, which typically come with a specific expected delivery date that sets our priorities. We generally do not deviate from this commitment. Our customers are aware of our current capacity limitations, and while we do save some slots for urgent needs, they understand that in order to replace equipment or plants, they need to place orders to secure their slots. We don’t often rearrange priorities based on other factors. However, our plant teams will try to optimize based on parts availability and similar considerations, and it's important for us to communicate effectively with our customers about any potential adjustments. Additionally, with the current inflation in steel prices, when quoting for projects or equipment, we base our estimates on anticipated costs of materials. Therefore, it’s crucial to ship units without delay, as fluctuating material costs can lead to pricing issues if we attempt to rearrange orders excessively.

There are no further questions in the queue. I'd like to hand the call back to Steve Anderson for closing remarks.

Thank you, Karen. We appreciate your participation in this conference call and thank you for your interest in Astec. As today's news release indicates, today's conference call has been recorded. A replay of the conference call will be available through August 18, 2021, and an archived webcast will be available for 90 days. 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 distributed earlier this morning. This concludes our call, but I'm happy to connect with you if you have additional questions going forward. Thank you all. Have a good day.

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