Astec Industries Inc (ASTE) 2003 Q3 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 third quarter 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 and then the number one on your telephone keypad. If you would like to withdraw your question, press star, then the number two on your telephone keypad. Thank you. Mr. Anderson, you may begin the conference.

OK. Thank you, Lisa. Good morning and welcome to Astec Industries' conference call for the third quarter of 2003. My name is Steven Anderson, and I'm the Director of Investor Relations and Assistant Secretary for the corporation. Also on today's call are Dr. J. Don Brock, our Chairman and CEO, McKamy Hall, our CFO and Al Guth, our group VP of Administration and also Secretary of the Corporation.

In a few minutes, I'll turn the call over to McKamy to comment on our financial results, and then to Don to discuss our third quarter and outlook for our fourth quarter.

But before we begin, I'm sure that all of you have had a chance to read and digest the press release that we've issued on the third quarter. Our discussion this morning may 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. Any such statements are not guarantees of future performance, and are subject to certain risks, uncertainties and assumptions and other factors, some of which are beyond the company's control. 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 our annual report and our quarterly and annual filings with the SEC. Naturally we urge you to familiarize yourself with those factors before making investment decisions regarding Astec Industries.

At this point, I'll turn the call over to McKamy Hall to discuss our financial results.

Thanks, Steve, and good morning. Obviously the most significant factor in our third quarter results is the sales volume. It's down $19.2 million from the same quarter prior year, or 15.2%. International sales are up $6.3 million or about 34%. Part sales are up about 2%. Attached to your press release is the revenue by segment, and I won't repeat those numbers. I'll only comment at the underground revenue is up and is the only segment where revenue is up, and that is both due to augers and the case product line.

In terms of the gross profit, our gross profit is at 17.1% versus 16.5% for the same quarter prior year, or up 60 basis points. Our gross margin dollars are down $2,449,000 from the third quarter of 2002. If you look at the gross dollars impact from the decline in sales volume from last year and multiply that by the gross profit percentage for the current quarter, you would readily see that that is about a $3.3 million impact to the bottom line.

Also attached to your press release is the ranking of the segments by gross margin and all the percentages of gross margin are up for the quarter compared to the prior year.

In the SG&A engineering expense area, we are at 16.8% this quarter as well as the prior -- the same quarter prior year, so that is flat, but in terms of dollars, we have reduced the SG&A and engineering dollars $3.2 million, and I know that some of you always like to look at that compared to the prior quarter as well, and from the prior quarter or the second quarter of this year, it's down about $503,000.

So we are glad to have demonstrated some responsibility and some cuts in those areas. In terms of the interest expense, it is also down, as we pointed out in our press release, from the same quarter prior year $1.1 million. It is also down from the second quarter about $551,000, so again, we are glad to report those reductions.

In terms of the net loss for the third quarter of 2003, we were at $785,000 compared to the third quarter of last year, it was a $1,438,000, and compared to the second quarter of this year, that was $2,212,000. So again, we have shown improvements in that area as well.

In terms of the backlog, our backlog is down from $63,404,000 to $42,132,000. Now, in terms of the backlog by segment, the asphalt group is down 36%, mobile asphalt paving is up 27%, the aggregate and mining is down 40%, and the underground is down 17%, and the underground is reflected -- or reflective of the adjustment for the addition of the case equipment from the prior year, so it's apples to apples, is what I'm trying to say.

In terms of the balance sheet, our receivables are down about $14.3 million. Our inventories are down about $19.6 million. In terms of the debt, the long and short-term debt is almost flat. So $87.1 million compared to $87.7 million, but in the IRB area, we have reduced or we have paid off the grapevine bonds to the extent of $8 million, and so that is a reduction of $8 million in the IRB area. Our capital expenditures, September year-to-date are $3,386,000.

We do plan to limit that to $5 million or less for the year, our depreciation year-to-date is at $10.1 million, and as we pointed out in our press release, I would just like for you to note that on the year-to-date pre-tax loss of $7.8 million, we actually have incurred on a year-to-date basis $6.3 million attributable to the refinancing. So that has dramatically impacted our results for the year.

This concludes my prepared remarks, and I'll certainly be available to answer any questions, after Don completes his remarks. Steve?

Thank you McKamy. At this point, Don Brock will discuss our third quarter, and also outlook for fourth quarter.

Good morning. Our third quarter as you can see was particularly weak and particularly in the asphalt and aggregate area, which was also about 35 to 40%. This is attributed to a couple of reasons.

Number one, highway funding, the appropriations bill was about five months behind and didn't really get released till about March of the year probably a more subtle thing was whether from October to July, we had rain in the eastern part of the United States and volumes that exceeded about anything in prior history, which just about shut down most of our customers.

I spoke with the President of the National Asphalt Pavement Association, and he said the tons of asphalt were actually behind at the end of the first quarter 25%, at the end of the second quarter, it was still behind 25% year to year, but to his surprise, it had caught up at the end of September. What that did to us during that third quarter, when everyone was catching up, nobody wanted to talk on the phone or buy anything.

We had about six weeks of actually just practically no orders. It was absolutely dead. It did seem to have Road tech in that people were adding more paving crews trying to catch up, so they were buying pavers and mobile equipment, but they weren't interested in talking about any permanent plants or even portable asphalt plants or crushing equipment.

In early October, we saw a substantial pickup in business. We think some of this is driven by a change in attitude as the customers caught up, and also looking at year-end, if they make money, the depreciation bonus of 50% seems to be getting a lot of the private companies' attention. Although our third quarter was weak due to the reduction in expenses, it was a little better than last year although it was still a loss. Without if we take as McKamy said, as we take out the expenses related to restructuring our debt, frankly in the last two years, we'd practically be profitable.

Our backlog is down at the end of September to about approximately $21 million. Again, we had very little order intake during the last six weeks of the third quarter. We also, last year, had a couple of large systems jobs that we don't have this year, and that was the primary difference for the reduction in backlog, but we as I said, we have seen a pretty substantial pickup in the last six weeks or actually the first two weeks of the fourth quarter here.

We continue to make asset sales. We have three pieces of real estate that we have on the block for sale, and that, again, will reduce our debt further as we are able to do that. We have continued with a strong initiative to do a better job in our working Capital Management by reducing inventory and receivables. Our inventory is down approximately $11 million from the beginning of the year.

One of the things that has hurt our further inventory reduction is due to the lack of work in the Astec or asphalt division, we have gone ahead and built orders ahead of their normal shipping time to keep the plant running at -- even though at a lower capacity, but to absorb some overhead, and that has ended up with a increase in our finished goods inventory.

While the equipment is sold, the customers are waiting on permits or not ready to take delivery on those. The underground division experienced a slight loss for the quarter but is operating close to break-even at this time, and we feel like that it's about to get up to speed.

Unfortunately, the core products in that area, the large trenchers have been very slow and most of our volume has been in the Case New Holland trencher line which, while it increased our volume year to year about $10 million, it really resulted in a loss during that same period.

As I mentioned earlier, we're continuing to work to reduce our expenses. We sold our pavement technology operation, which built the laboratory testing equipment during the third quarter. This was not a very large entity but had not made money the last couple of years.

We've continued to reduce our head count in the businesses and have reduced our interest expense substantially as we restructured our debt.

Looking forward to the fourth quarter and the next year, as I said, sales have picked up but we remain very cautious. We have had a lot of -- last six months, it seems like we get spurts in sales and then it dies again, but there seems to be a general consensus of our customers that things are beginning to pick up. Congress passed a five-months extension of the authorization bill. They have not passed a one-month extension of the appropriations bill.

The five-month extension is based on an annualized expenditure of $33.8 billion. This year, the expenditure is at $31.6 billion, and for October, the amount that will be appropriated will be based on the $31.6 billion.

We expect a new bill will be passed before the end of February, but it's kind of one of those GOK situation, God only knows what's going to happen with Congress, so - there seems to be the consensus now that the bill may be a $250 billion highway bill, which is an average of about $41 billion a year, but it just doesn't seem to be very high on the radar screen, and we are cautiously optimistic that it will get passed, but right now we really don't know.

The accelerated depreciation has certainly helped the thinking of a lot of the privately owned companies. Their thinking is also helped by lower interest rates, and our international sales is being helped by the weak dollar, but we still are struggling, the states are struggling with funding, and until the general economy picks up there, we see the states slow on matching funds and spending on normal state roadwork, which is what we would need.

If there's anything good about the five months extension, it doesn't give them time to do much engineering, and we expect a lot more maintenance and overlay-type work, which does help our customers in this five-month period, and normally in the highway bills, the money that's spent on road pavement, rehabilitation of the roads with paving and upgrading in that area on the front end of the bill, is spent on bridges on the back end of the bill. Due to this short five months thing, it's practically got to be all paving on this front end of this bill, and the beginning of the next six-year bill.

I guess in closing, I'd say we expect the fourth quarter of 2003 to be better than 2002. We expect 2004 to be better than 2003. We have less debt on our and are continuing to reduce our debt. We have less fixed cost. We expect some pickup in volume. We have continued to work on new product development. We've developed two new models of milling machines, two new models of pavers this year. We have developed a new longer life material transfer vehicle. We expect to run a half a million tons without maintenance.

We have developed a new surface mining machine and sold our second of those. The Case products are continuing during the cost down on the Case trenched line, and we believe that product as we flow in the parts business next year will be profitable. We have developed a new state of the art burner for our asphalt plants, which reduces the energy consumption on the plant considerably. The new fast pack highly portable crushing plant, we have now sold a number of those units, and we believe it will do a lot to practically revolutionize the crushing industry.

Our modular crushing plants, while we have going through a lot of learning in the last two or three years, are beginning to sell, and we see a good future for those. With that, we'll be happy to answer any questions on this. That concludes our remarks. Steve?

Lisa, we'd be glad to take questions at this point.

At this time, I would like to remind everyone, if you would like to ask a question, please press star then the number one on your telephone keypad. Your first question comes from John Kasprzak.

Hello, John.

Good morning, guys. How are you? Just on the subject of the SG&A, McKamy mentioned the numbers and that it's down, and you've been focused there. Are you finished in terms of the reductions you hope to make? And what guidance can you give us where you hope, you know the absolute level of SG&A should be once you're done fine-tuning and cost-cutting?

I think, Jack, at this point I'd actually we're pretty well finished. Our SG&A, if you take out all the extraordinary items and everything, we're down to about an annualized $65 million a year. We hope that -- and I guess what we think right now, that the volume will sustain that, we can sustain that level, and that our volume will see a slight rise in volume as we enter into next year. And we're on point right now, though, to do what we need to do if the volume doesn't occur.

OK, very good. On the subject of interest expense, I think previous guidance you guys have given was that it might be closed to inventory a million dollars or so per quarter, and I guess that would be before any more land sales, which you might use to reduce debt even further. Is that still the Case? Do you think we'll see the interest expense come down going forward?

Yes, to answer your question, I think that's a fairly decent level to put it at. We have had a couple of low-ball offers on the grapevine property. We have a number of people still looking at it. Our free land opens up in the first quarter of next year, and we expect that, you know, the interest in that property will continue to increase, and that's probably the pivotal one that would make a substantial reduction in our debt. We've got a couple of other smaller properties, one that we hope -- we expect to sell during the fourth quarter.

And one other that we don't have a lot of interest in at this point, but it's in the Atlanta area and we think it will sell. We also expect that we will continue to reduce our working capital. The asphalt plant business has caused kind of a hole in the inventory a little higher than we had anticipated, and we have about seven plants on the yard waiting for permitting. It seems like the bureaucrats are getting slower and slower. There's no question about them getting the permit. It's just a matter of getting through the paperwork.

So is that something that could happen in the fourth quarter, you think?

We think we'll see a continuing decrease in our working capital during the fourth quarter.

OK. And the increase in the underground sales, McKamy said part of it was attributed to the Case addition. Can you give us the amount, the dollar amount?

I don't have that readily separated, Jack, but it is primarily Case because as Don alluded to, it has not been a good year for the big trenchers.

OK. So mostly Case would be -

There's some improvement in the augers as well.

Actually the train core trencher business is down year to year, so it's mainly -- it's practically all the Case line.

OK. Thanks.

Your next question comes from Arnold Ursaner.

This is John Reilly for Arn Ursaner. Good morning. Just a question on the decrease in sales volume, in your best estimation, do you think that you might be losing sales to any of your competitors, or are your customers just simply decreasing their orders by that amount?

We think it's the latter. We think the market -- and it's really been hurt more in the asphalt and the aggregate. One of our major competitors is going through a major downsizing in the aggregate side of the business, and it's just down overall, John. It's not -- we don't believe we've lost any market share. We may have gained a little, but everybody's down.

Great. And then just another question on the sales that you are making, are you having to give your customers any concessions relating to price or any customization of the equipment?

Yes. You know, they're taking advantage of the fact that everybody's hurting for business, so the price pressure is probably as intense as I've seen it in a while.

And then just one follow-up. You mentioned the grapevine facility and that you had had a couple low-ball offers.

John, we can't hear you.

I am sorry, what do you think the value of that grapevine facility is? You mentioned it's coming to a head as early as first quarter of 2004.

The value, I guess, we believe is up in the $18 to $20 million range, and we had -- you know, we had a deal at $24 million, but it went away. If we were in the -- we hope to net out of it 18 to 20, in that range, but we haven't had an offer up in that area yet.

Thank you.

Your next question comes from John Franzreb.

Good morning, John. I am curious to as to what's going on in the aggregate business. News from Martin Marietta and Vulcan would seem to suggest an improving outlook. What are you hearing, and why is it that that business has been weak for you given what the major players are saying about the outlook for them?

I think basically the major players are getting -- they've got to get up to capacity before they need to spend money, and I think it's improving for them. I've met with some of the top players in that business, and think they begin to see a turn in about July, and basically if you look at what happened, they were down the first two quarters pretty badly because of the weather-related situation, and then during the third quarter, the contractors have not only kept up with last year, but they've increased the third quarter by 25% because they were catching up with what they were behind in the fourth quarter, first and second quarter of this year, the fourth quarter of last year.

So they're furnishing the rock that our customers, a lot of our asphalt customers are painting black and put putting on the road. So their volume is obviously going to be, it has been good for the third quarter and should be good for the fourth quarter of this year providing the weather holds. I guess as you look on forward for them next year, it depends a lot on the highway bill an and just general building construction and the economy.

So you're not hearing any meaningful pickup in CAPEX on their side next year?

From what we've seen, what we're hearing is the CAPEX basically is going to be about the same as it was this year. Again, I think they're going to have to see some sustained volume before they spend a lot of money. That doesn't mean they won't spend money, but it's just not a substantial pickup.

OK. In light of that environment, what opportunities do you think you have for plant consolidations kind of lowering your expenses a little bit?

We have looked at various consolidations, but where we are right now, we think we've done what we need to do. We see an opportunity in the down market. The new highly portable crushing plant that we have will sell in a down market. It allows our customers to reduce their costs because they can take one asset and move to as many as five or six low volume quarries, and get the same production cost as you'd get out of a huge quarry because you're getting a million tons a year through this one plant.

So being able to have a piece of machinery like that, we think will continue to sell in the down market. But don't misinterpret what I'm saying. I think we're going to see a little pickup for next year, particularly due to the product mix that we have available.

And it does not and lot of opportunities for plant consolidation. What kind of capacity utilization are you running at today? Just give us a sense.

We're running probably -- and it varies from company to company, but I'd say on an overall average, we're probably running at 60%. We probably have the ability to do $750 million in our facilities.

OK. Thanks a lot, Don.

At this time, there are no further questions.

OK. Thank you. We do appreciate your participation on this conference call, and thank you for your interest in Astec. As our press release indicates, today's conference call has been recorded. A replay of the conference call will be available through October 24th, 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 Web site and all of that information is contained in the press release that we sent out earlier today. Again, thank you for your participation in Astec's conference call for the third quarter of 2003, and this concludes our call.

This concludes today's conference. You may now disconnect.