Under Stanley Elliott, who you might know. Today, we're pleased to have Astec Industries with us. From the company, we have Jaco van der Merwe, President and Chief Executive Officer, and Heinrich Jonker, Chief Financial Officer. They will first give a brief presentation about the company, and then we'll jump into Q&A. So guys, thank you for joining us, and the floor is yours.
Yeah, absolutely. Thank you, Andrew, and everybody welcome. Welcome to this session. Just, like Andrew said, myself, Jaco van der Merwe, CEO and President for the last 18 months now, and Heinrich is with me on the stage. Heinrich is our current VP of Finance for our Infrastructure Solutions business and also Interim CFO. So maybe just a quick introduction on the company for those of you who don't know us. We are a Chattanooga-based organization, playing specifically in the infrastructure space. You know, if people ask me the question about what do you do? Simple explanation is anything that you drive on and anything that you land on probably ran through our equipment one way or another.
So, so, you know, we build equipment for the industry that creates our road and infrastructure. Last year, we did about $1.3 billion in sales, and we delivered about, you know, $2.67 in EPS, which is about 8.2% EBITDA. Overall, a really strong year for us last year. So, we operate in two groups. Infrastructure Solutions, that's specifically focusing on construction, roads, bridges, any infrastructure that we need. And then obviously, we have a Materials Solutions business, and as you guys know, anything that we build needs aggregate to flow into that. So, this year, we updated our strategic plan, and we're building our business around three strategic pillars.
First of all, creating an environment where our employees feel valued and engaged. Focusing on our customers. And lastly, you know, our company was built on innovation and bringing that focus back on innovation. And, you know, I look at this in a very simple way, that if we focus on our employees and we take care of them, they will help us to take care of our customers, and when we do that, you know, we should have a strong business in the future. Now, from a long-term point of view, you know, there's actually quite a few things that I'm very excited about in our business, and I wanna start with the one right at the bottom, and that's funding.
As you guys know, we're right in the middle of our infrastructure bill right now, and the you know, the question that we always get is: What happens after the bill? Now, you know, if you look at some of the material that's published on, for instance, Department of Transportation's website, you know, they created this vision for infrastructure over the next few years. And you know, if they want to achieve some of the targets that they've set long term, I believe that, you know, the future infrastructure bills not only has to match what we have today, but they have to be significantly bigger in order for them to get any close to delivering on their promises.
I'm very excited about the space that we are in because I think it's gonna be a pretty strong industry for many years to come. Personally, I grew up in an environment where we focus very strongly on parts and service business. Once again, I think that if we provide our customers with great parts support, great service, they will come to us for their equipment needs as well. You know, one of the things that our organization struggled with in the past is creating consistent, repeatable results, and for me, building a business around a strong parts and service business will help us to achieve that.
The other thing that I'm very excited about is, you know, like this year, for instance, at our World of Asphalt exhibit was a really good show for us, where we showcased various new products. For those of you who followed Astec for many years, you know that this business was built on customer service and innovation. You know, our team are really focused on bringing that back and making sure that we stay on top of new product development. You know, we are very excited about various new products that we bring to the market.
You know, just two of those units that you see there, the 40 5 milling machine, is attacking the biggest market segment that is currently owned by one of our competitors, and we never played in that market. We were always on the higher end of the product line, so it gives us access to the biggest volume market. The same for the track paver there. Different competitor, single biggest market, and we used to be a very small player in there because we didn't have the right product, and now we do have the right product, and actually, just this past week, we released the first production unit to a customer, and the machine has been running great the last 5 or 6 days. So really excited about it.
Two big market segments that we didn't have a product to play in the past. You know, obviously, an organization like us always focuses on cost. The one thing that I'm really excited about is the work that we now do under the OneASTEC umbrella, something my predecessor started already. We're building on that, and our procurement team are now, you know, in a place where all the work that they put together over the last two, three years are really starting to gain momentum. So, we believe that that will position us very well in the future. The other thing that is key for us, we are very strong here in the US in various of our product lines, but from an international point of view, there is tremendous growth for us.
For us, you know, we are focusing on growing our footprint around the world with expanded dealer network, expanded sales offices, and every time we do that, you know, we have an opportunity to grow, to grow our business. From an operations point of view, I will say today our organization has the best operational team that we've had, in my opinion, since the existence of the company. You know, historically, the company was very focused on new product development, customer service, and manufacturing was almost a side topic. You know, I come from a manufacturing background. Various of our executive leadership team come from a manufacturing background, and we've created and invested in the right organizational structures. And we are starting to see the benefits of those, and obviously you will see that as well.
I think our margin development here over the last few quarters is an example of what will happen as a result of our operational excellence. Just lastly, you know, we have a very strong balance sheet today. One of the opportunities for us as an organization, when I came in as CEO, one of the things we focused on was to create some stability in the organization. You know, I think we have a really good opportunity now to take advantage of our balance sheet and find ways to grow, not just organically, but also inorganically. I'm happy to say that, you know, our board is very supportive of that.
We have a good plan and a good strategy, and, you know, obviously we're exploring opportunities that will help us to grow this business in the future. And the good thing is, there's a lot of opportunities in the market. You just have to go and find the right, the right deals that make sense. So, so once again, from my side, thank you very much for the time today. And, Andrew, over to you.
Yeah. Thanks for that, Jaco. And when you came on board back in January 2023, the existing strategy was to simplify, focus and grow, which I believe you publicly aligned with.
Absolutely.
I was wondering, I guess, what are your updated thoughts on the strategy? Like, what, what inning are we in, and where has your focus been-
Yeah
... recently?
Yeah. No, absolutely. I mean, we, as a team, you know, we were part of creating that simplify, focus, and grow. And you know, I grew up in an environment where we talked a lot about stability, profitability, and growth, and it really fits into those three things very well. You know, we will-- we're gonna continue to use that as a base. Earlier this year or late last year, as a leadership team, you know, we talked about what we believe will differentiate us in the future? And you know, the three strategic pillars that's on the screen right now is what came from that. And so we will always keep, you know, simplify, focus, and grow in mind.
But the environment where we are in, we believe that the market for talent is always gonna be a challenge. And as an organization, we wanna make sure we create a really good environment for our employees. We wanna create opportunities for them, because, like I said earlier, if we do that, I believe that they will look after our customers. And if we give our customers great service, you know, they will reward us with business. And then, you know, if we can supplement those first two with great industry-changing innovation, you know, that's something that I think those three things together will position us very well for the future.
How much does the OneASTEC operating model and the brand consolidation that you all have done in the past play into the employee engagement initiative?
Yeah. No, absolutely. You know, when the OneASTEC model was created, you know, I will say it was maybe a little bit... it was maybe a little bit forced on the employees, just because we were so decentralized. Every business was ran completely separate. You know, my view on that is when you let it happen naturally, that's when people really embrace it. And I can give you an example. You know, our OneASTEC procurement team, you know, every time when I meet with that team and I see the progress they're making, you know, the benefits we're gonna get from those things in the future is really good.
Now, I will stress also is that, you know, I think there's certain things that you can centralize, but the focus needs to be in the business. And that's one of the things that we've definitely done in the last 18 months, is give the business full responsibility for running business. As you guys have known us, we've significantly reduced our executive leadership overhead structure, and you know, I've given my team the liberty to add the resources within the business to really drive it. But where we can take advantage of, you know, the OneASTEC environment, we do. Great example is, you know, when you come to one of our big exhibits...
You see the branding, and you see how all the product now look and feel the same. It really gives our customers the understanding that we're much bigger than just a small entity, so.
Yeah. And you all have always been a very innovative company. And you mentioned the new products, such as the grinder, the mill, and the track pavers. I'm wondering what you're doing from an asset connectivity standpoint. I know you all bought MINDS Automation a few years ago. How are you looking to create a fleet that's, you know, connected?
Yeah. No, absolutely. You know, if you look at our industry in general, you know, we have a lot of what I call dumb iron. So, you know, pieces of equipment that is pretty easy, you know, I don't wanna say easy to copy, but, you know, people can look at the equipment and do something with it. You know, I believe, and once again, I came from an environment where taking that dumb iron and make it intelligent is what will really differentiate us in the future. So, we've created an Astec Digital team. That team now consists of, you know, the historical Astec control systems that we have, the MINDS system. We also bought Grathwol Automation a couple of years ago.
Our aim is to provide our customers visibility of their operations from Rock to Road. Actually, just yesterday morning, we visited a customer, and, you know, they operate crushing and screening quarries. They operate asphalt plants, they have concrete plants, and then they have paving equipment. One of the questions the guy asked, or the leader of the organization asked, is: "Can you help me to see the performance all the way through the value chain?" The answer is we will be able to do that really soon. So just think about the benefits that that will create for our customers. You know, a customer can see...
If he, let's say he has 15 or 16 asphalt plants, he can plan his, bitumen inventory, you know, to make sure that no plant runs out. He can plan his production crews if they have, for instance, rain in one area, or there's a breakdown of equipment or something like that. So, you know, our customers will be able, you know, on a screen, on their phone, see the performance of their equipment, as I said, from rock to road. And, I think it's gonna be a game changer. And there's very few, you know, companies in our industry that has the product offering that we have, that can provide that type of intelligence. So, I'm super excited about that.
You know, our teams are working on this and, you know, by the time we get to Conexpo 2026, I think we're gonna have a product that's the market wants.
Mm-hmm. And, I guess broader term, like, what type of—how long of a timeline are you looking at for adoption for those types of connected products to take hold, and what type of mixed impacts might you see?
Yeah. I mean, today, if you look at every mobile construction piece of equipment that we ship is connected. So every paver, every milling machine, every Shuttle Buggy that we already ship to our customers is connected. So they can see the performance of that product today. Every asphalt plant that we ship, you know, customers can connect to their equipment today already. They can see the performance. And even more importantly, we can connect to that equipment, so that if there's, you know, any maintenance issues or breakdowns, you know, our technicians can connect remotely, and we can fault find with our customers, you know, on the phone. So it's already there. A lot of the equipment we already sell has that ability.
The piece that we're looking forward to now is how do you connect it all together and give our customers a view all the way across the value chain.
Right. And then switching gears to sort of the demand picture and guidance. You're out with the guidance of low single-digit revenue growth this year and 24%-25.5% gross margins. Just wondering how you're thinking about the cadence of revenue, the remaining quarters, and any color on order activity you've seen the past couple months or weeks.
Yeah. No, absolutely. And maybe I touch quickly on the margin side. You know, we've given a range of 24%-25.5%, and Heinrich jump in here anytime, but I believe that we're gonna be on the upper side of that range, like we presented in the last earnings call. You know, that's a result of the operational excellence work that we're doing, the cost work that we're doing. From a business point of view, you know, the Infrastructure Solutions side of the business, especially our asphalt plant and concrete plant, the demand is very solid there, like I communicated during the last earnings call. Materials Solutions is soft and but stable.
You know, even in the months since the earnings call, you know, it's remained fairly stable, although on a lower level. You know, just here the last week or so, we saw statistics on the amount of rock that was produced by all the companies who does that, Vulcan, CRH, those type of companies, and it was only down about 4% in the first quarter. So the disconnect between our customer activity and what we see really sit in that inventory chain between us and the dealer network. And, you know, we explained that during the quarter.
You know, just the day after the earnings call, we met with all our Materials Solutions dealers and we had two or three of the dealers told us that they had the best first quarter in their history. So you think about that, you think about our, our position, and then you think about the production, and you say, "Well, what is the disconnect?" And you know, obviously the, the inventory that's in the channel, the, the rental fleets that's not converting is creating that picture, but they're moving equipment.
Mm-hmm.
So it's only a matter of time before that demand is, is coming back to us on a more stable level. So, so I, I will say, you know, like we said during the quarter, another 3-6 months, and I think that inventory will be flushed out, and, we'll start to see, a more normalized business. So I don't know if you wanna maybe say something about the, the different quarters and what to expect, here for the next few, few quarters, just high level?
Yeah, Jaco, I think we will continue. You know, I think you know, Q2 for us as well, kind of stable activity. You know, Q3 typically for us is a little bit more seasonal, seasonal for us. Towards the last quarter of the year is typically where we see strong performance coming through. So, you know, I think we will continue to see kind of in line with that-
Yeah
... for the remainder of the year.
Now, you know, for us to get to what we set on the, on the earnings call, you know, that, that low single-digit growth, the third quarter this year needs to look different. And, you know, the way it's shaping up now, there's a potential that that can happen. So, you know, like, like I say, Q2, you know, is, is gonna be a stable quarter, we think. And, you know, potentially Q3 stronger, that will make up some of what we, what we lost in the, in the first quarter.
Yeah.
You mentioned some supply chain delays-
Yeah
... in the first quarter. I think, are you seeing that situation start to improve, and maybe that'll help you out on the top line, too?
Yeah. Yeah, so we had a very specific supplier that created an issue for us. You know, and during times like that, it forces you to go and look for alternative suppliers. Now in this case, it's not just changing, it involves a full engineering change that needs to take place. So we've done that work. We've identified at least two alternative suppliers now. We have the first set of parts in-house that can, you know, we can use in the future. However, you know, our current supplier have done a great job of catching up. We still have... You know, in the first quarter, we had about two plants that moved out from the first quarter to the second quarter.
You know, those, those are done and shipped, but there's a potential for, you know, two different ones to move to the next quarter. And that will obviously then, you know, potentially make the third quarter much, much stronger, so. But for the year, you know, we believe over the year's time, that, that will not be an issue anymore.
Gotcha. And then you also mentioned cost-saving initiatives in the materials segment of this year. Just wondering if you could talk a little bit about those and quantity of savings you'd be expecting, or anything you wanna talk about?
Yeah, absolutely. I mean, you know, it's always unfortunate when you have to go into, especially headcount reduction, and we did some of that during the first quarter. You know, we had about 40 or so employees that was affected. It will give us about $1 million-plus a quarter of savings. You know, the piece that we are really focused on right now is, you know, everybody knows how difficult it was to build up resources. So what we don't wanna do is to push it too far, and then when the market comes back, that we don't have enough capacity.
So, right now, you know, we're letting natural attrition take care of some excess capacity, but we are not planning any major reductions, especially on the Materials Solutions side of the business. And, you know, because we wanna take care of the opportunity when it comes, and we believe it's gonna be in the near term, so.
Where do you stand with the rollout of the new ERP system? How much of that is left, and what are spending levels you're thinking about there?
Yeah, no. So, you know, we during Q2 during the earnings call we announced that our second wave sites went live. So they went live on the first of April. You know, they are producing, they are shipping. So now we in the planning stage for wave three, which will consist of another two sites, you know, October, November this year. The program overall, we're spending as per the plan. You know, we gave guidance on that spending, and we're seeing it being in line on that. You know, we are reviewing the project overall, just to make sure we have the right structure, the right strategy.
You know, these things are always complicated, and as you go along, you learn, you learn what works in your organization or whatnot. So, but I, I think we have a great team, in-house. We've learned a tremendous amount during the first three implementations already. So you know, it, it will-- right now, the, the end date that we had originally, scheduled was the end of next year. We are evaluating, you know, what that looks like. From a costing point of view, you know, we, we have a very clear target, and that's what we focus on, on achieving, so. But there's a lot of work to be done. And, you know, the CloudP ort platform that we selected is very different than a on-premise solution, so we're learning a lot.
But, we also believe that we'll get the value, and especially as we grow and add companies, you know, it will be. That's when we will really see a lot of the synergies that come from that, so.
Sure. Switching gears to the balance sheet and cash flow in our final four minutes. I guess just broadly, maybe for you, Heinrich, how are you thinking about the free cash flow profile of the business going, going forward, and what are you doing to improve it?
Yeah, and I think for us at this point, you know, the main focus for us from a cash flow perspective is the focus on inventory. You know, for us, we talked about the inventory that's sitting in the channel as well. You know, we have some finished goods we need to work through as well as an organization. You know, so we're driving that, especially hard during this time. You know, not just from a finished goods perspective, but also from a parts perspective and a raw materials, right? Finding the right balance of what we need to have on hand.
You know, Jaco spoke about parts sales and how important that is for our business, so it's very important that we have the right inventory at the right time so we can satisfy our customer needs from that perspective. So, you know, we historically have not had problems with things like receivables and collections. We've been very, very healthy and on that side of the business. Now, not to say we're not working on those areas as well, right? On the large equipment side, we collect large down payments, so we're trying to speed up those cycles. You know, we're constantly reviewing terms and conditions on our contracts to make sure that, you know, it's favorable to us as an organization as well.
You know, on the payable side, Jaco talked about the OneASTEC procurement group, right? We're also evaluating our suppliers across the organizations, right? Do we have the same terms across all the sites? That helps us as well. So there's several activities that's going on at the moment. But out of all of those, I would say inventory is our big focus area to drive it down.
Yeah, maybe just to add to that, you know, I think two things for people to consider is, obviously, we're spending quite a bit of cash on Oracle, you know, based on the rollout plan. But for us, you know, from an inventory point of view, you know, there's potentially between $50 and $100 million dollar opportunity for us to improve our capital situation. And the team is very focused on that because obviously we know we're gonna need that if we wanna start to do acquisitions. So, you know, very clear focus in the organization. Obviously, you know, the market will help us, if it gets stronger, to do that quicker.
But, I think the teams are on it now, and we should start to see that going in the right direction.
Yep. And, maintaining a strong balance sheet has always been y'all's bread and butter, and you mentioned the cash inflows from the working capital reductions. What are you gonna do with all that cash? Maybe-
Yeah
... a fun one to end on.
You know, good, good question, and obviously, you know, Astec has paid a dividend in the past, that will continue to go. But for us, you know, the biggest opportunity lies in two places. You know, is investing in ourselves and investing in our factories. You know, I talked about the strong operations team that we have, and actually, just while we were sitting outside, you know, one of the manufacturing engineers updated me on a recent investment that we made in our factories. And, you know, as we do those things, the amount of time that we spend to produce equipment is getting less and less because the equipment is just so much more efficient. So we're gonna continue to do that.
But from an acquisition point of view, you know, we have a good plan. We have a good strategy now. You know, we have quite a few opportunities in the pipeline. Nothing that will happen, you know, this quarter, but there's definitely a few opportunities that if we can get the right deals in place, that can hopefully still happen this year or early next year. But we have to generate the cash, so we are laser focused on driving down the inventory so that we can have that available.
You know, if you look at our leverage today, you know, just, just on the current leverage with the current, you know, balance we have on our revolver, you know, we can go and do a $150 million deal without any need for further capitalization. So there's quite a bit available for us. And if we can release the money out of our inventory, that makes it even, even a bigger amount, so.
Great. Well, with that, we're out of time. So Jaco, Heinrich, thanks for the presentation today, and thanks for joining, everybody.
Thank you.