Hello, and welcome to Astec Industries First 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 good morning, everyone. Joining me on today's call are our President and Chief Executive Officer, Jaco van der Merwe; and our Interim Chief Financial Officer, Heinrich Jonker. In just a moment, I'll turn the call over to Jaco to provide comments, and then Heinrich 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 earnings 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 results, we refer to various 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 U.S. GAAP measures. A reconciliation of U.S. GAAP to non-GAAP results is included in our earnings 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. So now I'll turn the call over to Jaco.

Thank you, Steve. Before I start with our review of the quarter, I'd like to take a moment to welcome Heinrich as our interim CFO. Since joining Astec in 2021, he has been an integral leader on our financial team, most recently serving as the VP of Finance for our Infrastructure Solutions segment. Heinrich has approximately 20 years of public company experience, deep financial acumen and he knows our business well. All of this has helped make for a seamless transition to interim CFO, although I am certainly underplaying the hard work and long hours he and the team have put in since he stepped into the role. Heinrich, thanks for your commitment to Astec and for joining me on today's call. With that, I would like to begin my remarks with our first quarter overview summarized on Slide 4. As our results indicate, we experienced a more challenging first quarter than anticipated, mainly due to market headwinds in our Materials Solutions segment. These headwinds impacted our reported results, offsetting what was a relatively solid quarter for our Infrastructure Solutions segment. We are taking action to overcome these headwinds through focused execution of our strategy and targeted cost reduction initiatives in Materials Solutions, which we will return to later in the call. We continue to see opportunities ahead as we collaborate with our customers, deliver innovative new products to the market and develop best-in-class aftermarket practices in both Infrastructure and Materials Solutions. Driving sustainable profitable growth and margin expansion remains our North Star, and we have the right tools and team on hand to deliver on those objectives. Moving to our first quarter overview. We delivered $309.2 million in net sales and gross margin of 24.9% with consolidated implied orders up 2.4% sequentially. While we experienced a supply chain delay…

Thank you, Jaco, and good morning, everyone. Before I jump into the overview of our results, I wanted to share how honored I am to be serving in this interim role. For almost 3 years, I have served as Astec Vice President, Finance, Infrastructure Solutions. And during that time, I have worked closely alongside our broader finance team. Due to Jaco and my colleagues support and collaboration, the transition to this new role has been smooth. We have a strong and deep bench of talent at Astec, and I know everyone is focused every day on delivering for our customers and our shareholders. Before I start, I wanted to share that the company has 2 reportable segments. Each segment comprised of sites based upon the nature of the products or services produced, the type of customer for the products and the nature of the production process, among other considerations. Based on a review of these factors, the company's Australia and Latin America LatAm sites and Astec Digital have changed reportable segments beginning January 1, 2024. The Australia and LatAm sites were previously reported in the Infrastructure Solutions segment and have moved to the Materials Solutions segment. Astec Digital was previously included in the Corporate and Other category and has moved to the Infrastructure Solutions segment. Although the overall financial impact of this change is relatively minor, prior periods have been revised to reflect the changes for both the segment composition and the segment profit or loss metric calculation for comparability. With that, let's discuss the numbers. I'll begin my review of the first quarter results on Slide 11. Net sales decreased 11.1% to $309.2 million in the quarter, due primarily to finance capacity constraints and lower conversions from our Materials Solutions Group and supply chain delays from a specific supplier…

Thank you, Heinrich. Turning to Slide 17. In summary, despite the challenging current market dynamics, the fundamentals of our business remain strong, led by Infrastructure Solutions, and we are moving forward guided by our new strategic pillars. The outlook for Infrastructure Solutions remain favorable due to continued strong demand for asphalt and concrete plants. As we noted earlier, we have taken actions to drive additional cost reductions and efficiencies in Materials Solutions as we anticipate challenging conditions for dealers and contractors in the first half of this year. We released a significant number of new products at the 2024 World of Asphalt/Agg1 trade show earlier this year, and we are excited about the momentum in our innovation pipeline between now and ConExpo 2026. We are also encouraged by the increased federal highway funding and the positive sentiment from our customers, we continue to receive. Our resilient operating model, new strategic framework and our cost reduction and efficiency initiatives provide us with a solid foundation to drive growth and value creation moving forward. With that, we are happy to take your questions.

[Operator Instructions]. And your first question comes from the line of Stanley Elliott from Stifel.

Can you all talk about how the quarter progressed? I mean you did report at the end of February, you're curious if you all were thinking that maybe orders would have picked up in March or if business dropped off in March? And then maybe how did April track just to frame it all out for us?

Yes. No, good question, Stanley. So obviously, on the Materials Solutions side, our shipments came in much slower than what we expected when we talked to you guys in February. On the flip side of that, parts sales came through pretty strong for the year. And we mentioned in the call some of the supply chain issues that we experienced on the Infrastructure Solutions side. That gave us a pretty decent number that we moved from Q1 to Q2. So we will see that here in the following quarter. From an April point of view, on the Materials Solutions side, I actually got an update this morning. orders are, I will say, in line with what we've seen in the last couple of months. However, I am very excited about the order intake that we've seen for asphalt plants and concrete plants. We think that business is going to be really strong for the remainder of the year.

And I guess you also talked about kind of flat to up single-digit revenue. Maybe help frame kind of where we are now with it sounding like that the plant business being strong and the material business being probably weaker than what you would have guessed.

Yes. No, we discussed that a lot internally, Stanley. And at this point in time, we are reconfirming that view. As I said that Materials Solutions, obviously, is lower than what we expected, but we believe that the IS side, especially on the plant side, there's a potential that, that can outperform and make up some of the losses on the MS side. I think it's important to also remember IS makes up about 2/3 of our business. So if that momentum is positive, it will have a good effect for the organization. We're also seeing really good margin momentum. Obviously, in the quarter, it dropped a little bit from the previous quarter. But we continue to see positive momentum on the margin side. And I'm pretty optimistic on what we will see for the rest of the year.

And speaking of margins, maybe help kind of unpack the 600 basis points on the MS side. How are you all thinking about that for the full year or progression sequentially to kind of figure out where we are because, I mean, right now, you guys are kind of back to '21, '22 type of margins when it was COVID impacted.

Yes. No, good question. I think if you look at Materials Solutions, obviously, there was a couple of onetime items in there. We highlight in our EBITDA bridge, a few items there, including some onetime inventory adjustments. We don't foresee those things to continue, although we have a very conservative inventory valuation policy that we follow. And we're going to watch that very carefully. And in this case, we have now inventory available, obviously, on the finished goods side. And if the market momentum comes back, we will be well positioned to shift that inventory and get it into our customers' hands. So we have a good view on that, Stanley. And obviously, we're going to continue to watch that. For the remainder of the year on the Materials Solutions side, as I said, we do see the volumes staying under pressure. Although here in April, we've seen that about 18% of all the machines that after our dealers had in inventory moved into their rental fleets. So customers are still busy. The only thing our dealers are not seeing that those are converting into purchases. The moment that happens, we will obviously see those orders replenished by our dealers. Parts continue to see good momentum. In the quarter, we were up about 10% on parts. As you guys know, it's one of the things that me and the team are focused on a lot, and we are very encouraged with the work our teams are doing. And I think that momentum will continue as well for the rest of the year.

Our next question comes from the line of Mig Dobre from Baird.

Yes. Can you hear me okay? Answer

Yes...

I want to go back to your commentary about the outlook here being flat to up single digits for 2024. To be honest with you, I really struggle with the math here because that would imply that for the next 3 quarters, you need to deliver average revenue of, call it, $340 million, maybe $345 million. When we're looking at your orders in Q1, they were less than $300 million. And backlog, backlog is down pretty significantly relative to the prior year. So I'm trying to think through what needs to happen here from an order standpoint over the next 3 quarters to allow you such a significant ramp in revenue unless the assumption here is that we are going to be burning down the backlog to something like, I don't know, $300 million, $350 million exiting 2024. So how do you think about that? And how do you do production planning given kind of what the numbers give...

Yes, Mig, I mean, if you look at backlog, it only went down about 1.8% from Q4. We do see that our lead times in manufacturing is continuously improving due to our investments in our factories. And obviously, that allows backlog to go down without necessarily affecting sales. Our parts availability is at a all-time high for most of our product lines. So that means that most of our parts doesn't make it to backlog, and then as I mentioned, when Stanley asked the question, we are really encouraged with the order intake that we've seen here in April for asphalt plants and concrete plants. And we have all indications that, that will continue. Our customers on that side continuously to give us feedback around the amount of work that they have and the backlogs that they have. The other thing that I think we need to consider is that we have positive momentum on new products that we've released to the market. There's a couple of models that we displayed at World of Asphalt and those products are entering the highest volume segments in the market. And we believe that we will get an upside due to those volumes. So yes, strong view on the next 3 quarters. But with what we see right now, we felt that it was prudent for us to reconfirm that.

I want to clarify something. The reason why your backlog is only down 2% sequentially is because Q1 revenues were down 11% relative to the prior year. So Q1 came in below your own internal expectations. As a result, your backlog was relatively unchanged. The discrepancy between your order intake and revenues is what the issue is here because in order for you to grow revenues or even keep them flat relative to the prior year, that obviously implies a very significant ramp sequentially in production, in revenues, which, again, at least in theory, it has to be supported by orders. So I guess my question relative to all of this is if you're saying that you're seeing better orders in April, are you able to sort of quantify that? And should we think that orders can actually return towards a, call it, $340 million plus kind of run rate as we think about the remaining three quarters of the year?

Yes. No. I mean, as I said, April was very strong for us on the asphalt plant side and the concrete plant side. Our parts order intake remains strong. MS was more or less in line with what we've seen in the last couple of quarters. The encouraging part on the MS side is the movement out of dealer inventory, just standing inventory into the rental fleet. 18% movement there was pretty significant for us. So yes, Mig, I mean, it's a fair question. We are very encouraged with what we've seen here in April. And if anything shifts, obviously, we will update you guys on that. With what we see right now, we felt comfortable with that.

My second set of questions here is around margin. And I'm curious, you've spent the last couple of years investing internally in systems and in people as well, with the idea that you're going to have better visibility and you're going to have hopefully more consistent execution. And unfortunately, this quarter, yet again, we're sort of seeing some variances here relative to that. So I'm kind of curious, from your standpoint, what needs to be done here in order to sort of get a more even operational sort of road map here on a go-forward basis?

Yes. No. I mean if you look at the margins, Q1, we ended on that 24.9%. Our range that we provided to you guys before was in the 24% to 25.5%. We feel optimistic that we will end closer to the higher end of that range for the year. Actually, in our Infrastructure Solutions side, margins came in strong. Obviously, we have the under-absorption and some of the inventory cost that we book on the Materials Solutions side that pulled them down. We also see continued positive margin development on our parts business. So Mig, I think the teams are working on the right things. I'm still encouraged with what we see. If we just take the inventory and adjustments all that we had, our margins were close to 26% during the quarter.

So on that note, can you help us understand what was this inventory charge that you're talking about?

Yes. No, I can. Obviously, we have internal policies that we review the quality of our inventory from an excess obsoletion and aging point of view. It's a conservative policy. And during the quarter, a couple of finished goods units reached a certain threshold that we had to take the write-down. Obviously, that inventory is still very good. It's sellable inventory. And when we move that inventory, we will see that positive effect in the margins in the future. We are evaluating this. We have pretty good visibility on that for the next couple of quarters. So we'll keep an eye on that. And obviously, we'll continue to apply our policy as we've got it in place here at the moment.

Is that inventory used equipment or new equipment?

No. No. No, it's not. And that's the big difference from the past. I think you guys will remember a couple of years ago, there was a big used inventory issue. No, this is new inventory. And as the dealers move inventory out of their fleets, we feel very comfortable that we'll be able to sell that inventory.

I'm sorry, one last question here. I'm a little bit puzzled by this because if anything, equipment prices have been going up. So why is it that this requires a write-down, especially if we're not talking about used equipment inventory?

Yes. No, once again, good question. It's a conservative policy that the team here put in place a couple of years ago. Obviously, we are applying that policy. And we're continuously reviewing these policies together with our internal audit team. So definitely conservative, Mig.

[Operator Instructions] Our next question comes from the line of Stephen Ferazani from Sidoti.

Appreciate the detail on the call. I wanted to ask about the supply chain challenges you ran into on Infrastructure Solutions in Q1. It would seem, given the strength in highway construction spending and the projects underway. And as you noted, you're seeing orders picking up. It would seem like those challenges might widen over the next 5 or 6 quarters. So I'm trying to think about, do you have visibility to that? And what can you do to prevent those challenges from impacting your results on a quarterly basis? Is there anything you can do?

Yes. No, absolutely, Steve. We can do something about that. This is a specific electronic components that basically goes into our asphalt plants. It's a pretty complex design. If you look at the whole control house that operates an asphalt plant. And that is one area that we were typically single sourced with in the past. We have found alternative suppliers. Unfortunately, there is an engineering design cycle and verification cycle that we're going through right now. So we have alternative suppliers on the line now that is approved. So over the next couple of quarters, we will have additional options from a supplier base point of view. So it will be tight. Some of the orders that moved from Q1 and Q2, those orders will ship. There is a potential risk of some of the items that we see to be delivered in Q2 that will move out to Q3. But we feel that within the year, we should still be able to deliver what we have on the backlog and where we make commitments to customers for this year.

So just to be clear, your expectation on the supply chain challenges, it's to a very specific item on the electronics side. that could persist somewhat into 2Q, but you're not seeing it in anything else right now and you're not concerned?

No. I mean, I will say there's always 1 or 2 components that is bugging us from time to time. But this is a very specific issue where we just have no alternatives to explore during the quarter. And our corrective action and the work that our engineering teams have done now has given us alternatives in the future.

Okay. Appreciate that. When I look, I know Q1 is never a good cash conversion quarter. It typically is negative compared to EPS. And obviously, you had certain challenges this quarter, a bit concerned on how much receivables went up this quarter, whether that's specific to issues you ran into on Materials Solutions with some of your customers? How reversible that is and how you're thinking about cash conversion this year?

Yes. Let me take a first step on that and then maybe Heinrich can elaborate. You're right, receivables went up in the range of $39 million. One thing to remember, Steve, is that on capital equipment, our terms is typically that customers pay on delivery. On parts, we typically have 30 days and Q1 being a strong part sales, obviously, that's the biggest reason for receivables going up. But Heinrich, I don't know if you have any additional view on this.

No, I think it's similar to what Jaco mentioned here. I think we continue to focus, I think, in a lot of areas within that cash conversion cycle, specifically related to the inventory side of the business. More specifically to your question on the receivables side, Jaco mentioned a little bit the stronger the part sales that we had here during Q1. We do have terms on those part sales. On the equipment side, we fully collect basically on shipment and equipment sales were lower during the Q1 phase. And yes, we continue that to improve from the equipment side going forward. And we also, within the receivables at a share class suits that we have that reached the criteria of being estimable and probable, which was in that number as well. There is no P&L impact to that item. It's clearly a balance sheet item. It's created as a receivable and then also a liability. The insurance carrier will take on full payments on that. So it will not be a long-term item for us in receivables.

Steve, just to confirm also, we feel very good about the quality of that receivables. We see very a low risk in aging receivables.

Okay. That's helpful. If I get one more in, you sound pretty confident on the '24 margin based on your comments on the last questions. Are you expecting to see more benefits from these plant efficiency efforts you've undertaken over the last year as well as are you starting to see any benefits to margin from ERP implementation?

Yes. So from an OpEx and CapEx point of view, our teams are now, I will say, fully structured. Some of the teams have been in operation now for a year plus. We fully expect the benefits of those to show up in the future. I will say it's a little bit early on the article implementation. Although the plants that we went in first, we believe that the teams are starting to identify the next step in our phase now that we have the investments we need. We have the article implementation finished. So the opportunity for us to drive margins there is pretty good. So I think we will see more, and that's why we feel comfortable with talking about the upper end of the range for this year.

Our next question comes from the line of Brian Sponheimer from Gabelli Funds.

I just wanted to talk about the broader competitive environment and pricing and what you're seeing from larger competitors relative to some of the niche providers and whether that's something that as we go forward into this year, there's either an opportunity or perhaps a challenge for you to get the pricing that you want?

No, good question. Obviously, we have quite a wide array of competitors in the market. I will say the one thing we are seeing specifically from the larger players is subsidies in terms of interest rates and floor plans, giving 12, 36 months by 0 interest for floor plan arrangements. So we're definitely seeing more of that, which takes us a little bit back to the pre-COVID era. We have responded in some of those cases. And obviously, that is reflected in some of the results that we've had as well, especially on the Materials Solutions side of the business. We are keeping a very close eye on pricing. But you guys also know that inflation has not come down as much as the Fed's wanted. So I think we're going to see fairly stable pricing for the foreseeable future. And we even think that going forward, and as we start to sell, some of our product lines are now into 2025, we are already thinking and taking pricing action for the items that we sell into next year. The other side that I'm really excited about us is I think our One Astec procurement team is doing a really good job for us with data analytics and trend line. So we have better visibility today than what I've seen in my time with Astec around price increases from suppliers, trend lines on steel, copper, those type of things. So we're definitely managing it in a much more proactive way than what we've done in historical quarters.

All right. Great. And best wishes for better second quarter and beyond.

And there are no further questions in the queue at this time. I would like to hand the call back to Steve Anderson for closing remarks.

Thank you, Dei. We appreciate your participation on our conference call, and thank you for your interest in Astec. As today's news release indicates, the conference call has been recorded. A replay of this conference call will be available through May 15, 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 7 days. All of that information is contained in the news release we distributed this morning. So as we said, this concludes our call, and I'm happy to connect with any of you if you have questions 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 now disconnect your lines at this time, and have a wonderful day.