Hello and welcome to the Astec Industries Fourth Quarter and Full Year 2023 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 good morning, everyone. 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 provides 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. A reconciliation of GAAP to non-GAAP results is 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'll turn the call over to Jaco.

Thank you, Steve. Good morning, everyone, and thank you for joining us. I will begin on Slide 4 with a review of our full-year highlights. 2023 was an important year for Astec, as we advanced key strategic initiatives such as operational excellence, growing our parts' business, new product development, and Oracle ERP execution. These efforts enabled us to achieve great results in 2023 and will help us deliver more consistent, profitable growth in the future. I am very proud of what the team has been able to accomplish this year. In 2023, we had record full-year sales as end-market demand remained solid in both segments. We were particularly encouraged by the steady momentum we saw across the business at the end of the year, with Q4 implied orders growing 27.6% sequentially. I met with many customers at the recent World of Concrete and National Asphalt Paving Association events and was encouraged by their positive sentiment. They remain busy and are using our equipment to complete their projects. Their optimism, combined with a positive turn in implied orders during Q4, increased funding from the Federal Highway Bill, and new product introductions give us confidence in the long-term demand outlook for our business. During Q4 2023, our team delivered improved profitability and expanded margins. This is a testament to the team's ability to execute efficiently and apply operational excellence practices. We expanded gross margins 400 basis points and adjusted EPS more than doubled for the full year. A priority for us in 2023 was to build a performance culture that consistently delivers financial results. Our full-year results demonstrated that we have made great progress towards this objective. These achievements have laid the foundation for an even higher level of profitability as our business continues to grow. Our Oracle ERP implementation continues to…

Thank you, Jaco, and good morning, everyone. I'll begin with a review of our fourth-quarter 2023 results on Slide 12. Sales were $337.2 million, down 3.6%, as a slight increase in Infrastructure Solutions was more than offset by Material Solutions decline. By region, domestic sales growth of $4.1 million was more than offset by softer international sales, which were down $16.8 million, with particular weakness this quarter in Europe, Australia, and Canada. Parts' sales grew 2%, which was offset by a decline of 6.9% in equipment sales. Adjusted EBITDA increased 46.8%, increasing adjusted EBITDA margins by 340 basis points. The biggest driver was pricing realization and tailwinds for manufacturing efficiencies. We expanded gross margins by 610 basis points to 26.4%. Full-year gross margins were 24.7%. Increased SG&A costs were driven by higher planned personnel-related costs and increased consulting and project costs. Overall, we are pleased with the progress and improvements we're making on margins. Adjusted earnings per share increased to $0.90 from $0.34 the prior year, an increase of 164.7%. This figure excludes the transformation program and other costs. The adjusted net effective tax rate for the quarter was 17.3%, a significant decrease from last year. The lower effective tax rate for the current period included an income tax benefit from the utilization of existing net operating losses and corresponding release of valuation allowances in Brazil and India. Our normalized net effective tax rate for the full year was 22.1%, which was slightly below the 23% to 24% range we had estimated. On Slide 13, fourth-quarter adjusted EBITDA increased 46.8% to $32.6 million, with margin expansion of 340 basis points to 9.7%. The positive contribution from volume, pricing, and mix, plus manufacturing efficiencies, more than offset the impact from inflation and higher SG&A expenses. Moving on to Slide 14, Infrastructure…

Thank you, Becky. In closing, on Slide 20, we closed 2023 by delivering strong results in the fourth quarter. I am confident our teams can deliver even better results during 2024. We have work yet to do, but we are well on our way to delivering enhanced performance for our customer and shareholder. 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 is from the line of Steve Ferazani with Sidoti. Please go ahead.

Hi, good morning. This is Alex on for Steve. Thank you for taking questions. Can we start by providing a little bit of color around what's led to the higher margins? Is that higher margin sales or pricing or other factors?

Yes, Hi, morning, Alan, this is Jaco here. Like we mentioned in previous earnings calls, Q4 is typically a strong quarter for us with regards to favorable parts mix. We've definitely seen that during the quarter. We also had a strong performance from our Infrastructure Solutions team, and it's difficult to pinpoint to one thing, but our teams have obviously done a lot of work on our parts performance. We've done a lot of work around operational excellence and investing in our facilities. And then, we have a positive effect on pricing versus inflation. And as you've seen by the bridges, that effect is getting narrower every quarter. So definitely, for the coming year, we expect that to move much closer to each other as well.

Thank you for the context. And a follow-up for me, could you talk a little bit about order rate trends and, if you're seeing movement towards a positive turn or particular areas of improvement within the backlog?

Yes. When it comes to ordering and backlog, there's a couple of factors that we are looking at. As mentioned in the prepared remarks, I've had the opportunity to speak to many customers already this year at World of Concrete and National Asphalt Paving Association. Our customers are busy. Sentiment is positive. We are seeing, improved flow from federal funding and, we obviously mentioned the release of new products that is busy eating the market right now. On the opposite side of that, obviously interest rates are affecting mostly our mobile crushing and screening equipment. And then this year, obviously being an election year, we always expect a little bit of up and down from an order point of view. But, overall, we believe that this year is going to be a stable year for us. The implied orders that jumped here in Q4 was a positive signal, so, we are expecting, flat to single-digit growth for 2024.

Great, thank you. And last question for me. Could you talk, a little bit more? You've mentioned the plant efficiency and ERP, but I'm curious about some of the timing of margin improvements we might see from those as the implementations develop.

Yes, so just on margins as a whole, it comes from various places. We are continuously working on delivering operational excellence and as you can see with our CapEx last year, we invested quite a bit in our facilities. Those are continuously now, having an effect and obviously we saw that in the last couple of quarter. We mentioned already the pricing inflation parity, and, our OneASTEC procurement team, they are really coming together now nicely and we are definitely taking advantage of the size of Astec now across the organization. So those are all contributing. On the ERP side specifically, we went live with one site last year. We have various sites that will go live here during 2024, and we will have specifically two sites that will go in Q2. So we expect to see, positive effect of those in future quarters. But, for the shorter-term, there's a lot of good work that the teams have already done that should help with margins. I think one thing to consider also, from a margin point of view, the level of work that we have in our factories are always a big item to consider when it comes to, having good absorption, and I think our teams are doing a really good job now with improved sales and operations planning processes to plan for resources based on level. So, the teams are well-positioned that, if the market continues to be strong, that we can take advantage of that. On certain products, if the market turns down, we have good visibility now to take the appropriate actions.

Jaco, I might like to add a reminder as well. We had a significant transformation program that's been in play the last two years with one of our sites in Chattanooga, and that is coming to a close. We are putting the final detail, which is launching in Q1 here, and then that's the end of that program as far as the investment, and then throughout the remainder of the year, they'll continue to perfect and stabilize. And so we do expect continued margin improvement from that investment to impact us in the back half of the year. And then going forward, it'll just continue to grow. The other major investment we're making is in our Omagh facility in Northern Ireland. We had a capital expansion to their facility, which is still in progress, but will also finish in 2024, and that is specifically what we're calling our gateway to Europe. So we will be launching several new products in that facility once they have the room, and that will be in the back half of the year and into 2025. So we do see opportunity from our investments to increase our margin, our gross margin and EBITDA margin portfolio.

Thank you, Jaco and Becky, I really appreciate all the color.

Your next question comes from the line of Mig Dobre with R.W. Baird. Please go ahead.

Hi, good morning, guys. It's Joe Grabowski on from Mig this morning. I also wanted to ask about EBITDA margin, but maybe kind of split it out between segments. The infrastructure EBITDA margin was the highest quarter it's been in the past several years, but Material Solutions margin was softest that it's been in 2023. So maybe kind of, talk about margins by segment, and I know, Becky, you were just kind of touching upon it, but what is kind of working in Infrastructure that maybe is not flowing through in Material Solutions?

Yes, hi, Jaco here, I can take a first stab at that. You're absolutely right. Infrastructure Solutions had a really strong performance. If you look at, that group specifically, Q4 is a very strong parts quarter, as will be Q1 this year, so parts obviously has a positive influence. We've also - the teams have done really well in driving efficiencies around our plants and, the asphalt and concrete plants that we're selling. You guys have heard us talk in the past around modularization and the work we're doing on that, so we're starting to see, the outcomes of that. So - but on the Infrastructure Solutions side, I will also say that, over the last three, four years, we've created a very strong operational team, and that team, has obviously had enough time now to execute. And now that we have a new leader on the Material Solutions side, we will duplicate what we've done on that side. We have definitely seen, interest rates having a more significant effect on the Material Solutions side of the business, specifically with customers not converting rental units to procured units. So our dealers are carrying a bigger rental fleet versus, converting those at the end of leases. The good thing is that, our customers are running the equipment. So it's not that we're not - that we have equipment standing, they are running. So as soon as they are starting to convert those rental to purchase agreements, our dealers will have to replenish their inventory. And, we're obviously having discussions with our dealer network on a daily basis around that.

Got it. Okay, thanks. Thanks for that color. My next question would be, I guess, international sales, $51 million in the quarter, down 25% year-over-year. Can you talk about what you're seeing on the international side of the business?

Yes, and I will say, a big piece of that was more timing. So, obviously, Europe is soft. I think you've heard that from multiple other people in the industry. So Europe is soft. Although, Europe is not a big part of our business. But actually, if you look at our pipeline from an international point of view, we have a very strong pipeline in our quoting funnel, and, we have various pieces of equipment that was in transit to international customer, and those should flow through here in Q1. So, actually, I think our investment in our international organization, have shown improvements over the last few years. And with the strong pipeline that we have, we believe that 2024 will be stronger on the international side.

Got it. Okay. And final question for me. Becky, you touched upon the transformation program. I think you had $26 million of charges in 2022, $29 million in 2023. Maybe just kind of, talk about what is - what all is in the transformation program charges and what you expect those charges will be in 2024 and beyond?

Sure. Absolutely. So we do expect the same kind of range of spending, as '24 and '25 are the rollouts to all the sites, and we do expect to conclude the majority of that program in 2025 with all of our largest sites that manufacture products, and then we'll continue with international sales entities and such. But those will be a lighter lift as we go forward. The transformation program, there was two programs, as I mentioned, the transformation at our facility here in Chattanooga is concluding this year. And so that one is - that is finished at the end of Q1, for all intents and purposes, so that we won't have those charges going forward. The remainder of the transformation is tied to our Oracle rollout. And I'll just remind everyone it's more than an ERP. So it is - we really had, disparate systems everywhere in the Company. Every site had a different flavor, but we were missing some fundamental basics. So we rolled out a human capital management system, we rolled out a customer relationship management tool, and we rolled out a corporate consolidation tool, our ERP, and we're doing a transformation management system program. So quite a few heavy lists there, but it will conclude at the end of '25. And we're pretty excited about it because we are already seeing that we have more effective and efficient operations because we went live in the manufacturing facility and corporate, and then we went all of the U.S. on the human capital management. So the information we're getting, the quickness of the information, the accuracy of the data, that's really setting us up for future profitability and efficiency.

Got it. Okay. Thanks for taking my questions. Good luck.

Thanks, Joe.

Your next question is from the line of Larry De Maria with William Blair. Please go ahead.

Hi, thanks. Good morning, everybody. I wanted to talk --

Hi, good morning, Larry.

Hi, good morning, Jaco. First, that Material Solutions, it's obviously, it's kind of a little bit weak in your term, but can you answer that, A, can you break out backlog by segment? And then secondly, how did, Materials Solutions' orders do versus expectations considering the dealer event? I think we were looking for a $70 million to $75 million there. Did we hit that number? Is that not relevant? Or can you just talk about, the orders versus expectations and maybe split out backlog of orders by segment?

Yes, I'll take a stab at the Material Solutions event. We - the full value came in quite a bit lighter than what we expected, Larry. We had about $40 million. Now, I will say that we had two or three of our biggest dealers that did not participate in that program this year due to, what we explained earlier, equipment not converting from rental to procurement. We are having discussions with those dealers right now. Customers are using equipment, so we might - we're actually expecting some of that writing to take place here in the next couple of months. So, yes, it came out quite a bit lighter but, customers are still using equipment. And if you look at, the reports of companies in the material crushing space, all of those companies are expecting a pretty strong 2024. So we feel comfortable that this is more of a, timing issue and we're continuously working with our dealers on getting what they need to support their customer. On the backlog by segment, I don't think we typically break that out by segment, but obviously, Material Solutions saw the biggest reduction year-over-year from a percentage point of view. Sequentially here in the last quarter, both were more or less the same percentage reduction compared to previous years. But we fully expect that bookings here in Q1 will be in line with what we expect and, potentially be above what it was last year in Q1.

[Operator Instructions] Your next question's from the line of Brian Sponheimer with Gabelli Funds. Please go ahead.

Hi. Good morning, everyone. I appreciate all the color on the call. Just a question about backlog. If we're looking at the $500 million or almost $600 million in backlog, your $570 million, and compare that to $913 million a year ago, talk about maybe imputed margins and imputed pricing and what is in that backlog maybe relative to a year ago or what you've seen there, and your ability to really defend pricing in that backlog as it's normalized?

Yes. Now, Brian, I will say we are very confident in the pricing that we have in our backlog. I think our teams did a exceptional job after that first year, being caught off guard with the inflationary pressures that jumped up so quickly. So we feel, confident about that. We've also already implemented pricing to offset any inflationary expectations for 2024.

So are there any - within that backlog, are there any potential mechanisms in case inflation - the inflation outlook changes for you to adjust price on that and on what is there?

We typically do not have an inflationary adjustment in our contracts post the signing of a deal, and that was the reason why, what was it, two years ago, pricing lagged inflation so much. So I think the teams have been much more proactive to anticipate inflation and building that into pricing for future deliveries.

I appreciate that. And maybe, Becky, you can help here. As I'm thinking about how 2023 went, with, some decent quarters to start the year, obviously third quarter was a challenge. If we're thinking about the ability to drive profitability in 2024, maybe in a year where Infrastructure is up and Materials is down, talk about where your starting point is from a profitability perspective relative to a year ago.

Oh, certainly, Certainly, we had - we've seen some softness in MS but we don't expect that to continue. We are seeing signs that that will come back. And part of that comes from the fact that on our Infrastructure Solutions side of the house, we are largely direct sales. So we don't have the same pressures from - we don't internally have the same pressures from interest rates. Certainly our customers do, but we have some pretty large customers, that can weather these storms a little bit more than we can at our size. But on the dealer sales channel, that's where we're seeing the most pressure. And if interest rates come down, I think everybody can read what's out there the same as I can, but we expect maybe one or two cuts to come next year. If that happens - we're not, we're not banking on it, but if that happens, then that'll give some confidence to our dealer network and they'll be able to carry some more inventory. Right now, they're kind of wait and see. They want to see that these rentals convert, but certainly we were pretty pleased, every single quarter this year we had above 23% gross margin and we know that we can do better than that as we saw in Q4, so if we can get the sales, we feel pretty strong that we have a runway to expand both gross margins as well as EBITDA and profit margins going forward. We're also very confident in our programs that we're rolling out, the return on our invested capital grew quite a bit this year, finishing the year at 9.9%. So we know that we're tracking very well with our programs that we're spending money on and we make sure that they hit our metrics for approval. So we do see quite a bit of opportunity, and Jaco mentioned this as well, the other point that gives us confidence is our ability to increase our parts fill rates. We should never have parts in backlog, so that is part of our drop in backlog. We are turning parts' orders at a regular routine. We want to satisfy the customer in 24 hours when possible, a little bit longer if we have to manufacture something that's, on older equipment, but we've seen very good progress there and - but we're not where we want to be, so we'll continue to focus on that and that should also give us some room for expansion.

Hi, Brian, I don't know, it's Jaco here, maybe just a, additional comment on that. That this year for us I will say, if we get the sales, we feel that operationally we have a lot of stability now in the way we manufacture, pricing. So if the sales are there, we feel that there's an upside, to profit development. So, we're spending a lot of time and effort with our sales teams to drive that, to fill the pipeline up. And, because of all the work that we've done to create more consistency in our business, that should show up positively in the future, if we materialize the sales.

I appreciate that. I guess, one last one if you'll allow. With the idea that, you've kind of set a baseline for where profitability is going to go. Balance sheet is in great shape. How do you think about using cash here? Is it buyback, you're looking for acquisitions, is it just fixing what's - continuing to fix what's --

Yes, no, good question. Good question, Brian. So from a capital allocation point of view, there's a couple of things that we have on the table. Obviously, CapEx, we still want to invest in our facilities. So, we think CapEx is going to be in that $30 million, $35 million range, and then, we'll continue with the dividends. I think, in this past year it was about $12 million. From a buyback point of view, we do have an open program. Under the current program design, even if we do start buyback, it will not give us significant volume, just because of the way the plan is designed. But we want to make sure we drive down our inventory to obviously fund and pay down the debt that we have on our revolver today. And we are definitely, looking at future acquisition opportunities. The teams are all working on filling that pipeline, and if we find the right company, we'll definitely consider that. I will also just mention that, our teams have done a really good job this last year on things other than just inventory. If you look at our accounts receivable, accounts payable work that the teams have done there, I will say it's in the best shape it's been in a long time. So a lot of work around using our capital in a good way and, driving that ROIC in the right direction is a big focus for us.

All right, great. Much appreciated, and congrats on a good turnaround from Q3 here.

Thank you.

Your next question is a follow-up from the line of Larry De Maria with William Blair. Please go ahead.

Hi, thanks. Hi, sorry about that, I got disconnected before. Jaco, you noted the - and obviously, big increase in gross margin for the year, I think 24.7%, and obviously, above 26% in 4Q. If we look at '25 - 2024, flat to up sales, transformation program benefits, growth in parts. So shouldn't that not imply 25% to 26% growth margins in '24? Is that fair or if not, why?

Yes, no, that's a good question. We definitely have various, items that we are working on, Larry. I talked about further driving the parts business, the new products that we are releasing, the work we're doing on procurement. I will say that the item that we are watching very closely is making sure that we have good control in our factories around absorption. So, all the goods that we're working on, we are expecting margins to continuously improve. It's just a, it's just a timing thing on exactly when it will hit, but there's definitely a lot of positive momentum around margin development.

Okay, thanks, Jaco. That's basically what I was looking for.

Yes, Larry, I might add, we're positive on our margin expansion, but just, we're cautionary at this point because we do have, several factories that are going to go live with Oracle. We're really confident in where we're positioned. The teams are all on board and great leadership at our sites that are going live, that are really driving it from the top down. So if everything goes as planned, we should expect our margin to improve. But we are certainly expecting an uptick here, with a range that could be anywhere from 24% to 25.5%.

Okay, that's fair enough. Thank you very much for the color.

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

All right, thank you, Dennis. Thank you, everyone, for being on the call. I'd like to remind you that Astec will be displaying products at the World of Asphalt trade show in Nashville, Tennessee on March 25th to March 27th. So if you attend that show, please stop by our booth and say hello. We appreciate your participation on this call and thank you for your interest in Astec. As today's news release indicates, this conference call has been recorded. A replay of the conference call will be available through March 13th, 2024, 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 that went out earlier this morning. This concludes our call, but as always, I'm happy to connect with calls later on. 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.