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 shown on Slide 4 starts 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, and 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…

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 from the impact of 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 lever 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. This excludes costs driven by our transformation program, which will optimize our company for long-term value creation. Last year in the third quarter, we had a negative tax rate of 26.1% after recording a $2.1 million benefit for a valuation allowance release in Brazil and net R&D credits. Our adjusted net effective tax rate for this quarter…

Thank you, Becky. Turning to Slide 18, I would like to conclude my comments with a review of our key investment highlights. For 50 years, Astec has been connecting the world with heavy equipment to build essential infrastructure and have established leadership positions in our industries that are aligned with positive long-term secular growth trends. Over that time a reputation for innovative high-quality products and superior customer service have become recognized across our industry. We have leveraged our global installed base to establish a recurring aftermarket parts business that greatly improves the stability and quality of our earnings profile. This contributes to our strong balance sheet and generates cash to fund growth opportunities, support balanced capital deployment and enables us to weather economic challenges. Finally, our strategic evolution built on the three pillars of Simplify, Focus and Grow is gaining traction and will enable the achievement of our long-term vision and goals. With that, operator, we are now ready to open the call for any questions.

Thank you. [Operator Instructions] And we will take our first question from Mig Dobre with Baird. Your line is open.

Thank you for taking the question. Good morning everyone.

Good morning, Mig.

Good morning.

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's capitalized on the various schemes of things. It's a very small portion that gets put on the balance sheet. And so we continue to be adjusted 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. And so 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. So the elements of the HCM, CX as well as ERP that go live next year. And then in '24 and '25, it will be all ERP rollout. So we'll see that progress. And also, we'll see the costs 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'm presuming that this is going to be all cash.

It is all cash. That's correct. We have 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 very program that's in there is largely capital and very little expense.

Understood. Okay, then maybe we can talk a little bit about your reported inflation figures. We've been in a relatively narrow range for the past 3 quarters in this kind of, call it, $30-plus million range. And I'm kind of curious as to how you're thinking about this figure on a go-forward basis, considering that some of the input costs like raw materials maybe are starting to move a little bit lower. So yes, maybe you can comment on the fourth quarter and maybe kind of what the setup into 2023 is.

Yes, Mig, 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 actually outpaced inflation for really the first time as a company. As we've also said prior, when we look forward, as we said earlier in the year, through the rest of this year and in 2023, we still have pricing in our backlog as of right now, Mig, that we haven't realized that we'll continue to realize through Q4 and into 2023. From an inflationary perspective, how we see that is we've started to see it actually slowdown in regards to the increase. In some cases, it's actually stabilized. And 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 know there's inflation actually in our inventory today that we haven't completely realized. But 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. And our teams continue to look at if we have to take more pricing actions moving forward through the rest of this year into 2023, we'll continue to work with our customers and dealers to do that as well. So I think we're in a good place at this point in time, Mig, in regards to how we handle them moving forward. We've got better visibility. We've got more control and more ability with our pricing. And we feel like, as I said...

We appreciate your patience. Please stand by while we reconnect our speakers. And we do have our speakers reconnected. Thank you for your patience.

Yes, thank you. Yes again, this is Barry. Mig, I'm not sure where I got cut off here in answering your question.

Yes. Well, last thing I heard, you were kind of talking about pricing and what you have in the backlog and kind of how that's flowing through into '23, and you mentioned that inflation is in certain portions of your businesses kind of peaking.

Yes. So that's right. So we have seen some stabilization, at least the increase in inflation has slowed versus what we've experienced over the course of the year. We've got pricing on backlog, as you commented on, that we haven't realized yet. So as we move forward into through the rest of 2022 to 2023, we'll continue to look at pricing to take actions there appropriately in order to make sure that we're positioned appropriately in the marketplace to really deliver the value and get the value that we're providing to our customers. And -- but I think, generally Mig, where we sit today is because now we've kind of turned that corner on pricing out by outpacing inflation. but we're in a good place now where we can maintain that position and make the appropriate changes as we move forward into 2023.

Okay. So with that in mind, if we look, for instance, I guess, either segment really segment gross margins, what's the proper framework for gross margins into 2023? Is it reasonable for us to expect sort of return to the kind of levels that we have seen maybe in 2020 when these price cost dynamics were not nearly as onerous as what we've been experiencing here over the past, call it, 12 months or so or is that premature in your view to set expectations that way?

Yes, Mig, good question. So as we look forward through the rest of this year and in 2023, we believe that gross margin will be governed really by the supply chain. So if you look at our 2022 Q3 results, that really was the manufacturing efficiencies really from the supply chain type issues that have had an impact on our gross margins. as stated already, our pricing inflation is at a good mix today. So as we move forward into '23 and as we see supply chain issues improve, and I would say, generally, Mig, we've seen supply chain issues actually improved throughout the course of 2022. And if they continue to do so, then we'll be able to claw back that margin. Keep in mind, our teams are extremely active in engaging with suppliers and alternative suppliers, new designs, doing things within our manufacturing facilities to try and offset any impact from supply chain issues, but that would be our biggest determined at this point in time is supply chain. And as I said, we've seen it get better, but there are certain things right now that we're still working through that has had an impact in Q3. And as our action items become -- get some more traction, we should start to see some of that improve into next year.

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. And I know that this segment does quite a bit of its business through dealers. So I'm kind of curious as to what's been driving the strength here relative to dealer stocking or really if there's any other color either by equipment category or geography that you can sort of provide here?

Yes. I think as we talked about before, Mig, this time of year is typically an ordering period, and we do do some dealer convention and some dealer engagement around this time of the year as well. And so for us, we've kind of signaled, I think, that we would expect that we have potential growth in our order flow as we hit this time of year. Just maybe a little bit more color, Mig. We've spent some time with what we call our executive customers. So these are customers that are owners of businesses or founders, high-level executives within our customers' businesses. And through that process, we've surveyed them to understand how they see the market and where they see the market going. And two data points that really came out of that is as they look at 2023 infrastructure market versus 2022, 24% of those customers expected to be just as good in '23 of what it was in '22 and 51% of the customer -- I'm sorry, 51% of the customers actually expect it to be 10% or more better than it was in 2022. Another question we've asked is, from a capital budgeting perspective and commitment perspective, how do they see '23 versus '22? And 56% of them see that they'll spend equally as much in '23 as it did in '22 and 34% of them expect that they'll spend more in '23 than it did in '22. So I think that's just some good data and color around the market dynamics that our customers are seeing. And of course, those are primarily North American customers. So hopefully, that gives you some more color and supports why you hear us have confidence in market demand.

[Operator Instructions] And we will take our next question from Steve Ferazani with Sidoti. Your line is open.

Good morning Barry, good morning Becky. I wanted to ask about what your -- and you covered this a little bit in terms of what you're seeing for component shortages, sort of been a mixed bag for this earnings season. Just trying to get your sense, is it getting easier to get necessary components from your suppliers? And also, I mean, there seems to be a bifurcation in terms of smaller companies still struggling more in terms of how they are prioritized by suppliers. If you can get a little bit of take on that.

Yes, good morning, Steve. Thanks for the question. So the items that were -- that we have issues with today are, I think, have been pretty consistent, electrical-type components, displays for equipment, hydraulic type components, pumps and so on and so forth, some cooling equipment type radiators and oil coolers and those types of things. So that's kind of generally the types of issues that we're dealing with. When I think about this, I think about there's really two parts of our business. There's the part where the plant side of it, where we're very vertically integrated and have that direct model where I would say, generally, the supply chain issues have really slowed down significantly. There's the other part of our business where it's more procured type products, and that's where we see some of the issues with hydraulics and electrical components and some of the cooling equipment packages. But I would say, generally, Steve, we've seen some improvement in the supply chain, and I credit our teams really for all our hard work and actions they've taken to really drive whether that's alternative suppliers, new designs, so on and so forth. They are just things we do differently in our facilities to be able to manage through this more effectively. So there's been a reduction in the severity of the supply chain issues, but there are still some things right now, as I alluded to, that we continue to work through. And honestly, we'll -- they're not going to get fixed overnight, but generally, we've seen some improvement.

That's helpful, thanks. When we think about -- you talked a little bit about backlog and what your customers are expecting. You mentioned in your prepared remarks starting to see some of that federal highway spending flow. When we think about the significant growth in that Infrastructure Solutions backlog, is that part of that starting to see your customers starting to expect projects beginning next year?

Hey Steve, Steve Anderson. Yes, we're hearing from our customers that they're starting to see some funds flow. We're seeing that in the places as well. So as we said before, we expected most of the flow in the new projects to come online in 2023 and 2024. So that's consistent with what the expectations were and our customers are confirming that. So -- we're pleased that is a good long-term tailwind for the business, as you know, going out through 2025, mid-2026. So glad to see those funds beginning to flow.

Yes. And just to maybe add some more color to that. As we talk to our customers today, Steve, the majority of our customers have a backlog that really is about nine months and longer. So they have a good backlog of work today. And as those projects really start to flow through, they have confidence then giving us confidence that our order rates will continue to stay strong as really our implied order rate as shown in Q3. And I think what also is good about our customer set is they're not just sitting there relying on residential or nonresidential or they have the ability to really kind of flow their business towards the areas where there's opportunities and not only just from a revenue perspective, but also from a margin perspective. And as you know, Steve, they've had really record years year-over-year-over-year from '20 to '21 and now into '22. So they've done well. Now when I talk to customers, yes, they're experiencing some inflationary type impact, but they've also got great pricing capability that they'll be able to take advantage of and we'll continue to take advantage of as we move forward in time.

Great. Last one from me, just in terms of -- I didn't hear if you updated your CapEx expectations for this year and if you're starting to plan next year and how and whether or not you've incorporated any kind of factory automation efforts into CapEx?

Yes, I can take that one, Steve. We have lowered our expectation for this year. We had $40 million to $50 million as the range and we've dropped that to $35 million to $45 million, and it's really timing on when we're receiving the goods that are on order and when they'll go into actually usage. So we've pushed some things out into 2023. We expect 2023 to be in that range of $30 million to $40 million as well, some of it the carryover projects, but then the continued automation programs that we have going on.

Yes. Just to maybe add lot more color to that. All of our CapEx really that we put into the business over the last 18 months has really been a brown automation. As we've talked about, Steve, we have a high dependency upon labor. We're very vertically integrated in most of our sites. And so as we invest that capital that's really around automation. The things that we're doing around capacity are really in low-cost produced countries. So we're making sure that the capital goes in, we'll always have a good return regardless of the cycle that we're actually in the business. So I'm pretty pleased with the momentum we've built around identifying projects that will really return long-term shareholder value through cycles for Astec moving forward.

Great. Thanks Barry, thanks Becky.

Thanks Steve.

We will take our next question from Larry De Maria with William Blair. Your line is open.

Good morning, Larry.

Hey thanks, good morning. Hey guys. A few things, first of all, if I followed the last question correctly, that was about the Infrastructure Bill not the Highway Bill. And so just to confirm, you're starting -- the customers are starting to see some projects come. But what is your kind of time frame on expectation for meaningful numbers to come out to the market, not just for you guys, but meaningful projects and cash hitting the market?

Yes, hey Larry, this is Barry. So just to kind of reiterate what Steve had mentioned. Yes, we are -- our customers are 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, Larry, as you probably know, there were certain funds that were allocated for COVID-relief application and because that's actually slowed down, now states have the ability to actually go to the Federal Government and put forth projects, which now are also being funded by some of the COVID relief money as well. So not just the IIJA types funding, but it's also other types of funding that they're able to get to. So we've started to see that flow through. We've always said it's really typically around 18 months from the time that the law or the policies passed before you start to see good traction, but we're pleased that some of that funding is flowing through today.

Got it and that's very helpful, thank you. And then secondly, I'm just curious a little bit about pricing. And specifically, maybe you can delineate and break down that price volume mix for us that you saw in the quarter, but kind of more importantly, think about the carryover pricing into next year from the progressive price hikes through this year when they hit. So you could tackle that the pricing questions and it'll carry over to next year.

Yes. So as we looked at the pricing volume index versus inflation, as I already said in -- we've seen pricing actually outpace inflation. So we've identified inflation to be $20 million on a year-over-year impact for the company. Pricing is greater than that. We've had a nice impact from volumes. So we're getting more products out the door and [indiscernible] that as well. And actually, quite honestly, Larry, we've seen a little bit of a negative from the mix. So pricing being up, volume being a good contributor and mix being a little bit of a drag on us for the year-over-year quarter comparison we believe and we know that there's pricing in our backlog that we haven't realized yet. We've said that pretty much all year long that we're getting caught up, and this is the first time in 2022, where we back turn the corner on being able to have pricing to more than offset inflation. So we expect that we'll have pricing that will flow through each quarter as we move through the rest of the year and into 2023. And we'll continue to look at opportunities or needs to increase pricing as well as we go through that same time frame.

Okay. I guess, thank you for that. I'm looking at 2Q and 3Q, similar level of top line sales, not too far differently. And I know that, I guess, probably obviously, supply chain constrained. So with gradually improving supply chain, could we more or less take this 3, 15 to 20 number as your capacity for the next, I don't know, three, four quarters, add a little bit of price and a little bit of gradual capacity increases to get to the top line. In other words, take out some of the typical seasonality and kind of look at the run rates we're at now and assume slightly better as we go forward?

Yes. Without getting into a level of detail or providing guidance, we haven't started to do yet. We do make even in our prepared remarks that as supply chain improves, we will experience revenue and margin growth and I'll just leave it at that.

Okay, thank you. Good luck.

Thanks.

And ladies and gentlemen, there are no further questions at this time. I would like to turn the call back to Steve Anderson for any additional or closing remarks.

We do apologize for the technical difficulty earlier, but appreciate you staying on the call. So I appreciate your participation in our conference, and thank you for your interest in our company. As today's news release indicates, the conference call has been recorded and so 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. All of that information is contained in the news release distributed earlier this morning. 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.