Astec Industries Inc (ASTE) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Astec Industries second quarter earnings conference call. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions following today's presentation. At this time, it is my pleasure to introduce Steve Anderson. Steve, you may begin.

Thank you, Lynn. Good morning and welcome to Astec Industry's conference call for the second quarter of 2004. As Lynn mentioned, 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. Don Brock, our Chairman and Chief Executive Officer, and McKamy Hall, Vice President and Chief Financial Officer.

In just a minute I'll turn the call over to McKamy to comment on our financial results for the second quarter and, then, to Don to discuss operations and to comment on 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 issued on the second quarter that ended June 30. In the way of disclosures, I'll 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 during the conference call today 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. We urge you to familiarize yourself with those factors before making investment decisions regarding Astec Industries.

At this point, I'd like to turn the call over to McKamy Hall to summarize our financial results. McKamy.

Thanks, Steve, and good morning to each of you. We are certainly pleased to report much improved results, compared to 2003. As previously announced, the company sold, substantially, all of the assets and liabilities of Superior Industries of Morris on June 30, 2004. This sale is the reason for reporting income from discontinued operations for the three and six months ended June 30, 2004. Superior sales and all expenses are netted on one line on the Statement of Operations entitled "Income from Discontinued Operations". Income taxes on Discontinued Operations are shown on a separate line and the gain on disposal, net of tax, is also on a separate line. $4.5 million of the proceeds from Superior were used to reduce the term loan. $10.6 million was used to reduce the revolver credit line to zero. The remainder of the $24 million sales price was in the cash balance at 6-30-04.

Going to the Continuing Operations, our net sales from Continuing Operations was $145.9 million in the second quarter versus $103.4 million in Q2, or up 41 percent. Our international sales, again, from a continuing basis excluding Superior, was $38.1 million versus $21.9 million for the prior year, up 74 percent.

Areas of improvement, Europe was the largest, that, primarily, being Astec and Intel Smith subsidiaries, the Middle East being, primarily, Astec Underground and American Augers and, then, Asia, China and Central America.

Our part sales were $29.8 million, up from $23.4 million, or up 27.4 percent.

Revenue of segments is attached to the press release for your convenience. Asphalt is up 44 percent. Aggregate and Mining is up 43 percent. Mobile is up 27 percent and Underground is up 51 percent.

The consolidated gross profit is at 21 percent, up from 17.6 percent. In terms of looking at the gross margin, which is also attached for your convenience, by segment the gross margin is by Aggregate and Mining, 23.1 percent, Mobile and Asphalt Paving, 22.7 percent, Asphalt Group, 21 percent and Underground, 16.3 percent.

We had favorable overhead absorption in the quarter, much improved because of volume, compared to prior year. We did incur steel price increases and related purchase part increases. We also had some write-down of used equipment.

In the SG&A and Engineering area, we were up from $17.6 to $19.9 million. Health insurance is our single biggest cost increase in that category. I'm sure that's a problem for many companies. If you compare the first quarter - - and this is a question that many of you always ask me - - the first quarter of 2004 to the second quarter of 2004 for Continuing Operations, the SG&A only changed $41,000. On the Operating Income, we were at $10.7 million versus $.4 million last year. Interest expense is down 48 percent. Going to the Discontinued Operations - - and I don't want to focus too much on this, but just for clarity, let me just restate income from Discontinued Operations is $1.2 million this year versus $1 million last year. The taxes on those are $.5 million versus $.4 million. The gain on the sale of Superior was $10.5 million gross, taxes of $5 million or a net of $5.5 million.

On the Continuing Operations, we are at 31 cents for the quarter, up from a negative 14 cents last year. That 31 cents - - just to restate that - - does not include Superior, which, if you were comparing to last year, you would add back 4 cents to the 31 to get 35 to compare to last year - - if you want to look at it that way - - but it is 31 cents as reported for Continuing Operations.

Discontinued Operations are 31 cents for the quarter. That includes the gain and, as I just mentioned, that it also includes the 4 cents for Operations. The gain, by itself, was 27 cents.

On the total earnings per share, we are at 62 cents for the quarter, up from 11 lost last year, or an improvement of 73 cents.

Our backlog for Continuing Operations is at $68.7 million versus $41.9 million. That's an increase of 64 percent.

By segment, the Asphalt Group backlog is down 5 percent. The Mobile Asphalt Paving is up 107 percent. The Aggregate and Mining is up 121 percent. Underground is up 76 percent.

We have certainly strengthened our balance sheet by several events. Our revolving credit line has been paid down to zero as a result of the sale of Superior. We do have a lot of cash on the balance sheet at this point. We will have some large tax payments on 9-15 relating to the sale as well as Operations. Our trade receivables are up $10.3 million, but our volume was up 41 percent. Our days outstanding have reduced from 45 days in the first quarter to 38 days in the second quarter. Our inventory is down $7.8 million. Our inventory from the first - - that's from prior year - - from the first quarter it's down $6.6 million. The total debt now is at $37.7 million, with $10.2 million of that being IRB's, $27 million of that being term debt. Our capitalization is at 17 percent versus 31 percent a year ago. Our capital expenditures for this year are at $2.2 million versus $2.7 million last year. Our covenants are fine and our covenants for capital expenditures are at $9.5 million for this year. The budget for capital expenditures is $7.4 million. Our depreciation for the quarter is $2.8 million. Our projection for the year is $11.5 million. Our cash flow will be attached to the 10Q filing.

This concludes my prepared remarks on the financials and we'll certainly be glad to answer any questions later in the call.

Don Brock will discuss the operations for the second quarter of 2004 and also on the general business environment. Don.

Thank you, Steve. Our sales, as McKamy said, during the second quarter were up 41 percent and the profitability went from a loss to a very good profit that we're very pleased with. It's up 323 percent.

One of the biggest events, I guess, of the second quarter was the sale of Superior and I feel like I need to make some comments on that. First, Superior was a very good company and is a very good company. About 40 percent of their volume was in the component business and as we looked at it and as we go into more global sourcing we came to the conclusion that probably the high-volume commodity business really didn't fit with our other businesses and that we should focus our resources on more sophisticated products that differentiate us and require after-sale service and parts and product support.

The second issue that kind of led to the sale of Superior was that we had been looking - - our Board has pushed us to look at more consolidations of our facilities - - at trying to run more volume through less facilities. With that in mind, we took the Mobile Screening Operation from Kobert (ph) Pioneer and from Production Engineered Products and combine those two into Astec Mobile Screens, which gives us one focus company on the Mobile Screening business and one set of dealers to sell those products. At KPI, or Kobert Pioneer, that leaves us space to increase our conveyor manufacturing and it puts all of our conveyor products in one plant instead of two plants and two companies. We feel like this allows us to focus a dealer network to run more volume per plant. Secondly, the transaction allowed us to reduce our debts and ,from what we believe, the transaction will be earnings neutral and we will have no GAPP in our product line.

During the second quarter, we continued to have, I guess, the negatives that we face as the steel prices continue to rise. I was of the opinion that, probably, they would peak in June, but that has not happened at this point. The over-absorption due to our volume has offset some of this, but steel is still having a negative effect. I guess the other negative effect is that we buy a lot of components that are made of steel, which tends to echo through the entire purchasing process. Oil prices remain very high, but there's a mixed bag on asphalt prices. Liquid asphalt is varying from $230 a ton in New England to as low as $135 a ton in the Midwest and parts of the mountain states. This seems to be a mix of what the refineries are selling, but it sure is a wide swing that I've never seen in my career.

We still do not have a highway bill. It looks like, from what we've seen, that we probably won't have a highway bill until after the election or, maybe, until next spring. State funding is still low, but it seems to be improving substantially. Many of the states have revenues that are exceeding their expectations and we expect to see state funding improve for roads over the next six months.

On the real positive side, our volume has been good. This has been driven by the weak dollar and more international sales. Our parts business has been strong and improved substantially. We put a lot of emphasis in this area. The Underground side of the business has improved quite a bit and we see a continued improvement there. I guess the other area is the continuing reduction of our debt that has reduced our interest expense.

Looking forward, just a few more comments related to the highway bill, it looks like the conference committee will meet again tomorrow, but it looks like, from what we see, they're somewhat in gridlock and somewhat polarized on what each group wants. My personal opinion is that I don't think we'll see anything but continuing extensions. What this does to the industry is at the beginning of the highway bill there is always a lot of asphalt work, a lot of resurfacing, because that's the easy work to get out. The larger jobs come at the middle and at the end of the highway bill, bridges, big inter-changes, $100 million type projects, which, generally, is not as good for our customers. The front end of the bill is generally best for our customers. The back end is not as good. Over the last two or three years, we seemed to be at the back end of the highway bill, plus the recession on top of that. Since September 30th of last year, when the highway bill expired, there's been continuing extensions and the government is spending money at the level of $33.8 billion, but they're putting it out in small doses. As a result, the states - - it's kind of like the front end of the highway bill - - the states are letting a lot of work, our customers have a lot of work. Most of them tell me that they've got more work than they can get done but we'll be out of work by October or November, so they operate with no backlog but, yet, they're doing quite well.

Basically, it's a good market, but there's no planning and they can't see out very far - - somewhat reminiscent of what we live with all the time, it seems to be. It leads to what I call the "Anxiety Index" and on a scale of zero to 10 our customers are very anxious, very nervous. I put it at a level of eight to nine on the Anxiety Index. I see this getting more anxious as they find that they've made money this year, the accelerated depreciation is running out. We feel like in the fourth quarter there will be a lot of quick buying or buying of products to take advantage of the acceleration depreciation but, again, they're reluctant to make decisions and when they make them, you better have the products available.

As I said, I continue to see the state budgets improving. We think that with the stabilization of Iraq that will help attitudes. We continue to work on our working capital. We, at this point, thought we had a sale for the Grapevine, Texas property, but, at this point, we don't. I'm still working on that. We continue to press and do better jobs in managing our working capital and we still intend to have our debt down to approximately where we could pay off all of our debt by the end of the fourth quarter, if that's necessary.

I guess, in closing, we'll be glad to take any questions after that, but we are somewhat guarded in our outlook. Basically, we think things are looking better. We see the economy continuing to turn up, but we are getting our balance sheet positioned to handle whichever happens. If inflation continues, obviously, interest rates will go up and they will slow the economy down, so we're trying to position for either a downturn or a strong upturn.

With that, we'd be glad to answer any questions.

The floor is now open for questions. If you have a question, please press *1 on your touch tone phone at this time. If, at any point, your question is answered, you may remove yourself from queue by pressing the # key. Questions will be taken in the order that they are received. We do ask that while you pose your question that you pick up your handset to provide optimum sound quality. With those instructions in mind, if you do have a question, please press *1 at this time. Please hold while we poll for questions. Your first question comes from Jack Kasprzak of BB&T.

Good morning, everyone. First question is on the Grapevine facility, can you just give us an update on whether there's been any movement there in terms of selling that property?

Jack, we had an offer on it and it was close to what we wanted but we had a disagreement. We had planned to remove two of the bays from the building and move to Louden, these are heavy bays, and that's been understood from the beginning. It didn't work out with the buyer who decided later that he wanted those. It's back on the market at this point. We still believe that it will sell within the next six months. The Gaylord, Texas facility across the street is opened and they're building all around it. We just haven't found the right buyer. We're not in the position that we're really going to - - it's not a matter that we're going to make a profit when we sell it, it's a matter of trying to get a good price or market price out of it.

OK. My second question was, McKamy mentioned in his comments on international sales, he mentioned, specifically, the Middle East being, I guess, pretty strong on the Underground side, I was just wondering if you could add a little more color on that? Specifically, what areas in the Middle East are you selling to? Are you selling to places like Iraq and do you see a lot of incremental opportunity there?

The big trenching part of the business is probably around Qatar. There are the natural gases in that area and they're also bringing in pipelines from Saudi and some of the other countries into Qatar where they are building liquidification terminals. Some of the big trenchers have gone into that area. There seems to be a lot of pipeline work really taking off around the world, Jack, which is helping, at least, the outlook for the big trencher market. We have quite a few orders for the larger trenchers. China, a lot of directional drill business. We're pretty pleased with the Underground business. It has turned. It's profitable. We will take in the $12 million a case parts business. They're in the process the starting to come in now and we will take over that business September the 30th. I just completed the quarterly reviews with the companies and I'm real pleased with the progress they're making there. Crushing plants in Europe, we've done very well in that area. Around the world with the weaker dollar, it certainly helps our prices. Asphalt plants, we've sold some of those into Europe and other parts of the world. I guess, with the weaker dollar, it helps a lot.

OK. The other question I have is with regard to highway funding and I missed a little bit of your comments at the end of your prepared remarks, Don, so forgive me if you covered a little bit of this, but is it necessarily a very bad thing if Federal highway funding continues under these series of continuing resolutions which, by the way, have been at slightly incrementally higher levels of funding for the past year or so? Is that necessarily a bad thing in that it could induce the states to continue to do what they're doing now, which seems to be move out fairly straight forward paving type work rather that be preoccupied with these larger projects that you say your customers - - ?

Frankly, Jack, it's better for our customers in that it's more their type of work, maintenance inlay or overlay type work. The appropriations bill for next year is that both sides are saying that we're going to have $34.8 billion for next year for the appropriation. The only negative to the highway bill is we don't have the six-year outlook going forward. In other words, it's year to year. As I said earlier, it's kind of like the customers have to kind of live like we do. We never know more than a quarter or two - - from four to twelve weeks out is about as far as we ever get on backlog and they're living with that, which makes them a little uncomfortable. They have, historically, had much larger backlogs, much longer outlooks, and I think it's uncomfortable for them.

I'd also point out that of the total funding spent on roads, we'll probably spend $135 billion this year on roads and 33.8 is coming from the Federal money. It's not the money being spent, it's just the comfort level.

OK. Very good. Thank you.

Our next question is from John Reilly with CJS Securities.

Good morning. A very good quarter. First focusing on your competition, do you think that you've gained share in the first half of this year? It appears that your results are very strong comparative to some of your other competitors.

John, I think we probably have in some areas. The Crushing end of it, we've got some real exciting products with our highly portable Fast Pak that has done well. Our track-mounted machines are doing well in that area. We have some large systems projects that are good. On the asphalt plant side, we've got some real exciting improvements in that. We have a new burner that is extremely quite, very efficient. We've got some products that really differentiate us. It's hard to tell, in the industry, exactly how the others are doing. Our competitors are generally owned by a larger company and sometimes it's hard to tell how they're doing in their specific areas. We get the feeling, I guess, that we've gained some market share.

Focusing on that burner product that you mentioned, could you focus on the efficiency and, with the rising price of fuel, if your customers are focused?

Particularly, there are two areas in the asphalt side that's really drivers right now. With high liquid prices, high fuel prices, it's necessary to run - - when a customer is buying an asphalt plant, they need to be buying it for 20 years out and we're increasing every year the amount of recycle that we run. We have, probably, the only product on the market that will run 50 percent recycle while not using anymore fuel. There are some others that will run that much, but they burn more fuel when they're doing it. We capture all of the heat with ours. We also have the screening equipment through our Astec Mobile Screens that will prepare the recycle to allow them, by mix design, to go up to 50 percent.

On the new burner, we designed this burner for two reasons, the environmental requirements, particularly on the West Coast and the East Coast who have become stricter and stricter. This is a pre-mix type burner and it has a lower knocks level, a lower emission level than anything we've seen before. Secondly, we are using a variable frequency drive on the burner and on the exhaust fan which reduces the electric cost substantially. Most plants that are 400 ton an hour plants generally run most of the time at 200 tons an hour. When this plant is running at 200 tons an hour, it will use about 1/8th the electrical energy requirement that our older plants would do. It offers a lot of economics in the electrical side of the business. The new control system we have out, which has fiber optic cable going to the control house, is a very sophisticated system. It allows you to really adjust this burner so that you can stay really on with the air fuel really set correctly regardless of the firing rate of the plant. You actually put in a parameter for each firing rate. I'm probably telling you more than you want to hear but we're pretty excited about it.

I can tell. One last question, can you give us a breakdown of backlog by segment and tell us what percent is approximately international in the backlog?

McKamy gave you, I think, a little bit.

I missed the backlog part.

In the backlog numbers, the Asphalt Group really is the only one that's down and what we've seen there, probably, in the last six weeks, I think we're in a situation where our customers are all working that day and they're not doing a lot of buying, but we're at about $14.2 million there. A substantial part of that is international. In the Mobile, it's $5.2 million. It's kind of a mixed bag there. I guess more domestic than international. Aggregate and Mining is $36.6. $13.6 is international. The Underground business is $12.5 and $4.1 is international.

One last question and let others get in the queue. You've dramatically improved your balance sheet and done very good things with working capital. After the sale of the Grapevine facility, being in a net cash position, are you, potentially, looking at making additional acquisitions?

Yes. There's a couple that we would be interested in. We are not going into a hunkered down position where we won't continue to grow. We believe that there are opportunities for internal growth and we would look at a large acquisition if that became available.

Great. Thank you.

Once again, the floor is open for questions. If anyone does have a question, please press *1 on your touch tone phone at this time. Please hold while we poll for questions. Our next question is coming from John Franzreb with Sidoti and Company.

Good morning. I was wondering if you comment on your customer base demand in the private sector? I'm finding anecdotal evidence out there that there's a recovery going on in commercial construction. Does what you're hearing support that?

Yes, John, that's what we see. There is a lot more of the commercial construction. The home building - - and there was a point with all the home building that there was a pretty good inventory of subdivisions. That has pretty well been used up. There is growth still in that area, but the commercial is what has been dead and that is what is coming back so we're seeing quite a bit of commercial work, which is more profitable for our customers.

OK. McKamy, maybe you can help me here. I was wondering if you have, with the cost impact , what the higher steel was in the quarter and, maybe, the write-down of the equipment?

The steel situation we have tried to monitor and I think Don has been (inaudible) the needs of the company and I didn't have an opportunity to go this time, but it is very hard to monitor. I think that Don feels that it has impacted the margins, maybe, one percent.

One percent.

Yes, John, and that's just more of a gut feeling than it is reality. I think trying to identify it, it's moved so fast and, then, we've had variations. I've seen steel prices in the last two weeks from 36 cents a pound on 836 up through 55 cents. There are a lot of middle men that are taking advantage of some of it. If you look at it coming from the mills, it's probably 31 cents. It's a mixed bag on what it is. The rest of the story is, too, it's affecting some of the other product purchases.

In relation to the write-downs, I guess, on used equipment, the total in the company is about $1 million. We think we're getting pretty well at the end of all of that. As the economy turned down three years ago, we were very aggressive in creating deals and taking trades and probably gave too much and then the market changed. That's about the end of that. The second thing, used equipment with the price of steel and the price of new equipment, the used equipment valuation is better than it was. We think we're pretty well at the end of that.

So, no more impact in the third or fourth quarter on that?

No, sir.

You alluded to the fact that your customers may be buying product to take advantage of the accelerated depreciation in the fourth quarter. Does that suggest that you'll be building inventory in the fourth quarter in a time you normally wouldn't be?

We're probably going to build some inventory up in anticipation of that. I guess that's just my gut feeling. What we see is that they're nervous, they're anxious, but yet they're doing well. I think a lot of them are going to look and say that next year is going to be OK, we're going to spend it this year if we can get it and go ahead and buy it. We think we'll see a little bit of pop from that. That's more of a gut feeling than anything else.

Lastly, this relates to the consolidation of some of your operations, are there any charges that we should expect related to that going forward or not?

No. We have none.

OK. Thank you. Good quarter, guys.

Our next question comes from Joseph Kalanowski (ph) of Publici (ph) and Company.

Congratulations on a great quarter and where you've come over the past year. My quick question is are you guys gearing up the balance sheet to kind of take advantage of kind of a market upturn or a market downturn? Can you just, maybe, elaborate a little bit on the leverage you have there and what kind of capacity that you guys can withstand now and just how far you've come along with that?

We, probably, are operating, I guess it varies from company to company, but on an average of all the companies, we've probably got the ability to handle 25 percent more volume. It varies from company to company, but I'd say, overall, without much bricks and mortar we can do that. We are adding some machine tools at various places. To answer your question, if you annualized this second quarter, we're getting on up close to 600 million in volume. We probably have the capacity of going on up to 700, 750. Did that answer your question?

It certainly did. Thank you.

There are no further questions at this time. I'd now like to turn the floor back over to Steve Anderson.

Thank you, Lynn. We appreciate your participation on 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 July 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 within the next seven days. All of that information is contained in your press release. Again, we thank you for your participation in Astec's conference call for the second quarter and, Lynn, this concludes our call.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a great day.