Astec Industries, Inc.

Hello, and welcome to the Aztec Industries Third Quarter Earnings Call. As a reminder, this conference call is being recorded. It is my pleasure to introduce your host, Steve Anderson, Senior Vice President of Administration and Investor Relations. Mr. Anderson, you may begin.

Thank you, and welcome to the Aztec Third Quarter 2023 Earnings Call. Joining me on today's call are Jakob van der Merwe, Chief Executive Officer, and Becky Weinberg, Chief Financial Officer. In just a moment, I'll turn the call over to Yako to provide comments, and then Becky will summarize our financial results. Before we begin, I'll remind you that our discussion this morning may contain forward-looking statements that relate to the future performance of the company. And these statements are intended to qualify for the safe harbor liability established by the Private Securities Litigation Reform Act. Any such statements are not guarantees of future performance and are subject to certain risks, uncertainties, and assumptions. Factors that could influence our results are highlighted in today's financial news release, and others are contained in our filings with the SEC. As usual, we ask that you familiarize yourself with those factors. In an effort to provide investors with additional information regarding the company's results, the company refers to various U.S. GAAP, which are generally accepted accounting principles, and 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 GAAP measures. Management of the company uses both GAAP and non-GAAP financial measures to establish internal budgets and targets and to evaluate the company's financial performance against such budgets and targets. A reconciliation of GAAP to non-GAAP results are included in our news release and the appendix of our slide deck. All related earnings materials are posted on our website at www.aztechindustries.com, including our presentation, which is under the Investor Relations and Presentations tabs. And now, I'll turn the call over to Jakob.

Thank you, Steve. Good morning, everyone, and thank you for joining us. Turning to slide four. The third quarter turned out to be disappointing from a short-term results perspective, yet positive from creating a stronger business for the long term. As mentioned in earnings release, our results for the quarter were negatively impacted by a litigation loss contingency of $6.4 million related to equipment sold during 2017. Becky will make more comments about this in her remarks. Sales also ended lower than expected due to various infrastructure solutions related orders being delayed to Q4 due to customer readiness and payments. From a long-term performance point of view, I'm excited about the 220 basis point improvement and margins we realized during the quarter. The investments we are making in our factories and systems are progressing well and I fully expect to see further benefits in future quarters. The large transformation at one of our infrastructure solution sites is developing well, with most of the capital equipment and new shop floor layouts completed. Margin development at this facility improved from last year, but ended below our Q3 expectations. Gross margins are up 320 basis points year to date, and we have exceeded 20% gross margins for five consecutive quarters. We continue to see funds flowing from the federal highway bill, further supporting our long-term confidence. Year-to-date sales were up 8.3% with growth in both segments. Our teams are working diligently to reduce inventory levels, and we expect the results of these efforts to flow through over the next few quarters. We expect operating cash flow to improve in Q4 as we convert inventory to cash and improve profitability. During the quarter, I visited various customers, attended the National Ready Mix Concrete Association meeting, and met with most of our mobile construction equipment dealers. The sentiment remains strong, and customers continue to express a desire to do business with Aztec. The mobile construction dealers were specifically excited about the new products we are bringing to the market. More about this later in my commentary. I'm pleased to see the way our employees are bracing a culture of sustainable performance and improved execution. Focusing on our employees clearly reflect in our new vision. I am proud that we announced the addition of paid parental leave for both parents during the quarter and an increase in our company 401k match. for our employees effective January 1, 2024. Lastly, we are excited about the release of our first corporate sustainability report during Q4. The team has done a fantastic job with this. We have now established a baseline from which we can set improvement targets. Slide five highlights that our focus in 2023 has been on execution. There are a number of significant initiatives noted for your convenience, but today I would like to tell you more about our progress on two specific things I'm passionate about. Parts and safety. Having the right parts available as and when needed by our customers is key to success in the capital equipment markets we operate in. We have made significant improvements in our parts fill rate after a challenging first half of the year. The investments we've made in our factories and the implementation of management dashboards are helping us to improve further. Creating a strong parts business will further enhance our ability to create sustainable and predictable results in the long term. Finally, our core values augment individual efforts into a team that works together to deliver results. Safety is one of our core values. and I would like to highlight our favorable year-over-year safety performance. Our recordable incident rate improved to 1.31 year-to-date, below our 2022 performance. Investing in our factories has had a positive impact on our safety performance, and our teams will continue to find further improvements to make. Turning to slide six, I would like to review the current business dynamic and how we are responding. Our customers remain optimistic about 2024 as they already have solid backlog on the books. As mentioned earlier, last month I attended the National Ready Mix Concrete Association meeting in Nashville, Tennessee. While there I was able to connect with various customers and dealers. They remain positive and this is reflected in the solid backlog we have for our concrete plants and related equipment. We are expecting that our material solutions national dealer conference to be held in Q4 will yield strong demand for 2024. Our current indication is that it will be stronger than last year. Over the last 12 months, we have improved our dealer coverage, and this has contributed to demand. Rising interest rates could potentially have a negative effect on the conversion of dealer rental fleet to customer sales. We have seen examples of dealers' customers extending rental agreements versus buying equipment at the end of the lease. Customers and equipment are however still working, but this could potentially put pressure on our dealer network. Driving down our in-house inventory will however give us the ability to support stronger dealer floor plans to mitigate this if required. However, With the pressure in the macro environment inclusive of the rising interest rates, we are monitoring our high-volume dealers' orders in the backlog for possible modification, push-outs, or cancellations. Funding from the Federal Highway Bill has started to flow, with federal contract awards increasing 12% year-over-year. We view the federal funding mechanism as providing long-term stability for our markets and customers. Slide seven further illustrates our expanding global footprint. Our international team has made significant improvements on our market coverage and presence. While various of these dealer relationships are still new, we are encouraged about the level of activity. Our backlog continues to normalize, as can be seen on slide eight. As a reminder, Q3 has historically been a lower order intake quarter, due to customers working and focusing on completing projects before the winter months. Our October bookings are encouraging within the infrastructure solutions business, and we have good inputs that the material solutions national dealer conference will yield strong bookings, as mentioned earlier. I'm very excited about the release of our new vision on slide nine. To build industry-changing solutions that create life-changing opportunities. This vision is focused on our employees, our customers, and resonates well with our legacy of strong customer service and innovation. We will share more about our vision and our Aztec 2030 strategy during our investor day planned for the spring of 2024. I'm extremely pleased with how our employees are embracing the new vision significance and the profound impact we will have on our people, customers, and the industry in the future. Turning to slide 10, we continue to execute our simplified focus and growth strategy to deliver value for employees, customers, and shareholders. For example, we have simplified by streamlining our internal staffing and adopting branding as one aspect. Under focus, we are pursuing operational excellence Investments to optimize the manufacture of mobile construction and crushing equipment domestically and internationally are examples of putting capital to good use. We're also focused on inventory management and aftermarket parts excellence to enhance customer value. Grow includes the introduction of new products and growing into new geographies as well as developing our aftermarket. This includes getting more parts out of the door. We are working closely with our dealers and direct sales teams, understanding what they are seeing in the field and partnering with them to better serve our customers. Flight 11 highlights a few of the innovative new products we displayed earlier this year at the ConExpo trade show in Las Vegas. Our new horizontal grinders were released during Q3. and the milling machine and paver are scheduled for release over the next two quarters. These products address specific market needs and have sparked the interest of our dealers and customers. The large investments we have announced before for mobile crushing and construction equipment are progressing well at our Omaha Northern Island and Chattanooga, Tennessee facilities. These investments are both transformational for the respective product lines, and will yield positive results in the future quarters. Slide 12 reflects our one ASTEC business model. This framework ties in well with our new vision, placing our employees and customers in the center. I'm very proud of our purpose of Built to Connect, and it is meaningful and tells the story about what ASTEC's customers accomplish with our equipment. Lastly, on slide 13, we are proud that we will release our first corporate sustainability report during Q4. This is a significant step forward on our ESD journey. Our report highlights how we are investing resources to advance environmental and social initiatives while maintaining sound governance. I look forward to publishing our report and updating you on our progress. With that, I will now turn the call over to Becky to discuss our detailed financial results.

Thank you, Jaco, and good morning, everyone. I'll begin my review of third quarter results on slide 15. Sales were $303.1 million, down 3.8%, slight declines in both segments. By region, strong international sales growth of 11.7% was enhanced by positive margin development and was offset by softer domestic sales, down 7.9%. Part sales grew 2.4%, which was offset by a decline of 4.5% in equipment sales. Backlog continues to normalize, down 36.6% from the peak in the third quarter of 2022, and 10.8% sequentially, and still within our historical range of one and a half to two quarters. Domestic backlog was down 37.2% and international down 33.4%. Order rates have remained steady over the last three quarters, a trend we expect to continue as demand remains strong. Supply chain disruptions are becoming less of an issue, further incentivizing customers to resume normal order patterns. We are also improving our ability to convert backlog into sales. suggesting backlog will stay within that historical range. Adjusted EBITDA decreased 39.8% to $10 million, decreasing adjusted EBITDA margin 200 basis points to 3.3%. The biggest driver here is a litigation loss reserve of $6.4 million associated with an initial adverse verdict related to equipment sold in 2017. Looking at ongoing operations, we expanded gross margins by 220 basis points to 23% as we achieved further price realization and benefited from operational excellence. This is the fifth consecutive quarter gross margins have exceeded 20% and year-to-date gross margins are 24.1%. SG&A increased due to the litigation loss contingency and higher personnel costs as we invested in our business. We are also experiencing increased consulting and project costs. While profitability was masked this quarter due to the litigation contingency, the team is doing a good job of managing expenses, and we are pleased with the progress and improvements we are making on margins. Adjusted earnings per share decreased to a loss of one cent from an income of 28 cents the prior year. Again, the litigation contingency was the biggest driver here, decreasing EPS by approximately 28 cents and offsetting gross profit improvements. The adjusted net effective tax rate for the quarter was 108.3% driven by the higher weighted tax impact of adjusted earnings add backs due to lower operational income. We expect our normalized net effective tax rate to continue to be in the 23 to 24% range for the remainder of the year. Moving on to slide 16, infrastructure solutions net sales decreased 5.5% to $190.8 million, with international growth of 3.4%, being offset by softening domestic demand. Mobile construction equipment contributed to sales volume, while asphalt and concrete equipment sales declined. A positive impact from our transformation initiative on the manufacture of mobile equipment was experienced, and greater contributions are expected going forward. Part sales were up 5.5% as we were able to fulfill parts orders for aftermarket demand. Segment backlog decreased 27.5%, primarily due to the normalization of customer order patterns. Adjusted EBITDA margin for the segment declined 10 basis points to 8.6% as favorable gross margin was offset by higher operating expense as a percent of sales. Turning to slide 17, material solutions net sales decreased 1.2% to $110.5 million as strong international sales were offset by a decrease in domestic demand and mix. International sales increased 20.7% as domestic sales declined 9%. Equipment sales fell 0.6% and parts were down 3.2%. Segment backlog was down 51.7%. As a reminder, our annual dealer event takes place later in the fall. We anticipate order activity will be in line with the prior two years. Adjusted EBITDA margins for the segment declined 420 basis points to 7.5%. This was largely due to the litigation loss contingency offsetting the positive gross margin impacts. On slide 18, we highlight the key drivers of our year-over-year adjusted EBITDA bridge. Adjusted EBITDA decreased 39.8% to $10 million. a contraction of 200 basis points to 3.3%. The positive contribution from pricing, net of unfavorable volume and mix, more than offset the impact from inflation. Manufacturing inefficiency headwinds due to supply chain disruptions were a $1.8 million impact, and SG&A expenses were higher due to the $6.4 million litigation contingency and higher personnel costs. Looking ahead, we continue to expect further benefit from the implementation of our transformation strategy to drive increased EBITDA to deliver our long-term targets. Turning to slide 19, our cash and cash equivalents available for operations stood at $71.3 million as we increased borrowings on our credit facility. We expect this to reverse in Q4 as we work through working capital. We maintain sufficient liquidity and a solid balance sheet to support our operations and balanced capital deployment strategy. Our current net leverage ratio is 0.5 times with a target leverage range over cycles between 1.5 to 2.5 times. Turning to slide 20, we maintain a disciplined capital deployment framework balancing investments and growth with returning cash to shareholders. We spent $7.9 million on CapEx in the third quarter to maintain and improve operationally. Our targeted full-year capital expenditures are estimated not to exceed $35 million. As Jaco mentioned earlier, we are making progress with our Oracle Cloud ERP implementation as shown on slide 21. In addition to the previously launched human capital management and the ERP at two operating sites, including one of our largest sites, we also launched in the current quarter our consolidation and reporting module. Implementation at both sites is going well, and we're already seeing improved production output. As more sites are added to the system, we anticipate achieving progressive benefits I am pleased with the performance and support of everyone involved and remain confident that we will continue to see measurable benefits as we complete the remaining implementations throughout the entire organization. I will now turn it back over to Jaco for his closing comments.

Thank you, Becky.

Turning to slide 22, I would like to summarize our key messages. Although Q3 was disappointing, the Aztec team continues to work together, serving customers and driving operational excellence. Our customers continue to convey a positive sentiment to us, supported by positive long-term end-market drivers, including funds from the Federal Highway Bill. The One Aztec operating model is guiding us to create a culture of consistent performance and execution. We delivered higher gross margins and the third quarter on lower sales with EBITDA margin performance masked by the litigation loss contingency. We are transforming and improving our operations. And finally, our simplified focus and growth strategy establishes a framework to drive long-term shareholder value. I like where we are heading and I'm optimistic about our future as we drive towards our long-term goals shown on slide 23. I also like to share that we are putting the finishing touches on our Aztec 2030 business plan and look forward to sharing those details in 2024. I'm 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.

In order to ask a question, please press star then the number one on your telephone keypad. Please limit yourselves to one question and one follow-up. If you have additional questions, please re-enter the queue.

We'll pause for just a moment to compile the Q&A roster. And your first question is from the line of Stanley Elliott with Stifel. Please go ahead.

Hey, good morning, everyone. Thank you for the question. Can we start off by talking about kind of what's happening on the margin front, you know, and namely kind of the move sequentially down? I mean, even if you back out the litigation charge, you're still looking at maybe flattish sort of margins. And I think we had hoped that there had been enough pricing in the backlog and, you know, an improved kind of within the order book that we would actually continue to see the margin trajectory kind of like what you saw in the first half of the year.

Yeah, I can take that, Stanley. So, you know, as reported, you can see that, you know, overall margins continue to improve for the quarter and then obviously, you know, nicely year over year. I think, you know, it's important to note that, you know, the third quarter, as we mentioned previously, has a different profile mix with regards to parts and capital So obviously that contributes and then also if you look at last year in the third quarter the mix between plants and mobile construction equipment was different than this year and that contributed to what you see. So overall I will say with the mix of products that we have with the the change in the mix on parts for the quarter, that's what you can expect during a typical third quarter, which we didn't have last year.

I guess as a quick follow-on, did the mix of international versus domestic revenues contribute to that in any way?

No, not really. In fact, we are very pleased with the performance that we that we've seen on our international business. And remember that on the international side, transfer pricing to comply to local jurisdiction obviously dictates a little bit the margins that you make on the international side. But as I said, we are actually very pleased with the development on our international business.

I guess as a follow-up, a fair amount of positive commentary from some of the dealer events. Are we saying that order rates are going to start turning positive in the fourth quarter and into early next year because of these trade shows? Or should we think of you all continue to work down the backlog to get more to that historical norm?

Yeah, good question. And once again, as a reminder, in the prior two years, especially on the material solution side, the dealer order writing took place in earlier quarters, you know, last year and the year before. This year we will have it in Q4, and as mentioned, you know, we believe that it's going to be a strong order writing period, at least in line with what we've seen the last few years. You know, we still have relatively low dealer inventory, especially on the mobile construction equipment side. So we feel confident and we have pretty good visibility that that order writing will be strong. We've also seen good order writing for asphalt and concrete plants here in October. And we've actually seen a pretty nice development on parts orders for October as well. So, you know, we are expecting that the backlog will moderate a little bit more, especially as we're focusing on, you know, reducing our lead times and reducing parts backlog. But, yeah, very good progress. view on what we think is going to happen in Q4.

Perfect. Thanks so much.

Your next question is from the line of Meg Dobre with Baird. Please go ahead.

Yes, good morning. The term normalization has been used repeatedly on the call and it's been used in prior quarters as well. So I'm trying to understand exactly what it means that orders have normalized. if we look at you know three three months from now if after you report q4 if we look at your combined order intake for 2023 would you say that that is the normal run rate for orders in both your businesses yeah so i think once again if we look at what we have on slide eight you know we gave there the

the historical range. So we always talked about that one and a half to two. You know, if you look at the order patterns for the first three quarters, you know, I think I don't think you should take that and just multiply it by four, especially if we look at, you know, the peak of the backlog in the third quarter last year. You know, as we improve availability and as we improve our our own lead times, our dealers will not have the need to place orders as far in advance as what they did in the past. So from my perspective, if we stay in that 400 to 500 million range, that is a range that we are really comfortable with and that we've dealt with in the past. Anytime I think that we go below that, for myself, that's where the red lights will come up a little bit. At this point in time, indication is that Q4 will be a strong bookings quarter. Customer sentiment is still very positive. The dealer interaction that we've had is really good and that You know, I'm very excited about the new products that we bring to the market. You know, the new milling machine that we have in the presentation has been performing really well in trials. And, you know, when a customer tells you that he wants to buy the prototype machine, then you know you're up to something. So I think there's a lot of positive, you know, momentum that we are seeing in terms of, Just the order writing, we're seeing the seasonality and then the new products that we bring to the market.

So again, when you're evaluating your order intake for full year 2023, would you consider that to be a normalized level of demand or are there distortions still that we need to be aware of?

Yeah, I think it's distorted. I mean, if you look at the orders that we got during you know, 2013 and how the backlog increased. I mean, if you just look at Q3 of 21 to Q3 of 22, you know, there was a buildup of 50%, you know, 300 million of additional backlog. And we're still working through that. So, Meg, I have no concerns right now that we're going to see a significant drop in the in the output for 2024.

And I think that's interesting, right? Because right now, your production, your shipments are obviously exceeding order intake, hence backlog coming down. At what point in time does this backlog normalization, as you call it, actually has to result in lower production?

Yeah, I mean, we obviously are reviewing production levels on a consistent basis. We have multiple levers that we can pull if we get to that point. But, you know, right now we are not making any of those plans. Our S&OP processes at various of our product lines is really strong and robust and we have pretty good visibility of what's coming. You know, we have good visibility on our quoting pipeline, which is really strong right now. So I'm not concerned at the moment. I think the teams have a really good handle on that. But of course, you know, the moment we see those indications, we'll pull some of the levers that we have. you know, at some of our facilities, we are already working, you know, significant overtime levels because we have the visibility of what needs to be delivered in the next couple of quarters. Our international business is continuously growing as we expand our footprint. Here in the US, over the last year, we've expanded our footprint for our mobile construction equipment and on the material solution side. There's a lot of other positive factors that can mitigate any external pressures from interest rates or the macro environment.

Meg, I would just add too that unlike some of our peers, we're not planning any layoffs. There's no reason for us to go to that level yet with what we have in front of us. To Yaco's point, we're not concerned about that. The capacity is right size, and we're still running pretty significant overtime in certain locations.

Okay.

Then I guess my final question, in your prepared remarks, you mentioned some delays, maybe, in infrastructure orders. Can you comment on that a little bit more? And when do you expect those delays to sort of reverse?

Yeah, no, I can, Mick. So, as you know, you know, when we sell a big asphalt plant, you know, it can be, you know, $5 to $10 million on a deal. So, if two of those deals do not ship, it can have, you know, a noticeable impact. And that is exactly what we saw during the quarter. You know, the majority of those, the funds have already flowed from our customers. The teams are in the process of shipping. So it's not something that will linger for quarters. It was literally just, you know, a couple of weeks that we didn't get into the quarter.

Okay. Thanks for the call.

Your next question is from the line of Steve Ferrazani with Sidoti and Company.

Please go ahead.

Good morning, Jaco. Becky appreciates the detail on the call. I did want to ask a little bit about SG&A. Even if I back out the litigation contingency, it still looks like SG&A was up pretty substantially sequentially in year over year in what's a seasonally slower quarter. Can you help out a little bit on the higher costs and whether that stays in?

Yeah. So, you know, our range of $57 to $60 million is still – what we are seeing. During the quarter, obviously, we booked the litigation loss there. We had some through up on our bonus structure. We have a specific project that we're working on that we talk about, modularization, where we have quite a bit of our engineering team working to change various of our models from an ETO-type model to more of a configure-to-order model, and that is to prepare us for our transitions at some of the sites to Oracle. That's about another million dollars that is one-time items in the quarter, so Going forward, we still feel comfortable that we will be in that range that we communicated before, Steve.

Okay. Thanks for the help on that. With the new products becoming available, I know one of the three became available this quarter, but the other two are next quarter. When you roll out new products like this for order, how much can that provide a bump?

Yeah, no, good question. So the first machine was a significant upgrade of, you know, one of our best sellers that we've had in the portfolio. We've had really good customer feedback on that. And in this case, you know, it's more of a cost improvement opportunity. On the milling machine that will go next, If you go and look at the market, that is the single biggest product model that is sold in the milling market. It's a significant opportunity for us. If you look at our dealers today, if every dealer sells two of those machines next year, we talk about 50 machines plus. It actually can have a nice impact. a nice bump for us. And then on the paper, same comment there. It's the single biggest market segment where we didn't really play in the past. We still have some testing to do. The prototypes are still being worked on. But the same comment, if every dealer just sell two of those machines, you talk about another 50 machines. Okay.

The last couple of quarters, or maybe even more, you've been talking about the investments to improve plant efficiency. Can you tell, what's your take on when we'll start seeing that in your numbers?

Yeah. Now, so we have, obviously we're investing in all our facilities, and, you know, that is what you're starting to see, you know, flowing through in the margins over the last, you know, four or five quarters. The two significant ones that we are making is in our factory in Northern Ireland. And then, you know, one of our big infrastructure solutions factories here in Chattanooga. And in the last factory, you know, as I mentioned in the script, all the capital equipment is in place. The layouts are now in place. So now it's a matter of putting the final touches on line balancing and getting everybody trained in the new processes. So we already expect that Q4 will start to see some of that improvements and then quite a bit in next year.

Yes, Steve, I would also add that what we're expecting and what we're seeing is that about six months after a site goes live with Oracle, we're seeing those operational improvements from the system. So we are already seeing them now in that first site and certainly in our corporate teams and their work balances. So it really confirms our investments will have solid returns. We're seeing it a little bit ahead of what we anticipated, but definitely six months after goal life per each site.

The investments we're making in the factory in Northern Ireland, there's significant new product development that is included in that project. So that will take a little bit longer. We will most probably start to see the benefits of that later next year and even into 2025. However, we will actually produce some of the models that we currently sell at that facility, and that will give us additional capacity for both the U.S. but for the rest of the world as well.

Thanks, Jaco. Thanks, Becky.

As a reminder, in order to ask a question, simply press star, then the number one on your telephone keypad. Our next question is from the line of Larry DeMaria with William Blair. Please go ahead.

Thanks. Good morning. I wanted to go back to a couple things here. We expect the orders to moderate given the timing of the dealer event. I think you called that out. We discussed it last quarter. You also commented that you expect to write a lot of tickets and get back to your prior levels. Does that imply we should be looking for you know, orders that are in the range from 3Q of 22, which was really high at 450 million. So, or if not, what's the reasonable expectation to think about for a pickup in orders based on the comments you made?

Yeah, I most probably need to come back to you on that one. I don't have a clear answer.

Yeah, Larry, this is Steve. It's okay if I jump in, but that $450 million range that you mentioned when you're doing the implied orders, obviously backlogs a key factor there. Q3 of last year was our peak backlog at 969, but if you look at the implied orders overall, I mean, we've been in that 235, 240 plus or minus implied order rate for the past three quarters, so we have seen the normalization where it's been in that range and then have some chance for some upside going forward.

Okay, that's a good raise, thank you. Secondly, can you go into some further detail on the inventory? I think we're at a point where deals were short in inventory, and we're still there to some degree, and we couldn't get it fast enough, and now we have too much. So can you talk about what happened there, maybe where year-end inventory might land, and if there's a level of cancellation just leading to that higher inventory?

I'll take that one, Larry. Good morning. inventory, the makeup of really the increase this quarter was largely in finished goods, which is up 25 million and whip, which is up 21 million. So it's really that conversion. And we have the one site that, uh, carries the lion's share of the inventory. And that's the one that's going through all the transformation work. So their, their ability to bleed that down, um, will come next year for sure. And we might see some of that in Q4. But that's going to be the meaningful one. And when it drops, it should drop fairly significantly. And it's just been, they've got high backlog and they've been working through a lot of change. So that's really, I would say the lion's share of our bites have turns improvement because we've got to keep in mind inventory also has that incremental pricing from our suppliers. So the normal value will remain higher. which we're pricing for and certainly are confident in our ability to price for inflation.

Yeah, Larry, also Jaco mentioned about a couple of deals that, you know, just didn't get through on the reporting line and that, you know, those were certainly in inventory at quarter end, but that'll get relieved as, you know, those shipments are delivered on a couple of the bigger plants.

And just to make a comment on the finished goods that Becky mentioned, We've had some cancellations, but very little to mention, actually. So that's not the risk. Most of that inventory is carryover, is part of the carryover, so we'll see that change. If you look at the year-over-year, the cost of that inventory, you can work on about 6% or so. That is just pure inflation year over year. So, you know, when you calculate that in the change is not that significant. You know, we mentioned last quarter that supplier lead times is still elevated. So, you know, that's still the case, even though we have less supplier issues, lead times are still high. You know, I got confirmation just yesterday from our teams that we are continuously updating our supplier lead times. So as lead times come down, you know, inventory will be a reflection of that. So, yeah, we have some work to do there for sure. Obviously, it's costing us in terms of interest. So, you know, we are really focused on driving that over the next couple of quarters.

Okay, if I could just sneak one more in here. Thank you for that caller. You know, look, we had a quarter with lower expected margins, even solving for the litigation, higher inventory, and you have one factory going through transformation. It leads us to be a little concerned on the ERP implementation. So can you maybe discuss that a little bit more, maybe the impact of ERP outside of expectations in the quarter and, you know, and how that ultimately is going? Because, you know, obviously there'd be some concern that, you know, that's having some impact. Thank you.

Yep. Larry, great question. I think it's important to separate two things going on at this one site. So there's two different transformation efforts going on. They have the Oracle implementation, which happened in May. But for the last two years, all of last year and all of this year, there's been $25 million of capital improvements that are going on. And when you have a tight floor footprint, it's like a quilt, right? You pick out a patch and you move it and then you move the new equipment in and you keep playing musical chairs until everything comes in. So it's that same facility. So it's not just one effort that's going on, if you will. So they will be turning the corner here. And as Jaco mentioned, they're just about through the last investment is happening right now and we'll turn on a state-of-the-art paint system in Q1, and then the capital investment there is really complete, and their Oracle system is in, and they're perfecting that. We're seeing some operational improvements from both already, but it's going to be meaningful more so next year.

Okay, thanks. So aside from that facility, then, there's nothing outside the ordinary in what's specific to the ERP system broadly at Aztec this quarter?

I mean, right now, we're in the middle of designing the ETO module for the future sites, and the teams are getting ready for the 2024 launches. We have a significant number of our infrastructure solution sites that will go live next year. We are continuously monitoring the cost. You know, right now we're still in the ranges of what we reported before. If we see anything change on that, we'll obviously inform the market about that.

Yeah, but to be very specific, no impacts in Q3 or Q4 to performance expected from ERP.

Okay, thank you very much and good luck. Thank you.

There are no further questions in the queue.

I'd like to hand the call back to Steve Anderson for closing remarks.

All right. Thank you, Dennis. We appreciate your participation on the conference call this morning, and thank you for your interest in Aztec. As today's news release indicates, today's conference call has been recorded. A replay of this conference call will be available through November 15, 2023, and an archived webcast will be available for 90 days. The transcript will be available under the Investor Relations section of the Aztec Industries website within the next seven days. All of that information is contained in the news release distributed earlier this morning. This concludes our call, but I'm happy to connect with you if you have any additional questions. So thank you all and 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.