Hello and welcome to the Astec Industries Second 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 second quarter 2023 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 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, which are generally accepted accounting principles, and non-GAAP financial measures, which management believes provides 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 of 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 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. I would like to begin my comments with the key messages summarized on slide four. We achieved record sales during the second quarter on strong end market demand and improved outputs of our products. We are building on a solid start to the year as the Astec team delivered unique solutions and outstanding service to our customers. Positive customer outlook continues to be driven by demand for asphalt, concrete, aggregates and machinery to support the Rock to Road value chain. Our exciting new products have been well received by our customers for their expanding projects. Due to the team's tireless efforts, we delivered adjusted EBITDA margin expansion of 510 basis points. Our improvements in operational excellence have helped drive throughput and further realization of previously implemented price increases contributed to revenue and profitability. I am proud of the contribution from everyone across our organization and optimistic about the momentum we have built going into the second half of 2023. Internally, we are elevating our performance to achieve objectives and we are united by our OneASTEC operating model. As I mentioned in our Q1 earnings call in May, we went live with the successful launch of the Oracle Cloud ERP at one of our major manufacturing sites. Additional incremental improvements are expected as we continue to complete the integration of the ERP solutions throughout our organization. As expected, our team managed the ERP implementation well, causing minimal production disruptions from the launch. The Astec team is excited as preparation continues to launch additional sites in 2024 and 2025. This crucial implementation will allow us to improve upon our performance excellence and continue to simplify, focus and grow across our entire organization. Becky will provide an update on our progress…

Thank you, Jaco, and good morning, everyone. I'll begin my review of second quarter results on slide 12. Sales were $350 million, up 10% with growth in both segments, especially in Materials Solutions, which increased 21.2% year-over-year. By region, strong domestic sales growth of 15.3% more than offset softened international sales. Both equipment and parts sales grew 5.8% and 7.1%, respectively. Backlog decreased at the end of the second quarter, down 17.7% year-over-year and 13.9% sequentially, while off from peak levels, backlog remains elevated and above our three-year average. Domestic backlog was down 16.6% and international down 24%. As Jaco mentioned earlier, with fewer supply chain disruptions, customer order patterns are normalizing, and we continue to make investments in operations to increase output. We anticipate converting more backlog to sales as these initiatives are implemented and the supply chain constraints continue to ease. Though extended lead times on certain purchase components continues to exist. Overall, they have started to come down, and this has led to moderation in our backlog. We posted a strong bottom line as adjusted EBITDA increased 143.9% to $32.2 million, expanding adjusted EBITDA margin 510 basis points to 9.2%. We expanded gross margins by 390 basis points to 23.7% as we achieved further price realization and higher volumes with favorable mix. This is the fourth consecutive quarter gross margins have exceeded 20% and year-to-date gross margins are 24.7%. Adjusted SG&A increased slightly due to higher personnel costs as we invested in our business and increased consulting and project costs. Adjusted SG&A expenses declined as a percentage of sales. We are pleased with the progress on adjusted EBITDA margins and look to continue driving improvements. Adjusted earnings per share increased to $0.87 from $0.19 the prior year. The improvement was driven by our improved operating margin. The…

Thank you, Becky. Turning to slide 19. I would like to summarize our key investment highlights. We have built leading positions within our attractive niche markets. Our markets are benefiting from long-term secular trends, including population growth and aging infrastructure. Government spending on US infrastructure has also been in place for decades when the National Interstate and Defense Highways Act was put into place in 1956. Federal funding continues to provide a core level of work for our domestic customers. Through our leading positions in Materials and Infrastructure Solutions, we are delivering best-in-class products and services. We have built a reputation for innovation, which is carrying forward with our Astec Digital solutions. The combination of these factors has helped us grow our installed base. We will continue to drive our aftermarket parts initiative to serve our customers and grow this reoccurring revenue stream. As our top and bottom line grow, we further strengthened our balance sheet to provide the liquidity needed to fund our growth initiatives, including a return to shareholders. Our simplified focus and growth strategy is driving sustainable profitable growth as we progress towards our long-term goals shown on slide 20. We have a good start to 2023 and are optimistic about the second half of this year. I am grateful to our employees for their dedication and hard work and to our customers for their loyalty and support. With that, operator, we are now ready to open the call for questions.

[Operator Instructions] Your first question will come from Stanley Elliott with Stifel. Your line is now open

Hi. Good morning. This is Brian Brophy on for Stanley. Just wanted to ask one on backlog. Can you give us a sense on how you're thinking backlog is going to trend from here and where we might expect things to bottom out? What kind of level do you guys feel is normal?

Hey, good morning, Brian. This is Jaco here. As I mentioned in the call so far, we still feel positive about the market. Our customers have a very strong pipeline. During last year, we had the order writing for our Materials Solutions Group during August. And this year, we are expecting that to happen in Q4. So we see that still reflecting in the backlog for Q3. If you look at historically we always were running 1.5 to 2 quarters of backlog. And we'll feel comfortable if we can stabilize around those levels going forward. We are still continuing to drive down parts backlog, ensuring that we can provide our customers with the service they need from us. So that's a very specific effort that we have in place.

Okay. That's helpful. And then I wanted to ask one on capital allocation. Obviously, you guys are getting close to a net cash position below your leverage targets. Share repurchases have taken a little bit of a pause here. I guess, how are you guys thinking about capital allocation? What is the M&A pipeline looking at? What are some of the priorities on M&A? Any thoughts there would be helpful.

Yes. Our focus so far this year was to create good stability in our results and have a good transition from the year before. So I think we are well positioned now to start to shift our focus to the growth side. And obviously that will include potential acquisitions, Brian. We are always looking, although we were not active here in the last six months or so. And we believe that there's various opportunities for us to fill pipeline or to fill gaps in our product portfolio. Things like share repurchases and dividends are obviously something that the Board reviews every time. And if the time is right, we will also look at those.

Okay. Thank you. And then one other one. You guys introduced a handful of new products at CONEXPO, some categories you guys hadn't been competing in, to my understanding in the past. I guess I'm curious as to what initial customer reception has been on some of those new products you introduced?

Yes. So you're specifically referring to the products that we have on our mobile equipment side. We will actually release those products for sale year in September and October. The customers who've been testing the prototypes have been very complementary of the new designs. So we are really excited about taking those to market. And we expect to see those orders to come through in the fourth quarter for those products.

Great. Thank you. I'll pause it on.

Thank you.

Your next question comes from Mig Dobre with Baird. Your line is now open.

Hey, good morning, everyone. It's Joe Grabowski on for Mig this morning.

Good morning, Joe.

Good morning. So I was surprised to see that infrastructure equipment sales were down 7%. Backlogs are still elevated, it sounds like throughput levels are improving. Was this just driven by lumpy shipments or anything else going on there?

Yes. So if I look at the data, it looks like our numbers reflects a little bit higher sales for Infrastructure Solutions year-over-year. We obviously did go live, Joe, in one of the biggest sites in our Infrastructure Solutions Group. And we planned for lower output during May and June. I'm glad to say that our teams did better than what we had in our internal plans. So you will see that output in the sales and obviously, that comes from that going back to normal levels here in the next couple of months. So that was the biggest driver. And we most probably had a few machines that didn't ship at the end of the quarter. And specifically, we had some parts that was still left at the docks. So the team is all on board there. We've done a much better job here in the last months to work through some of the small tweaks we had in the system. So that's the biggest driver for that.

I see. And was that implementation, was that international? Did that impact the international sales, which were, I guess, down 25% year-over-year?

Yes. So a big piece of our international sales come from mobile equipment that comes from the large sites we had here in the US. So, obviously, they didn't have all the machines that they have in backlog to invoice during the quarter.

I see. Okay. And then I guess on the flip side, you talked about in the Infrastructure segment, strong domestic service and installation revenue. Can you maybe expand upon that? And are those positive trends sustainable?

Yes. I mean that's one of our focus areas is to improve the service and the construction work we do for our customers and our team has done a really good job growing our capabilities over the last year or two. So yes, it's intentional, and we will continue to grow that as -- obviously, as we install more equipment, that business should grow accordingly.

Got it. Okay. And then last question, sticking with the Infrastructure segment. It looks like implied orders were kind of stable Q1 versus Q2, obviously, down somewhat from the past two years. But does it kind of feel like we've sort of stabilized there and the kind of the run rate we've been on the last couple of quarters is maybe the run rate will be on for a while here?

Yes. We've definitely seen it stabilizing. So you're correct there. Historically, if you look at especially the asphalt plant-related business, Q2 is a very busy season for our customers as is Q3. So it's typical for us to see lower orders during those two quarters. A lot of our customers are now going into their budgeting process as well. So we fully expect here in the latter part of Q3 and then the majority of the order writing for next year's delivery will be late Q3, early Q4.

I see. Okay. Great. Thanks for taking my questions. I appreciate it.

Thanks, Joe.

[Operator Instructions] Your next question comes from Stephen Ferazani with Sidoti. Your line is now open.

Good morning, Jaco. Good morning, Becky. I did want to follow-up with some of the questions around backlog and orders. Obviously, you've had two really strong quarters, particularly top line as you've converted a lot of this elevated backlog. When we think about this cycle and the new spending plan, clearly, some of your orders should be front-end loaded around the asphalt plants. When we think about where your order trends are going and the fact that you've converted really strongly over the last two quarters. Are you thinking these two quarters are peak revenue in this cycle or can you grow top line from here?

Yes. We, obviously, had a very strong booking season the last 12 to 24 months. And our teams have done a really good job creating additional capacity. So theoretically, our factories have the capability to deliver higher numbers as even compared to what we've delivered here in H2. We still have strong backlog and we feel pretty confident that H2 will be more or less in line with what we had in H1.

Okay. That's fair. Thanks. Last quarter and I don't want to put words in your mouth, but you were targeting sort of a 24%, 25% gross margin for the year. It looks like you're still tracking there. You still feel good about that?

Yes, we do. Just a reminder that typically the third quarter is the lowest parts quarter of the year. So that will weigh a little bit on overall margins. But we feel that that range is definitely applicable right now.

Right. And then we haven't talked a lot about the given everything else that's been going on, sort of the margin improvements you can make through the OneASTEC model with reduced branding and reduce SKUs and a lot of that stuff, I know took a backseat. But over the next two to three years, you have that 12% plus EBITDA margin target. I know we've had inflationary pressures through. But when we start thinking about '24, '25 where parts should theoretically be a stronger percentage of share of sales, which would be higher margin and just those other efforts that maybe come back to the forefront. Do you think that there's margin -- you have substantial margin lift from here over the two, three plus years?

Yes. I mean I do. I will say, first of all, I think we've built a really strong operational team. We've created some good structures in terms of manufacturing, engineering, quality engineering. We've really put good investments in place in our factories and those things are all starting to deliver results. So me personally will be disappointed if we don't see that expand over the next couple of years. But of course, the market is dynamic, and we're going to watch the market very closely in terms of movements around pricing and continuously to keep an eye on inflation. We're still seeing some vendors are raising prices. So we are definitely watching it closely at the moment.

All Right. Thanks, Jaco

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, Briana. Again, we appreciate your participation on this conference 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 will be available through August 16th, 2023, 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 this information is contained in the news release distributed earlier this morning. This concludes our call and I'm happy to connect with any of you that 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.