Astec Industries Inc Q3 FY2022 Earnings Call

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.

Thank you, and welcome to the Astec third quarter 2022 earnings conference call. Joining me on today's call are Barry Ruffalo, Chief Executive Officer; and Becky Weyenberg, 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 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 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 GAAP measures. Comments made during today's call will refer to non-GAAP results and a reconciliation of GAAP to non-GAAP results are included in our news release 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. And now I will turn the call over to Barry.

Thank you, Steve. Good morning, everyone, and thank you for joining us this morning. I will begin with key messages from the quarter, followed by a brief overview of business dynamics and then an update on progress made on our continued strategic evolution. Then Becky will share details on our financial results and capital deployment. I will then provide some concluding thoughts before opening the call up for your questions. Key messages for the quarter start with market demand that has remained robust across our segments, even as general macroeconomic indicators are beginning to soften. Customer sentiment remains positive, and overall order rates for our products are steady. Sales in the third quarter grew 18% compared with last year, with strong double-digit growth in both segments and was the highest third quarter sales we have ever achieved, while output increased. Higher order rates resulted in backlog growing once again, providing solid visibility as we enter the final quarter of 2022 and move into 2023. In addition to growing our sales and backlog, we are continually focused on improving our business and operations. This culture helps us navigate macroeconomic challenges such as the supply chain and labor constraints that have persisted over the last several quarters. Despite these challenges, our team has done a commendable job and we are combating these factors on a daily basis. We are engaging with supply chain partners, including both customers and suppliers to work through demand and supply issues and to better position us to meet customer needs. We were successful in increasing headcount by roughly 9% from the same quarter last year. We will continue our diligent focus on supply chain and labor availability on an ongoing basis. As shown in our third bullet, we maintained a strong balance sheet, which enables us to invest in growth, implement our strategic transformation and return cash to our shareholders. Just last week, we announced an 8.3% increase in our quarterly dividend to $0.13 per share. In the third quarter, we repurchased $6.1 million or approximately 160,000 of our own shares. Becky will comment on this more in a few minutes, but we believe this disciplined and balanced approach to capital deployment serves our shareholders by creating sustainable value. Three years ago, we began a journey to strategically transform our organization by implementing new business strategies and a new operating structure. A key component to this is implementing a global technology platform to leverage automation and drive process efficiency. We remain committed to this journey and believe that based on the progress made thus far, we are well on our way to achieving the targeted benefits of this endeavor. There is still much work to do, but I'm confident that we are on the right path to realizing a greater future for us in the days ahead. In parallel, we are executing our Simplify, Focus and Grow strategy to drive profitable growth and to fundamentally improve our business and earnings profile. Again, we are not yet where we aspire to be, but I am pleased with the progress our team is making. Before moving forward, I would like to recognize the significant milestone we celebrated in August. It was 50 years ago that Dr. Brock, an inventor and entrepreneur founded Astec Industries. From those humble beginnings, Astec has grown into a global billion-dollar manufacturer of equipment for road building and construction-related products to connect the world. In that spirit, we continue the mission of delivering innovative products that are truly revolutionizing the Rock to Road value chain. 50 years is a tremendous milestone achieved by few companies. I was humbled to be joined by other Astec executive team members as we rang the NASDAQ opening bell to celebrate our anniversary. Turning to Slide 6, I would like to review current business dynamics and how Astec is responding. Industry demand for our equipment remains high as activities such as asphalt road building, aggregate processing and concrete production are needed to support the ongoing investment in infrastructure across the markets we serve. This has led to increasing levels of backlog, and we are responding by expanding capacity and throughput in our operations. We will leverage these investments and improve profitability as we grow. Additionally, funding from the Federal Highway Bill is beginning to be deployed, which should provide long-term tailwinds for future growth. I have briefly addressed our own labor challenges, but also want to note labor shortages impacting our suppliers. Many components we use in our equipment are produced and tight labor conditions are creating bottlenecks in the manufacturing processes for these components. We expect our margins and revenue will improve as the supply chain normalizes. Inflation has been another ongoing challenge for the last 18 months. However, we have made progress in offsetting inflation with favorable volume, price and mix, and we'll continue to pursue our disciplined pricing strategy to ensure we are fully capturing the value we are delivering to our customers.

Thank you, Barry, and good morning, everyone. As shown on Slide 11, sales were $315.2 million, up 18.1% with strong growth in both equipment and parts, which increased 20% and 11%, respectively. By region, there was a 23.6% increase in domestic sales, while international sales remained constant. As Barry mentioned, overall order rates were strong, and we achieved our eighth consecutive quarter of record backlog, increasing 56.2%. Backlog increased in both segments with Material Solutions growing 31.2% and Infrastructure Solutions surging 75.8%. Order activity remains robust across geographies with international backlog up 39.7% and domestic backlog of 59.8%. We continue to win orders as our commercial teams are connecting with customers to match their needs with our solutions. Adjusted EBITDA increased 1.2% to $16.6 million while adjusted EBITDA margin decreased 80 basis points to 5.3%. The decline was primarily due to higher manufacturing costs due to inefficiencies in the supply chain and an increase in adjusted SG&A expenses, which were up 2.8% as we are investing in headcount, consulting fees, travel costs and incremental costs from acquired business. Adjusted SG&A expenses declined as a percentage of sales to 17.8% from 19.8% in the same period last year, in line with our strategy to leverage investments for future growth. We expect adjusted EBITDA margins to improve as we overcome supply chain challenges and realize benefits from our transformation. Adjusted earnings per share was $0.28, driven by inflationary pressures in material and labor. Our adjusted net effective tax rate for this quarter was 28.4%, primarily due to the relative weighting of jurisdictional income. As previously communicated, the full year range of 22% to 24% still holds.

Yes, Mick, this is Barry. I'll take that question to start with, and Becky can add on if she has anything else to contribute. So we're pleased that as we've said all along, we've had pricing that's been catching up to inflation. Earlier in the year, we had pricing that basically offset inflation. In Q3, what we've experienced is pricing that has actually outpaced inflation for really the first time as a company. As we've also said prior, when we look forward, we still have pricing in our backlog that we haven't realized, that we'll continue to realize through Q4 and into 2023. From an inflationary perspective, we've started to see it actually slowdown regarding the increase. In some cases, it's stabilized. So on a year-over-year basis, we're projecting that we should start to see inflation change less as we go through further quarters and move forward. We also know, as I said earlier, we've got pricing that we haven't realized as well. So we think we've got pricing right now that will offset that plus, we continue to look at our position relative to inflation in the market.

Thank you for taking the question. Good morning, everyone. My first question is on your comments on the ERP implementation. I'm sort of curious if you can give us a sense in terms of what this will entail as far as incremental P&L investments, how you intend to treat that, do you intend to adjust that out or kind of better flow through? And is there also maybe like a CapEx component that we need to be aware of?

Sure. I'll take that one, Mig. Because we're going cloud, there is very little that is capitalized on the various schemes of things. It is a very small portion that gets put on the balance sheet. And so we continue to adjust out to the extent that a site has not yet gone live. So when we retire their old system they'll get the cost of the new system. Our add-back will come down dramatically over the next two years. In 2023, as we mentioned, we'll go live with the whole suite at different points. The elements of the HCM, CX as well as ERP will go live next year. In '24 and '25, it will be all ERP rollout. So we'll see that progress. And we also expect the costs to come down as we go. 2023 will be the heaviest split.

Okay. But you're not in a position right now to kind of give us a sense in terms of the sort of cost that you guys are dealing with here because yes, even though we adjusted out, I presuming that this is going to be all cash.

It is all cash. That's correct. We've stated that previously. It's in that $150 million range for the total program. And keeping in mind the program also includes the transformation of one of our facilities, which has the capital expense. If you're talking strictly ERP, it's almost all expensed, but the second program that's in there is largely capital and very little expense.

Yes, Mick, this is Barry. I'm sorry, I'm not sure where I got cut off here in answering your question. We're pleased that, as we've said all along, we've had pricing that's been catching up to inflation. Earlier in the year, we had pricing that basically offset inflation in Q3, what we've experienced is pricing that outpaced inflation for the first time as a company. As we've also said prior, when we look forward, we still have pricing in our backlog that we haven't realized. We believe we can maintain that position.

Understood. Final question from me. In Materials Solutions, maybe you can give us a little bit of context surrounding pretty strong order intake that you've had here.

Yes, I think as we talked about before, this time of year is typically an ordering period, and we do some dealer convention and some dealer engagement around this time of the year as well. So for us, we've signaled that we would expect that we have potential growth in our order flow as we hit this time of year. Just maybe a little more color, Mig. We've spent some time with what we call our executive customers. These are customers that are owners of businesses or founders, high-level executives within our customers' businesses. Through that process, we've surveyed them to understand how they see the market and where they see the market going. Two data points that came out of that is as they look at 2023 infrastructure market versus 2022, 24% of those customers expect to be just as good in '23 of what it was in '22 and 51% of the customers expect it to be 10% or more better than it was in 2022.

Hey everyone. I believe the last question was about the Infrastructure Bill rather than the Highway Bill. To clarify, customers are beginning to see some projects emerge.

Yes, we're starting to see some of the funds flow through from that law that's been passed. I would also tell you that in certain states, there were funds that were allocated for COVID-relief application and because that's actually slowed down, now states have the ability to go to the Federal Government and put forth projects that are also being funded by some of the COVID relief money. So we've started to see that flow through. We expect meaningful numbers in the coming quarters.

Thank you for your interest in our company. As today's news release indicates, the conference call has been recorded and a replay will be available through November 16. An archived webcast will be available for 90 days. The transcript will be available under the Investor Relations section of the Astec Industries website within the next 7 days. This will conclude our call, but I'm happy to connect with any of you that have additional questions. Thank you all. Have a good day.

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may now disconnect your lines, and have a wonderful day.