Astec Industries, Inc. (NASDAQ:ASTE) Q3 2023 Earnings Call Transcript

Astec Industries, Inc. (NASDAQ:ASTE) Q3 2023 Earnings Call Transcript November 1, 2023

Astec Industries, Inc. misses on earnings expectations. Reported EPS is $-0.01 EPS, expectations were $0.64.

Operator: Hello and welcome to the Astec Industries Third 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 welcome to the Astec third quarter 2023 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 could 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 US GAAP, which are generally accepted accounting principles, and non-GAAP financial measures, which management believes provides useful information to investors. These non-GAAP financial measures have no standardized meaning prescribed by US GAAP and are therefore unlikely to be comparable to the calculation of similar measures of other companies. Management of the company does not intend these items to be considered in isolation or as a substitute for the related GAAP measures.

Management to company is 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. A reconciliation of GAAP to non-GAAP results are included in our news release and 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 Merwe: Thank you, Steve. Good morning, everyone, and thank you for joining us. Turning to slide 4, the third quarter turned out to be disappointing from a short-term results perspective, yet positive from creating a stronger business for the long term. As mentioned in earnings release, our results for the quarter were negatively impacted by litigation loss contingency of $6.4 million, related to equipment sold during 2017. Becky will make more comments about this in her remarks. Sales also ended lower than expected due to various infrastructure solutions related orders being delayed to Q4 due to customer readiness and payments. From a long-term performance point of view, I’m excited about the 220 basis point improvement in margins we realized during the quarter.

The investments we are making in our factories and systems are progressing well, and I fully expect to see further benefits in future quarters. The large transformation at one of our infrastructure solutions sites is developing well with most of the capital equipment and new shop floor layouts completed. Margin development at this facility improved from last year but ended below our Q3 expectations. Gross margins are up 320 basis point year-to-date and we have exceeded 20% gross margins for five consecutive quarters. We continue to see funds flowing from the federal highway bill, further supporting our long-term conference. Year-to-date sales were up 8.3% with growth in both segments. Our teams are working diligently to reduce inventory levels and we expect the results of these efforts to flow through over the next few quarters.

We expect operating cash flow to improve in Q4 as we convert inventory to cash and improve profitability. During the quarter, I visited various customers, attended the National Ready Mixed Concrete Association meeting and met with most of our mobile construction equipment dealers. The sentiment remains strong and customers continue to express their desire to do business with Astec. The mobile construction dealers were specifically excited about the new products we are bringing to the market. More about this later in my commentary. I’m pleased to see the way our employees are embracing a culture of sustainable performance and improved execution. Focusing on our employees clearly reflect in our new vision. I am proud that we announced the addition of paid parental leave for both parents during the quarter and an increase in our company 401-k max for our employees effective January 1, 2024.

Lastly, we are excited about the release of our first corporate sustainability report here in Q4. The team has done a fantastic job with this. We have now established a baseline from which we can set improvement targets. Slide 5 highlights that our focus in 2023 has been on execution. There are a number of significant initiatives noted for your convenience, but today I would like to tell you more about our progress on two specific things I am passionate about. Parts and Safety. Having the right parts available as and when needed by our customers is key to success in the capital equipment markets, we operate in. We have made significant improvements in our parts full rate after the challenging first half of the year. The investments we have made in our factories and the implementation of management dashboards are helping us to improve further.

Creating a strong parts business will further enhance our ability to create sustainable and predictable results in the long term. Finally, our core values augment individual efforts into a team that works together to deliver results. Safety is one of our core values and I would like to highlight our favorable year-over-year safety performance. Our recordable incident rate improved to 1.31 year-to-date, below our 2022 performance. Investing in our factories has had a positive impact on our safety performance and our teams will continue to find further improvements to make. Turning to slide 6, I would like to review the current business dynamic and how we are responding. Our customers remain optimistic about 2024 as they already have solid backlog on the books.

As mentioned earlier, last month I attended the National Ready Mixed Concrete Association meeting in Nashville, Tennessee. While there I was able to connect with various customers and dealers. They remain positive and this is reflected in the solid backlog we have for our concrete plants and related equipment. We are expecting that our Materials Solutions National Dealer Conference to be held in Q4 will yield strong demand for 2024. Our current indication is that it will be stronger than last year. Over the last 12 months we have improved our dealer coverage and this has contributed to demand. Rising interest rates could potentially have a negative effect on the conversion of dealer rental fleet to customer sales. We have seen examples of dealers customers extending rental agreements versus buying equipment at the end of the lease.

Customers and equipment are ever still working but this could potentially put pressure on our dealer network. Driving down our in-house inventory will however give us the ability to support stronger dealer floor plans to mitigate this, if required. However, with the pressure in the macro environment inclusive of the rising interest rates, we are monitoring our high volume dealers orders in the backlog for possible modification, pushouts or cancellations. Funding from the Federal Highway Bill start to flow, with Federal contract awards increasing 12% year-over-year, we view the Federal funding mechanism is providing long-term stability for our markets and customers. Slide 7 further illustrates our expanding global footprint. Our international team has made significant improvements on our market coverage and presence.

While various of these dealer relationships are still new, we are encouraged about the level of activity. Our backlog continues to normalize, as can be seen on slide 8. As a reminder, Q3 has historically been a lower order intake quarter due to customers working and focusing on completing projects before the winter months. Our October bookings are encouraging within the Infrastructure Solutions business and we have good inputs that the Material Solutions National Dealer Conference will yield strong bookings as mentioned earlier. I’m very excited about the release of our new vision on slide 9 to build industry changing solutions that create life changing opportunities. This vision is focused on our employees, our customers and resonates well with our legacy of strong customer service and innovation.

We will share more about our vision and our Astec 2030 strategy during our Investor Day plan for the spring of 2024. I’m extremely pleased with our employees are embracing the new vision significance and the profound impact we will have on our people, customers and the industry in the future. Turning to slide 10, we continue to execute our simplified focus and growth strategy to deliver value for employees, customers and shareholders. For example, we have simplified by streamlining our internal staffing and adopting branding as one aspect. Under focus, we are pursuing operational excellence. Investments to optimize the manufacture of mobile, construction and crushing equipment domestically and internationally are examples of putting capital to good use.

We are also focused on inventory management and aftermarket parts excellence to enhance customer value. Grow includes the introduction of new products and growing into new geographies as well as developing our aftermarket. This includes getting more parts out of the door. We are working closely with our dealers and direct sales teams, understanding what they are seeing in the field and partnering with them to better serve our customers. Slide 11 highlights a few of the innovative new products we displayed earlier this year at the CONEXPO trade show in Las Vegas. Our new horizontal grinders were released in Q3 and the Milling Machine and paver are scheduled for release over the next two quarters. These products address specific market needs and have sparked the interest of our dealers and customers.

The large investments we have announced before for mobile crushing and construction equipment are progressing well at our Omagh in Northern Island and Chattanooga, Tennessee facilities. These investments are both transformational for the respective product lines and will yield positive results in the future quarters. Slide 12 reflects our OneASTEC business model. This framework ties in well with our new vision, placing our employees and customers in the center. I am very proud of our purpose of Built to Connect and it is meaningful and tells the story about what Astec’s customers accomplish with our equipment. Lastly, on slide 13, we are proud that we will release our first corporate sustainability report during Q4. This is a significant step forward on our ESG journey.

Our report highlights how we are investing resources to advance environmental and social initiatives while maintaining sound governance. I look forward to publishing our report and updating you on our progress. 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 third quarter results on slide 15. Sales were $303.1 million, down 3.8%, slight declines in both segments. By region, strong international sales growth of 11.7% was enhanced by positive margin development and was offset by softer domestic sales down 7.9%. Part sales grew 2.4%, which was offset by a decline of 4.5% in equipment sales. Backlog continues to normalize, down 36.6% from the peak in the third quarter of 2022 and 10.8% sequentially, and still within our historical range of one and a half to two quarters. Domestic backlog was down 37.2% and international down 33.4%. Order rates have remained steady over the last three quarters, a trend we expect to continue as demand remains strong.

Supply change disruptions are becoming less of an issue, further incentivizing customers to resume normal order patterns. We are also improving our ability to convert backlog into sales, suggesting backlog will stay within that historical range. Adjusted EBITDA decreased 39.8% to $10 million, decreasing adjusted EBITDA margin 200 basis points to 3.3%. The biggest driver here is a litigation loss reserve of $6.4 million associated with an initial adverse verdict related to equipment sold in 2017. Looking at ongoing operations, we expanded gross margins by 220 basis points to 23% as we achieved further price realization and benefited from our financial operational excellence. This is the fifth consecutive quarter gross margins have exceeded 20% and year-to-day gross margins are 24.1%.

SG&A increased due to the litigation loss contingency and higher personnel costs as we invested in our business. We are also experiencing increased consulting and project costs. While profitability was masked this quarter due to the litigation contingency, the team is doing a good job of managing expenses and we are pleased with the progress and improvements we are making on margins. Adjusted earnings per share decreased to a loss of $0.01 from an income of $0.28 the prior year. Again, the litigation contingency was the biggest driver here, decreasing EPS by approximately $0.28 and offsetting gross profit improvements. The adjusted net effective tax rate for the quarter was 108.3%, driven by the higher weighted tax impact of adjusted earnings, add-backs due to lower operational income.

We expect our normalized net effective tax rate to continue to be in the 23% to 24% range for the remainder of the year. Moving on to slide 16. Infrastructure Solutions net sales decreased 5.5% to $190.8 million with international growth of 3.4%, being offset by softening domestic demand. Mobile construction equipment contributed to sales volume, while asphalt and concrete equipment sales declined. A positive impact from our transformation initiative on the manufacture of mobile equipment was experienced, and greater contributions are expected going forward. Part sales were up 5.5% as we were able to fulfill parts orders for aftermarket demand. Segment backlog decreased 27.5%, primarily due to the normalization of customer order patterns. Adjusted EBITDA margin for the segment declined 10 basis points to 8.6%.

This favorable gross margin was offset by higher operating expense as a percent of sales. Turning to slide 17. Material Solutions net sales decreased 1.2% to $110.5 million as strong international sales were offset by a decrease in domestic demand and mix. International sales increased 20.7% as domestic sales declined 9%. Equipment sales fell 0.6%, and parts were down 3.2%. Segment backlog was down 51.7%. As a reminder, our annual dealer event takes place later in the fall. We anticipate order activity will be in line with prior two years. Adjusted EBITDA margins for the segment declined 420 basis points to 7.5%. This was largely due to the litigation loss contingency offsetting the positive gross margin impacts. On slide 18, we highlight the key drivers of our year-over-year adjusted EBITDA bridge.

Adjusted EBITDA decreased to 39.8% to $10 million, a contraction of 200 basis points to 3.3%. The positive contribution from pricing, net of unfavorable volume and mix more than offset the impact from inflation. Manufacturing inefficiency headwinds due to supply chain disruptions were a $1.8 million impact and SG&A expenses were higher due to the $6.4 million litigation contingency and higher personnel costs. Looking ahead, we continue to expect further benefit from the implementation of our transformation strategy to drive increased EBITDA to deliver our long-term targets. Turning to slide 19, our cash and cash equivalents available for operations stood at $71.3 million as we increased borrowings on our credit facility. We expect this to reverse in Q4 as we work through working capital.

We maintain sufficient liquidity and a solid balance sheet to support our operations and balance capital deployment strategy. Our current net leverage ratio is 0.5x with a target leverage range over cycles between 1.5x to 2.5x. Turning to slide 20, we maintain a disciplined capital deployment framework balancing investments and growth with returning cash to shareholders. We spent $7.9 million on CapEx in the third quarter to maintain and improve operationally. Our targeted full-year capital expenditures are estimated not to exceed $35 million. As Jaco mentioned earlier, we are making progress with our Oracle Cloud ERP implementation as shown on slide 21. In addition to the previously launched Human Capital Management and the ERP at two operating sites, including one of our largest sites, we also launched in the current quarter our consolidation and reporting module.

Implementation at both sites is going well and we already seen improved production output. As more sites are added to the system, we anticipate achieving progressive benefits. I am pleased with the performance and support of everyone involved and remain confident that we will continue to see measurable benefits as we complete the remaining implementations throughout the entire organization. I will now turn it back over to Jaco for his closing comments.

Jaco Merwe: Thank you, Becky. Turning to slide 22, I would like to summarize our key messages. Although Q3 was disappointing, the Astec team continues to work together, serving customers and driving operational excellence. Our customers continue to convey a positive sentiment to us, supported by positive long-term end market drivers, including funds from the Federal Highway Bill. The OneASTEC operating model is guiding us to create a culture of consistent performance and execution. We delivered higher gross margins in the third quarter and lower sales, with EBITDA margin performance masked by the litigation loss contingency. We are transforming and improving our operations. And finally, our simplified focus and growth strategy establishes a framework to drive long-term shareholder value.

I like where we are heading, and I’m optimistic about our future as we drive towards our long-term goals shown on slide 23. I also like to share that we are putting the finishing touches on our Astec 2030 Business Plan and look forward to sharing those details in 2024. I’m grateful to our employees for their dedication and hard work, and to our customers for their loyalty and support. With that operator, we are now ready to open the call for questions.

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Q&A Session

Operator: [Operator Instructions] And your first question is from the line of Stanley Elliott with Stifel.

Stanley Elliott: Hey, good morning, everyone. Thank you for the question. Can we start off by talking about kind of what’s happening on the margin front and mainly kind of the move sequentially down. I mean, even if you back out the litigation charge, you’re still looking at maybe flattish sort of margins. And I think we had hoped that there had been enough pricing in the backlog and an improved kind of within the order book that we would actually continue to see the margin trajectory, kind of like what you saw in the first half of the year.

Jaco Merwe: Yes, I can take that, Stanley. So as reported, you can see that overall margins continue to improve for the quarter and then obviously nicely year-over-year. And I think it’s important to note that the third quarter, as we mentioned previously, has a different profile mix with regards to parts and capital. So obviously that contributes. And then also, if you look at last year in the third quarter, the mix between plants and a mobile construction equipment was different in this year. And that contributed to what you see. So overall, I will say with the mix of products that we have with the chains in the mix on parts for the quarter that’s what you can expect during a typical third quarter, which we didn’t have last year.

Stanley Elliott: Okay. And I guess as a quick follow on, did the mix of international versus domestic revenues kind of contribute to that in any way?

Jaco Merwe: No, not really. In fact, we are very pleased with the performance that we’ve seen on our international business. And remember that on the international side transfer pricing to comply to local jurisdiction, obviously dictates a little bit the margins that you make on the international side. But as I said, we are actually very pleased with the development on our international business.

Stanley Elliott: And I guess as a follow up a fair amount of positive commentary from some of the dealer events. Are we saying that order rates are going to start turning positive in the fourth quarter and into early next year, because of these trade shows, or should we think of you all continue to work down get the backlog to get more to that historical norm?

Jaco Merwe: Yes, no, good question. And once again, as a reminder, in the prior two years, especially on the material solution side, the dealer order writing took place in earlier quarters, last year and the year before. This year we will have it in Q4 and as mentioned, we believe that it’s going to be a strong order writing period, at least in line with what we’ve seen the last few years, we still have relatively low dealer inventory, especially on the mobile construction equipment side. And so we feel confident and we have pretty good visibility that order writing will be strong. And we’ve also seen a good order over writing for asphalt and concrete plants here in October. And we’ve actually seen a pretty nice development on parts orders for October as well.

So we are expecting that the backlog will moderate a little bit more, especially as we focusing on reducing our lead times and reducing parts backlog. So but we have very good view on what we think is going to happen here in Q4.

Operator: Your next question is from the line of Mig Dobre with Baird.

Mig Dobre: Yes, good morning. The term normalization has been used repeatedly on the call and it’s been used in prior quarters as well. So I’m trying to understand exactly what it means that normal, orders have normalized. If we look at three months from now, after you report Q4, if we look at your combined order intake for 2023, would you say that that is the normal run rate for orders in both your businesses?

Jaco Merwe: Yes, so, Mig, I think once again, if we look at what we have on slide 8, we gave there the historical range. So we always talked about that 1.5 to 2. If you look at the order patterns for the first three quarters, I don’t think you should take that and just multiply it by four, especially if we look at the peak of the backlog in the third quarter last year. As we improve availability and as we improve our own lead times, our dealers will not have the need to place orders as far in advance as what they did in the past. So, from my perspective, if we stay in that $400 million to $500 million range, that is a range that we are really comfortable with and that we’ve dealt with in the past. Any time I think that we go below that, that’s for myself, that’s where the red lights will come up a little bit.

But at this point in time, indication is that Q4 will be a strong bookings quarter. And customer sentiment is still very positive. And the dealer interaction that we’ve had is really good. And I’m very excited about the new products that we’re bringing to the market. The new Milling Machine that we have in the presentation has been performing really well in trials. And when a customer tells you that he wants to buy the prototype machine, then you know you’re up to something. I think there’s a lot of positive momentum that we are seeing in terms of just the order writing we’re seeing, the seasonality and then the new products that we bring to the market.

Mig Dobre: So, again, when you’re evaluating your order intake for full year 2023, would you consider that to be a normalized level of demand or are there distortions still that we need to be aware of?

Jaco Merwe: Yes, I think it’s distorted. I mean, if you look at the orders that we got during 2013 and how the backlog increased, I mean, if you just look at Q3 of ‘21 to Q3 of ‘22, there was a build-up of 50%, $300 million of additional backlog. And we’re still working through that. So, Mig, I have no concerns right now that we’re going to see a significant drop in the output for 2024.

Mig Dobre: And I think that’s interesting, right? Because right now, your production, your shipments are obviously exceeding order intake, hence backlog coming down. At what point in time does this backlog normalization, as you call it, actually has to result in lower production?

Jaco Merwe: Yes, I mean, we obviously reviewing production levels on a consistent basis. We have multiple levers that we can pull if we get to that point. But right now we are not making any of those plans. Our S&OP processes at various of our product lines is really strong and robust, and we have pretty good visibility of what’s coming. And we have good visibility on our coating pipeline, which is really strong right now. So I’m not concerned at the moment. I think the teams have really good handle on that. But of course, the moment we see those indications, we’ll pull some of the levers that we have. And at some of our facilities, we are already working significant overtime levels because we have the visibility of what needs to be delivered in the next couple of quarters.

And our international business is continuously growing as we expand our footprint here in the US over the last year, we’ve expanded our footprint for our mobile construction equipment and on the material solution side. So there’s a lot of other positive factors that can mitigate any external pressures from interest rates or the macro environment.

Becky Weyenberg: Yes, Meg, I would just add to that, unlike some of our peers, we’re not planning any layoffs. There’s no reason for us to go to that level yet with what we have in front of us. So to Jaco’s point, we’re not concerned about that. The capacity is right size, and we’re still running pretty significant overtime in certain locations.

Mig Dobre: Okay, then I guess my final question. In your prepared remarks, you mentioned some delays maybe in infrastructure orders. Can you comment on that a little bit more and when do you expect infrastructure order to slowdown, reverse?