Astec Industries Inc Q4 FY2020 Earnings Call

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

Thank you, and welcome to the Astec Industries fourth quarter 2020 earnings conference call. My name is Steve Anderson and joining me on today's call are Barry Ruffalo, our Chief Executive Officer, and Becky Weinberg, our Chief Financial Officer. In just a moment, I'll turn the call over to Barry to provide comments. And then Becky will summarize our financial results. 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 that 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 U.S. 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 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 related GAAP measures. Management of the company uses both GAAP and non-GAAP financial measures to establish internal budgets and targets 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 is included in our news release and in the appendix of our presentation. All related earnings materials are posted on our website at www.astecindustries.com. And now I'll turn the call over to Barry.

Thank you, Steve. Good morning, everyone, and thank you for joining us to discuss our fourth quarter 2020 results. I would like to thank the entire Astec team for their hard work and continued focus on our core values to serve our customers during an extraordinary and unprecedented year. As I mentioned before, the health and safety of our employees, suppliers, and customers continue to be our number one priority as we continue to navigate through the pandemic. Our fourth quarter results demonstrate our ability to execute and perform well with a focus on continuous improvement and driving operational excellence through our OneASTEC business model. I'll begin with key highlights from the quarter and then provide an update on our operations. I will also discuss what we're seeing in terms of demand and our supply chain before turning the call over to Becky for details on our financial results. We'll also highlight further progress made on our strategic transformation and then open the call for Q&A. Beginning on Slide 4, here are today's key messages. First, we had a strong finish to the year as we drove another quarter of robust performance with adjusted EBITDA margin expanding by 490 basis points compared to the prior year, despite a decrease in net sales. The margin improvement is a direct result of our ongoing strategic transformation and our ability to gain further traction on our operational excellence initiatives. Second, customer demand for Astec solutions remains resilient, as backlog at the end of the year increased by approximately 37% compared to the prior year. As you know, we typically comment that our backlog represents at least one full quarter of work, but now in some product lines, our backlog covers a good two quarters of capacity. We continue to provide our customers with industry-leading technology solutions that deliver value and support our Rock to Road initiatives. As we continue to stay engaged with our customers, we can share with you that many note 2021 is already full of projects, and they are starting to schedule work into 2022. Third, we have significantly strengthened our positioning this year and we remain poised for future growth with our streamlined organizational structure, strong balance sheet, and ample liquidity. Our continued focus on operational and commercial excellence will enable us to further strengthen our organization in 2021. Fourth, during the quarter, we continued to execute against our strategic initiatives to simplify, focus, and grow the business. We continued to leverage and build upon our OneASTEC business model, which gives us a great foundation to grow organically by having the most comprehensive Rock to Road set of customer solutions and through acquisitions by having disciplined processes and company-wide tools. We also completed the acquisition of Grathwol Automation during the quarter, which included bringing in an experienced Vice President of Product Management for our controls and automation platforms. For 2021, we will continue to transform our company with greater emphasis on the focus and growth strategic pillars. Lastly on this slide, 2020 was a transformational year for Astec and our strong performance was a testament to our dedication and ability to execute throughout the cycles. In 2021, we will build upon the positive momentum from 2020 and further transform the business with a focus on commercial and operational excellence, profitable growth, and long-term stakeholder value creation. We will continue to build upon the strong foundation we have created here at Astec. Moving on to slide 5. For those who are new to the company, this is our business segment breakdown. Our revenue mix during the quarter was approximately 30% Materials Solutions and 70% Infrastructure Solutions. Under the simplified two-segment structure, we are able to serve a strategic value chain that supports our Rock to Road strategy. Turning to slide 6. As a reminder, we unveiled our OneASTEC business model at Investor Day back in December. Our focus on operational excellence across the organization has enabled us to operate with minimal disruption throughout the pandemic. We continue to have many of our employees working from home, with approximately 30% of our office employees working remotely. Regarding our manufacturing sites, all Astec facilities around the globe continue to be fully operational with no material interruptions during the fourth quarter, and we maintain the ability to flex operations as needed and quickly adapt to the changing environment. On slide 7, I will touch on some business dynamics we are seeing and hearing about from our customers. Although we are still in unprecedented times relative to the pandemic, we could be in the early innings of an upcycle in North America as we continue to see strong residential real estate demand followed by improvements in non-residential. Construction demand continues to show signs of improvement in our ongoing conversations with customers suggesting a positive demand outlook for 2021. Under the new administration, we are optimistic about increased U.S. infrastructure spending as it is a key component of President Biden's Build Back Better Plan. Furthermore, the Coronavirus Response and Relief Supplemental Appropriations Act was recently signed into law. This bill will appropriate $10 billion to highway infrastructure projects. Importantly, during January alone, 25 states introduced new transportation funding measures, which should further support infrastructure spending. With respect to our supply chain to date, we have not experienced any significant disruptions and we are constantly maintaining discussions with our suppliers to identify and mitigate risks. We have also expanded the depth of our supply chain to support our risk mitigation efforts. In terms of market risks, the industry has started to see commodity inflation for many raw materials such as steel, and we expect this will continue as we move deeper into 2021. Additionally, we are beginning to notice tightness in labor availability for some positions as well as container shortages in general to support the increasing backlog. As always, we proactively monitor the environment to take action to manage our business accordingly. Turning to slide 8, we highlight some of our important ESG initiatives. Although we are not new to innovating sustainable products such as warm mix asphalt systems and Cold Planers that reclaim asphalt off of existing roads for reuse and new pavements, we are still in the early days of our ESG journey as a whole. Our efforts continue to create more products, such as the Double Barrel Green System and our Shuttle Buggies, which focus on reducing fuel consumption, eliminating the trucking of materials to the central site, and reducing the need for virgin oil products. Enhancing our ESG profile as a company is one of our top priorities. One of our recent accomplishments was under the governance pillar. During the fourth quarter, we remediated all prior period material weaknesses and did so approximately one year ahead of schedule. This was an impressive feat, and I am proud of Becky and her finance team and all the Astec employees involved for the hard work they put in over the past year to achieve this accomplishment. We continue to gain traction on our ESG initiatives throughout the organization, and our team is engaged and excited about our increased focus and early progress in this area. Here at Astec, we know that these initiatives will help us be better, healthier, and more sustainable solutions providers. I invite you to visit the About Us page on our website to learn more about our ESG commitments. We look forward to providing you continued updates on our progress. Overall, during the quarter, we continued to make significant progress on our transformation strategies: simplify focus and grow the business. The fourth quarter marked another period of strong execution and performance with a 69% increase in adjusted EBITDA and a 490 basis point expansion in adjusted EBITDA margin despite a decrease in sales. 2020 was a remarkable year for our organization, and I know that we will continue to build upon the strong foundation as we continue to execute our strategy and drive commercial and operational excellence and growth across the organization. With that, I will now turn the call over to Becky to discuss our detailed financial results.

Thank you, Barry, and good morning everyone. I am pleased to join you on today's call. Starting on slide 10, fourth quarter adjusted revenues decreased 15.6% to $238.9 million compared to the prior year quarter. Equipment sales decreased 14.7%, while parts sales increased 10.3%. Our backlog increased 36.7% to $360.5 million at quarter end driven by higher materials solutions and infrastructure solutions orders which increased 92% and 15.1% respectively. Higher materials solutions and infrastructure solutions orders were driven by improved customer demand. Fourth quarter adjusted EBITDA increased 68.8% to $23.3 million compared to $13.8 million in the prior year period and adjusted EBITDA margin improved 490 basis points to 9.8% compared to the prior year period. The margin improvement was driven by favorable mix and our ongoing transformation initiatives. Adjusted SG&A expenses decreased 21.5%, driven by reductions in consulting fees, travel, and employee expenses. Adjusted earnings per share rose 55.6% in the quarter to $0.56 compared to $0.36 in the fourth quarter of 2019, driven by our business formation savings. Fourth quarter 2020 GAAP earnings per share of $0.67 included an $0.11 benefit from transformation-related savings. Overall, we reported strong fourth quarter results despite the challenging economic environment as we continued to execute against our transformation strategy. Turning to slide 11, we highlight the key drivers of year-over-year adjusted EBITDA margin expansion. Adjusted EBITDA margin expansion of 490 basis points was primarily driven by reduction in headcount and related savings in addition to savings from supply chain management and other transformation savings. Moving onto slide 12, our infrastructure solutions business revenue decreased by 12.6% to $167.2 million in the quarter, driven primarily by a slowdown connected to our industrial products. Adjusted gross profit decreased 3.7% to $39.5 million and gross margin expanded 220 basis points to 23.6%, driven by strong parts margins, particularly in asphalt plant equipment. We continued to show improved quality of earnings during the fourth quarter, driven by rightsizing pricing initiatives, plant efficiencies, and controlled spending. We remain focused on commercial and operational excellence to drive efficiencies across the business and we'll continue to limit discretionary spending going forward. Positively, the BMH Systems and CON-E-CO acquisitions have been fully integrated and are performing above our initial expectations. We remain well-positioned to support our customers as we continue to see solid demand for highway and rolled building construction products across the country. As Barry mentioned, we are seeing strong government support for infrastructure spending, which would provide a strong catalyst for the industry. On Slide 13, our Material Solutions business revenues decreased 22.1% to $71.7 million compared to the same period a year ago. Adjusted gross profit increased 2.3% to $17.7 million, while gross margin expanded by 590 basis points to 24.7% driven by rightsizing initiatives taken in 2019 and 2020 to maximize utilization of our manufacturing footprint capacity, improving margin despite declining revenue. During the quarter, we also saw additional earnings improvement from controlled spending. We continue to make progress on our materials solutions transformation plan and have efforts underway to leverage our global footprint for deliveries to end-customers. As I mentioned last quarter, we completed the closure of our Mequon, Wisconsin facility, and the operations have been moved to other asset sites. As a reminder, this is in line with our ongoing strategy to optimize our overall manufacturing footprint and manufacture closer to our global customers. Overall, improved earnings performance in the fourth demonstrates the traction of our initiatives to right-size operations to market demand. Exiting the fourth quarter, we continued to see strong domestic and international order intake for materials solutions products. On Slides 14 and 15, we summarize the drivers of our full year 2020 results versus 2019. Overall, we achieved 220 basis points of year-over-year gross margin improvement despite a decline in net sales. Turning to Slide 16, we continue to maintain a strong balance sheet with minimal debt and a net cash position of over $158 million. We remain focused on strong liquidity and cash preservation to withstand sustained periods of market uncertainty. Of note, operating activities were approximately a $142 million source of cash in 2020, driven primarily by cash provided by net income after non-cash items of $93.6 million and inventory reduction of $44.7 million. We continue to invest in organic growth and strategic M&A, while paying dividends. Overall, we have available liquidity in excess of $312 million with only $2 million in total debt as of December 31, 2020. Now on Slide 17, just a reminder on our capital deployment framework, which is consistent with what we have previously shared. We continue to have a disciplined approach to deploying our capital. 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 to maximize shareholder value. Our capital allocation priorities remain unchanged in the current environment. On internal investments in property, plant, and equipment, we will continue to target greater than 14% return on invested capital for new investments. Regarding acquisitions, we are only considering strategic acquisitions that align with our growth strategy and meet our internal financial criteria. Our strategy for M&A is to seek the opportunities where we can build upon our strong positions in the Rock to Road value chains. We intend to use strategic acquisitions to maintain and strengthen our market-leading positions as we add-on products, talent, and capabilities. We believe that M&A is a mechanism that will potentially allow us to accelerate our investments in technology and innovations. As a reminder on Slide 18, we summarize our strategic and disciplined approach to M&A, which helps to support our grow pillar. Finally, as Barry mentioned in his discussion on governance, during the fourth quarter we fully remediated all prior period material weaknesses a full year ahead of schedule. During the past 12 months, our team has worked diligently to develop and execute our remediation plan. I am extremely proud of what we have accomplished, and we now have a stronger organization with the appropriate controls and measures in place. With that, I will now turn it back over to Barry for his closing comments.

Thanks, Becky. On Slide 19, I'll provide a quick overview of our three pillars of our strategy for profitable growth: simplify, focus, and grow. First, simplify. The fourth quarter marked another period of successful execution on our strategy to leverage our scale, reduce organizational complexity, and rationalize our footprint and product portfolio. I am proud of the progress our team has made to simplify our business to drive efficiencies across the portfolio. Second, focus. We continue to strengthen our customer-centric approach, driving commercial excellence, and streamlining processes while instilling a performance-based culture. Finally, grow. We are reinvigorating innovation, leveraging technology to unlock internal synergies, while also enhancing the customer experience, exploring global growth opportunities, and carefully allocating capital to maximize shareholder value. In 2021, our organization is well-positioned to capitalize on global growth opportunities. We made great progress in 2020 within these three pillars, especially given the challenging pandemic environment. I am confident that our team will continue to build upon our success in 2021. Slide 20 outlines some of our major milestones, we are executing again on our transformational journey and the progress we have made to date. During 2020, we have made significant progress under our simplify pillar as we work to consolidate our footprint and streamline our portfolio. The fourth quarter marked a pivot point for our strategic transformation, as we will now shift more energy and effort on the focus and grow pillars in 2021. Under focus, during our December Investor Day, we introduced the OneASTEC business model for continuous improvement and continued to gain strong traction on our commercial and operational excellence initiatives across the organization. We will also make significant progress on our product rationalization initiatives, as we streamline the portfolio to align with our Rock to Road value chain. Under grow, we brought on Grathwol Automation during the fourth quarter, a strategic acquisition that supports our technology leadership vision to provide value-added solutions. We remain focused on providing our customers with industry-leading technology solutions, and we are confident that our efforts related to innovation and technology, particularly telematics, will support future organic growth across the business. The actions that we have taken under our transformation strategy have and will continue to result in significant cost savings for our organization. With the expected savings, we plan to reinvest in our business to drive profitable growth and maximize shareholder value. I'll conclude on slide 21, with our key investment highlights, which remains consistent. In the midst of the economic challenges faced in 2020, our team continued to execute and make great progress with respect to our efforts to simplify, focus, and grow the business. This year was a testament to our dedication and ability to perform well throughout cycles as we increased margins, despite the decline in revenue. We have significantly strengthened our position this year and are well-positioned for future growth with a streamlined organization, a strong balance sheet, and ample liquidity. In 2021, we remain well-positioned to capture industry growth opportunities through superior customer service, leadership positions in attractive niche markets, and a culture of continuous improvement. We have a strong leadership team, leading our organization through this next phase of growth, and I am confident that we will see continued positive momentum. I am extremely excited for the future of our organization as we enter the next chapter of our journey. With that, operator, we're now ready to open up the call for any questions.

Thank you. We will now begin the question-and-answer session. Our first question comes from Mig Dobre with Robert W. Baird. Please go ahead with your question.

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

Sure. Hi Mig, good morning. The first point is regarding the savings from headcount adjustments. We experienced a 110 basis points improvement, largely due to incentives that we aim not to repeat, particularly because our sales declined nearly 11% for the year, which affected those incentives. Consequently, we made some adjustments in the quarter. However, we anticipate that about 20 basis points of those savings will remain. Regarding the supply chain, while we expect the savings to persist, we are facing rising steel costs, which have increased approximately 77% year-over-year in Q1. We're navigating through that, but there may be some decline in savings due to this issue. The other transformation savings should also remain steady, although we expect to incur additional corporate expenses as we implement our systems and shift focus towards innovation instead of product rationalization.

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

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

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

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

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

Yes, I'll address that, Mig. This is Barry. Good morning. Looking at the situation, we have observed a 77% year-over-year increase in steel prices as of now in 2021. We have implemented price adjustments of about 5% across the board. Currently, steel accounts for roughly just under 20% of our total costs. That's about the level of detail I can provide. We are in regular discussions about how to manage our steel purchases and assess their effects on our material margins. We believe we are securing better prices than the current spot prices. However, we tend to set our prices based more on spot prices than on our actual purchasing costs. With that in mind, we anticipate that steel prices could affect our material margins, particularly because rapid increases make it challenging to keep pace. We are not as concerned about gradual increases, but sudden spikes do create some pressure. Thus, we will need to navigate this situation as efficiently as possible throughout 2021.

Understood. Maybe shifting the focus away from raw materials, I have a question about SG&A. In 2020, your adjusted SG&A decreased by over $20 million. Given the significant investments you've made to address some material weaknesses, which wasn't cheap, how do you view SG&A moving forward? Do you believe the current run rates are sustainable in 2021, or should we anticipate some level of inflation, as Becky mentioned earlier?

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

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

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

Our current limitation regarding capacity is primarily due to manpower. We don't believe there's a need to increase our brick-and-mortar presence. We've taken steps to reduce our footprint, but we are confident that the enhancements we've begun to implement in our operational excellence initiatives will allow us to meet any potential increase in demand with our existing facilities. In 2020, our capital expenditure was around $15 million, which was less than we had hoped for. As we enhance our operational excellence efforts, we aim to focus on creativity before capital investment, but we recognize that there are opportunities to improve automation and efficiencies through increased capital expenditure. We are collaborating closely with our manufacturing engineering and operational teams to identify these opportunities to address both current and future demand.

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

Yes, thanks, Mig. While we won't provide specific details, we are confident in the reductions we've made to our footprint, which allows us to maintain our recent historical highs and even exceed them. With our ongoing operational excellence initiatives, we believe we can process more materials and products through our facilities than ever before, and we will continue to invest in this capability. Although I can't give you an exact figure, we feel that we have significant potential for capacity expansion based on our recent history, even with a reduced number of facilities.

Understood. Thank you for the color.

Yeah. Thanks, Mig.

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

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

Good morning, Stanley. Thanks for the question. If you look at 2019 and most of 2020, our customers had record years. Even during the pandemic, many of our customers experienced a record year in 2020 following a record year in 2019. However, the demand flowing through our business has not matched their performance. Taking into account that at the end of 2019 and into early 2020, we made significant efforts to rightsize our dealer inventories and finished goods inventories, we noticed that rental durations increased, and customers weren't converting rentals into retail sales. As we moved through 2020 and into the beginning of the last quarter, we held our annual order writing period, which resulted in record revenue. This indicates that there's been a bit of catch-up in demand compared to what dealers are experiencing and what we observe from customers. As we head into 2021, there are some positive indicators. However, we must keep in mind that we are still in a pandemic, and uncertainties remain. Considering the actions taken by states in early January regarding gas tax and the increase in driven miles, this trend is beneficial. The renewal of the FAST Act has already occurred, along with some smaller supplemental bills. We've been engaging in positive discussions about long-term infrastructure development. We feel confident as we stay close to the market regarding our inventories. Our dealers are beginning to restock, and we're seeing a quicker conversion from rentals to retail sales. That’s what's driving the Materials Solutions component, with many different factors coming together.

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

Yes, there are a couple of aspects to consider. You're correct. Not only in telematics but also as we examine the Rock to Road value chain, as discussed at our Investor Day in December, we are in the process of building a platform that will allow our customers—many of whom, about 30%, have a value chain that includes quarries, plants, and road construction crews—to manage all their equipment on one platform. This will help them understand and optimize their internal supply chain more effectively. We believe this approach will also strengthen our connections to service and parts-related opportunities. Historically, parts have contributed between 25% and 30% of our sales, and we see a significant opportunity to increase that percentage. In addition to the technology, we've reorganized our leadership structure. Now, we have someone directly accountable to me for our strategy around parts sales at the company level, rather than having individual accountability based on groups or sites. We believe this focus will help enhance our parts sales as well.

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

Thank you.

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

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

Yes, we haven't provided details on the acquisitions, Steve. It's nice to meet you and I look forward to meeting you in person in a few days.

Absolutely.

When we acquired the two concrete plants, we mentioned that they would typically generate around $55 million in sales annually and would immediately enhance our company's performance. I can confirm that on an annualized basis, they are already exceeding our expectations in terms of revenue contribution compared to what we anticipated at the time of closing the acquisitions. We've also identified numerous synergies in procurement, which will continue to positively impact our margins. While I can't provide specific details, I want to assure you that the statements we made at the time of closing are holding true.

As we've moved through earnings season, it was initially all about steel prices. However, as time has progressed, some companies have expressed concerns regarding the supply chain, particularly with shipping containers and accessing components. Have you observed a shift in the last month? Would you say there is increasing concern or not?

Yes, I would say that so far it hasn't impacted us too negatively. We do consider it a risk, and we are actively monitoring it through ongoing discussions. We have implemented several measures to strengthen our supply chain and create redundancies, while also keeping a close eye on our inventories. I feel confident that we are taking the right steps to protect ourselves from these risks. However, as you and I both understand, factors like container costs and availability could affect us as we progress. We are staying vigilant about these issues. We have noticed some minor impacts at one of our sites in South Africa, but overall, it is not significant at this time, and we are managing through it effectively. I believe we have done an excellent job handling our supply chain and procurement during the pandemic, which will help us remain resilient against risks in the future.

During the Investor Day, you mentioned some new international products that are aligned with demand from international markets. Can you discuss the traction in introducing some of those new products, like the lower-priced mobile plants?

Yes. We've made significant progress there. I would say that for some of those product lines, we're just entering the launch phase with the prototypes. We've seen a lot of acceptance and enthusiasm regarding their introduction. Some of our initial units are already sold in international markets, which is encouraging. As we both understand, often when introducing a product aimed at international markets, we discover potential applications in the domestic market as well. However, if I were to show you our product development roadmap today, many of those products are specifically targeted at the international market, in which we sometimes do not participate at all. We are addressing this by gaining insight into specifications, evaluating our competitive position, and understanding our footprint. What has been particularly positive is that our backlog increase has also helped advance our efforts to utilize our existing facilities, whether in Northern Ireland, Brazil, or Johannesburg. We're exploring ways to optimize all our capacity and manage costs to enhance our supply and margins while also looking at outsourcing options. Historically, we've been very vertically integrated, and if you compare our facilities to those of competitors that are more assembly-focused, our operations are more integrated. Therefore, we are assessing how to better leverage our capacity and space in the future to ensure we're focused on activities that add value from our perspective rather than relying on external sources through a global supply chain.

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

Okay. Hi, thanks. Good morning, everybody.

Hey, Larry.

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

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

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

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

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

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

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

Thank you.

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

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

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