Astec Industries Inc (ASTE) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Astec first quarter conference call. [OPERATOR INSTRUCTIONS], Mr. Steve Anderson. Sir, the floor's yours.

OK, thank you. Good morning and welcome to Astec Industries' conference call for the first quarter of 2004. My name is Steve Anderson and I'm the Director of Investor Relations and Assistant Secretary for the company. Also on today's call are Dr. J. Don Brock, Chairman and Chief Executive Officer and McKamy Hall, Vice President and Chief Financial Officer.

Don is on the West coast this morning, in Eugene, Oregon, at Johnson Crushers, one of our subsidiary companies. In just a moment I'll turn the call over to McKamy to comment on our financial results for the first quarter, and then to Don to discuss the operations and the current business environment. Before we begin, I'm sure that all of you have had a chance to read the press release that we've issued on the first quarter that ended March 31st, 2004, and in the way of disclosures I note that 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, assumptions and other factors, some of which are beyond the company's control.

The comments that we will make today 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 investments decisions regarding Astec Industries.

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

Thanks, Steve. Good morning. We are pleased to report to you this morning on the most profitable quarter for Astec in twelve quarters. Sales are up $21 million over the same quarter prior year, or 17.2 percent. Aggregate segment sales are up $13.4 million, mobile segment sales are up $3.7 million, and underground segment sales are up $5.5 million. Domestic sales are up 16 percent, international sales are up 24 percent. Part sales are up about three and a half million dollars. The source of our total sales by segment for the first quarter are asphalt, 30 percent, aggregate 40 percent, mobile equipment, 17 percent and underground equipment, 13 percent.

There is attached to your press release a breakdown of segment information for your convenience. On the gross profit line we have an increase of $10.4 million, that is an increase in percentage from 16.9 percent to 21.6 percent. I would call to your attention that that $10.4 million increase is on a $21 million increase in sales, that's an incremental percentage of about 49.4 percent.

Certainly we have improvements in capacity utilization and volume. We are benefiting from the reduced manufacturing costs that we worked very hard on last year. Our man hours are up. In terms of the ranking of the segments by gross margin, our mobile, asphalt paving group is at 25.4 percent, our aggregate and mining group is 24.8 percent, asphalt group at 20 percent and the underground group at 11.8 percent.

In the SG&A area, we are pleased that as a percent it has been reduced from 17.5 percent of sales last year to 14.6 percent of sales this year, a small increase in dollars but a large increase in volume.

In the interest expense area our interest is at $1.1 million versus $2.3 million last year. We had refinanced our debt during the year last year, have lower rates, and the most important factor is the fact that we've paid down debt, $60.2 million since March of 2003.

Our earnings per share are at 27 cents, or $5.5 million compared to a loss of 9 cents per share, or $1.830 million last year.

The backlog is another very important factor in that we are at $108.8 million versus March last year $53.3 million, that's an increase of $55.5 million, or 104 percent. That is the first time that we have been over $100 million in backlog since March of 2000. On the backlog by segment, the asphalt group is at $34.1 million, compared to $17 million last year. That is a $17.1 million increase, or 101 percent

The Mobile Asphalt Paving Group is at 8.4 million. It was 1.6 last year. That's an increase of 6.8 million or an increase of 425%. Aggregate in mining is at 50.6 million, up from 22.6 million. That's a 28 million increase or 124%.

Underground is at 15.6 million compared to 12 million last year. That's a 3.6 million increase or 30%. Our international backlog is up 204%.

On the balance sheet we have a small decrease in receivables even though we achieved a 17% increase in sales volume. Inventory, we have a decrease again with a 17% increase in sales. We are continuing to focus on making further reductions during these improved market conditions.

On the debt, as I mentioned earlier, we have reduced the debt 60.2 million and our debt to total capitalization is at 29.2%. On capital expenditures we had 700,000 in the first quarter. Our budget for this year is a 7.4 million. Those are being approved as needed.

In the depreciation for the year we are projecting 11.5 million. We will attach a cash flow to our 10Q filing for your reference when that is filed. And this concludes my prepared remarks at this point and we certainly will be happy to be available to answer questions that you have later in the call.

Thank you, McKamy. Dr. Don Brock will now discuss operations for the first quarter of 2004 as well as the general business environment.

Thank you, Steve. As McKamy said, our sales for the quarter was up 17%. They were actually flat in the Asphalt side of it, but the second quarter will see a pickup in the Asphalt side as you saw from the backlogs.

Our profits were certainly helped during the year. But resizing the company and we cut a lot of expenses over the last two to three years that are beginning to show up as the volume picks up. We've continued to reduce our debt and plan to continue along this route. We still have some major assets in the property at Grapevine that has not sold yet.

So, as these flow in we will continue to see reductions in our debt. Although our quarter was good, the two classical positive indicators that we watch is lower oil prices and a strong new Highway Bill. And neither one of those have kicked in at this point.

We believe that the increase in volume has been due primarily to somewhat improvement in the economy and pent-up demand that's helped by accelerated depreciation. A lot of people just hadn't spent any money for the last three years on equipment and they're at the point that they have to do that.

We're also seeing that with our product mix. We're seeing people buying more components and less complete packages that normally occurs in better times. Looking to the second quarter, as all of you know, it's a little difficult to look much beyond a quarter, but our backlog is very strong. It's over twice what it was this time last year.

Last year the first quarter we saw a sudden drop off after the first quarter last year. We don't see that this year. I guess, first the concerns that I have is basically, steel prices have certainly - will be affecting our margins during the second quarter and have affected them during the first quarter.

Fortunately, counter to that, our over absorption in our plants is certainly helping. We're running more man hours than anticipated and one tends to offset the other. It's just hard to determine what that difference will be.

We're also seeing increases in other component prices that are made in components particularly made out of steel. Oil prices obviously hurt our customer side of the market. They tend to remain high and I guess the other concerns we have are the size of the Highway Bill. Both versions that are out there are improvements, but obviously, the Senate Bill would be better than the House Bill.

Other concerns we have is basically with rising steel prices, rising component prices it's certainly causing inflation and that's going to result in higher interest rates. And it's a matter of what is the momentum and how do those all play in.

On the positive side of it, we've really resized the company. We've cut a lot of expenses. We've reduced our debt. As I mentioned earlier, we've got more to come. We've got a lot of new products out that we believe are very timely. In times of high oil prices it results in high liquid Asphalt prices. And that really equals more percentages of recycle. And our equipment is most suited for that.

The double-barrel Asphalt plant that we built is the only plant on the market that will run 50% recycle without using anymore fuel. We capture the heat loss from the drum and that makes a significant difference.

We have a new multi-fuel burner that will allow contractors to switch fuels very easily to the lowest cost fuel. This is all tied into a new control system that makes using the newer type burner even workable. With more recycle being used there's more milling being done. We have very timely a new line of road tech milling machines.

We have a new line of road tech pavers. Mid-size machines are selling extremely well, particularly in the foreign markets. The new highly affordable fast pack crushing plant that we have out we think is really an industry changing innovation.

It changes the economics of the industry considerably, allowing a customer to take one asset and move it between about five to six locations. And what was normally a higher crushing cost in the low volume operations now can be competitive with a very high volume operation.

The new surface miner that the underground division has out allows us to reach aggregate markets or places where you couldn't drill and shoot. You couldn't get zoning. And it allows you to eliminate the need of any explosives since you can cut rock with this large 1,650 horse power machine.

We also see a lot of growth in the transportation end of aggregates. More and more areas are running out of good aggregate so it's have to be brought in by ship, by rail from farther distances which helps or increases the demand for loading or unloading systems to automatically handle the aggregate as it arrives at the site.

I guess then other things we've see is we see the general economy continuing to improve. State funding is pretty sad in a lot of states like California, Kentucky, different states are really just out of any highway funds. But over - it usually takes about a period of nine months for the improvement in the economy to result in more sales tax and flow into the coffers of the states where they start to spend state money on highways.

As I said earlier, we think the new Highway Bill will be passed - we think it will pass in the next three or four weeks and both versions are better than what we have. The House Bill is not a lot better, but we're starting at a fairly decent high level. And the Senate Bill, obviously, would be our preference and would be the better of the bills.

The weak dollar, while it's hurting on component costs as foreign components come in, it raises their prices but it sure helps the prices of our products that we export. And as you can see from the backlog and from the export volume, it's picked up substantially.

Our parts sales seem to be very good as the economy picks up. Where there is a reluctance to spend there is people fixing up what they've got and that's certainly helping our parts sales. And we have, as you know, our volume last year was 100 million in parts and we expect it to be North of that this year.

Our underground division is operating at about a breakeven at this point. Efficiencies are increasing. We are improving the sales force there and our costs are improving. In conclusion, I guess I'm cautiously optimistic. We see the second quarter as being good. It's a little early to tell about third and the fourth.

We normally have a downturn during the third quarter and the fourth quarter. But if the general economy continues to improve, we think we'll end up with a good year.

At this time, I'll turn it back to Steve and we'll take any questions you have.

OK. Thank you, Don. Wayne (ph), we'd be glad to take questions at this point.

Thank you. The floor is now open for questions. [OPERATOR INSTRUCTIONS]

Please hold while we profile our first question.

Once again, that's star one if you have a question at this time.

Our first question comes from John Reilly from CJS (ph) Securities.

Good morning and good quarter.

Thank you.

First question I have is about your backlog. Thank you for breaking it down by segments. And first could you tell us, was there any particular order internationally that caused such a sharp rise in international backlog?

John, there's really not any huge orders in any of it. It's more of our classical products. So, we don't have any big - real big systems jobs or anything like that that's out there right now.

No large system. Any particular country that caused such a sharp rise in that?

We do have some pretty good sized orders out of Russia. We have an order out of Turkey right now. So, that's in the aggregate side of the business. But there's none that's significantly large as compared to some of the $20 million systems jobs we had in the past three or four years.

Right. And then just - is there anything else in particular aside from the international orders? Are there any particular orders causing such a sharp rise in backlog in any of your other segments?

Yes, there's not large orders, John. It just seems to be overall things have picked up a lot. I guess the thing that's a little different this time is generally the classical drivers are lower oil prices and a new highway bill. And we don't have those, but yet we have a pretty good pickup of orders.

And I think the thing that I was trying to emphasize earlier is people are not totally opening up their pocketbooks, but they are beginning to go ahead and, you know, improve the things they've got. They're buying components. They're buying a new crusher instead of a new crushing plant or a new double-barrel instead of an entire Asphalt plant.

Got it. And then just a question, in your Asphalt group you showed a dramatic improvement in your gross margin without an increase in revenue. And judging from your backlog you should show some revenue improvement in Q2.

Can you further leverage those margins in the Asphalt group?

I think, I guess there last year we had the construction part of some of these large projects was in the Asphalt group and they really took it on the chin last year which depressed their margins in an unusual situation last year.

This year we are selling more smaller - what I'd say a lot of components to go with some new Asphalt plants, but it's not all brand new plants. And there's a little better margins on the small stuff than there is on the bigger plants.

But to answer your question, our mix looks like it'll be about the same in the second quarter.

All right. One last question and then I'll get back in the queue. You mentioned that, obviously, rising steel prices are going to have an impact on a lot of manufacturing companies. Is there any possibility you'll be able to pass some of these onto the customers? Or is the competitive environment just still very competitive right now?

We've increased prices, I'd say, in every company probably an average of 6%. And we're not getting a heck of a lot of kickback on that. I think our customers understand. A lot of them are in the bridge building business and they're getting killed on steel prices, you know, on steel bridges and things like that.

So, we're not seeing the resistence or the kickback that historically you would see in normal times because everybody's experiencing the same thing. I guess what I see is it seems to be beginning to taper down a little bit.

Steel prices haven't increased in 15 years. And probably this is more driven by the weak dollar because imported steel is not competitive with domestic steel now or not near as competitive due to the weak dollar.

And what we're seeing, it seems to be a flattening of where it is right now. My gut feeling is it's probably going to settle down at about 30 cents a pound. You know, in the end product from the steel suppliers. That's just my personal gut feeling on it. And that's probably where it should be. It's been more a year ago in the 22 - depending on what kind of steel it is - 22 to 24. But we've seen a substantial increase and I think it's going to settle along in that area.

Don, this is McKamy. I'd just add to that that we are monitoring on our major products the cost of the steel impact every two weeks. In some cases, every four weeks in some cases.

And are keeping all of our management involved and aware of the impact of those prices. And we are also limiting the time exposure for quotes so that as we incur these rapidly increasing steel prices we won't get prices out there for long term quotes that we can't respond to or amend our quotes.

Great. Thank you very much.

Our next question comes from Jack Kasprzak from BB&T. Jack, your line is live.

Can you hear me?

Yes, we can, sir.

OK. This is Todd Metzel (ph). How are you guys?

Hey, Todd.

Just a couple of questions just to follow onto that last question on steel. Do you have any way to tell - to isolate how much steel cost you in the first quarter? Sort of the year over year higher steel price?

It varies with our different companies, Todd. And we - to give you a number I don't think we have that.

The other problem that we have is we use a lot of varieties of steel.

Yes.

You Know, if you were talking A36, which is just mild steel. That's one number and when I was throwing around the 30 cents, that's probably the number. Probably a little south of that number for A36.

But T-1 (ph), some of the wear resistant material, higher strength steel there is some unusual situations going on in that the government's getting a lot of that for armament.

OK.

Prices of that stuff is - we've seen some of it going as high 85 to 90 cents a pound. And you know, where it would normally be 45, somewhere in that range - 40 to 45. So I can't give you a good answer because of the mix.

What's steel, typically, as a percentage of your costs of goods sold overall?

Typically it will range in the 10% to 15% range.

OK. And with regard to the Highway Bill. I know you guys keep very close tabs on that there in Tennessee. Are you hearing any sort of early indications out of the conference between the House and the Senate? Out of, you know, leading up to the conference to conference those two bills?

Oh, you know, I've heard both sides. The House seems - certain people in the House are primarily driven by the administration don't think that they can get anymore than they've got, which goes from like 33 billion this year - 33.6 up to about 39. It's a bout a billion dollar a year increase.

There are some strong opinions on the Senate side that there going to stay at the 238 - in that range for highways, which is 318 in total for the whole bill, but like 238 for highways. And that increase is about 2 billion a year.

We're obviously hoping for the Senate side, but my guess it's been pretty quiet between - the conference right now just started two days ago.

Now, this is all happening against the backdrop, too of the threat of a presidential veto. And I mean, I know that both of the bills out of the House and the Senate came with sort of super majorities, if you will. At least on initial passage.

But, you know, with the people you're talking to do you think there's a will to try to push one through at one of these, you know, at somewhere at the House level or north given the veto threat? Or are people starting to back away?

I think they'll override the veto. That's my opinion. The percentage is pretty darn strong and there's also too much depending with an election year on bringing home certain projects. And unfortunately, I wish there weren't all those projects in these deals, but that seems to be the way it is. And there is - I wouldn't call it all poor because of a lot of it is still road projects. Most of it is. It's just that they're selecting it instead of professionals selecting it.

Right. Now, you've talked about being, you know, looking for wanting to pay down that debt some more. Of the - of the long-term debt that's on your books right now, what's the flexibility or what would be the terms on paying that down? Can you just go ahead and pay that down as you generate cash?

Yes.

Are there any make (ph) holes that you have to think about?

No. There's no make holes. We can pay it down.

OK. And I apologize for doing this, but if you can run the backlog breakdown for me one more time, I'd appreciate that. Real fast.

McKamy, you want to take that?

OK. Todd, do you want just the current amount?

Give me the current amount and a year ago, if you would.

OK. Asphalt.

Yes.

Thirty-four point one verses 17. Mobile - 8.4 versus 1.6. Aggregate - 50.6 versus 22.6. Underground - 15.6 versus 12.0.

OK. And what was the - what were the amounts on the international?

I just said it was up 204%.

OK. All right. Thanks a lot, guys.

Our next question is coming from Bentley Offutt from Offutt Securities.

Yes. Good morning.

Good morning, Bentley.

On your - going back to the aggregate business, that's a pretty sensational increase and what I'm trying to find out is the - your expected outlook for the year in aggregate. The - it's, what, 30 million, almost 30 million increase in aggregate which is - is this largely attached to the accelerated depreciation reason or is it just the strength of the industry? And when you're running at this level of business, what does that - what impact is that having on your profitability for that - well, you have that in here, but - OK. So what is the real increase and why is it continuing so strong? And it was strong last year, too.

Well, Bentley, I think, to answer your question, there is a - there is shortage in aggregates in a lot of areas of the country. Florida's got a shortage. There's many areas of the country that is running out of aggregate and a lot of that, again, is the product mix. For high-volume roads, you have to use skid resistant material like granite or gravel or something that won't polish. And in many areas there's not - like Florida doesn't have any of that. So that's got to be imported from other areas of the country or - either from granite in Georgia by rail, Marietta (ph) brings it from Nova Scotia by ship. And as a result, a lot of - a lot of new quarries - our upgrading of quarries is going on to try to meet these demands that are occurring. So I think there a general increase in demand, number one, with all the construction going on. And number two, there is a change in the mix that requires upgrading of - or putting in new plants.

As far as your Fast Pack , can you give us some indication on the - this new product, the impact it's having on your backlog sales?

Well, it's obviously a very good product. It's a $4-4.5 million plant. And it's one of these products that will sell even in a down market. There are a lot of - a lot of producers that have operations that do not sell in that market area more than 300,000 tons a year of stone. Where in the metropolitan areas, the big quarries will do from one to four million tons. Well, the economics make a lot of sense. There are so many fixed costs in any operation that if you can get more tonnage through it, rising water covers a lot of stumps, as they say. And the more tonnage you can get through one per two piece of equipment, the better you are.

So, what it does - it's - it moves and sets up so quickly, it allows a producer to cover maybe four or five of those 300,000 ton a year operations and drive their cost down from, in many cases, as high as $4.50 a ton down below $2.00 a ton. And instead of having five crews, they've got one crew with a skeleton loader guy and scale guy staying at the quarry when it's not operating there. So, they reduced the number of personnel and overall reduced the costs. Plus, it's a very efficient plan. It's fuel efficient. It is a state of the art. It's got the controls like a large four million ton a year plan.

If you - if you were to look at your current backlog of 51 million, is your Fast Pack equipment or, I mean, as you stated, $4 million a unit - are you talking about three or five units?

No, there's not that many in there. It's a mix of all products. And we've built, in two years, we've built seven of the Fast Packs. So, and it's ramping up. But I can't really tell you the breakdown of ...

It's less than 10% of the backlog.

Yes. It's less than 10% right now.

OK. And the second question I have - going back to your steel price situation. When you're talking to your distributors, do they give an indication that steel prices, perhaps, could be peaking during the second quarter? Are they that optimistic?

Seems to be peaking right now. I mean, I've heard numbers it's still going up in May, but I heard earlier this week that one of the mills was cutting back $30 a ton. Scrap is going back. It's dropped back about $40 a ton. So those are good indications that it's pretty well close to the peak.

Right. Well, thank you very much.

OK.

Once again, as a reminder, please press star, one for any further questions. You have a question coming from John Franzreb from Sidoti and Company.

Good morning, gentlemen.

Good morning, John.

I'm sorry I broke in late. I had another conference call. So, if this was touched on, I apologize in advance. But J. Don, when you talk to your customer base, what I've been hearing is that there's a recover going on in the commercial construction market. I know that the private side of the business for your customers tends to be more profitable than the government side. Is that what they're seeing and is that what's giving them, maybe, the confidence to reinvest in their own operations?

Yes. I think that's dead on it, John. The state - the state highway departments, in many cases, really are in trouble on funding. Everybody knows California's problems. A lot of states - I could go down the list - that really have major funding problems. And while, in most states, the money is dedicated - the tax collected from gasoline is to be spent on roads is various states have ways of diverting that money. And from some doing zero to some doing as much as 50% diversion. That, in most cases, has still not kicked in at all. And what we are seeing more - as I talk to the customers, as I talk to probably 30 or 40 a week - and the general improvement, as you talk about states, they say we don't have much money, but yet they've got a lot of work. So it is more the private commercial type work that's picking up.

OK. And given the strength of the quarter and, you know, given how much you've, you know, dedicated to improving, you know, streamlining your operations and kind of, you know, tightening the ship there, it's been quite some time since you've given out earnings guidance. Do you feel comfortable yet with your visibility to kind of suggest what kind of profit range you're looking at?

No, I think, we're - we can't do that. It's just impossible to predict that far ahead and, unfortunately, we've just decided that that's not in the best interest to do it, John.

OK. It was worth a shot. Thank you.

Thank you.

At this time, I'm showing no further questions. I'd like to turn the floor back over to our speakers for any closing comments.

Thank you, Mike. We appreciate your participation in our conference call this morning 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 Saturday, April 24, 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 within the next seven days. All of that information is contained in your press release. Again, thank you for your participation and this concludes our conference call for the first quarter of 2004.

Thank you for joining today's teleconference. You may disconnect your lines and have a great day.