Rick Dorris - Interim Chief Executive Officer, Chief Operating Officer David Silvious - Chief Financial Officer Steve Anderson - Vice President, Director of Investor Relations

Good day ladies and gentlemen, and welcome to Astec Industry’s Fourth Quarter, 2018 Conference Call. [Operator Instructions]. At this time it is my pleasure to turn the floor over to your host, Vice President and Director of Investor Relations Steve Anderson. Your line is open sir. Please go ahead.

Hi, thank you Jess. Good morning, and welcome to the Astec Industries conference call for the fourth quarter and full year ended December 31, 2018. As Jess mentioned, my name is Steve Anderson. Also on today’s call are Rick Dorris, our recently appointed Interim CEO and Chief Operating Officer; David Silvious our Chief Financial Officer. In just a minute I’ll turn the call over to Rick, but before we begin I’d like to 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 annual report and our filings with the SEC. As usual, we ask that you familiarize yourself with those factors. So at this point, I’d like to introduce you to Rick Dorris.

Thank you, Steve. Good morning everyone and thanks for joining us. I'm very pleased to be here today speaking with all of you as Astec’s Interim CEO. While I'm new to the CEO role, I'm not new to Astec. As many of you know, I've been with the company for 20 years. Most recently I served as Executive Vice President and Chief Operating Officer. Prior to that I was the Group President of the Energy Group for two years and the President of one of our subsidiaries Heatec for 10 years. I'm also a registered Professional Engineer in the state of Tennessee. This experience has given me a tremendous understanding of our markets, our customers, our employees and how we operate, enabling a seamless leadership transition. Since stepping into this position, my focus together with the rest of the management team and with the support of the board has been to continue executing on the company’s strategic priorities. During the past year we have taken decisive steps to improve the company's financial performance and ensure capital is directed to the areas that we believe will drive the greatest value for our shareholders. Overall our core business remains strong and we continue to see positive momentum. With our core businesses performing well, we have continued to take steps in support of our long term goals of increasing operational efficiency, reducing costs and improving profitability. We took some additional actions in the fourth quarter and I'd like to speak to those briefly. As you know we have been working collaboratively with our pellet plant customers in Georgia to pursue a potential sale of the plant. While we remain in discussions regarding a potential sale, the timing of a transaction and the ultimate sale price are uncertain. After careful consideration, our board and…

Alright, thank you Rick and thank each of you for joining us this morning. I’ll run through the financial results quickly here. The net sales for the quarter were $317 million compared to $312.4 million last year in Q4, that's an increase of 1.5%. International sales were $68.8 million compared to $67 million in Q4 last year, a 2.7% increase. The increase in international sales for the quarter-over-quarter occurred primarily in Africa, in Europe and in Russia. Those increases were offset by decreases in Canada and Brazil and in Australia. For the quarter our international sales increase in the Ag and Mining Group and decreased in the Infrastructure Group and Energy Group. Domestic sales were $248.2 million in the fourth quarter of ‘18 compared to $245.4 million in Q4 last year, a 1.1% increase. For the quarter domestic sales increased in our Ag and Mining Group and the Energy Group and decrease in the Infrastructure Group. Part sales were $72.5 million in Q4 of ’18 compared to $69.3 million in Q4 of ’17, a 4.6% increase in part sales. For the quarter part sales increased in the Ag and Mining Group and were essentially flat in the other two groups. Forex had a negative impact of $2.4 million on sales quarter-over-quarter. Attached to the press release is a glossary reconciling GAAP amounts as reported to adjusted amounts that we’ll discuss in this call. So as adjusted in both periods, revenues were $317 million in Q4 this year compared to $306.8 million in Q4 last year, a 3.3% increase. Domestic sales increased 3.5% quarter-over-quarter as adjusted. This would also make infrastructure sales for the quarter $124.9 million compared to $141 million for Q4 ‘17 an 11.4% decrease as adjusted. On a year-to-date basis sales were $1.17 billion compared to $1.18 billion…

Thank you, David. I’ll speak briefly about our outlook for 2019. We recently attended the World of Asphalt Show and I have visited with several large customers in the past few weeks. We're hearing from our customers that they are busy, have good backlog and expect a good year in 2019. Given our recent order activity, current backlog and discussions with our customers, we feel good about the first half of this year. We're cautiously optimistic on the second half of 2019 as more than half of the states in the U.S. have mechanisms in place for stable infrastructure spending. Even though the current Federal Highway Bill does not expire until September of 2020, President Trump and Congress appear to be willing to work together to increase infrastructure spending before the end of this year, and a much needed increase to the federal gas tax is being discussed as a way to fund highway projects. Our customers also have good private sector work. To help us capitalize on the current solid in-markets, we have a strong balance sheet and we've taken several significant steps to improve our operational performance. The strategic sourcing efforts we began last year is on track to deliver saving on raw materials, components and logistics this year. Our sales and operational planning programs will provide better scheduling, better inventory control procedures and a cash release from reduced inventory. The quality and operational excellence training programs are continuing and will help us provide better performance for our customers and shareholders. Our new international sales plan is also proceeding and will allow us to better serve our international customers and increase international sales. We recently opened a new international sales and service office in Santiago, Chile to serve Latin America. We're excited about our opportunities in 2019 and…

Alright Rick, thank you for those comments. Jess if you would poll for questions, we’d be glad to move into the Q&A.

Certainly, thank you. [Operator Instructions]. We’ll go first to Mig Dobre with Baird.

Hi, good morning. This is Peter Ziel on for Mig Dobre.

Good morning.

Good morning. So maybe just starting with demand and infrastructure in particular, I think there is a comment on the third quarter call, so in late October that the backlog there was flat year-over-year after some good order activity in the beginning of the fourth quarter, but it looks like maybe that flowed down in the back part of the quarter. Could you just maybe talk about cadence through the quarter and maybe how that’s carrying into 2019 in Infrastructure in particular?

Okay. There was some delay in some of the mobile equipment orders in the fourth quarter, mainly due to the weather, the contractors were trying to catch up. They had so much rain last year that they were delayed on completing some projects and were busy trying to get those done and delayed orders. But we started seeing that trend reverse a little bit at the end of the quarter.

Okay, so I guess it sounds like maybe a bit better going into the year and I guess maybe relative to the 4% to 7% full year growth rate for the company, where do you see infrastructure shaking out relative to that?

Infrastructure should be right in that same range.

Okay, alright. And then maybe shifting to Ag and Mining which obviously had a good couple years, but I suppose you understood the fact of comps, this can’t go on forever. Can the order activity continue in ‘19 and then comping two years of double digit growth, does that kind of come back more to the, you know the 4% to 7% range or can that maybe outgrow and be above the company average again this year?

We expect Aggregate and Mining to have another good year this year. The outlook for them is good; aggregate has been good. Domestically we are seeing some – a little increase in mining orders to, so we expect that ’19 will be another good year for Aggregate and Mining.

Okay and then maybe lastly, just on the strategic sourcing and some of the raw mats and component things that you mentioned will be coming through in ’19, is there any quantification that you can provide or also just kind of the cadence of how we should think about the gross margin progression through the year?

We have said in the past that we expect our gross margins to be up to 26% by the end of the year and a good portion of that increase is due to the savings that we’ll have from strategic sourcing.

Okay. I appreciate it. I’ll leave it there.

Thanks.

Thank you.

[Operator Instructions]. We’ll move next to Stanley Elliott with Stifel. Stanley your line is open.

Sorry about that. Thank you guys for taking the questions. Real quick, could you talk a little bit about the leverage. I mean obviously not a big deal, but it is from running a pretty much a net cash sort of position. Did it creep up a little bit? Was that to support projects, was that a change in philosophy and how you are thinking about, just curious what you have to stay there. And then it look like you had repurchased some shares too, if you could kind of help us directly about thoughts on that going forward.

What was the first part of the question, Stanley?

Leverage. So on that leverage you may recall that we settled with Holland earlier in 2018 or mid-mid-year 2018 and that was a cash payment. We were debt free prior to that, but then that was $68 million that we had to settle with them for and then we did do some share buybacks during the year. We are authorized at a $150 million level and we did do some to the tune of about $24 million during 2018.

Okay, thank you. And then thinking about kind of [Technical Difficult]

Sorry Stanley, we can’t hear you on this. I don’t know if we got a connectivity problem, but can you restate.

Yeah, I’m actually calling from Europe so this is probably one of many things going on. But thinking about the businesses right, and I think you said 18 divisions. Is that the right number now or when you were going through this operation and this exercise did you identify other businesses and maybe weren’t quite the strategic fit. I’d like to hear [Technical Difficulty].

Stanley, we are getting part of your question. I’ll restate up to this point and maybe you can jump back in and correct if this is not accurate. But the question was along the lines of we now have 18 subsidiary companies, previously 20. We had discontinued our German operation; it did not meet our return expectations. Dillman is been operated as part of Astec Inc. Astec Inc has owned the stock at Dillman. The Dillman product is very much available to our customers and important to the company and we do continue to look at our companies on an ongoing basis to meet our return thresholds to provide shareholder value, so that will continue to be an ongoing process.

We're also looking at. We're also looking at ways that we can better utilize facilities that have extra capacity, thus transferring work from a facility that needs more capacity and we think that will help us you know increase our overall capacity across corporations.

Is there any way to guestimate on maybe what sort of footprint you could kind of combine anything along those lines, from a high level perspective.

Well, that's basically what we're trying to do by shifting work. We are not really looking at combining footprint facility wise, but we are looking at shifting work from one facility to another where its feasible.

Perfect, and thank you very much and sorry for the technical difficulties.

No problem. No problem Stanley.

And gentleman, there appear to be no further questions at this time. Mr. Anderson, I'll turn the call back to you.

Alright, thank you Jess. We appreciate everyone's participation on the call today and thank you for your interest in Astec. As our news release states today's call has been recorded. A replay of the call will be available through Match 15, 2019 and an archived webcast will be available for 90 days. A transcript will be available under the Investor Relations section of the Astec Industries website within the next seven days and all of that information for your reference is contained in the news release we sent out earlier today. So at this point we will conclude call and thank you all again. Have a good week!

Thank you. This does conclude today’s teleconference. We thank you for your participation. You may disconnect your lines at this time and have a great day!