Astec Industries Inc (ASTE) 2004 Q3 法說會逐字稿

Welcome to Astec Industries' sponsored third quarter earnings conference call. (OPERATOR INSTRUCTIONS). At this time, I would like to turn the floor over to your host for today's conference, Mr. Steve Anderson. Sir, you may proceed.

Welcome to Astec Industries conference call for the third quarter of 2004. My name is Steve Anderson and I am the Director of Investor Relations and Assistant Secretary for the Company. Also, in today's call are Dr. J. Don Brock, Chairman and Chief Executive Officer, and McKamy Hall, Vice President and Chief Financial Officer. In just a moment I'll turn the call over to McKamy to comment on the financial results for the third quarter and then to Don, to discuss operations and comment on the current business environment. I am sure that all of you have had a chance to read the press release that we issued on the third quarter that ended September 30, 2004, but before we begin that, I'll note our standard disclosures. Please be aware 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'll 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 would like to turn the call over to McKamy to summarize our financial results.

I would like to first call your attention to the first paragraph of the press release. Our attached financials are unquestionably correct, but in the first paragraph, we've got a couple of typo problems that we are investigating, and the electronics are great when they work, but on the first line of the first paragraph some of your press releases may say 111.4 instead of 111.7 million in sales. In the next to the last sentence of the first paragraph, the net income for the third quarter, some may say 0.4 instead of 0.7 million per net income. Again, let me reiterate that the financials are correct, but we have got a problem with those two -- 0.4s versus 0.7s in the first paragraph.

Our sales are up 10.5 percent over the same quarter last year at $111.7 million. Our international sales for the quarter are $29.9 million versus $24.4 million or up 5.5 percent. Coincidentally, parts sales are up exactly the same percentage. They are up from $25.1 million to $26.5 million or 5.5 percent. You do have attached to your press release the revenue of segments, but I won't to read that to you. In terms of the gross profit, the two most important factors impacting our gross profit are lack of volume and the steel price increases, as we have said in the press release that we estimate a 3 to 4 percent impact on our gross margin for this quarter. The SG&A is at 18.5 percent of sales versus 17 percent of sales for the quarter last year. Health Insurance is our single biggest cost increase, we listed 2 or 3 other items in the press release as well -- recruitment, relocation, R&D, and Sarbanes-Oxley cost that add to the -- that make up the increase as well. In terms of interest expense, our interest expense is down 43 percent.

Our earnings per share is 4 cents positive versus a 4-cent loss last year. Our backlog is $66.8 million versus $40.8 million, that's a 64 percent increase, and that is not a typo, that is exactly the same increase it was for the last quarter over the prior year, so that is 64 percent. Now this split of how that increase has occurred in the backlog, the domestic backlog is up 55 percent and the international backlog is up 85 percent. In terms of backlog by segment, we will share that with you. The Asphalt Group backlog at 2004 is 27.3 versus 10 million for 2003. The Mobile Asphalt Paving backlog is 2.7 versus 0.7 for 2003. Aggregate and Mining is 29.7 versus 18.6 for 2003. Underground is 7.1 for 2004, it was 11.6 in 2003. We certainly have continued over the last 15 to18 months, we've continued to strengthen our balance sheet. Our revolving credit loan is at 0. Our debt peaked in March of 2002 at $146.7 million, our debt now is $30.5 million that is $116.2 million reduction in debt over that time frame.

Our receivables are at $50.3 million at the end of the quarter versus $59.5 million last year, and that is a reduction in dollars, but an increase in volume. On the days outstanding, we are actually down from 51 days last year to 39 days this year. We certainly do like that trend and continue to work hard at keeping it at a low number of days. The inventory is up $5.4 million while our debt, as I said, is down $30.5 million, and it is $30.5 million at the end of this quarter versus $87 million at the same quarter last year or in the last 12 months, a reduction of $56.5 million. The total debt to capitalization at the end of the quarter is 14 percent. Our capital expenditures are $5.4 million versus depreciation year to date of $8 million. Our budgeted capital expenditures were $7.4 million against depreciation of $11.5 million. The cash flow will be attached to the 10-Q filing, and we will be available to answer any questions that you may have after Don shares his remarks with you. Thank you.

Thank you McKamy. Dr. Don Brock will now discuss our operations for the third quarter 2004, as well as comment on the general business environment. Don?

Thank you, Steve. As can be seen by the numbers, the volume this year has returned to, what I would call, the normal cycles that we used to see, where about 60 percent of our volume occurs in the first half of the year. Our third quarter was really the end of peak of the working season for our customers. It was somewhat by the fact that we have no highway bill and there was a continuation of just short extensions, which basically led to a lot of short jobs for our customers, which kept them busy and very low relative equipment. I guess -- I look at it as customers are quite nervous and anxious, they only buy what they need right now, and they want it right now.

Also adding to this, we had 4 hurricanes in the south that did not help much. It delayed a number of shipments during the quarter. Our margins, as McKamy mentioned, were severely affected by accelerated steel price increases. We have raised our prices on our equipment, but there is a built-in delay from the time we raise the prices, we are generally about a quarter behind where steel prices are. And unlike anything we have seen in the price, the steel prices continue to rise. We have seen some little flattening right now, but during the first 3 quarters, there was a constant rise in prices every month on steel. We had similar increases during the first 2 quarters, but I guess the biggest thing that covered a lot of this or tampered the effect of it was the fact that we were very over absorbed in our plans and that tampered this additional cost increase. Unfortunately during the third quarter, with the volume, we didn't get this effect while we were about absorbed, we had a slight under absorption but we were about absorbed, it really showed the true effect. My estimation is that steel price's increases will cost us probably a total of $16 million this year or affect what our margins could have been by 3 to 4 percent. Some of this, as I have just mentioned, was hit by over absorption during the first half.

As McKamy mentioned, our SG&A was affected by pretty rapid increases in healthcare costs, Sarbanes-Oxley compliance, we have accelerated our R&D expense development, which was higher than we have seen in the last couple of years, and we had some relocation expenses. On the positive side during the quarter we continued to reduce our debt, our debt to total capital. It dropped below 14 percent in the quarter. If cash were netted, we will be down below 10 percent. We hope to continue to reduce our debt and continue the improvements in working capital and in selling unused assets. We still are in the process of trying to sell the Great property. Though we had it sold, we had a contract. But again the developer, we -- it did not come up with the money . So we have another prospects. The South African operation at this form, we are continuing the plan on keeping that operation and continuing to grow with them. We continue to reduce slow-moving inventory that we won't replace. But all of these will have refined. We will still continue to be narrow the debt by the end of the year.

Other positives that we see is our part sales that increased here in the first 9 months from 76 million to 90 million. Our underground operation was profitable for the first time and were profitable for the year. In fact all segments were profitable. We took on the Case New Holland parts business on October 1 and over the next 12 months that should ramp up about a $12 million a year business that will add to our parts business, and allow us to grow our parts business up to 125 million a year annually.

Looking forward, I guess, there is still a lot of uncertainty without the highway bill but our backlog is up, as McKamy said, from about 67 million versus 41 million last year. We've had a number of strong sales in early October that really is an addition to this. The accelerated depreciation expires in December, on December 31. We do have a lot of customers talking about trying to get equipment in this year, which should make the former quarter better than normal. The weak dollar continues to have exports. We have been hurt somewhat by the fact that European companies have imposed tariffs on their equipment, hopefully with recent bill passed by Congress that they will reduce these tariffs. And again will help us in exporting to the European countries.

As most of you know, there has been a 8-month highway extension and our opinion that should lead to a better highway bill maybe when Congress comes back -- at the first year they will not be focused -- only election -- but do not try to do something positive. Also very positive we feel like it over the last year so we have put a lot of effort in resources and developing new equipment. The highly portable crushing plant is selling and we have -- we sold a number of those and we will have a number of orders for next year. The new modular plant that our Telsmith operation has developed reduces installation cost and we believe it is an excellent product and will continue to grow. Our aggregate mining group has developed a full range of crushers and screening plants that are selling quite well. The other thing with oil prices going up like they have is a real hard demand for recycle systems that will allow us to increase the amount of recycle that is used in Asphalt. The combination of the Telsmith crushers, Astec mobile screens, high frequency screens and Astec's technology on the double barrel offers the customer the ability to go up to 50 percent recycle without the use of any more fuel and it's the only combination of equipment that will do that.

Our new controlled system that Astec has developed leads into this. The new mailing line and paving line is becoming quite popular. We are developing a new paver that has the distributor or tag time billed directly into the paver and have the first of those operating. We have the third of our big surface miners working. DTI has developed the laboratory scaler that increases the production about 3 times. And we see a major thing has been discovered recently as we got a new relish, we found that the if you build the road smoother the fuel consumption in cars go down and vehicles go down significantly as much as 20 percent between a rough road versus a smooth road. We see this over the next couple of years. It's really increasing the demand and the focus in trying to build better roads and will lead right into more of our material transport vehicles selling. I guess, in summary, from outlook -- our outlooks are a little guarded, we are still waiting to see what happened with the new highway bill. Whatever happens, we believe it will be better, but due to the higher oil prices and higher steel prices, it makes us a little guarded and otherwise we're very cautiously optimistic. With that I'll stop, and we'll be glad to answer any questions. Kane, if you would, please open the line up for any questions.

Thank you. The floor is now open for questions. (OPERATOR INSTRUCTIONS) John Reilly, CJS Securities.

First question I have is related to the backlog in your Asphalt Group. That number seems very large, I mean are there any unusual orders in that and do you expect all that to ship in Q4?

John, it will not all be shipped in Q4 but we've showed some sense that we will ship it in Q4. I think people are held back for 2 or 3 years, and I think this is a part of the plan of demand. There is also a lot of what I call high plans where people are adding just double barrels in the to increase the amount of recycle. With oil prices going up likely, liquid asphalt certainly goes right with them. And the need to go on up to higher percentages of recycle is pretty paramount. And so we see the asphalt plant business coming back over the next -- pretty strong over the next 12 months.

Okay. Next question is related to the accelerated depreciation goal. When does the customer actually have to have possession of the equipment. When do you expect to see the orders, and what is giving you confidence for it?

We see a number up right now, I guess I answered your question. They have to have the equipment ready to operate. I think that's the key turn. It doesn't necessarily have to run, but it has to be -- you push a button and it would run. And so those orders -- I think we perceive quite a few orders in early October here, and a number of them -- people are in between before the first of the year. It -- always that it didn't run out but it's particularly for the private companies is a great . I think it will also -- I think we will sell a lot of our mobile equipment which is -- probably people will look at our numbers, a lot of our customers don't really know what their profits are going to be till the end of the year because one or two bad months, bad weather months in October and November can really affect it. If they have good months and we have the inventory, and we gradually build our inventory up intentionally to be prepared for that.

And one last question, and then I'll get back in the queue. With the recently -- the continuation of the highway bill in the 8 months, continuation longer than anything before. Has that changed -- the purchasing patterns that you are hearing from your customers?

John, I think that will certainly help. A lot of the states cannot redesign jobs that they don't have the money -- see the money coming for and 8 months is certainly better than these 3 months extensions that we've been having. And I guess there is general consensus -- we're going to have some kind of highway bill, but I think just seeing it past and knowing what it was, we gave our customers a lot more confidence to go ahead and place orders for the larger equipment.

Jack Kasprzak, BB&T.

My first question is related to really the fourth quarter, and just trying to get a little better feel for how you think it might play out. You mentioned, for example, that some shipments might have been delayed due to the hurricanes, and that you've already seen a little pick up in orders here in October. Fourth quarter is always a tough quarter I know, seasonally, but -- can you may be give us a little more color on do you think it will be sort of like in the third quarter given these other factors -- may be little better, just may be a little help there might be -- appreciate it?

Jack, I think, it is probably going to be like the third quarter -- is my best estimate. It could be better though, my hesitation is from Thanksgiving through the end of the year. There is a many holidays. And you get the weather problem related -- at year-end, get the people to take it at year-end. I guess my concern would be, do we end up with the bunch of stuff stacked up in December that we can't ship either with these regulations that we operate under right now, you pretty well just -- you can have the bill and holds and things like that are tough, and we have to be extremely cautious in having the equipment shipped or meeting all the criteria for shipments. So, not that we're doing anything much different but is still -- the cut-offs are pretty important and whether or not we'll be able to get it out in December in our reluctance, but I guess my best estimate is 2 years, as it should be above like the third, hopefully a little better.

Okay. Fair enough and then, you mentioned the impact of the highway bill or lack of a highway bill and I was wondering your business is also affected by the overall economy, if you will, and it obviously looks like we've lost a little sales momentum from the first half of the year here in the third quarter. Are you sensing other than the lack of a highway bill, anything else going on with that might give us some insight into the overall economy?

Jack, I guess there's more disparity in my opinion between consumer purchases and business purchases that I have seen in it. We're seeing substantial inflation with the steel prices and other stuff coming behind it. while it didn't seem to be affecting consumer pricing and that's kind of an unusual situation. Overall, it looks there is a continuing increase and improvement in the economy, which bodes well for state revenues and should start helping state spending. I guess the exciting thing I've seen coming is this thing, where there is a group of us in the industry has done some real work on the effect of smoothness on fuel consumption and we've discovered; it looks like by getting the roads smoother down in, not even the level that we can get with the transfer machines, but if you take a from a 150 inches per mile, on the international rating index down to the mid 40s, we're saving 20 percent in fuel. We think this will bode real well for the congress and we've got a major research study going on right now. And that could be a real shot in the arm for the industry just in getting the roads in better shape to reduce fuel consumption. We're kind of excited that that could help us get us forward next year or over the next couple of years. That would be good for the country and be good for our industry.

And lastly, while I've got you guys on the phone, can you remind us what Superior's revenues were in the first half of '04, McKamy or any one of you had that handy?

I got it in the last press release, just one second. You want the sales, Jack, for the 6 months?

Yes.

That's $19.6 million.

(OPERATOR INSTRUCTIONS) John Franzreb, Sidoti & Company.

Good morning gentlemen. Don, you said you had strong sales in October that were not in the backlog. I was looking if you could expand upon that and tell us what kind of products were doing well early in October?

John, it has been on corrosion plants, asphalt plants. We got an order last week for from one contractor. So, it's kind of across the board. Probably the one that hadn't seen this part during the fourth quarter that the others (have in the underground has not, although it is okay, but primarily on the highly corrodable corrosion plants and the asphalt plant.

And the backlog trends, if I remember correctly, you tend to tee down your orders in December for delivery into early spring. Is that the case you expect to see this year or you think there'll be a disconnect because of worries about the ending of the depreciation?

John, I guess logic probably given the orders a little early. Although, the typical, my guess to be along the things typically we probably speak out on backlog more in March. I think that's about where we generally hit the real peak. I would say that, what we are getting -- a lot of what we're getting right now is people buying ahead. But I would expect if we patch the highway bill reasonably early that people will go with it, turn loose the expenditures that they would normally do next year too or so.

I heard some of the -- you tapped into what's going on in Washington. I heard some venture that Bush administration would want to extend the rules for accelerated depreciation, and actually what Kerry administration wants to do. What have you heard?

We have heard the talk of extending it probably somewhere in the May, somewhere like, but we hadn't seen anything happened on that yet.

(OPERATOR INSTRUCTIONS). , Stock .

Could you elaborate on that over absorption issue that you mentioned, was a factor, as well as the working season and you said the continuation of shore extension. Can you just explain those 2 issues a little bit further?

Let me make sure I understand the first part. On the over absorption--

What is that about?

During the last couple of years -- as our number of man-hours going through our plants going down. We said at the beginning of each year of rate or each man-hour going through the plant. If we work more man-hours in that, we are over absorbed and while we cost it based on that, then we bring that back into the profit. And we worked a lot more man-hours through our facilities during the first 6 months than we had anticipated. We didn't do that in the third quarter and that's really what that's about. We were over absorbed about $9.5 million, first hike of the year and we got to absorb that hike in the third quarter or so. That tends to offset a lot of the steel price increases. Now, we are based on our cost on the man-hour rates we were planned. That should answer your first question. What was the second one?

Can you just extend a little bit; you said that the third quarter was weak due to the working season of the customers?

Yes. This is their peak working season. The summer month is when they are working and they are not generally interested in buying. They got to have the equivalent rating and lastly it is just less they gotten unusual amount of work and they need to have another preview or they need to have something like that on major capital equipment. Very little buying in the summer unless it is international. They are part of our volume in the third quarter. We wish to internationally, if it is going to a country in the southern hemisphere, it's offset of this season of what we have got here in the northern hemisphere. So that tends to some international sales -- tends to offset the seasonality of the business.

Jim Brilliant, Century Management.

In the Q3 short fall in terms of fields, can you quantify that in dollar amounts, not much was missed because of hurricanes and weather or whatever?

I would say Jim it's probably $10 million effect on delayed shipments--

Not very significant, then?

Yes. It's a fairly significant number. The hurricanes in Beach Florida, that shut Florida down and many of our customers told us down there that it is not, I don't think -- well I shouldn't say that most of our equipments do that very well. Some of the plants along the East Coast of Florida they told us installation offer some and offer the drums and things like that, but don't know substantial damage on it, but the complaint we had from our customers down there is that they couldn't keep get there people back to work. Because they were so busy with their personal problems and they just really couldn't get back to run it. One contractor told me that they probably was average and losing at least 3 weeks on each of their hurricanes as it goes, either getting prepared for the road work and getting out of there. So they kind of just shut Florida down and in fact best single breakdown in Southern Alabama numbers, number of other states just rainfall as the hurricanes .

Did the hurricane damage create any future work for you?

It's sure that delayed a lot of work and yes, we'll increase -- it will help in the future. There is no question that a lot of independent in Florida.

And regarding the -- I know this is -- you are crystal balling it but with regards to the uncertainty around the highway bill, do you have any sense of what the pent-up demand is there as they just wait for the bill to be signed?

Jim, I think it just would give a lot of our customers a lot more confidence to replace or to add to if they saw a 6-year bill out there and they saw it was there. The administration bill of $256 billion as they were proposing was a flat bill. It just didn't increase any. That would be extremely negative. The general consensus is that we may end up waiting, getting something more like the senate bill or around $317 billion, $318 billion. That would be very positive. There is even some pure optimistic thinking you might get what the original house bill was of $375 billion, I think that's kind of a dream but it's going to be, I think, with it being delayed, there will be, hopefully, more in the congress, I don't know whether that's possible but there were strong support on both sides for the bill, and the President was really the one who was opposing it, for the administration. So, it depends on who is elected. Either way, I think we would be better off. I think even if President Bush is reelected, he will probably, he is softened a lot on his original position. In fact, they had agreed to come up to about $286 billion and there is at go around.

And then in the quarter, you mentioned some additional pressure on SG&A. It seems a bit that it was particularly acute in this quarter relative to the previous quarters, is there some lumpiness in there or is this just a quarter that's hit?

Jim, the biggest things is unfortunately is the medical cost has gone -- is against or little over 50 percent of the . We, last year, had a very, very good year in the medical cost area, and this year, we just had an extreme amount of --it's the increase in frequency of large clients. And I think it is lumpy and the actual result tell me that there is no way we get this better year again next year but it's one of those things that happens.

Okay. So, just so I can kind of quantify or redo my model, the 10 million that you missed in Q3, you'll see that in Q4?

Yes. We think so. I guess as I told Jack a while ago, my biggest concern is I hope we don't get --

There is no more hurricanes or weather delays?

Well, right at the end of the year, when everybody lives for Christmas, the New Year, we have a terrible time getting the thing, but that's always. It is not just cold weather or anything. It's just the end of the year shutdowns

And then in addition to that, you've seen the pickup in some backlog relative to the depreciation --

Yes, that's correct.

One last thing if I can sneak one in. Any kind of visibility in the next year at all?

I guess, Jim, our -- what we are looking at is probably a true 10 percent increase in revenues, I mean, that's kind of the guidance

I have given our Presidents and we think we are going to see -- and what we are trying to do is factor in the inflation that we have seen this year too. So --

How much of you -- have you increased the cost in your new pricing?

6 percent to 10 percent.

6 percent to 10 percent. That's what you have increased prices by --?

That's correct.

Okay, and when do you think that fully flows through so you start to offset some of these pricing, commodity pricing.

It's basically flowing through out right now. The hesitation in all that is steel prices and some of the other prices are flowing upward too, so are cold steels. We are seeing a wave of price increases of anything made out of steel, while steel is kind of -- I hope it's peeked but it's in the 45 to 50 cent a pound and a lot of the steel that we are buying now, and we are seeing stuff like electrical components going behind it, anything, wiring, anything made out of copper, metal, aluminum going up. So, we are seeing a wave of price increases, but we are trying to stay ahead of that wave. And that's not only hesitation, and steel was the only one, it's kind of more volatile.

(OPERATOR INSTRUCTIONS) John Franzreb, Sidoti & Company.

John, I was thinking back to 2000, when we had the last oil spike that could -- the contractors kind of unaware. We talked since then about them repricing the contracts and get away from the fixed price type contract. I want to just discuss -- would you think there vulnerability is to the high/low pressures now and if they are adopted and it's not as big initially as it was -- 4 years ago for them?

John it's kind of the one good thing in not having the highway bill in these 3 months' extension, there's not been that many big, big jobs for them. So the extended jobs and loan backlogs have not been out there, so they're adjusting their process pretty quickly as the oil prices goes well. The other unusual thing is happened for the first time in my career that I guess I've never seen as much disparity in processing. Typically the rule of thumbs take the process of a barrel of crude oil multiply of 5.5 to 6 and that's the process of ton of liquid asphalt. So with $50 a barrel, you ought to pay $300 a ton. It's probably 230 to 240 which is not too much out of the ratios. But if you go to the Mid West, if you go to Montana, you go to places like that, you still see $140 a ton of liquid. What's happened is the refineries are running so full out. They are bringing out a lot of heavy crudes particularly those in the Mid West, out of Canada and it makes a lot of asphalt in order to get the gasoline and the fuel, they got an excess amount of liquid asphalt. So, the process in that part of the world is really unusually low based on the price of oil. And so it's a little -- it's an odd situation. I guess those specifically answer your question. They've adjusted pretty quickly and in 2000 they were setting there again with pretty long - pretty large jobs big backlogs and had a certain increase from 15 to 30 and that's what really plays havoc with them. It's not good what it is; I mean I was just telling like it is I mean I don't like the $50. We see our major customers -- we are getting a whole a lot of calls about how can I learn more .

Okay great. Thanks a lot.

Thank you.

Thank you Gentlemen. There appear to be no further questions coming from the phone line at this time. I'll turn the floor back over to you Mr. Anderson, for any closing remarks you may have.

Okay. Thank you, . 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 October 23 and an archived webcast will be available for 90 days. A transcript will be available under the Investor Relations section of the Astec Industries Website within the next 7 days. All of that information is contained in your press release. Again, thanks for your participation this morning that will conclude our call.

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