Astec Industries Inc (ASTE) 2003 Q1 法說會逐字稿

Good morning, my name is Lisa and I will be your conference facilitator today. At this time I would like to welcome everyone to the Astec Industries First Quarter Results and Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Dr. Brock, you may begin your conference.

Thank you Lisa. Good morning. With me today I have McKamy Hall, our Chief Financial Officer; Steve Anderson, our Assistant Secretary and Director of Investor Relations. To start with I'd like to turn the podium over to Steve and let him say a couple of words, and then I'll take the call back. Steve.

OK, thank you Don. Before we begin I'm sure that all of you have had a chance to read the press release that we issued on the first quarter. Our discussion this morning will contain forward-looking statements that relate to the future performance of the company. These statements are intended to qualify for the safe harbor liability established by the Private Securities Litigation Reform Act. These statements are not guarantees of future performance and are subject to certain risks, uncertainties, assumptions and other factors, some of which are beyond the company's control, and could cause actual results to differ materially from those anticipated in the press release.

The comments that we will make during the conference call are commentary, and our answers to your questions are commentary as well. Some of those factors that could influence our results are highlighted in today's financial press release, and others are contained in the annual report and our quarterly and annual filings with the SEC. Naturally, we urge you to familiarize yourself with those risk factors before making investment decisions regarding Astec Industries. At this point I'll turn the call back over to Don Brock.

Thank you Steve. At this time I'd like for McKamy to just go through our financial results for the quarter, and then I'd like to follow that up with a few comments of my own related to the quarter, and the positives and the negatives, and then talk about the outlook that we see for the rest of the year. McKamy.

Thanks Don. Good morning. As you know, I'm sure, in the press release, our sales are basically flat for the first quarter. There is a change in the product mix. We had the Case product line sales being new additions to our sales volume, and we also have an increased volume of used equipment sales, combined with an increase in aggregate segment sales, to help offset the reduced asphalt plant segment sales.

The international sales are up from $18.8m to $23.6m for the quarter, that's a 25.5% increase. Parts sales are at $26.2m in 2003 versus $26.3 in 2002, basically flat. In terms of the pie chart of where the revenues come from for the quarter, the asphalt segment produced 36.3%, aggregate was equal to that at 36.3%, mobile at 16.8% and underground at 10.2%. The sales and other information related to segments is attached to your press release.

The consolidated gross profit declined $7.3m for the quarter; the gross profit percentage declined 6 points for the quarter. During the quarter, we reduced inventory $23.6m, that obviously generates some reduction in man-hours for the quarter, which contributes to the underutilization that we encountered for the quarter. As we referenced in the press release, we also encountered under- utilization as a result of the learning curve costs at Loudon, plus the fact we, that's on small tractors, plus the fact that we had no new large tractors in production at Loudon until mid-March.

In the SG&A and engineering area, our expenses were at $21.4m versus $19.6m, or up $1.8m. As we noted in the press release, this increase is basically accounted for by the real estate title and recording fees, the write off of old loan costs related to the current lenders, the legal and consulting fees required by the current banking and note holder relationships, and amendment fees related to those relationships. We also had about $300,000 of Con Expo cost in the first quarter this of year, versus the first quarter of last year.

In terms of interest expense, the interest expense was basically flat at $2.3m versus $2.2m. This expense would have been less if we had been allowed by lenders to pay down the debt on a revolving basis, as was normally our arrangement. That cost us about $300,000.

In terms of other income, we were at 182 this year versus 675 last year. The difference there is the Astec portfolio of sales. The net loss for the quarter was 9 cents versus a net income of 23 cents for 2002. Our backlog, as we noted in the press release, was at $53.3m versus $74.7m, that's a 21.4% million-dollar decrease. I'll share with you by segment how that 21.4 breaks down. The asphalt group is off $9.3m, the mobile asphalt-paving group is off $6m, the aggregate and mining group is off $13.6m and the underground group has an increase of $2.1m.

In terms of the balance sheet, we have reduced our receivables from $93.4m as of 3/31/02 to $76.3m at 3/31/03. That's a decrease of $17.1m. The Astec financial receivables represent 10.8 of that $17.1m decrease. We still do have an $8.1m portfolio of Astec financial yet to be sold, and we're in the process of pursuing the sale of that at this point. Our day's outstanding decreased to 55 days from 60 days at the end of the first quarter last year. Our inventory decreased from $138.1m at 3/31/02 to $114.6m at 3/31/03, for a decrease of $23.6m or 17%.

Our debt at 3/31/03 was $131.6m versus $146.7m at 3/31/02. The [unintelligible] portion is $18.7m, our bank debt is $31.9m, our letters of credit are $22.1m, and we have $44.5m in cash at 3/31/03. Normally approximately $31.9 or $32m of this would have been used to pay off the bank debt. However, under our current circumstances we cannot reduce the current bank debt.

Capital expenditures for the first quarter were $1.7m versus $2.8m for the same quarter prior year. We are holding these to an absolute minimum in 2003. The depreciation for the first quarter was $3.3m on property, plant and equipment, and $.3m on [AFS] operating leased equipment. I separate those two for you because we will not be having the $.3m on the ongoing quarters, so an average of $3.3m. This concludes my prepared remarks on the financials, but I'll be glad to answer any other questions you may have later in the call. Thank you Don.

Thank you McKamy. Just a few comments related to the first quarter. We, although the volume looks the same, we had a lack of volume in our core products. We had a very slow start in the Loudon facility, but there was approximately $18-20m in volume that was related to Loudon and related to used equipment reductions and sales that basically had little or no margin. If you really take our core products and looked at those, they were off about 18%.

Our results were really affected by the start up at Loudon. We realize that it was quite an ambitious undertaking, but we moved two different companies into a third new facility and the ramp up of this has been slower than expected, and costly. On the good side of that, we were able to-- we built 20 small trenchers in January 50 in February 75 in March and approximately 100 in April. So we are ramping up quite well. The other good side of this is the quality of these products have been extremely, we've had extreme high ratings on the quality of the products that we have produced. During the first quarter we did not build any Trencor products at Loudon, but started our first Trencor product about the middle of March.

We also had a lot of expenses, as McKamy mentioned, on the time and cost of restructuring out debt consisting of fees, consultants, higher interest cost and legal expenses, and we hope to close a new loan and get our debt restructured in the next few weeks. In order to continue to reduce our debt, we put a targeted effort on reducing the amount of used equipment and were successful in reducing our used equipment considerable both at Astec and Roadtec.

The market also continues to be very competitive, with margin compressions as you can see, and some of this is just deep discounts that were required to meet the competition. Also during the quarter, our customers I guess with the uncertainties related to Iraq, made them reluctant to order equipment. The highway funding, both at state and federal levels, was low, and as I mentioned about three weeks ago on our earlier year-end conference call, funding was slow to come out in January and February, but we are seeing pickups in highway lettings at this point.

In addition to that, the asphalt supply out of Venezuela was interrupted during the fourth quarter and the early first quarter. That seems to be straightening itself out, but also created quite a bit of knee jerk on the part of our customers.

Combining with all of this, we had the poorest weather winter that I can remember in a number of years. Many of the customers personally tell me they had the worst cash flow that they've had, they basically had about six months that they couldn't do work.

On the positive side of all of this, with the poor weather our customers have good backlogs. In addition, our production, as I mentioned, is increasing every month at the Loudon plant, and we are beginning to reduce our under absorptions. We have picked up Trencor business, which will help there, and in all of the companies we have cut expenses. With the closing of the new loan we'll reduce interest costs, we'll stop fees, stop consultings and legal costs, which should help us considerably ongoing during the year. We continue to reduce our debt with better inventory control. We focus on our receivables, and we are in the process of selling the last part of the Astec financial portfolio.

In regard to the outlook, I guess the simplest way I can say, it's still kind of foggy out there. Our visibility is not good. There are pockets of prosperity, but there's a lot more pockets of depression. Short term we continue to believe that the market will be weak, people will order equipment only when they need it, and as noted from our backlog, people are not ordering ahead of time. They order when they need it, and expect you to be able to deliver.

Looking out a little more than six to nine months out, we feel like the market is beginning to turn and we believe at the end of the fourth quarter or during the fourth quarter, we'll see it start to turn up. We base this on the fact that the reauthorization of T21 seems to be going along, with all the numbers being up. We've seen numbers from as low as $218b, which would give an average of $36.3b a year for highway funding, to as high as $231b, which would give an average of $38.1b for the six year bill.

Also the senate seems to be, and the house seems to be, planning to take the bill up in good time this year. It's supposed to come before the senate in July. The last T21 went over into the next year, with just continuing resolutions. It sounds like there's enough focus on this for the congress, and the need to see the economy turn that they will take the bill up as they should, in the summer.

The weaker dollar on an international basis will certainly help us. And, we see all of the ingredients for a turnaround out in front of us. But, for the next six months, it continues to look weak.

In closing, while we--on my comments, I'll just say while we expect the market to remain weak for the remainder of this year, we believe that 2004 will begin a strong recovery. With our broad product offerings, our dominant market shares, our highest technology equipment and our strong service support, we are positioned to return to growth and profitability.

The reduction in expenses and our vertically integrated manufacturing facilities, we believe, will give us real leverage in such an upturn. With that, I'll stop and we'd be glad to take any questions.

Don, I'd like to make one correction. On the backlog for mobile asphalt paving, it was called to my attention out there that it was down $6m. It's down $.6m, OK? Quite a difference. Thank you McKamy.

OK. With that, we'll be glad to take any questions.

Once again, if you would like to ask a question, simply press star and the number one on your telephone keypad. To withdraw your question press the pound key. We'll pause for just a moment to compile your Q&A roster.

Your first question comes from Arnie Ursaner.

This is John Reilley for Arnie Ursaner.

Good morning, John.

Could you give us a quick update on the financial condition of some of your competitors?

Oh, I think that information is kind of available to you as much as it is for us. But, in the asphalt side of the business, of course, we have about four competitors, two fairly large ones in [Gencore] and in [Terex], and, two smaller ones in [All Mix] and [ADM].

The latter two are private companies and seem to be doing all right. Of the others, Gencore has come out of Chapter 11 and seems to be doing all right. And you see the Terex numbers. I don't guess I need to comment any further on that, but you see their numbers are public like ours are.

In the aggregate side of it, I think [Medso] has pretty well completed their consolidation with [Spidalla], and our very tough competitor Terex continues to be a tough competitor in the aggregate side of it. I think all of the companies have leaned-down and are positioned for an upturn to do well. So, we have some very formidable competition.

Right, and just focusing on that for one more second, do you typically price at a higher price point than most of your competition?

That's correct.

Are you forced now to give price concessions? Or are you adding extra services to your equipment?

John we are-- yes to meet the competition sometimes, we are forced to do it. The fortunate thing that we have, due to our service and due to our longevity in the industry, we have a cadre of customers that probably 75% of our business is repeat customers. And, while they take advantage of the competitive market, generally they're not--they don't beat us up too bad. The problem is that just frankly, it's lack of volume. Many of those are holding back.

The other inertia that's frustrating to us, our backlogs are probably a little bit better in asphalt than they show, because we have a lot of orders waiting on permits. And, it seems like each year, the inertia of getting permits is, it takes longer to get the zoning and the air permits than it used to. The bureaucrats are not very responsive.

We have a number of, what I call, verbal orders that we don't book waiting on permits. We've got orders out into the third quarter, as we speak.

Great. Just one last quick question; you mentioned, on the international side, could you tell us what percent of sales international accounted for, for the first quarter? And, are there any particular markets that are showing particular order activity?

It's approximately 20%, I think 19.3%, says McKamy. It is spotty. We, during the first quarter in the asphalt sector, we shipped a plant to Russia. We shipped a plant to China and we shipped a plant to Australia. It's kind of all over. We have orders right now from China, from France; so it's scattered around the world.

On the aggregate side, primarily in South America, not a lot in the other countries. We did have one substantial order that's on hold in Turkey, in the aggregate group that was held up due to the Iraqi situation. We think that will be reinstated.

[Great]. Thank you.

Yes, thank you.

Your next question comes from Jack Kasprzak.

Thanks. Good morning, guys.

Good morning, Jack.

Don, you've mentioned that you had $18m to $20m of revenue that was from the Loudon Facility, and from the sale of used equipment, in the quarter. Is that correct?

Yes. From Loudon, you know, it was about half and half in sales of used equipment at Loudon.

So half and half, so say $9m to $10m, from Loudon. And would we expect that to ramp up? I assume we would expect that to ramp up in future quarters. Do you think the startup costs are behind you now? Or, put another way, should the profitability improve, do you think, in Q2, Q3 periods?

Jack, we think in Q3 it probably will. Each month is getting better, but we were very much, most of the loss was under absorption. With the lack of sale of the Grapevine property, we still have a little bit of activity going on out there, and really, we did not start manufacturing. We had built some stock in Trencor Equipment and really did not get it started until about the middle of March. We do have a couple of pretty good-sized orders now, for Trencor Equipment and are bringing it up to speed.

I guess, to answer your question, each month ought to get a little better, but I anticipate it will be third quarter before it gets in the black.

OK.

The good part of it, I guess, is the dealer surveys that we've done on quality have been extremely high. And so, the product [that] we're building, is very good. It's just a matter now of getting the man-hours down and the cost down.

Could you remind us what the capacity of that new facility in Tennessee is, the sales capacity, about?

Jack, it's probably got the capability of, without any addition, to do $150m, $170m a year.

OK.

So, it's a big facility. It's about [inaudible] what Trencor was.

On the SG&A line, which McKamy discussed and is below vs. last year, due to the factors you mentioned, but I also know that you said that your target is for it to be lower in absolute dollars from, possibly, this year. That's certainly where you positioned it. When do you think we'll start to see that decline in SG&A?

I think you'll see it in the second quarter and more in the third quarter. Getting part of that, that's in there, is this expense is related to restructuring our loan. And part of it was just some severances that we just took, you know, as they went along.

All right. OK. I think that's it, thanks.

OK, thank you, Jack.

Your next question comes from John Franzreb.

Good morning, guys. A little bit about those one-time items referred to in the press release. I assume that [all] of the SG&A line, you identified $300,000 of increased interest expense. How much was the other items? How much were the total of the real estate recording fees, legal and consulting fees? What was the absolute number there?

$1.9m.

$1.9m?

Yes.

The interest was $300,000 on top of that.

OK. Now, was all-[crosstalk].

The interest was in the interest expense line. The $1.9m was in the SG&A.

It was in the SG&A?

Yes. In the comments, John, I did not include interest.

I guess in total, there's $2.2m that should go away John.

Great, that's exactly what I'm looking at. Secondly, you talked about how you lowered inventory through selling used product. How much more used product is in the inventory line?

How much what, John?

What's the volume of used inventory right now, McKamy, is what he's asking.

Correct.

What do we have left?

Yes.

About $18m, John.

OK.

We are constantly, don't let me mislead you on one thing. We continue to trade in used equipment. We probably, in our aggressiveness to get volume last year, and in '01, we were more aggressive in taking used equipment in. And we had a problem that we took a lot of it in and then the market deteriorated on us. So we had some that we lost money in selling last year, as we mentioned during the fourth quarter.

Today, we, both in Astec and Roadtec, are the two biggest companies that are aggressive on used inventory. We have made pretty substantial reductions. We still intend to reduce it to a lower level. You know, I think that to give you the number, our maintenance level ought to be around $12m that we're probably going to get down to.

OK, so it's kind of a target number, not like a fixed percentage of inventories?

Yes, it's a target number that we will probably get down to that level and try to hold along there. But you need to, on used equipment, it's a good tool to help in new equipment sales. But you need to flip it pretty quickly. And, when the market is going down, you have a tendency to hold it, to try to get out of it what you put in it. That can be painful at times.

That's helpful, J. Don. And, can you kind of update us on what's going on with the sale of the Grapevine property? How do you stand in that process?

Steve and I went out and met with a couple of developers a couple of weeks ago. We are waiting on presentations from them. The way we see the property, we will probably sell it in a couple of different deals, if our proposals to developers have been--if they would buy at least a portion, enough for us to pay off the IRB, then we would be patient with them in developing, you know, as they develop the property. We believe that is going to be necessary to get the maximum amount out of it.

The fortunate part of that property, it's 52 acres that the new Opry Land Hotel [and] Grapevine is on 50 acres across the street from us. And, it's to open preliminarily in February of [inaudible-background noise]; completely open in April.

It's booked up for two years. So, there's a lot of [inaudible] for our property, but we're probably nine months to a year out of phase right now.

OK, and then one last question and then I'll get back into queue. Could you help me understand how come your lenders don't let you pay down the debt? I'm kind of confused about the mechanics there. What's going on?

The mechanics there is we have a "make-whole" provision, or a payoff penalty on the $80m loan. We're in the process of negotiating that right now. And, until that's negotiated, the banks and the lenders are to be paid down proportionately. And, since you're not-- until you determine what that make-whole is, the banks have requested that we put that in escrow until we get that resolved. And, it seems to be the only way to resolve that is to pay off everybody at one time, with that provision taken care of.

I see, I see. Thanks a lot guys. I'll get back into queue.

Your next question comes from Michael Braig.

Good morning. I wonder if you could comment on the mobile asphalt margins? They are down substantially. Is that due to pricing? Or, perhaps to the sale of used inventory?

Michael, it's a little bit of both, but it's primarily the used inventory. We put the heat on Roadtec to bring their used inventory down, and they reduced it approximately 40% of what it was, but they were very aggressive in March on that. That's a part of it. The other part is, it is a competitive market right now.

And a follow up question. On the seasonality there, that's varied quite a bit over the last couple of years. There was a time when that used to be shipped in the quarter of need, yet the first quarter this year was quite strong, and now we come up against lower comparisons in the second quarter, looking at '02. What should we be expecting there?

In normal years first and second is obviously your strongest, with the second at Roadtec being the strongest of the year. This is just an unpredictable year right now. We had a good month in March, it seemed like we've had about two weeks that it went to nothing, and then it seems to be picking back up again. There's been a lot of knee jerks this year. But normally you're correct; the second quarter is your strongest quarter for that business, and normally the first and second are the strongest for the asphalt plant business.

All right, thank you.

Your next question comes from Bentley Offutt.

Good morning.

Good morning Bentley.

I was wondering if you perhaps could give some flavor as to how you see, you mentioned 75% of your customer base are people who basically depend on you and have used your product for a number of years. I was wondering, with some of your larger companies have focused a lot of attention and effort extending the life of their equipment, better utilizing their equipment by shifting it around to other branches. Do you see this having a long-term impact on you? What's your feel for that, for the next year or so?

Bentley, frankly I see, we've gone through about a 10 year period, a decade of what I'd say have been rollups, or a lot of the larger companies acquiring smaller companies. They, many of them, are having digestion problems now and I frankly see this changing. I see more of the entrepreneurs coming back and the privately owned companies. Privately owned companies, many of them have got cash reserves. If I really had to - and this is a gut feeling more than I can show you on paper, but gut feeling wise, the privately owned companies probably buy three times the volume of equipment per dollar volume of their sales than the larger companies. They are quick to stay modern; they replace their equipment quite often.

Again, they are driving, they're interested in cash flow and depreciation more than showing a profit, and we're finding a lot of the private companies are surprisingly quite optimistic right now. If I had to look at our order backlog, it's predominantly, with few exceptions, it's primarily the privately owned companies. If you can show them ways of reducing their costs they'll usually jump at it and take advantage of it.

The larger public companies, this is a tough business to be in, because of the swings in oil prices and the other stuff. Some of them are doing quite well and some of them are struggling right now.

I see. As far as T21 is concerned, or the next T21 is concerned, [and] the fact that many of your states, perhaps half your states right now are having a difficult time in funding their portion -

Probably three quarters, Bentley.

Do you see this as having a lasting impact on the road program over at least the next year or two, even though you have an increase in expenditures from T21?

I think what the states end up doing generally, and it's a reason for some of my optimism, is the following; in the first years of the highway bill when there's additional funding, the states will match it. They may not do as much state work of their own program, they'll cut that out, but they just about have to take what money they do have and match the federal funding, because in some cases it's 90/10, 80/20, different ratios. So they've got to match that money. So that's why I'm optimistic that you're going to see a pop.

Secondly, I think the second thing in regard to that is that the first part of a highway bill, the quickest work that they can get out engineering wise is asphalt overlays. They can, engineering wise it doesn't take a lot to do an overlay. The tail end of the highway bills, the last two or three years, you get a lot of your big projects such as bridges over the rivers and big intersections, and that type of work that take maybe two to three years to engineer, and they seem to come in more on the tail end of the highway bill.

In [unintelligible] didn't 85-90% of the outlays were basically for widening roads and repaving roads?

There was a huge amount of it for that, yes.

Do you see this going forward?

Yes, I do.

Next bill?

Yes, we need more lane miles and you're going to see a lot of widening from four lanes to six lanes and that type of work. Widening secondary roads from two lanes to four lanes. That's the type of work I think you'll see more of.

OK, thank you.

We have a follow up question from John Franzreb.

J. Don, you referred to the uncertainty related to Iraq, the production disruptions in Venezuela and the weather. Those three events are largely behind us. Are you seeing order improvement at your customer base since that time, or any kind of improvement sequentially in the order outlook now that those three negatives are behind us?

John I'd like to say we were, but we're anticipating it, but to say it's happened today, no. In fact I expected it about two weeks ago, but there was a lot of optimism that as soon as we got into Baghdad that things were going to improve. But I haven't seen all of that happen. What I attribute some of that to is the fact that I guess last week I was with six different customers, and every one of them was complaining about cash flow problems because of the weather. They've got good backlogs but they went for six months without anything. So I think they're going to be a little hesitant to order until they get work going and they see they've got to have the equipment. I think it will still come, but I think we've got somewhat of a - at least optimistically I'm hoping for a little later start this year.

OK. Secondly, I missed some of these absolute numbers in your initial presentation. You talked about small trenchers that you're producing by month.

We were around 20 in January and about 50 in February, roughly 75 in March and we'll get a little over 100 in April.

OK, and another number I missed was how much remains on your loan portfolio to be divested, and maybe you can give me a quick update on the timing on that.

It's about $8.1m, and we hope to do that in the next few weeks, the next two to three weeks.

OK, thank you very much.

Thank you.

Once again, if you would like to ask a question, simply press the star, then the number one on your telephone keypad. To withdraw your question, press the pound key. We'll pause just a moment to compile the q and a roster. You do have one question from Doug Jones.

Mr. Brock, Jim Everett at [Siskin] Steele couldn't sit in at the last minute, but I may have tuned in just a little bit early, so let me ask this please--. Where are we with regard to the Bank One/General Electric situation?

We're about within the next three weeks of closing, is where we are at this point.

Has General Electric committed solidly behind you, and it's just a matter of paperwork?

That's what we're told at this point.

What you're told, OK. Have you begun, if you don’t mind, to go ahead and do the things that Bank One seemed to make requirements as of the 15th, as far as additional assets, etc., that are to be put on the present note?

Yes, we pretty well have done about everything that's been asked there, Doug.

OK, thank you very much.

There are no further questions at this time.

OK. If there are no other questions, I'd like to turn it back to Steve Anderson.

OK, thank you Don. We do appreciate your participation on this conference call, and thank you for your interest in Astec. As our press release indicates, this conference call has been recorded. A replay of the conference call will be available through April 25 and an archived web cast will be available for 90 days. A transcript will be available under the investor relations' section of the Astec Industries Website. All of that information is contained in your press release that was sent out today. Again, thank you for your participation. This concludes Astec's conference call for the first quarter of 2003.

Thank you everyone.

This concludes your conference, you may now disconnect.