Hello, and welcome to the Astec Industries Fourth Quarter Earnings Call. As a reminder, this conference is being recorded. It is my pleasure to introduce your host, Stephen Anderson, Senior Vice President of Administration and Investor Relations. Mr. Anderson, you may begin.

Thank you, and welcome to the Astec fourth quarter 2022 earnings conference call. Joining me on today’s call are Jaco van der Merwe, Chief Executive Officer; and Becky Weyenberg, Chief Financial Officer. In just a moment, I’ll turn the call over to Jaco 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 therefore, are 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. Management of the company uses both GAAP and non-GAAP financial measures to establish internal budgets and targets and to evaluate the company’s financial performance against such budgets and targets. You should also note a reconciliation of GAAP to non-GAAP results is included in our news release and in 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 Presentation tabs. And now, I will turn the call over to Jaco.

Thank you, Steve. Good morning, everyone, and thank you for joining us this morning. I would like to begin my comments by saying our humbled and grateful I am to be speaking to you as the CEO of Astec. When I joined the company six years ago, I was drawn by what I saw, a strong company with a history of delivering valued product that had tremendous potential. Now as CEO, I’m even more convinced of these early impressions. Astec has established itself as a market leader in the industries we serve, bringing innovative solutions to the road construction industry for over 50 years. The team here is talented, dedicated and committed to making the company a strong and resilient as possible. As a leadership team, we remain united around our purpose of Built To Connect. It defines where we are going and what we can become. We have made progress, and I’m proud to be part of the team that has moved us forward. The priorities for Astec in 2023 are shown on Slide 4. I’ll share more detail in a few minutes, but the priorities are executing on our simplify, focus and grow strategy and delivering on our commitments to employees, customers and shareholders. As CEO, I will continue to champion these priorities for the organization, while emphasizing the importance of execution to drive consistent and sustainable financial performance. We have a sound framework and motivated team and we are working together to create a culture of outperformance to reach our potential. Through our Built To Connect purpose, we are enabling our employees to create a customer-centric culture that provides value, and this will benefit our shareholders. That being said, we still have work to do. Our efforts this year will be primarily spent on our simplified and…

Thank you, Jaco, and good morning, everyone. I’ll begin my review of fourth quarter results on Slide 18. Sales were $349.9 million, up 31.2% with strong growth in both equipment and parts, which increased 45.3% and 11.8%, respectively. By region, there was a 32.2% increase in domestic sales and a 27.4% increase in international sales. Strong demand also kept backlog near the record level we established in Q3, coming down slightly as we increased output and order rates are beginning to normalize. Compared with last year, backlog is up 19.7% on a consolidated basis. By segment, Infrastructure Solutions backlog grew 26.2%, while Material Solutions increased 8.9%. Domestic backlog saw the greatest increase, improving 23.3%. However, International was also up growing 2.8%. This broad-based increase in backlog across segments and regions is indicative of the robust demand we are seeing in our end markets and the success of our global commercial teams winning business. Adjusted EBITDA increased $22.2 million, expanding adjusted EBITDA margin 370 basis points to 6.3%. This was primarily due to the net positive impact of volume, pricing and mix that outpaced inflation and higher manufacturing costs due to lingering inefficiencies in the supply chain. We have previously outlined our pricing actions and that we expected pricing to catch up with the rising costs we encountered over the last two years. This quarter, we realized significant pricing, which helped improve profitability and drive margins. We did see an increase in adjusted SGA&E, which was up 6% as we invested in headcount, incurred expenses for our transformation program as well as incremental costs from acquired businesses. We expect margins to further improve as we overcome supply chain challenges and realize additional benefits from our transformation. Adjusted earnings per share was $0.34, driven by increase in gross profit and maintaining cost…

Thank you, Becky. Turning to Slide 26, I would like to review our key investment highlights. Despite all the changes we saw in 2022, one thing that has remained constant is our customers’ desire for our unique solutions. We have built a leadership position by delivering innovative, high-quality products and superior customer service. And our markets are experiencing positive long-term demand drivers from secular trends such as population growth and aging infrastructure. We have been successful in winning business opportunities. As the global installed base of Astec products grow, it creates the need for reliable aftermarket parts that tends to be reoccurring and less cyclical. This strong OEM aftermarket combination, coupled with improving operational excellence, improves our financial returns. As a result, we have a strong balance sheet that enabled us to strategically invest and grow. Finally, our commitment to the Simplify, Focus and Grow strategic pillars unite our organization and drives improvement in everything we do. We saw improvements in nearly all financial metrics in 2022 and have made progress on achieving our long-term financial targets, shown on Slide 27. The plans we have in place including the Oracle implementation plus our team’s actions to live out our core values daily gives us confidence that these targets are attainable, and that 2023 will be a good year for Astec. I’ll close by reiterating the sentiment from my opening remarks. I’m humble and grateful to be the CEO of such a wonderful team and organization, and I’m excited about where we are going and what we can accomplish together in 2023 and beyond. With that, operator, we are now ready to open the call for any questions.

[Operator Instructions] Your first question is from the line of Mig Dobre with Baird. Your line is open.

Hey, good morning guys. It’s Joe Grabowski for Mig this morning.

Hey, good morning, Joe.

Good morning.

Good morning. Good morning. So Jaco, you’ve been in your new role for about 60 days. Obviously, you’re not new to Astec, but you are new to the CEO role. Any initial observations in addition to your prepared remarks from your new broadened perspective?

Yes, absolutely, Joe, and nice to talk to you this morning. The first 60 days, I visited 12 of our U.S. facilities, and I met through a significant number of people on all levels and organization. And one thing that’s very clear to me is that we have a lot of good people in our organization, a lot of people that’s really focused on delivering results for us. I’ve also spent quite a bit of time talking to customers, visiting various industry events, specifically the National Asphalt Pavement Association. And the market is very positive. Our customers has a lot of work to do. And obviously, that provides us some confidence for this year. We’ve also made some structural changes on our executive leadership team. And I think the structure will position us very well for a company of our size. And what I’m more excited about is that we’re putting the right focus in the right place in organization. And then we spend a lot of time communicating with our organization around the change, interacting with employees on multiple occasions. So very positive first 60 days, lots of work, a lot of traveling going on. But I think we have a strong organization behind us and even more important, our customers are very positive at this point in time.

Got it. Okay. Great. Thanks for all that color. I guess, my next question would be, it looks like guidance is still suspended. Becky did mention that you expect margins to continue to improve. But any other thoughts or color you could give on 2023 earnings drivers?

Yes. I mean, obviously, as part of our Simplify, Focus and Grow, we’re going to continue to drive our operational excellence. I think we have strong teams in place now. As you guys know, the volatility in the supply chain is still there. Our teams are working hard to minimize supply chain disruptions. And as that improves, we should see a positive effect on margins. Steel pricing is a little bit fluctuating, as you guys very well know. We’ve seen steel pricing moderating a little bit, however, recently turning back upwards. The other positive thing is that we have seen some stability with regards to employee turnover and actually our ability to hire employees. And that will help us as well, creating a stable environment and improving efficiencies in manufacturing. We invested a significant amount of money last year in CapEx. And those projects, as I walk through our facilities, is very visible. Equipment is getting commissioned and the benefits are starting to flow through our operations. And we’re continuously working on pricing. As you guys see, we’ve had a positive effect on pricing this year, and we’re going to continue to work on that.

Got it. Okay. And if I can squeeze in one more last question. Your sales in the quarter were the highest since the pandemic by a pretty sizable amount, yet the drag on EBITDA for manufacturing efficiencies got a little bit worse. So maybe kind of talk about supply chain, production and kind of, I guess, the ying and yang between the fact that the sales were much higher, but the efficiency drag didn’t get any better?

Yes, I can take the first start with that one as well, Joe. Obviously, supply chain disruptions are not over yet. So we’ve seen that specifically more in our mobile equipment side, where there’s obviously a large number of parts that goes into equipment. I think it’s also important to remember that the fourth quarter have significant holiday periods in the fourth quarter with Thanksgiving and the Christmas holidays. And then lastly, we also do our annual physical inventory counts during that period of time. And that takes some hours out of the shop. So I’m positive that you will see that turnaround here in the first quarter again.

Got it. Okay. Thank you for taking all my questions.

Your next question comes from the line of Stanley Elliott from Stifel. Your line is open.

Hey, good morning, everyone Jaco, welcome to the call.

Good morning, Stanley.

Could you talk about maybe what happened on the part sales and the material group, a big improvement there? Was that just an improvement on the supply chain or really just kind of some catch up? Any further help there would be great.

Yes. Good question there, Stanley. So obviously, for me, personally, parts is something that I’m very passionate about. And you guys will remember with the closures of our Mequon business. That was specifically in the Material Solutions business and created the short-term disruption in the flow of parts. So our teams have been very focused on reducing backlog in that business. And those results are starting to show up. Our teams have also been successful in leveraging our international footprint by getting additional capacity out of our international sites to support that business. So as the move plays out and as we get to the teams back performing before – like before we closed the facilities, I think those results will continue to be positive.

Perfect. And then you mentioned international a couple of times on the quality of a nice international background. With previous positions, help us from memory, legacy Astec had some issues on the manufacturing side and on the distribution side in the International, I suppose on the margin side. What do you think that you can bring to the table? What do you think that the company is going to do differently this period so that the International margins and growth profile could be not dilutive or accretive even to what you are doing here in North America.

Yes. Good question again, Stanley. So my view on international is that, that has a significant opportunity for our organization. If you look at our traditional market shares, obviously, the U.S. is much stronger for us. And I see the international market as a great opportunity for us. However, we need to be smart about it and make sure that we have the right manufacturing footprints and the right supply chain processes. So in our future growth, as we make our plans to grow internationally, finding the right footprint and the right supply chain processes will be important for us. Delivering products out of the U.S. is not always the best solution and will not give us the same margin. So leveraging our sites, which we’ve now started to do already that we have, is really important. And then when the time is right, we will look for other opportunities.

Stanley, this is Steve. I would add to that, that under our decentralized structure previously as Jaco said exploring to those sites. We were structured to fully optimize getting product to those sites, but we want Astec considering those as manufacturing sites, it opens up a lot of opportunities for us. Yes.

And then one other comment there is we are investing in specifically our site in Northern Ireland and Oman. And that facility will become a very important part for us to service the region there. So we’re very well aware that if we want to have good margins and good profitable business that we have to be local and we have to be grade at manufacturing and logistics in the local markets.

That makes great sense. And switching gears to the balance sheet. Inventories are up, obviously, just because of inflation and other things. Help us with the – where would you think inventories might finish into next year into 2023. Maybe the implications for free cash flow, what you want to talk about as a percent of EBITDA or net income conversion? Anything along those lines would be great.

Yes. Hi, Stanley. This is Becky. I’ll take a stab at that one. Our inventories are up year-over-year, but so is our backlog, and we continue to see good order intake. And so we’re really focused on do we have the right inventory at the right occasion for that backlog support. So we have pockets where the backlog is larger than others. And so we’re balancing that. But certainly, we’re challenging the rest of the sites to improve their turns across the house, we’re challenging everyone to improve their returns. So we expect that inventory with the focus we have on it to come down, but just being mindful that it does move in conjunction with backlog.

Yes, Stanley, it’s Steve. I’ll jump in as well. That inventory, the largest portion is raw materials. And there’s a little bit of whip that quickly converts to finished goods. Those finished goods are – they go out quickly based on the demand. So primarily raw material buildup to support the demand.

Perfect. That’s it for me. Look forward to see you guys a couple of weeks.

Thank you.

Thanks, Stanley.

Your next question comes from the line of Steve Ferazani from Sidoti. Your line is open.

Good morning, everyone. I wanted to ask about a couple, I know you’re not guiding for 2023, but a couple of lines, maybe you can offer some help if you didn’t provide it in the detailed review this morning. CapEx for 2023, how you’re thinking about it? And also with the announced limited restructuring, how you’re thinking that can affect SG&A?

Yes. I am Steve. Good morning. And so our CapEx outlook for this year is in the range of $25 million to $35 million. As you know, we invested heavily last year. And the focus is obviously to extract all the benefits of those CapEx investments. Yes, we did announce the limited restructure. And we see an SG&A run rate of about $56 million to $60 million and Becky can maybe provide a little bit more color on the SG&A run rate.

Sure. Steve, with the SG&A run rate, we do think we’ll be pretty flat year-over-year on a percentage of sales basis. So we’re trying to leverage the sales. So we should expect that to stay flat. We are taking some restructure – limited restructuring actions, not necessarily all SGA&E, but we are also we acquired MINDS, which is software engineers, and that all sits in SG&A. So we have an uptick related to that acquisition because of where those people sit. So all in all, we expect that it will largely remain flat as it moves with sales. Also, as a reminder, we have CONEXPO this year. So Q1, we always see an uptick and not that this is all SG&A either, but just I’ll throw in that we’re continuing to roll out our systems. And so we have some incremental things going on in Q2. And so we’ve got a lot of launches going on this year with those products. So it will be a little bit lumpy, but it’s still – it will be pretty flat with last year. I leave it at that.

And so you’re...

As a percentage of sales?

As a percentage of sales, correct.

Okay.

Yes. Sorry, Steve. I know you’re aware of this, so – or many others, but the CONEXPO shows once every three years.

Okay. Great. Two months into the year, can you give any look at how order trends are going? Obviously, this was the first quarter we saw backlog down. I know part of that is significant sales increase and maybe it was year-end, but can you give any sense on order tracking for the early part of the year?

Yes, Steve, I can do that. As I mentioned, when we met with a significant amount of our customers at NAPA, everybody was still very optimistic. We don’t believe that a lot of the money from the Infrastructure Bill has flown yet. So we trust that, that will continuously support our order intake. But just for January, we’ve seen an $8 million uptick again in backlog. So good trend continuing.

Great. Great. I talked to a lot of companies that are sitting on very significant backlog, and it’s provided them the flexibility to be much more aggressive on the pricing side simply because you’re sitting on this much backlog, you can be willing to lose lower margin business. How do you think about that equation?

Yes. Good question. I think it’s much easier to move pricing on and – on parts and services as your supply chain moves pricing. On capital equipment, obviously, you have to think a little bit forward and dissipate. So our teams are continuously reviewing pricing I think we are in a much better position today than what we were in the past. And one thing to consider is if a customer buys an asphalt plant from us, that customer has a lifespan on that equipment for 30 years. And we definitely don’t want to necessarily lose that opportunity as well. So – but we believe that our teams will be able to offset any additional inflationary pressures with pricing.

Okay. Makes sense. Thanks, everyone.

Your next question is from the line of Larry De Maria with William Blair. Your line is open.

Hey, thanks. Good morning. Obviously, a big increase in equipment sales. Just try to dig that into a little bit more so. Can you talk about volume-price mix, any big deliveries, trying to understand if the catch up in production or if we’re pivoting to better throughput at this point?

Yes. I mean if you – the reduction in backlog is obviously a function of getting additional volume out, I will say that our teams have done a really good job implementing some significant CapEx projects. We’ve also, over the last year, invested significantly in manufacturing engineering capability. And those teams are starting to deliver results by helping us to reduce our manufacturing lead times and cycle times. So I’m positive that we will see further improvements in our output versus what we have in prior year. The fact that that supply chain is still disruptive in some of our lines makes it a little bit unpredictable. But with that getting better output will continue to improve over the next couple of quarters.

Thanks. And then maybe I’m going to join two questions into one here. But you talked about dealer expansion and strategic accounts, and you also mentioned digital connectivity and telematics. Can you maybe just give us a rightsizing of where we are in that – in those multiple journeys, where we’ve come from where we are now and how much more where there is to shop? Is all the equipment going out connected with telematics now? Or is that in the future or just kind of right level on those initiatives, if you can.

Yes. So I will take it in three steps, Steve. So let’s talk about the dealers. I mean if you look back at Astec’s history, we were primarily a direct market player. And on the mobile equipment side, the teams have now significantly transitioned to dealers. And what happened last year was the teams have really put good structure in place around how we manage dealers, how do we agree on performance with the dealers. And that process, in my mind, is really going to drive the performance of our dealers. Our teams have also been successful with – we’re expanding dealers across the country, and we still have a few white spaces in the U.S., but overall, we – the guys have done a really good job expanding that. So I will say really good progress on the dealer side. On the strategic account side, this is something that I’m very passionate about as we see consolidation in our customer base, we need to be good dealing with the larger customers. And our teams have now, I think, found their strides on that. There’s still a lot of work to do for us. But I think we’re just going to see that improve in the future. On the telematics side, I think we are really early there. With the MINDS acquisition, the Grathwol acquisition of about two years ago, taking and putting all of those things together with the current technology we have is something that we are working on right now. And at CONEXPO, we will actually exhibit some of the new products. But there’s still a significant runway and work to do before we have all the technology on our equipment.

Okay. Very good. Thank you very much.

There are no further questions in the queue. I’d like to hand the call back to Steve Anderson for closing remarks.

All right. Thank you, Brett, and well to talk about it, anyone who’s going to be out in Vegas for CONEXPO, please stop by our booth in Central Hall and see us. We’d love to show you some new things that we have on display there. So thanks for that. We appreciate your participation on this call, and 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 March 15, and 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 seven 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 you if you have additional questions later. Thank you all. Have a good day.

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.