Astec Industries, Inc. (NASDAQ:ASTE) Q4 2022 Earnings Call Transcript March 1, 2023

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

Stephen Anderson: Thank you, and welcome to the Astec fourth quarter 2022 earnings conference call. Joining me on today's call are Jaco van der Merwe, Chief Executive Officer; and Becky Weyenberg, Chief Financial Officer. In just a moment, I'll turn the call over to Jaco to provide comments, and then Becky will summarize our financial results. Before we begin, I'll remind you that our discussion this morning may contain forward-looking statements that relate to the future performance of the company, and these statements are intended to qualify for the Safe Harbor liability established by the Private Securities Litigation Reform Act. Any such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions.

Factors that 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 U.S. GAAP, which are 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 of the company does not intend these items to be considered in isolation or as a substitute for the related GAAP measures.

Management of the company 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 a reconciliation of GAAP to non-GAAP results is included in our news release and in the appendix of our slide deck. All related earnings materials are posted on our website at www.astecindustries.com, including our presentation, which is under the Investor Relations and Presentation tabs. And now, I will turn the call over to Jaco.

Jaco van der Merwe: Thank you, Steve. Good morning, everyone, and thank you for joining us this morning. I would like to begin my comments by saying our humbled and grateful I am to be speaking to you as the CEO of Astec. When I joined the company six years ago, I was drawn by what I saw, a strong company with a history of delivering valued product that had tremendous potential. Now as CEO, I'm even more convinced of these early impressions. Astec has established itself as a market leader in the industries we serve, bringing innovative solutions to the road construction industry for over 50 years. The team here is talented, dedicated and committed to making the company a strong and resilient as possible. As a leadership team, we remain united around our purpose of Built To Connect.

It defines where we are going and what we can become. We have made progress, and I'm proud to be part of the team that has moved us forward. The priorities for Astec in 2023 are shown on Slide 4. I'll share more detail in a few minutes, but the priorities are executing on our simplify, focus and grow strategy and delivering on our commitments to employees, customers and shareholders. As CEO, I will continue to champion these priorities for the organization, while emphasizing the importance of execution to drive consistent and sustainable financial performance. We have a sound framework and motivated team and we are working together to create a culture of outperformance to reach our potential. Through our Built To Connect purpose, we are enabling our employees to create a customer-centric culture that provides value, and this will benefit our shareholders.

That being said, we still have work to do. Our efforts this year will be primarily spent on our simplified and focused pillars. This foundation will better position us to grow profitably through organic investments in the future. Then at the right time, targeted acquisitions can be pursued and effectively integrated into our operations. This is a great company with an outstanding team and differentiated products. And I'm very grateful for the confidence that Board has placed in me to be its next CEO. I look forward to meeting with you over the coming months and I commit to perform in a way to earn your confidence in the future. On Slide 5, you can see in the end markets we serve through our two complementary segments, ensuring that needed materials are delivered and installed for ongoing infrastructure investments.

I recently attended the National Asphalt Pavement Association's Annual Meeting and was able to connect with many of our customers. I can tell you that they are optimistic and the interactions were positive as the project pipelines looks very full for 2023 as well into 2024. I will also add that a lot of the work that is planned for this year is not yet being driven by the Infrastructure Bill as we are still in the early days of those funds flowing into specific projects. Excitement is high and our customers are anxious to get the solutions we provide. The 3 pillars of our strategy: Simplify, Focus and Grow are best summarized on Slide 6. They align the elements of our performance culture and provide the organization with a common framework to create value and drive returns.

Beginning with Simplify, we are optimizing organizational structure by reducing complexity across our organization, starting with the leadership team and extending into select areas. We are focused on consistent execution and driving efficiencies. The current system and process consolidations help enable efficiencies through better reporting and access to data as well as uncover opportunities for further improvement in our operations. We are also using Simplify to help optimize our product portfolio, including, which products we make, how we make them and where we make them. Once we simplify and remove unnecessary complexity, we are better able to focus using the OneASTEC business model to drive excellence in everything we do. Operational excellence is permeating our entire organization, driving a focus on quality and performance into our culture.

Performance includes thorough planning and execution. We are further assessing prior strategic actions and are harvesting learnings that will benefit us going forward. Prior strategic actions under review currently include our Drive to 2025 initiative, the performance of our Brazil business, our site closure Mequon and Tacoma and the integrations of recent acquisitions. We improve as an organization when we drive functional excellence across every part of the company. As we do this, we discovered that operational excellence is not only for production teams, but is applicable to all areas, such as commercial teams where we can elevate the customer experience through aftermarket excellence. This drives higher customer satisfaction and engagement as well as growth in our business.

Profitable growth will be driven by expanding our parts and service business, our dealer networks and our international presence. It will also be driven by bringing innovative new products through markets and by leveraging technology and digital connectivity for our customers. We have great products and a team that is diligently working to develop improvements and enhancements to meet customer needs and deliver solutions to add value. Together, these three pillars of Simplify, Focus and Grow help ensure we have the right priorities to consistently drive profitable and sustainable growth as we bring value to our customers, employees, partners and shareholders. Moving on to the financial results and the current business environment. We summarized our Q4 key messages on Slide 7.

I have already mentioned some of these and focus on those comments not yet addressed. Our fourth quarter results reflect the strong fees to a year that was characterized by challenging and dynamic environments. The global Astec team rose to the challenge by demonstrating our core values, delivering unique solutions and by providing outstanding customer service to our valued commercial partners. Q4 sales improved 31% compared with last year and full year sales were up 16%. In addition to the strong effort of our team, we benefited from robust end market demand across both segments. Positive customer sentiment is proving sustainable even in the face of ongoing macroeconomic uncertainty, and our record-level backlog gives us confidence as we enter 2023.

As a market leader in our industry, we develop and deliver technology that enable our customers to be successful. We are taking this same approach internally as we unify existing systems, standardized processes and integrate solutions with the rollout of our Oracle suite of solutions. Becky will say more about this in a few minutes. Turning to Slide 8. I would like to review current business dynamics and how we are responding. As we enter 2023, the demand outlook is much the same as it was during the second half of 2022. Infrastructure projects, which tend to be longer-term and less correlated with near-term economic fluctuations have remained robust, and our customer sentiment has remained positive. This supports our confidence and challenges us to increase output through capacity expansion and operating efficiencies to meet strong demand and convert backlog into delivered product.

As funding begins to flow from the Federal Infrastructure Investment and Jobs Act, we expect this to provide future revenue growth and visibility. As a reminder, the bill currently runs until September 2026. The health and reliability of the supply chain we rely on has shown improvement over the last year, eliminating some of the challenges we encountered. However, pockets of tight labor conditions are persisting, contributing to supply chain delays. Our procurement and engineering teams have done a good job to identify and qualify second sources when feasible. From a human capital management perspective, we continue to hire and train personnel to increase operation staff and output. At the same time, we are implementing operational excellence initiatives to mitigate future disruptions in our supply chain.

Inflationary pressures are stabilizing, but we expect some inflation to persist into 2023. We continue to proactively offset inflation through pricing as needed. We show our historical backlog on Slide 9. As you can see, backlog at the end of Q4 is down slightly from the record level we established in the previous quarter. Over the past two years, our backlog has increased 153% and some moderation is expected. We are making steady progress on our initiatives to convert backlog and expect to see this trend continue as order rates normalize, and we increase output. I mentioned earlier how the OneASTEC business model is shown on Slide 10 has aligned us along the unifying framework and centered us around our customers and markets. It is this alignment on core values that unite us as an organization and keeps us focused on achieving our operational excellence objectives.

It guides us in onboarding talent and as we add new employees to meet customer demand. It directs us as we leverage our global footprint to reduce lead times, optimize revenue and manage costs. And it empowers us to better mitigate supply and logistic challenges by building a robust supply chain. This model is a critical component of our success, and I believe it has become an ingrained component of our culture that will enable continued future success. Slide 11 and 12 lay out targeted areas of growth with our primary focus being the organic growth opportunities shown on Slide 11. These initiatives such as growth in parts and service and dealer expansion are beginning to gain traction. Organic opportunities offer us the most straightforward and efficient path to profitable growth.

And we will continue to prioritize these initiatives while we keep our eyes open for selective opportunities to acquire businesses that meet our disciplined, strategic and financial focus. We are on an ESG journey, as shown on Slide 13. That is focused on key areas where we believe we can create the most value. We are still early in our journey. But already, we are making progress. Slide 14 shows a carbon footprint model where we can employ our materials knowledge, process tools and telematics to monitor and drive lower emissions. This is an area where I believe we can add even more value and one that is generating interest from our customers. Staying on the theme of telematics Slide 15 shows how we are developing comprehensive digital solutions, including positive contributions from our Grathwol and MINDS acquisitions.

This approach aligns well with Simplify, Focus and Grow framework as we develop capabilities that improve our operations, elevates the customer experience for our partners and expands our ability to grow into high-value market opportunities. Finally, bringing these slides together on Slide 16, we highlight the Astec Digital suite. Beginning with materials in the ground to completed roads and bridges and then ongoing service. We're providing products and services that differentiate Astec as the industry leader. And while I'm proud of the progress we have made, I am even more excited about the path we have in front of us to deliver sustainable, profitable growth. With that, I will now turn the call over to Becky to discuss our detailed financial results.

Becky Weyenberg: Thank you, Jaco, and good morning, everyone. I'll begin my review of fourth quarter results on Slide 18. Sales were $349.9 million, up 31.2% with strong growth in both equipment and parts, which increased 45.3% and 11.8%, respectively. By region, there was a 32.2% increase in domestic sales and a 27.4% increase in international sales. Strong demand also kept backlog near the record level we established in Q3, coming down slightly as we increased output and order rates are beginning to normalize. Compared with last year, backlog is up 19.7% on a consolidated basis. By segment, Infrastructure Solutions backlog grew 26.2%, while Material Solutions increased 8.9%. Domestic backlog saw the greatest increase, improving 23.3%.

However, International was also up growing 2.8%. This broad-based increase in backlog across segments and regions is indicative of the robust demand we are seeing in our end markets and the success of our global commercial teams winning business. Adjusted EBITDA increased $22.2 million, expanding adjusted EBITDA margin 370 basis points to 6.3%. This was primarily due to the net positive impact of volume, pricing and mix that outpaced inflation and higher manufacturing costs due to lingering inefficiencies in the supply chain. We have previously outlined our pricing actions and that we expected pricing to catch up with the rising costs we encountered over the last two years. This quarter, we realized significant pricing, which helped improve profitability and drive margins.

We did see an increase in adjusted SGA&E, which was up 6% as we invested in headcount, incurred expenses for our transformation program as well as incremental costs from acquired businesses. We expect margins to further improve as we overcome supply chain challenges and realize additional benefits from our transformation. Adjusted earnings per share was $0.34, driven by increase in gross profit and maintaining cost controls and operating expenses. This excludes costs driven by our transformation program, which will optimize our company for long-term value creation. We also recorded foreign valuation allowances of $5.8 million, primarily associated with our Brazil entity. As a result, our adjusted net effective tax rate for the quarter was 47.6%.

For 2023, we expect our normalized net effective tax rate to be in the 23% to 24% range. Moving on to Slide 19. Infrastructure Solutions sales increased 27.1% to $238.4 million in the quarter, primarily due to strong global demand for our solutions, especially equipment and favorable net volume, pricing and mix. Demand was up for both domestic and international sales increasing 26.9% and 28.2%, respectively. By product, equipment sales were up 42.1% and parts sales grew 6.6%. Segment gross profit increased 34.3% to $48.2 million, and gross margin increased 110 basis points to 20.2%, primarily due to the impact of favorable volume, pricing and mix. Adjusted EBITDA margins expanded 280 basis points to 9.7%. Turning to Slide 20. Our Materials Solutions sales increased 39% to $109.8 million, driven by strong global demand for equipment and parts along with favorable volume, pricing and mix.

Equipment sales grew 49.4% and parts were up 23.2%. Domestic sales grew 45.7% and International sales increased 24.5%. Segment gross profit increased 35.6% to $21.7 million. However, gross margin decreased 50 basis points to 19.8%, due primarily to cost inflation and manufacturing inefficiencies this quarter that offset volume, pricing and mix for the segment. Adjusted EBITDA margins for the segment increased 530 basis points. On Slide 21, we highlight the key drivers of our year-over-year adjusted EBITDA bridge. EBITDA improved significantly in the fourth quarter, up 217.1% to $22.2 million, which caused EBITDA margin to expand 370 basis points to 6.3%. The positive contribution from volume, pricing and mix more than offset the impact from inflation.

Negative manufacturing efficiencies due to supply chain disruptions are still having a lingering effect and SGA&E were slightly higher due to increased commissions, research and development costs and the addition of personnel associated with our MINDS acquisition. Looking ahead, we continue to expect further benefit from price realization and the implementation of our transformation strategy. On Slide 22, we show full year results. Strong demand enabled us to grow sales 16.3% and backlog 19.7%. Adjusted EBITDA grew 8.8%, even with the various supply chain and manufacturing efficiency headwinds we encountered this year, which is a testament to the entire team for performing in a challenging environment. Turning to Slide 23. We continue to invest in growth, which brought our cash position down to $62.8 million reflecting an increase in inventory and CapEx to meet demand and improve productivity and capacity.

Our balance sheet remains solid, and we expect our cash position to grow as we manage working capital and resolve supply chain disruptions. Our liquidity and manageable debt enable us to withstand a variety of economic situations as well as support investment plans and return cash to shareholders. Should we need to incur higher debt levels in the future, we will strive to operate between 1.5 to 2.5 times net debt-to-EBITDA. Turning to Slide 24. We maintain a disciplined framework to capital deployment, balancing investments in growth with returning cash to shareholders. In 2022, we spent $41 million on CapEx to invest in projects to improve operational efficiencies and advance our long-term strategy. We also spent $18 million for the acquisition of MINDS earlier in the year to build out our digital platform.

Our commitment to return cash to shareholders was demonstrated in the fourth quarter as we repurchased $4 million in shares and increased our quarterly dividend 8.3% to $0.13 per share. Our Oracle transformation, summarized on Slide 25, remains on budget and on schedule. This system will be a key enabler of long-term sustainable improvements in productivity and efficiency. We will begin to see benefits in the second half of this year as the first waves of solutions are utilized. I am proud of the work our team is doing and excited as we draw near to delivering this objective. I will now turn it back over to Jaco for his closing comments.

Jaco van der Merwe: Thank you, Becky. Turning to Slide 26, I would like to review our key investment highlights. Despite all the changes we saw in 2022, one thing that has remained constant is our customers' desire for our unique solutions. We have built a leadership position by delivering innovative, high-quality products and superior customer service. And our markets are experiencing positive long-term demand drivers from secular trends such as population growth and aging infrastructure. We have been successful in winning business opportunities. As the global installed base of Astec products grow, it creates the need for reliable aftermarket parts that tends to be reoccurring and less cyclical. This strong OEM aftermarket combination, coupled with improving operational excellence, improves our financial returns.

As a result, we have a strong balance sheet that enabled us to strategically invest and grow. Finally, our commitment to the Simplify, Focus and Grow strategic pillars unite our organization and drives improvement in everything we do. We saw improvements in nearly all financial metrics in 2022 and have made progress on achieving our long-term financial targets, shown on Slide 27. The plans we have in place including the Oracle implementation plus our team's actions to live out our core values daily gives us confidence that these targets are attainable, and that 2023 will be a good year for Astec. I'll close by reiterating the sentiment from my opening remarks. I'm humble and grateful to be the CEO of such a wonderful team and organization, and I'm excited about where we are going and what we can accomplish together in 2023 and beyond.

With that, operator, we are now ready to open the call for any questions.

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