Astec Industries, Inc. (NASDAQ:ASTE) Q1 2024 Earnings Call Transcript

Astec Industries, Inc. (NASDAQ:ASTE) Q1 2024 Earnings Call Transcript May 1, 2024

Astec Industries, Inc. misses on earnings expectations. Reported EPS is $0.34 EPS, expectations were $0.87. Astec Industries, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to Astec Industries First 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.

Steve Anderson: Thank you, and good morning, everyone. Joining me on today's call are our President and Chief Executive Officer, Jaco van der Merwe; and our Interim Chief Financial Officer, Heinrich Jonker. In just a moment, I'll turn the call over to Jaco 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. Any such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions.

Factors that could influence our results are highlighted in today's earnings 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 results, we refer to various 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 are, therefore, 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 U.S. GAAP measures. A reconciliation of U.S. GAAP to non-GAAP results is included in our earnings release and 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 Presentations tabs. So now I'll turn the call over to Jaco.

Jaco van der Merwe: Thank you, Steve. Before I start with our review of the quarter, I'd like to take a moment to welcome Heinrich as our interim CFO. Since joining Astec in 2021, he has been an integral leader on our financial team, most recently serving as the VP of Finance for our Infrastructure Solutions segment. Heinrich has approximately 20 years of public company experience, deep financial acumen and he knows our business well. All of this has helped make for a seamless transition to interim CFO, although I am certainly underplaying the hard work and long hours he and the team have put in since he stepped into the role. Heinrich, thanks for your commitment to Astec and for joining me on today's call. With that, I would like to begin my remarks with our first quarter overview summarized on Slide 4.

As our results indicate, we experienced a more challenging first quarter than anticipated, mainly due to market headwinds in our Materials Solutions segment. These headwinds impacted our reported results, offsetting what was a relatively solid quarter for our Infrastructure Solutions segment. We are taking action to overcome these headwinds through focused execution of our strategy and targeted cost reduction initiatives in Materials Solutions, which we will return to later in the call. We continue to see opportunities ahead as we collaborate with our customers, deliver innovative new products to the market and develop best-in-class aftermarket practices in both Infrastructure and Materials Solutions. Driving sustainable profitable growth and margin expansion remains our North Star, and we have the right tools and team on hand to deliver on those objectives.

Moving to our first quarter overview. We delivered $309.2 million in net sales and gross margin of 24.9% with consolidated implied orders up 2.4% sequentially. While we experienced a supply chain delay from a specific supplier in our Infrastructure Solutions Group, underlying results were positive and implied orders were up 9.3% from the prior quarter. Materials Solutions results were impacted by lower conversions from rental to buy and finance capacity constraints stemming from the current interest rate environment. With this, we saw implied orders in Materials Solutions decrease 11% sequentially. Heinrich will share more on the specifics in a few minutes, but we do anticipate these headwinds to lessen as we move through 2024, and we are encouraged to see continued strong demand for asphalt and concrete plants.

Our backlog levels approached the historic range at $559.8 million, due to improved lead times on most of our product lines. This will allow us to continue to meet the demand for our products moving forward and increase our sales. Another highlight of the quarter, our time at the World of Asphalt/Agg1 show and conference was incredibly fruitful with strong customer engagement and a 38% increase in visitors over the previous record in 2022. Our new products displayed were very well received. We left with multiple plant leads, which we believe attest to a positive long-term mindset among customers. Now turning to Slide 5. I want to take a moment to discuss our new strategic framework that will drive our commitment to deliver sustainable value creation.

As you know, for the last several years, we have been working under a strategic framework that we call Simplify, Focus and Grow. Operating under this framework, we made significant strides to streamline our organizational structure and operations, improve operational excellence in areas such as quality performance, aftermarket excellence, inventory management and position the company for profitable growth. While elements of this strategy remain evergreen, for example, our focus on operational excellence and profitable growth, we ended fiscal 2023 with our key initiatives under the Simplify, Focus and Grow framework largely completed. As such, we are moving forward in 2024 with a new strategic road map, supported by 3 core pillars, empowered, enabled and engaged employees, customer-focused and industry-changing innovation.

Let me briefly touch on each pillar. First, it is our goal to develop high-performing talent. We do this through competitive compensation, the ongoing development of leadership and technical skills and a culture based on values that align to our employees. Being an employer of choice provide employees with the tools needed to succeed at Astec and offers life-changing professional opportunities. Next, we believe a strong customer focus across the organization is key to our success. This means driving commercial and operational excellence and simplifying our product offerings and production processes as a few examples. Finally, innovation has long been a cornerstone of our legacy. We want to build on our history of industry-changing innovation by rolling out a new product development approach that increases our market competitiveness and better leverage our technology and digital connectivity.

Innovation is very much at the core of who Astec is and what we do. The success of our operational improvements over the past few quarters gives us confidence in our ability to deliver on our strategic goals. Our focus on these 3 strategic pillars will help us build on our momentum and support our efforts to drive value for our employees, customers and shareholders. Now turning to Slide 6. I would like to provide an update on our current business dynamics. For Infrastructure Solutions, we are focused on strengthening our sales channels, including growing our strategic accounts, driving efficiencies and ensuring strong inventory control and supply chain cost reduction. We saw net sales of $202.2 million, which decreased 6.2%. As I mentioned earlier, this decline was mainly due to a select supply chain issue, but this was partially offset by increased part sales.

We also saw segment operating adjusted EBITDA margin of 12.7%, which decreased 50 basis points due to the supply chain delay and volume-related manufacturing inefficiencies. On the Materials Solutions side, we reported net sales of $107 million, a decrease of 19.1%. This reflects a combination of factors, including slower product conversions and lower equipment sales, the latter of which are due to finance capacity constraints with contractors and dealers. Separately, our segment operating adjusted EBITDA margin of 5% decreased 600 basis points. These results were impacted by lower sales volume, manufacturing inefficiencies and select inventory-related costs. We also wanted to provide an update on the Federal Highway Bill as it relates to our business.

Federal highway and pavement contract awards increased 11% year-over-year, with total state budgets up 12% year-over-year, according to the American Road and Transportation Builders Association. Given these numbers, we expect continued strong demand for asphalt road building and concrete production equipment moving forward. On Slide 7, we further highlight implied orders. As I said, implied orders is up 2.4% sequentially at $299 million in comparison to $292 million last quarter. Additionally, Infrastructure Solutions increased 9.3% this quarter from $192 million last quarter to $210 million this quarter, a strong indicator of the positive momentum we expect. Separately, Materials Solutions saw implied orders decrease 11% from $100 million last quarter to $89 million this quarter, a change, as I said earlier, due to lower conversions from rental to buy and finance capacity constraints stemming from the current interest rate environment.

As a reminder, Infrastructure Solutions makes up 2/3 of our total business. On Slide 8, we show our backlog trends. backlog of $559.8 million, as of March 31, 2024, is returning to our historical range. Backlog for Infrastructure Solutions was $372.7 million, a 2.1% increase sequentially, and our backlog for Materials Solutions was $187.1 million, a decrease of 8.9% sequentially. As I noted earlier, consolidated implied orders were up 2.4% sequentially, and we believe we are well positioned to meet the demand of our products and convert this backlog into sales. Moving to Slide 9. I noted earlier how important innovation and new product development is to our overall growth strategy. Let me highlight some of the new products we exhibited at the World of Asphalt/Agg1 trade show in March.

Our ReMix CCPR system efficiently utilizes reclaimed asphalt pavement or RAP, minimizing waste and promoting sustainable road construction practices. Our Vari-Frequency Screen Technology will revolutionize the industry with its ability to eliminate screen cloth blinding, increase performance and reduce operating cost. The Astec IntelliPac Moisture System provides visibility into virgin aggregate moisture levels with advanced features that empower operators with real-time data and insights and our Intelliflex Burner Controls provide intuitive control over burner performance and safety operations for asphalt mixing plants. We received strong feedback on these innovative products at World of Asphalt/Agg1, and our teams are hard at work to get them into customers' hands.

Various of these new products will enable us to apply artificial intelligence enabled technologies in the future. With that, I will now turn the call to Heinrich to discuss our detailed financial results.

Heinrich Jonker: Thank you, Jaco, and good morning, everyone. Before I jump into the overview of our results, I wanted to share how honored I am to be serving in this interim role. For almost 3 years, I have served as Astec Vice President, Finance, Infrastructure Solutions. And during that time, I have worked closely alongside our broader finance team. Due to Jaco and my colleagues support and collaboration, the transition to this new role has been smooth. We have a strong and deep bench of talent at Astec, and I know everyone is focused every day on delivering for our customers and our shareholders. Before I start, I wanted to share that the company has 2 reportable segments. Each segment comprised of sites based upon the nature of the products or services produced, the type of customer for the products and the nature of the production process, among other considerations.

Based on a review of these factors, the company's Australia and Latin America LatAm sites and Astec Digital have changed reportable segments beginning January 1, 2024. The Australia and LatAm sites were previously reported in the Infrastructure Solutions segment and have moved to the Materials Solutions segment. Astec Digital was previously included in the Corporate and Other category and has moved to the Infrastructure Solutions segment. Although the overall financial impact of this change is relatively minor, prior periods have been revised to reflect the changes for both the segment composition and the segment profit or loss metric calculation for comparability. With that, let's discuss the numbers. I'll begin my review of the first quarter results on Slide 11.

Net sales decreased 11.1% to $309.2 million in the quarter, due primarily to finance capacity constraints and lower conversions from our Materials Solutions Group and supply chain delays from a specific supplier for our Infrastructure Solutions Group. As mentioned by Jaco, we do expect to make up ground the remainder of 2024 as we continue to see strong demand for asphalt and concrete plants. By region, net domestic sales were down across our markets, with a decrease of 13.5% or $38.1 million and net international sales decreased slightly by 0.9% or $0.6 million. As a reminder, the U.S. represents around 80% of our consolidated sales. Additionally, we saw equipment sales decreased 18.6% or $40 million, but part sales did increase 10.3% or $10.7 million.

Further, we reported a decline in both adjusted EBITDA and adjusted EBITDA margin, with a decrease of 46.3% or $18.9 million and a decrease of 400 basis points to 6.1%, respectively. Adjusted EBITDA margin decreased due to lower volumes, which impacted manufacturing efficiencies at select sites and other period related costs. This was partly offset by pricing net of inflation. Increased SG&A costs were largely driven by higher personnel costs linked to a onetime recovery related to restructuring activity during the prior year. Additionally, increased consulting and technology support costs were partially offset by lower exhibit and promotional costs. Adjusted EPS was $0.34 compared to $0.90 in the quarter, a decrease of 62.2%, and we had GAAP EPS of $0.15 compared to $0.53.

Our adjusted EPS excludes transformation and other costs of $0.19 in the first quarter this year as well as $0.37 in the first quarter of 2023. Separately, our adjusted effective tax rate was 26%. Moving on to Slide 12. Infrastructure Solutions net sales decreased 6.2% to $202.2 million, which, as I mentioned, was a result of a select supply chain delay related to equipment sales. Domestic sales, international sales and equipment sales decreased by 3.2%, 30.6% and 12%, respectively. We did see a strong performance from parts sales, which were up 17.7%. Segment operating adjusted EBITDA decreased 10.2% to $25.6 million, and segment operating adjusted EBITDA margin decreased 50 basis points to 12.7%. These declines were primarily due to lower net volume and mix, manufacturing inefficiencies from lower volumes, which were partly offset by pricing net of inflation.

Moving to Slide 13. Materials Solutions net sales decreased 19.1% to $107 million driven by lower equipment sales, which were attributable to previously mentioned finance capacity constraints with contractors and dealers and the late product conversions. We did see international sales up 15.3%, while domestic sales, equipment sales and parts sales were down 35.7%, 27.4% and 3%, respectively. We implemented cost rightsizing activities after the quarter as we anticipate softening conditions for the dealers and contractors during the first half of the year. Segment operating adjusted EBITDA also decreased 63.7% to $5.3 million, and segment operating adjusted EBITDA margin decreased 600 basis points to 5%. The declines were attributable to lower net volume and mix, manufacturing inefficiencies from lower volumes, other period related costs and higher SG&A costs, which were partially offset by pricing net of inflation.

On Slide 14, we show our adjusted EBITDA bridge. As I shared earlier, we had a decline in adjusted EBITDA of 46.3% to $18.9 million and the decline in adjusted EBITDA margin of 400 basis points to 6.1%. We saw a slight benefit from volume, pricing and mix with inflation impact of $1.8 million, manufacturing inefficiencies and other period costs of $10 million, of which $5.5 million mostly relates to inventory adjustments and the previously mentioned $4.6 million impact from SG&A and other costs. Turning to Slide 15. We ended the quarter with cash and cash equivalents of $55.3 million, available credit of $150.2 million and total available liquidity of $170.5 million, which decreased 27.3% as compared to December 31, 2023. Our operating activities used $47 million of cash in the first quarter, and our cash available for operations decreased 7.7%.

As you'll see on Slide 16, we continue to execute a disciplined capital deployment framework, balanced investments in growth and returning cash to shareholders, we spent $5.8 million of capital expenditure in the first quarter to increase capacity and improve efficiency. We issued a dividend of $0.13 per share in the first quarter and continue to maintain a disciplined M&A approach to identify acquisitions that align with our growth strategy and meet our financial criteria. We also have $116 million remaining in authorized share repurchase program, positioning us for opportunistic share repurchases, subject to market conditions. With that, I will turn the call back over to Jaco.

Jaco van der Merwe: Thank you, Heinrich. Turning to Slide 17. In summary, despite the challenging current market dynamics, the fundamentals of our business remain strong, led by Infrastructure Solutions, and we are moving forward guided by our new strategic pillars. The outlook for Infrastructure Solutions remain favorable due to continued strong demand for asphalt and concrete plants. As we noted earlier, we have taken actions to drive additional cost reductions and efficiencies in Materials Solutions as we anticipate challenging conditions for dealers and contractors in the first half of this year. We released a significant number of new products at the 2024 World of Asphalt/Agg1 trade show earlier this year, and we are excited about the momentum in our innovation pipeline between now and ConExpo 2026.

We are also encouraged by the increased federal highway funding and the positive sentiment from our customers, we continue to receive. Our resilient operating model, new strategic framework and our cost reduction and efficiency initiatives provide us with a solid foundation to drive growth and value creation moving forward. With that, we are happy to take your questions.

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