Astec Industries - Earnings Call - Q4 2024

Executive Summary

• Record quarter: Q4 revenue $359.0M (+6.5% Y/Y), adjusted EBITDA $47.9M (13.3% margin, +360 bps Y/Y), and adjusted EPS $1.19; strong operating cash flow ($36.6M) and free cash flow ($32.1M) supported by working capital progress.
• Segment divergence: Infrastructure Solutions grew 11.9% with record segment adjusted EBITDA margin of 21.3%, while Materials Solutions declined 4.1% on dealer/contractor financing constraints and destocking.
• Backlog normalized: total backlog $419.6M (−26.4% Y/Y) reflecting strong invoicing in plants and dealers ordering closer to ship dates; management noted early 2025 order intake strength and H2-weighted demand expectations.
• Initial FY25 framework: adjusted EBITDA guidance $105–$125M; CFO laid out expected cash from operations $110–$125M, capex $35–$45M, adjusted SG&A $55–$65M/quarter, tax rate 24–26%, D&A $26–$30M; seasonality skewed to H2 (55–60%).
• Catalyst framing: operating/mix-driven margin expansion, a constructive plant cycle, and an H2-weighted 2025 setup; risks include mobile equipment softness, dealer destocking, and tariff/tax effects (Q4 effective tax 33.1% on one-time state accrual true-up).

What Went Well and What Went Wrong

What Went Well

• Record Q4 top-line and profitability on pricing/mix and execution: adjusted EBITDA $47.9M (13.3% margin) and adjusted EPS $1.19; CEO: “quarterly records for net sales, adjusted EBITDA and adjusted earnings per share”.
• Infrastructure Solutions outperformance: net sales $248.8M (+11.9% Y/Y) with record segment operating adjusted EBITDA margin 21.3% (+560 bps), driven by strong plant demand and operational excellence.
• Strong cash generation and liquidity: operating cash flow $36.6M, FCF $32.1M; liquidity $228.1M (cash available $88.3M + revolver availability $139.8M); CFO: “position us well for the future”.

What Went Wrong

• Backlog and Materials Solutions headwinds: total backlog down 26.4% Y/Y to $419.6M; Materials Solutions sales −4.1% with lower domestic equipment conversions amid finance capacity constraints and dealer destocking.
• Elevated tax rate reduced GAAP earnings quality: Q4 effective tax 33.1% (vs 14.9% LY) on one-time state under-accrual adjustment.
• Mobile equipment softness and interest rate sensitivity linger; CEO noted dealers/customers have been conservative and destocking persisted into January, though improving trends seen into 1H25.

Transcript

Operator (participant)

Hello, and welcome to the Astec Industries Fourth Quarter and Full Year 2024 earnings call. As a reminder, this conference call is being recorded. It is my pleasure to introduce to you your host, Steve Anderson, Senior Vice President of Administration and Investor Relations. Mr. Anderson, you may begin.

Steve Anderson (SVP of Administration and Investor Relations)

Thank you, and good morning, everyone. For your information, a copy of our press release and presentation are posted on our website under the Investor Relations tab at www.astecindustries.com. Joining me on today's call are Jaco van der Merwe, Chief Executive Officer, and Brian Harris, Chief Financial Officer. In just a moment, I'll turn the call over to Jaco to provide his comments, and then Brian will summarize our financial results. Turning to slide two, 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. 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 U.S. Securities and Exchange Commission. 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 and non-GAAP financial measures, which management believes provide useful information to investors. These non-GAAP 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 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 presentation, and now, turning to slide three, I'll turn the call over to Jaco.

Jaco van der Merwe (CEO)

Thank you, Steve. Good morning, everyone, and thank you for joining us. Moving to slide four, I am pleased to report we delivered quarterly records for net sales, adjusted net income, and adjusted EBITDA. The fourth quarter is typically one of the strongest quarters of the year. This year, we benefited from several of our continuous process improvement initiatives. Strong net sales for the quarter were primarily driven by capital equipment and aftermarket parts in our Infrastructure Solutions segment. Demand for asphalt and concrete plants has remained healthy, and we are encouraged by the level of quoting activity. Capital equipment sales in our Material Solutions segment continued to be challenged by high interest rates and further dealer inventory destocking activity. On a positive note, quarterly aftermarket parts sales remained stable throughout 2024.

This confirms the feedback we have received from our customers and dealers about being busy and having a lot of work on their books. At a recent meeting with our Material Solutions dealers, the vast majority stated December was a record month. Both they and we expect channel inventory levels to be nearing the end of the right-sizing phase that has been taking place over the past two years. Our Material Solutions dealers have seen further destocking activity in January, which supports our view of a stronger second half of 2025. Full-year net sales were relatively flat at $1.3 billion. We saw strong capital equipment demand in our Infrastructure Solutions segment, partially offset by lower equipment sales in Material Solutions. Aftermarket parts were stable in both the Infrastructure Solutions and Material Solutions segments.

Backlog moderated due to strong invoicing of asphalt and concrete plant equipment and the previously discussed delays in dealers placing restocking orders. Adjusted EBITDA of $47.9 million increased 47% in the fourth quarter, and adjusted EBITDA margin increased 360 basis points to 13.3%. For the year, adjusted EBITDA of $111.8 million increased 1.6%, and adjusted EBITDA margins increased 40 basis points to 8.6%. For the full year 2025, we expect further progress in consistency and profitable growth to produce adjusted EBITDA in the range of $105 million-$125 million. This range does not take into account the potential impact of tariffs. As part of our operational excellence initiatives, we have invested in resources to leverage our purchasing power and reduce supply risk. Since COVID, we have been identifying and building relationships with secondary and tertiary sources of supply across the globe.

We certainly are not immune to short-term tariff risk, but our operational excellence and procurement efforts provide some degree of mitigation. I will also remind you that approximately 80% of our net sales are domestic, and the majority of our manufacturing takes place in the United States. Less than 15% of our purchases are sourced from China. Positive free cash flow was generated as a result of profitable sales and our focus on working capital management. On slide five, we remind you of the strategic framework we introduced at the beginning of 2024. We believe having empowered, enabled, and engaged employees puts us in the best position to consistently take care of our customers and, in turn, our shareholders. As our internal voice of One Astec survey showed, employee engagement continues to grow from a favorable level, and ongoing engagement is planned in 2025.

Being customer-focused is in the DNA of Astec. We value our customers and will continue to provide them with industry-changing solutions and exceptional service. We are also excited about new product launches and advanced digital integrations and services in store for 2025, many of which will be showcased at the upcoming World of Asphalt AGG1 show in St. Louis. On slide six, we provide a brief state of the industry. As you know, Astec is a niche industry player focused on the rock-to-road market segments. In any given quarter, approximately 80% of our net sales are within the United States. Many of our nation's roads and bridges are in poor condition and need significant repair and replacement. A large portion of domestic funding comes from federal programs, in addition to state and private resources.

Investment in America's infrastructure continues, as evidenced by the American road and transportation data, showing states have committed over $180 billion in highway and bridge formula funds to support over 89,000 new projects. The total value of state and local government highway and bridge contract awards was nearly $121 billion in 2024, up from $114.6 billion in 2023. To put this in perspective, the value of awards was $83 billion in 2021. Growth has been driven by a combination of federal, state, and local investments. According to the U.S. Department of Transportation, approximately 60% of authorized IIJA funds have been obligated, with only 36% having been dispersed. Since our origin in 1972, Astec has provided solutions for the infrastructure industry. The need for our products is expected to continue for the foreseeable future. This provides stability for our employees, customers, and shareholders.

Worldwide spending on road maintenance and upgrades continues to climb. We see international markets as opportunities based on having strong brand recognition but modest to small market share. On slide seven, we show our implied orders, which were up slightly year over year and showed a strong increase sequentially. Our Infrastructure Solutions segment drove the majority of the overall increase. However, our Material Solutions segment generated a 12% increase over this year's third quarter. Moving on to slide eight, our backlog for both segments declined sequentially but remained healthy, supported by growth in implied orders. Current backlog levels are a combination of strong invoicing for asphalt and concrete plants, dealers ordering equipment closer to the desired shipment dates, and internal operational excellence efforts to increase capacity throughput. We are encouraged by the order intake in both groups thus far in 2025.

With that, I will now turn the call over to Brian to provide additional details on our fourth quarter and full year financial results.

Brian Harris (CFO)

Thank you, Jaco, and good morning. Our fourth quarter and full year financial results are highlighted on slide 10. As Jaco mentioned, we had record net sales for the quarter due to increased demand for capital equipment and aftermarket parts. Adjusted EBITDA and adjusted EBITDA margins benefited from favorable volume, pricing, and mix. Adjusted earnings per share of $1.19 for the fourth quarter was a record as well. Full year adjusted EBITDA dollars and adjusted EBITDA margins grew slightly as favorable pricing was mostly offset by volume mix manufacturing inefficiencies and the impact of inflation. The full year earnings per share decline was primarily driven by the impact of increased income tax, interest, and other expenses. Moving on to the Infrastructure Solutions segment shown on slide 11, we saw higher net sales for the quarter due to strong domestic capital equipment performance and moderate increases in aftermarket part sales.

For the year, net sales increased $37 million or 4.6%. Segment operating adjusted EBITDA dollars and adjusted EBITDA margins were affected positively by volume, pricing, and operational excellence initiatives and expense management. It was noteworthy that the performance in Q4 delivered record EBITDA margin of 21.3%, reflecting strong execution of our plans. The Material Solutions segment is shown on slide 12. Adjusted EBITDA dollars and margins were negatively impacted for the quarter and year by lower capital equipment sales resulting from the previously mentioned influence of high interest rates and dealer destocking. Aftermarket part sales were relatively flat, albeit at healthy levels. The negative impact of lower sales volumes was mitigated by effective cost control. Moving on to slide 13, to the fourth quarter adjusted EBITDA bridge, we were pleased to report an adjusted EBITDA of $47.9 million, a 46.9% increase over Q4 2023.

Favorable volume, pricing, and mix were the key drivers of the increase. On slide 14, you can see we maintain a strong balance sheet with ample liquidity. We ended the quarter with available cash and cash equivalents of $88.3 million, available credit of $139.8 million, for a total available liquidity of $228.1 million. Our free cash flow in the quarter was $32.1 million due to profitable sales and sound working capital management. Driving commercial and operational excellence and exploring inorganic growth will continue to be our capital allocation priorities. As Jaco mentioned, our adjusted EBITDA guidance range for 2025 is $105 million-$125 million. For modeling purposes, the cadence of our business has some seasonality, and we expect approximately 40%-45% of adjusted EBITDA in the first half of the year and 55%-60% in the second half, with plus or minus 2% each half.

We expect operating cash flow of $110-$125 million before capital expenditures, which we expect to be in the range of $35-$45 million. We expect adjusted SG&A of $55-$65 million per quarter and an effective tax rate of 24%-26%. Depreciation and amortization are expected to be in the $26-$30 million range. I will now turn the call over to Jaco for his closing comments.

Jaco van der Merwe (CEO)

Thank you, Brian. Turning to investment highlights on slide 15, Astec continues to be a trusted source of globally recognized brands and high-quality solutions for our customers. Overall, customers and dealers have steady expectations for 2025, with second-half tailwinds expected. I was encouraged by the recent World of Concrete trade show and National Asphalt Pavement Association annual meetings. Attendance at both events was strong. Many of our Material Solutions dealers have told us they experienced a very strong December. As a result, their inventories have been reduced but are still at elevated levels in some pockets of the markets. January saw further inventory reductions. However, lingering concerns over the pace of interest rate reductions continue to be a factor. Our operational excellence efforts continue to gain traction. They are beginning to pay off and have many benefits yet to come.

Manufacturing and procurement efforts are driving efficiencies, and we are seeing signs of improved Adjusted EBITDA trends beginning to emerge. We are excited about our growth drivers, which include our innovative pipeline of new products, a stable and growing recurring aftermarket parts business, multi-year federal and state funding for interstates and highways, expansion opportunities in current and future international markets, and inorganic growth opportunities that are strategically aligned and meet our financial criteria. A strong balance sheet which provides the ability to fund growth. I am proud of the great work our teams are doing and appreciate their efforts. With that, operator, we are now ready to take questions.

Operator (participant)

Thank you. Ladies and gentlemen, we will now begin the question and answer session. At this time, I would like to remind everyone to ask a question, press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key or Star two. One moment, please, for your first question. Your first question comes from the line of Steve Ferazani of Sidoti & Company. Please go ahead.

Alexander Robinson (Analyst)

Good morning. This is Alex on for Steve. Thanks for taking questions.

Jaco van der Merwe (CEO)

Hey, morning, Alex.

Alexander Robinson (Analyst)

You mentioned.

Hey, good morning, guys. In the prepared remarks, you touched on manufacturing inefficiencies. Could we talk a little bit about some of the progress you've made and maybe what's still to come? Yeah, absolutely. I mean, if you look at the EBITDA bridges of the last few quarters, you've seen a steady improvement in that. And in fact, if you look at the Q4 inefficiencies, it's been one of the lowest we've had in quite a while. Now, Q4 is typically an interesting quarter because we have quite a bit of vacations, days off. We also typically count inventory across the company. The teams this year have done a really good job improving our counting efficiencies, and we've seen a significant improvement in the amount of days that we've lost for counting.

Jaco van der Merwe (CEO)

We still have more work to do, but as I said, Alex, if you go back over the last few quarters, you can see that the teams have done a really good job driving those inefficiencies lower quarter over quarter.

Alexander Robinson (Analyst)

Thank you. Appreciate the color there. And then if we could touch on backlog, I'm trying to understand what do you consider a normalized level for infrastructure solutions at this point, and do you have any concerns about the lower level? And even if you have concrete and asphalt delivery scheduled for all of 2025, just sort of trying to get a sense of how that evolves.

Jaco van der Merwe (CEO)

Yeah, for sure. Maybe I'll just start a little bit with feedback from the market here. The first six weeks, we've had a very busy travel schedule. As I mentioned in the prepared remarks, we met with our dealers. We attended World of Concrete, NAPA, and overall, we get some cautious optimism from our customer base, and on the dealer side, specifically the Astec dealers, we've had a strong December for converting inventory to sales, and then another significant reduction here in January, so from that point of view, there's a lot of positive signs. From the Infrastructure Solutions side, there's two pieces to that business. We obviously have the asphalt and concrete plant side of the business, and then we have the mobile equipment that is our mobile road construction and forestry part.

And the mobile equipment here in the IS side is experiencing the same pressure that what we see on the Material Solutions side. So if we strip the development of that equipment out in the backlog, the backlog for asphalt and concrete plant equipment remains really good. I will say on the concrete side, we are now delivering in quite a few of our product lines third, fourth quarter this year. On the asphalt side, we've actually seen some really nice order intake here in the first six weeks of the year already. So I'm not concerned about the Infrastructure Solutions side. As I mentioned, the plant business overall is still pretty strong.

Alexander Robinson (Analyst)

Great context. Thank you very much. That's all from us.

Operator (participant)

Your next question comes from the line of Brian Sponheimer of Gabelli Asset Management. Please go ahead.

Brian Sponheimer (Analyst)

Hi, good morning, everyone.

Jaco van der Merwe (CEO)

Good morning.

Brian Sponheimer (Analyst)

A lot of improvement here, which is great to see. I'm curious, given you mentioned the political climate with tariffs, how important would the reinstitution of bonus depreciation at 100% be for you to see orders and backlog turnaround? If that's something that.

Jaco van der Merwe (CEO)

Yeah, absolutely. Yeah, absolutely. Actually, when we went to the Hill last year as part of the trade association visit there, and those were both topics that we raised because especially for our smaller customers, those are really important. So yeah, that will be a great win if those can be reinstituted. And as I say, especially for our smaller customer base.

Brian Sponheimer (Analyst)

Yeah. No, I think so too. I guess if we're thinking about the mobile market and interest rates have been something that have mattered greatly over the past two years, how much delta is there between what you would consider to be an interest rate environment that would be beneficial to one that's restrictive? Is it 200 basis points? Is it less than that?

Jaco van der Merwe (CEO)

Yeah, Brian, I actually have a different view on that. I think the customer base stayed conservative with buying because of the elevated interest rates. The challenge is that equipment has been used right through that time, and that just means equipment is getting older and older. So the conversions we've seen in December and the conversions we've seen here in January, I mean, to me, that's a bit of a sign that people have now learned to deal with higher interest rates, and they don't have much of a choice to actually start to replace. But we heard from our dealers that higher interest rates obviously created some challenges for them last year, but we cannot sit on the sidelines forever. Otherwise, equipment will just be too old.

Brian Sponheimer (Analyst)

Yeah, understood. All right. Well, thank you very much for having me on, and best of wishes for a successful 2025.

Jaco van der Merwe (CEO)

Thank you.

Operator (participant)

There are no further questions at this time. With that, I will now turn the call back over to Steve Anderson for final closing remarks. Please go ahead.

Steve Anderson (SVP of Administration and Investor Relations)

All right. Thank you, Kelvin. I'd like to remind everyone that Astec will be displaying products at the World of Asphalt AGG1 trade show in St. Louis, Missouri, on March 25th through 27th. If you attend the show, please stop by our booth and say hello. We do appreciate your participation on our conference call this morning, and thank you for your interest in Astec. As today's news release states, this conference call has been recorded. A replay of the conference call will be available through March 12th, 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 five business days. This concludes our call, but I'm happy to connect with any of you if you have additional questions later on. So thank you all. Have a good day.