Greetings. Welcome to Astec Industry’s First Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded. I'll now turn the conference over to your host Steve Anderson, Vice President and Director of Investor Relations. Mr. Anderson, you may begin.

All right. Thank you, Rob. Good morning, and welcome to the Astec Industries conference call for the first quarter that ended March 31, 2019. As Rob said, I am Steve Anderson. Also on today’s call is David Silvious our Chief Financial Officer. Unfortunately, Rick Dorris, our Interim CEO is unable to be on the call today as he is attending his father's funeral. So our thoughts and prayers are with Rick and the Dorris family in their time of loss. I am going to step in to provide a high level overview of results this quarter and David will discuss the financial results in more detail afterwards, but before I lead out, we'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 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 Securities and Exchange Commission. However, we have continued to take steps to support our long term goals of increasing operational efficiency, reducing cost and improving profitability. As you've seen our sales were flat year-over-year and March is typically a strong month, but that was not the case this year, unusually harsh weather has been a factor in the United States, a lot of equipment that we manufacture is used in the field and can operate, excuse me, in excessively muddy conditions. As an example, the North Carolina Department of Transportation has given contractors time extension beyond the contemplated standard specification in the January 2019 memorandum they provided for a 180-day extension…

Thank you, Steve and thank each of you for joining us this morning. I'll now walk through the financial results for the quarter. Net sales of $325.8 million in this quarter were essentially flat with Q1 of 2018. Our sales for the quarter were approximately $10 million to $15 million short of our guidance of 3% to 6% growth over the first quarter of 2018. And as Steve mentioned, weather-related issues primarily in March we believe impacted our revenues and our order intake and that in turn impacted our gross margins and our earnings per share as we will discuss. Driving some of those sales in the first quarter, international sales were up and the increase in international sales. Q1 '19 versus Q1 '18 occurred primarily in Canada and Australia and Japan and Asia. Those increases were offset by decreases in Russia, Africa and Brazil and for the quarter, international sales increased in the infrastructure group and the energy group and decreased in the Ag and mining group. Domestic sales for the quarter increased in the energy group and decreased in the infrastructure group and the Ag and mining group. Part sales were $92.6 million in the quarter compared to $88.1 million in Q1 of '18. That's an increase of 5.1% or $4.5 million and for the quarter part sales increased in each of the groups. ForEx had a negative impact of $3.4 million on sales quarter-over-quarter. Moving to gross profit, our gross profit percentage was 23.5% this quarter compared to 24% for the first quarter of '18 and the absorption variance as Steve mentioned in Q1 of '19 was $7.3 million under absorbed compared to Q1 of '18 under absorb variance of $4.5 million. That's a negative change in the absorption variance of $2.8 million. As adjusted for prior…

Thank you. At this time we'll be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is coming from the line of Mig Dobre with Robert W. Baird. Please proceed with your question.

Thank you. Good morning, everyone and my condolences to Rick and his family. There's quite a bit to get through here and I might jump back in the queue and come back as I certainly don't want to take up all the time upfront, but I sort of want to start with a big picture question. I understand the weather disruptions and you're not the only company to have experience them. What is not so clear to me is you know you reported your quarter, your fourth quarter on March 1st. You had pretty good perspective I think on January and February and obviously the adjustment that we're seeing to guidance here is very much material. The orders themselves and backlog are what I would call them unusually weak. What I'm not clear on is at what point in time did you start to get better visibility in terms of where demand was because again you know on March 1st you provided your initial guidance, right. So, I'm presuming that it was at a point in time in March that things started changing. It seems to me like given the magnitude as to what's happening here, we're talking about more than just the weather. So if we could maybe try to separate the weather issues versus some of the other things that might be impacting the business, I think that would be really helpful because we're trying to understand that there are share shifts here and you have a share loss issue. If there's something else going on cyclically with the market it's hard for I think anybody to sort of believe that what we're talking about here is just weather driven volatility. So I'd love to get your thoughts on that.

Sure. Good morning, Mig. This is David on the revenue side obviously the shortfall as we've called out some weather and again Steve mentioned that is this a low is that a dip that's yet to be determined and so cyclicality it's hard to address. We are hearing from the market from our customers that they have backlogs of work and that they are -- they're busy and they expect a decent 2019 in their own businesses. The weather impacts some of our customers because they have rental fleets and again rental underutilization would cause them to be sitting on large inventories, rental equipment and not converting that real equipment to revenues for them and in turn placing orders with us. So we see some of that also going on in the business. And you know we think it's a light year with the weather that you know that customers are just now getting around to especially on the east side of the country getting around to being able to really get out in the field and do a lot of work. It's just been -- it's been sudden and to just address the timing of it, you know we had a forecast and that's what we went to the market with and we were confident in that forecast based on and we build that from the ground up you know based on every subsidiary we've got people in touch with the market and with the customers and frankly it just slowed down suddenly and decisively in March. At the end of February it's a challenge because anywhere from 60% to 80% of our earnings could come in the last month of any quarter and 60% to 70% of the revenues. So it's a little bit of a challenge forecasting that and knowing at the end of the second quarter where we're going to be, but that being said it was a slowdown in March and obviously you see the impact of that.

Do you do you get a sense from your sales people the folks on the front lines as to -- as to what might be the culprit here other than the weather though? And I ask because the way I think about the business for instance correct me if I'm wrong, but I think of say the material guys the likes of a Vulcan is being the OpEx portion of highway construction. You are the CapEx portion of it and we've gone through some good years after getting the highway bill in 2015 right. I mean '16 was good, '17 was good, '18 was pretty decent. And I'm wondering if what we're talking about here is the realization on part of your customers that whatever equipment needed to be replaced has been replaced, there has been investment and now we're just kind of dealing with a normal cyclical downturn. I mean you've been doing this a while so you've seen this before. I'm just wondering if this is what's happening here or if there's a -- there's another nuance that I might be missing.

Yeah Mig, this is Steve. For the drop to have occurred so suddenly, we don't think it's anything more of a macro nature. I mean the domestic markets are strong and again our customers are busy and that's what we want to know and always want to hang your head on weather related, but it has caused a delay and pushed the season back some. So we're not seeing anything macro, we're hearing it from our sales personnel that would indicate that there's apprehension in the markets. We've been to the Bauma Trade Show and had a good show there. Different organizations that we participate in events are well attended, tends to be some optimism. The past few years, contractors have had the ability to perform well and clean up the balance sheets and have some room on their lines and things like that. They've been profitable. So if it had begun over a multi month period where there was some downturn it would lend more credence to apprehension of what's to come. But again to David's point it was fairly quick.

Okay. Then my last question before I go in the queue. You talked a little bit about, in the press release you hinted at potentially some recovery in orders. Is that what you're seeing. I understand Bauma obviously helps as a trade show but excluding Bauma are you seeing better trends now that weather gets a little bit better into Q2. And I ask because I do want to talk about guidance in my follow ups, but obviously the guidance the way it's structured it assumes a pretty decent back half of this year right. So something has to get better. Thanks.

Yeah and Mig this is David, yes. We see the incoming intel from the field from our sales folks and our folks that are in touch with customers that they're there they're definitely contemplating orders. There are a lot of folks that are in need of equipment that are -- have expressed that to us. It's just -- they're not pulling the trigger for one reason or the other and so what we can see is the weather side. But as you said, is there something more secular in the market a little more a little larger and we just don't see that, That's not the evidence that we're seeing. That's not to say that it's not something like that, but that's not the evidence that we're seeing. We are hearing discussion from our group presidents and the presidents of our subsidiaries that that it is a later season and so you know the back half of the year we expect to make up some of that ground. Obviously from the guidance, but in Q2 with the backlog where it is, the customers may not be -- may not have some apprehension, but certainly we would have some apprehension in putting anything too heavy out there. It's just, we're feeling our way through this and we expect and see a lot of order activity but we think that those will convert to orders at some point. We're just not sure of timing right. They're quoting activity.

All right. Well like I said, I'll come back in a follow up to talk about guidance and some other things. So, thank you.

Thanks Mig.

The next question is from the line of Stanley Elliott with Stifel. Please proceed with your question.

Hey guys. Good morning. Thank you for taking the call and so sorry to hear about Rick's dad. When we talk about the business, was it noticeably weaker on the asphalt side versus the concrete side or considering the energy business was hanging in there pretty well, just trying to kind of pass out typically I think of asphalt being kind of earlier to come to the market and concrete being a little bit later but just trying to get a little more color there if we could please.

Hey this is David. I can say that it was more on the road building side that that was where some of the weakness was along with some of the aggregates. So I think those and typically some of it was concentrated where customers have where our customers are dealers and have rental fleets. And so that's where some of that intel is coming from. But yes it was more on the asphalt side rather than the concrete side, concrete side hung in there pretty well.

Have you changed anything at the dealership level in terms of bringing in new dealers or anything like that that you could kind of share with us?

Now I think this is Steve, Stanley. No it's we had dealer distribution through our aggregate mining companies for several years that's very well established. We've been putting on dealers and the mobile asphalt paving area and being getting good dealerships there to go through and then certain products in our energy group. So through dealers as well and those are established also. So there are no major changes in the way that we're going through the dealer distribution network.

Okay. And then you mentioned pricing pressure. I mean is there anything you could help us with in terms of product categories or anything on the regional side that might kind of give us a little more color there.

This is Steve. I just think what we're seeing is just a lot of companies are hungry for growth. And every deal is competitive. So it'll continue to be that way. It's been that way to past that certain competitors that seem more focused on market share right now versus price on any specific deal, but it's just competitors are out there trying to fill their shops up as well.

And do you get a sense that you this is really more of a delay in orders or did your customers decide to kind of I don't know if change allegiance is not the right word but you do you feel like you're losing out on more deals now or do you think that the whole market just seems kind of punk right now.

We feel like we're holding our own. If there was no quoting activity or the contractors weren’t saying they were busy, it would be an even greater concern that with the fact that they are busy in and interested in new quotes. We certainly anticipate this being a low versus a dip but as we've said we are adjusting hours and prepared to adjust otherwise if it becomes extended.

All right guys. I'll hop back in queue. Thank you very much.

Next question is from the line of Larry De Maria with William Blair. Please proceed with your question.

Thanks. Good morning. I guess you guys talked about no apprehension in the market, but also as I was just brought up, I mentioned in all segments experienced some pricing pressure and then obviously March fell off. So it seems to be some bigger issues out there. So can we discuss maybe even further into pricing you know who is being more competitive and how competitive it really is and how pervasive of course the portfolio. And then maybe what was net pricing in the quarter and how do we think about net pricing for the year? I assume that was changed.

Yeah I think again Larry, we're seeing pricing -- we've got competitors across the board, the barrier to entry into these type of businesses is fairly high. So you have established competitors out there. I can't name you one specifically that's out there being overly aggressive. I mean they are all long term players, but steel has pulled back on coil just a little bit. That may provide a little bit of room. But you know plate prices have stabilized at a relatively high level. So if oil prices were to move from $60 a barrel to $70, then there could be some further inflation in steel prices as that's typically a driver. So again feel like the quotes that we're putting out there that are our batting average is holding and you know it's just every deal you just have to sharpen your pencil on.

So everything we're dealing obviously you know obviously everybody's been concerned about what it has done toward the industry and the competitive nature for a company like you guys. Would that be one area of concern that's playing out?

Work it is a bit of an aggressive competitor for years and that's still the case. So that's present in the market, but it's not different from what we've experienced in the past.

Okay. Thank you. And then you guys mentioned consulting fees. I think $2.8 million. That seems high. Is that out of the ordinary or what is that specifically related to?

Yeah that's definitely out of the ordinary. That relates primarily to our strategic sourcing initiative and our sales and operations planning initiatives that are going on. You may recall we had an outside consultant helping us build those initiatives out and we expect those projects to be complete sometime in the middle of summer end of June, end of July more than likely. So that's why we expect SG&A to drop for the latter half of the year.

Okay. To remind us the level of the drop in SG&A and maybe the annualized run rate.

Yeah. So the annualized run rate should be probably in the $54 million per quarter. We're running $58 million right now. Obviously that would mean that it would be significantly lower in the latter half of the year we expect. But we expect it to be more in line with our traditional say 16% to 17% of revenues, which it is not right now, it's higher than that. So we expect it to drop substantially there toward the latter half of the year.

Okay. Thank you.

Our next question is from the line of Brian Sponheimer with Gabelli & Company. Please proceed with your question.

Just kind of a bigger picture question as relates to ordering activity, how much if anything that you hear from your customers is related to a fast track that hasn't been effectively turned out for another five years yet? How much do you guys need another infrastructure build?

Brian thanks for your question. This is Steve. We don't hear of the order intake being affected by the fast track right now. You're right in that, it is a factor typically surfaces close to a year before the expiration. So it's not -- we're not quite there yet. There has been a lot of talk in Washington about bipartisan support for an infrastructure bill as speaker of the House Pelosi was in an article earlier this month saying we're ready to talk infrastructure with President Trump and mentioned in that article that about 75% of the conversation she's had with the President included infrastructure policy. So I don't know if it'll stay on target but they expect to at least have some discussions heading into May, which is positive at this point in the year and this far out. So as we get closer to the date, the tenure the bill is important and having at least four, five, six year bill, gives our customers ability where they're comfortable and spending money on larger ticket items that are you know a 20-year asset that has cost $4 million, $5 million, $6 million. So we're not hearing fast act being an issue right now but certainly tracking.

All right. Thank you very much. That's it for me for now.

The next question is a follow up from the line of Mig Dobre with Robert W. Baird. Please proceed with your question.

All right. Thank you for taking my follow-ups here. So if I may, I think I'm going to try to go by segment here my questions. I'll start with infrastructure. Just high level sort of thinking here, your backlog is about $81 million. How do you think about the amount of dollars that you need in the backlog relative to next quarter or next six months worth of potential sales? I mean in theory you would need a fair amount in backlog given how you're doing production planning right. I mean what's the normal percentage?

Mig, this is Steve. And David can jump in as well. But the backlog velocity through the shop depends on what's in front of it. You know if we. There's not much in front of it, you can get a plan out in about three weeks, but so it's hard to put an exact number on it plus is it a full plan or what have you. But Dave if you have a number more specific.

That's a difficult group to forecast that sort of number in because Rotech right now has an unusual circumstance of having probably more inventory than they would normally have. As Steve mentioned, we had built some and still working through that. And so you know the backlog could be fulfilled very quickly out of Rotech and of course there are high volume shop. And as we go through our S&OP program, our backlog should naturally drop over time relative to history because of better planning, more streamlined and lean manufacturing through the shop. So it's difficult to say I mean. As we've said in the past our backlog is generally termed in a quarter to quarter and a half. And our expectation historically would be a quarter's worth of sales or so in a backlog for any of our groups but that's not necessarily the trend going forward.

Okay. That's helpful. But then looking at it this way in 2Q '18 you did $158 million worth of revenue. You've done $155 million in Q1. Your backlog is at $81 million. Should we be thinking here then 2Q revenue, 2Q '19 revenue and infrastructure something around $80 million to $90 million is that how you're thinking about it with maybe some recovery as the year progresses?

Yeah we don't. We don't give the guidance down to that level at the group level. Certainly we're sharing that consolidated with you. And for the year we've disclosed that we're looking to be flat up 3% but we just, we just haven't talked about it in that detail.

Okay. Well I mean this seems to be at least to me and my model when I'm looking at it, this is this is one of the big pain points right. I mean your backlog in infrastructure is really the lowest now that it's been since 2009. So that has some immediate repercussions, which I guess that reflected into your guidance. But it seems it seems that 2Q infrastructure revenues will be down pretty materially. And my question is if that's the case, how do we need to think about this segment's gross margin because gross margin hung in here pretty well. You're up 30 basis points year over year in Q1, but with the volume pressure that you're going to get in Q2, I'm presuming we have a different story. Can you hold gross margin flat year over year on this kind of volume decline? I mean I guess I suspect the answer is no, but I'm wondering how you'd advise us to think about it.

I think it'd be a challenge to hold it flat unless the moves that we're making right now to better utilize those facilities to and then add a couple of those facilities to get more volume through the shop to reduce the manufacturing costs that are incurred as we produce and if we sell get the backlog built back up and turn it over especially at a place like Rotech where we could sell a significant amount of equipment right out of inventory. Of course that would in term limit the hours to the shop and you might have some absorption issues that would impact the margin, but we would we would be selling out of inventory, which would give you a little higher volume on the top line. I mean it's that's the challenge is to balance that out. And as we've said, we're making moves right now and are watching that very closely. We meet weekly and discuss our forecast and our volumes and our costs and we are mindful of how long it takes for changes to have an impact on the financial. I think to your point we're making those changes as we go along and we expect the margin is going to have pressure on it.

Well again when I'm plugging in your guidance, I'm struggling frankly to get to your EPS guidance for the second quarter without making some pretty generous assumptions about what gross margins and infrastructure are going to be in this really weak Q2 from a volume standpoint. That's why I'm wondering if there is something that you're aware of specifically in terms of cost actions or whatnot that might be benefiting the margin here? And I don't know if you can provide additional clarity but I'm having a hard time with my model essentially.

Yes. So some of the quoting activity we are seeing is in that area. So that that could be a factor as well.

Okay. Let me move to aggregate and mining. Is there a way to maybe separate what's happening with the mining portion of your business versus aggregate? I think I heard you say that it was aggregates that saw more pressure rather than mining. I don't know if there is a difference that you can call out between the two, more than what you already said.

Yeah Mig, this is Steve. In our aggregate mining group the vast majority of that's aggregates and the majority that's domestic aggregate. So our true mining exposure is the single digit. If you look at it from a company-wide standpoint, we have had some increases in mining from low levels. But Australia, South Africa. I've seen some benefits there but it doesn't move the overall needle that much. So most of what we're referring to is domestic aggregates.

Has this been impacted by the weather as well or was the weather primarily an asphalt comment.

Well the aggregate mining has been impacted again. We go through dealer distribution for those products. We've a lot of track mounted units and they're out in the field and out in the mud and the dirt and the pit. So we have gotten feedback that that's been an issue.

And where are you seeing demand trending from this Q1? I mean are things improving sequentially Bauma too I mean I think Bauma primarily as show benefiting infrastructure, but maybe I'm wrong maybe that benefits your aggregate business too.

There's some time between the two groups, obviously a lot of aggregates going into infrastructure projects. But we've had some strong years in the aggregate in mining group for the past couple of years so they have some good comps. But again when the rental markets are slow, that that flows through.

When you think about your full year growth guidance the 0% to 3% and you think about aggregate and mining versus infrastructure compared to that guidance how would you sort of rank the two?

I don't know that we've given anything with detail between the two, but we would expect both to contribute.

Okay. From a margin standpoint here, margin was a little weaker than what we were anticipating, but again the volumes were looking a little different as well. So as you look at this gross margin of 24% in Q1, directionally how should we be thinking about margin into the maybe weaker Q2 and then the rest of the year any help there.

Overall we've said that 22% or 23% gross margin in the second quarter is where we think we're going to wind up but then higher than that for the full year 23% to 24%. We think that as we make adjustments, if we have to make more adjustments relative to volume and those take effect that absorption will get better. And as we -- our strategic sourcing has its impacts in the second half of the year as we're buying materials, we will be able to recognize the savings on our sourcing and we also believe that in our S&OP, we're going to be more efficient through the shops. We're not only building stuff that we don't need. We're not going to be buying stuff that we don't need. We'll have a very strong demand forecast, strong demand, but a strong forecast that will tell us what our demand is to drive these shops and that's going to make us more efficient, we've got to plan better and carry costs into future quarters that we need and not guessing that that based on a guess at a demand schedule. So I think all of those things are going to start to take root in the second half and help us drive that margin back up to the 23% to 24% gross margin range for the full year.

Okay. Moving on to energy, maybe this is perhaps a good time for you to remind us what your true energy exposure is in this segment because obviously there's a bunch of other stuff here like the chippers and concrete and so on. And I guess my question is how much of what we've seen in Q1 order weakness related maybe to the dip in oil prices as oil is recovering, can this segment do much better going forward order wise. How do you think about it?

Mig, this is Steve. In the Energy group, you're right. It's a very diversified group. Peterson specific with the wood chippers is in there. The most direct oil and gas exposure that we have would be GEFCO products, the double pumpers that are used to clean out existing wells for improved flow. Their heritage product is a water well drilling equipment and that's been doing well. This group overall has been at lower levels. So it has some room to improve at greater percentage, but the true oil and gas exposure that we have would be in the low single digit range.

So oil price is not much of a factor but maybe some of the other stuff is impacted by weather and some of the things that we already talked about right.

Correct, yeah the drill rigs going out in the field to drill, I mean that's definitely an impact there. And then you have the pumpers and the wood shippers especially are out those kind of conditions.

Okay. And then I'm almost done I promise. Looking again at your second quarter guidance beating a dead horse here, but you've got a pretty wide range in terms of your expected revenue decline and again we're not we're only talking about what a few weeks until you close the quarter. Can you sort of help us understand what would get you from one end to the other of that range, like what needs to happen in one case versus the other maybe the best case scenario where you only down 5. What needs to happen in order for you to only be down 5%?

I think the quoting activity that we're seeing materializing into orders is the big answer there and then the season for the work that needs to be done actually beginning to flow. So again we had a later season by several weeks here due to the weather and we would need for things to kick back up. If you look overall and with customers being busy, part sales are up which shows you that materials going through the product, our part sales for the quarter were $92 million in the quarter this year versus $88 million. So we had a little over 5% increase there. And when equipment's being used there, they're running through the parts. So that's encouraging as well.

Okay. And then lastly, do you think, final question, do you think that if you're coming in at down 15% for Q2, do you think that the 0% so the low end of your full year growth guidance, do you think that's feasible. That's achievable based on what you know of the end markets right now?

It's possible with product mix obviously has a lot to do with it. And there are just a number of factors there. So we know the range is a little bit wider than we would normally put out there, but we've seen through the first quarter that's just some unique circumstances.

All right. Thank you for taking all my questions. I appreciate it and good luck.

Thank you. At this time I'll turn the floor back to Steve Anderson for closing remarks.

Thank you, Rob. We appreciate your participation on the conference call for the first quarter. Thank you for your interest in Astec. As our news release indicates, today's call has been recorded. A replay of the conference call will be available through May 7, 2019 and an archive 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 seven days. All of that information is contained in the news release that was sent out earlier today. This will conclude our call. Thank you all. Have a good week.

Thank you. Today's call has concluded. You may now disconnect your lines at this time. Thank you for your participation.