Good day, and thank you for standing by welcome to the Astec reports First Quarter 2022 results call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Steve Anderson. Please go ahead.

Thank you, and welcome to the Astec first 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 will turn the call over to Barry to provide comments, and then Becky will summarize our financial results. Before we begin, I will remind you that our discussion this morning may contain forward-looking statements that relate to the future performance of the company, and these statements are intended to qualify for the Safe Harbor liability, established by the Private Securities Litigation Reform Act. Any such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions. Factors that could influence our results are highlighted in today's financial news release and others are contained in our filings with the SEC. As usual, we ask that you familiarize yourself with those factors. In an effort to provide investors with additional information regarding the company's results, the company refers to various US GAAP, 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 US 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. 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, which is under the investor relations and presentation tabs. And now I will turn the call over to Barry.

Thank you, Steve. Good morning, everyone, and thank you for joining us. I will begin with a brief overview of the quarter, followed by highlights of progress made on our continued strategic evolution and key messages from the quarter. Then Becky will share details on our financial results and capital deployment. I will then share more detail on what we are seeing in terms of demand and current market dynamics and conclude with the discussion of our recent acquisition and a reminder of our ESG priorities. I will then open the call for Q&A. Beginning with Slide 4, end market demand remains strong for our products and services, as evidenced by another quarter of sales growth and record backlog. Looking back over the quarter, we saw the continuation of challenges from the fourth quarter, continue in the first quarter, with January being the most impacted. Since then, we’ve witnessed a steady progression of improving conditions in the environment in which we operate, giving us confidence that future performance will improve. Our entire organization is working hard to overcome the supply chain logistics and cost challenges we face, and I am proud of their progress as we gain traction on mitigating these challenges. Pricing action we have already implemented and are taking now, should be realized in future quarters, giving us additional tailwinds to support our margins. Customers are anxious to get our products and we are on track to improve output, to convert our backlog into profitable sales. I think we are set up for steadily improving performance throughout the balance of this year, and I'm confident in our team's ability to overcome the challenges we are facing. As you can see in our key messages, we saw another quarter of top line growth driven by solid market demand and…

Thank you, Barry, and good morning, everyone. As shown on Slide 10, first quarter sales increased 2.4% compared to the prior year quarter to $291.2 million. Part sales were strong, with a 9.7% increase and were partially offset by a slight decrease in equipment sales of 1.7%. Domestic sales were up 3.9% and international sales decreased 3.6%. Due to strong end market demand, we once again reached record backlog levels, increasing 98.4% to $834.7 million at quarter end, driven by both material solutions and infrastructure solutions orders, which were up 90.7% and 103.3%, respectively. Order activity remains robust as customer demand continues to rise, bolstered by strong commercial excellence initiatives, that are positioning us to win more orders. In parallel, we are focused on deploying operational excellence initiatives across the organization to mitigate the macro challenges we are currently facing. Although some of the supply constraints are easing, we remain diligent to deliver more value-added services, products and solutions to our customers. First quarter adjusted EBITDA decreased 10% to $18.8 million, compared to the prior year period, as cost inflation was slightly ahead of favorable volume price and mix, and Omicron related manufacturing challenges we incurred early in the quarter. We continue to work to offset the inflationary pressures we are seeing, through pricing actions. Adjusted SG&A expenses decreased 3.5% or $1.7 million, driven primarily by lower health care costs and favorable deferred compensation expense. These reductions were partially offset with increased activity for sales related activities, as well as travel costs as our employees reinitiate face-to-face contact. Adjusted earnings per share of $0.41, decreased $0.09, compared to $0.50 in the first quarter of 2021, and included $5.3 million of transformation restructuring and other costs. Our adjusted net effective tax rate for the quarter was 21%, due to reduced tax…

Thank you, Becky. Slide 16 shows the various organic opportunities we are pursuing in support of our growth pillar, and we expect to drive year-over-year organic growth over the long-term. In the first quarter, international sales were slightly lower than 1 year ago and represented just shy of 20% of our total sales. However, we expect a longer-term trajectory to be positive, as we gain traction. Further, we are increasing our investment to expand our manufacturing footprint in low-cost territories, which helps improve margin and strengthen our international presence. Next, opportunities to drive growth will continue in our parts and services business. I would like to recognize the Astec team for the achievement of a new quarterly record for part sales. First quarter part sales for $99.2 million, up 10% year-over-year, reflecting the momentum we are gaining. Opportunities related to dealer expansion, cross-selling, strategic accounts and new product development round out our organic growth initiatives. These are long-term pursuits, and our dedicated team is working hard to realize our potential. We are gaining momentum across these areas and I’m confident our related strategic initiatives will drive future profitable growth across their business. Turning to Slide 17, our strategic approach to M&A begins with a set of filters to ensure that the target company aligns with our growth strategy. If a target meets this criteria, then we look for financial characteristics that meet or exceed our long-term metrics and would achieve our goal of being accretive to EPS in the first full year. With that as a backup, I'm excited to share with you our most recent acquisition, MINDS Automation Group, illustrated on Slide 18. MINDS is the leader in plant automation control systems and cloud-based data management in the asphalt industry. This technology really compliments the capabilities of the Rothwell…

Thank you, sir. [Operator Instructions] Our first question comes from the line of Mig Dobre with Baird. Your line is now open.

Good morning, guys. It's Joe Grabowski on for Mig this morning.

Good morning, Joe,

Good morning. Can you talk about pricing on new orders this quarter? How did it compare to pricing in the second half of ‘21? And how does price cost look going forward?

Hey, Joe, this is Barry. Thanks for the question. So obviously, as we reported through most of 2021, we’ve been addressing the price cost ratio throughout the course of the year. Obviously trying to take pricing up and also do other things in the business to offset it as well, regards to manufacturing efficiencies, so on and so forth. And as we look at Q1 of this year, we are happy to say that we look at the price cost ratio as basically being neutral. In the quarter, we lump it in the bucket on the slide with volume and mix. Volume and mix actually pulled back the bar down a little bit, but on a price cost basis in Q1, we were neutral. As we look forward into 2022, obviously we expect more inflationary pressure, but we also have pricing in our backlog that we haven't realized at this point. So we feel like we're well-positioned at this point, anyway, understanding what we see for inflation to have a majority of that, if not all of it, offset by the pricing that’s yet to come.

Got it. Okay. That's helpful. I guess my follow-up question would be gross margins in the quarter rose strongly versus Q4, Q4 obviously last year was the lowest quarter of the year for gross margin in each segment. Should we kind of consider those gross margins in Q4 an aberration? And how do you expect gross margin to progress through 2022?

Yes. As we talked in the Q4 earnings call, Joe, we were happy that up until that point, really through Q3 of 2021, we were able to maintain that 23% to 24% gross margin average. And Q4 obviously had some unprecedented circumstances for us, with regards to supply chain, COVID-related absenteeism, so on and so forth, which as we also mentioned flowed into the first part of 2022. So we do feel like that was an extraordinary set of circumstances that hit us all at one time, and we feel good that the team has posted a good Q1 relative to Q4. As you look at the results, Joe, you can see that material solutions, gross margins were good. Infrastructure solutions; we even looked at that and said, when we look at the margin, that's where we had the most difficulty in the first part of 2022, around COVID related absenteeism, under absorption and supply chain issues. And so we've also seen some of those issues resolve themselves, as we went through Q1. So we feel better about how we're going to progress through 2022, obviously than we did in Q4 of 2021.

Got it. And if I could maybe just sneak in one more quick one. You talked in the press release about elevated steel costs, obviously, how are you managing the higher costs? I guess, what mechanisms are you using to maybe reduce the steel inflation that you're seeing right now?

Yes. Thanks for the question, Joe. We meet on monthly basis, if not more, certainly at least monthly in our steel council, and we look at what's going on with that important material, as a part of our COGS within our business. And so I guess from my experience over the years, there's not just one silver bullet, in regards to how you really manage your steel purchases or protecting of the steel on material margins. So we use all the different options, primarily you probably have heard or have been watching yourself that steel was high, as we entered into 2022, hot rolled coil dropped back off, plate stayed about where it was. Since that point in time, we've seen hot rolled coil go back up, and now start to plateau. So we believe that the actions that we're taking are serving us well to manage and protect our material margins. We are certainly not speculative when it comes to steel, and so we use things like forward buys, we use a little bit of everything, Joe, in order to make sure that we are protected. So we do feel good about our visibility there, and our ability to manage that, both in how we buy and in how we actually price to manage it as well.

Okay. perfect. Thank you very much.

Thanks, Joe.

Thank you. Our next question is from the line of Steve Ferazani with Sidoti. Your line is open.

Good morning, Barry. Thank you for sharing our lead color on the call. Do want to follow-up Joe's questions on the sequential improvement, because I think probably to a lot of us, it was a significant surprise, knowing that Omicron, you had noted previously, peaked in January. So I'm trying to get a sense, one of the financial impact of Omicron Q1 versus Q4, and whether it mattered that it was early in the quarter versus late. And also, we are getting a sense from other companies that the electrical component issues, in terms of the supply chain, are, if not getting better or actually maybe even getting worse. And if you could touch on both those topics, in terms of how you managed Q1 versus Q4?

Yes. Good morning, Steve. Thanks for the question. I would say, in Q4 we had about $11 million of under absorption in Q4 of 2021. We've seen an improvement in under absorption in Q1 of 2022. As I mentioned earlier, the biggest impact for us, in the quarter of Q1 of 2022, was really in the infrastructure solutions business, and that's where we saw, in January, the biggest impact from COVID. So that was a tough month for us, but as we look back and look at our performance in February, then March, we see an improvement there. So our COVID-related absentees have dropped off significantly, after January. Now we start to see, and hear about more in the news the Omicron, a little bit of an escalation and spike. We haven't necessarily seen that have any kind of material impact on our operations, recently. But we feel good that maybe that part of the variances are behind us, in regards to the COVID-related absenteeism, and now we can simply just focus on supply chain and logistics issues, which ultimately narrow our really our biggest constraint for us to continue to grow our volumes and reduce that backlog, and deliver product to our customers, as they continue to have a high demand for everything that we provide really across the board, Steve.

Okay. When we think about the growing backlog and the time of completion and industrywide issues, how much is that driving, what was a pretty significant growth in your parts business, which I imagine is higher margin? And how do you think about parts sales this year, knowing that you're looking at 3, 4 quarter backlog, and how much that can drive that higher margin portion of sales?

Yes, great question, Steve. I would tell you that I give more credit to the actual parts organization, and the hard work that they put into really driving execution on our strategic initiative to grow our aftermarket parts sales. They've done a lot in regards to using different systems, incorporating better data, looking across the organization at inventories and availability, better communication with our customers. And so I really attribute our parts growth, in dollars, really to the team and the work that they've put in, in order to make sure that we're having good strategic deployment and good execution in the items that they are -- action items that they're driving. So I would say more credit goes to them. Obviously, there probably is a little bit of customers who may be wanting to trade out equipment, have to run them a little bit longer because of the lead times in which they're dealing with, and so there's probably a piece of that, or maybe some protectionism in regards to making sure they have the parts when they need them, because of that. But I think ultimately I give more credence to the work, the team is doing to drive that parts growth, than maybe that market dynamic.

Great. Perfect. You could just squeeze one more in, in terms of SG&A expectations for the remainder of the year. Can you provide a little color there?

Yes. The SG&A reduction that we saw in Q1 was really driven by stock compensation and also health care reduction costs. So we were still holding to the previously announced range of SG&A that we talked to at the beginning of the year.

Great. Thanks, Barry. I appreciate it.

Yes, thank you.

Thank you. [Operator Instructions] We don't have any further questions at this time. Mr. Anderson, please continue.

All right. Thank you, Vince [ph]]. We appreciate your participation on this conference call. Thank you for your interest in Astec. As today's news release indicates, today's conference call has been recorded. A replay of this conference call will be available through May 18th, 2022, and an archive webcast will be available for 90 days. The transcript will be available under the Investor Relations section of the Astec Industry's website within the next 7 days. All of this information is contained in the news release distributed earlier this morning. This concludes our call, and as always, I'm happy to connect if you have any additional questions. Thank you. Have a good day

This concludes today’s conference call. Thank you for participating. You may now disconnect.