Astec Industries Inc (ASTE) 2004 Q4 法說會逐字稿

Good morning and welcome to the Astec Industries fourth 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 the presentation. It is now my pleasure to turn the floor over to your host, Mr. Steve Anderson. Sir, you may begin.

Thank you, Ian. Good morning and welcome to Astec Industries' conference call for the fourth quarter and fiscal year ended December 31, 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, our Chairman and Chief Executive Officer; McKamy Hall, Vice President and Chief Financial Officer and Neal Ferry, Executive Vice President. Some of you have met Neal, but for those that have not, I'd like to take just a minute to briefly introduce him.

Neal joined Astec Industries at the first of this year. Prior to joining Astec, he was for Corporate Equipment Manager for Peter Kiewit (ph) & Sons and had been with Kiewit for 34 years. Neal oversaw equipment that had a replacement value of $1.9 billion and managed approximately 1100 equipment management employees while at Kiewit. We welcome Neal to the corporate staff.

In just a moment, I will turn the call over to McKamy to comment on our financial results and then to Don to discuss 2004 and the 2005 outlook. Before we begin, I'm sure that all of you have had the chance to read the press release that we've issued on the fiscal year and the quarter that ended on December 31, 2004. 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 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 will turn the call over to McKamy to summarize our financial results.

Thanks, Steve. We appreciate your joining us this morning. We are pleased to present a much improved 2004 compared to 2003 and we look forward to continuing improvement in 2005. I'm not going to attempt to read all of the numbers to you that are on the press release or the attached material, but just hit some highlights and then be available for questions at the end.

In the quarter, we had an increase in sales of 34.8 percent from continuing operations. And please remember that as you look at these statements, that the -- all of the P&L numbers do relate to continuing operations. That includes the analysis of sales. On the international sales, we were up for the quarter 7.1 percent, PERK (ph) sales were up 19.5 percent. Aggregate and mining had the greatest improvement for the quarter, asphalt was second, underground third and mobile and paving fourth. The underground segment took charge of the parts distribution for the utility trenchers at Case at 10/1/04 and for the fourth quarter, got off to a start with 1.1 million in parts. For the year, our net sales are up 25.5 percent, again, for continuing operations.

Our international sales for the year are up 30.9 percent, and in this magnitude or in the order of magnitude, the Middle East led the way, Europe second, South America third and Asia fourth. In terms of domestic sales, our domestic sales were up 23.9 percent. Our parts sales for the year were up 19.6 percent and that is from 97 -- that is from 97.4 million to 116.5 million. And on the international number, I believe it is in your press release, but just for those of you that might not have seen it, that we were up to 122.6 million. So we, as a rule of thumb, will exceed 100 million for international sales and PERK sales for each year.

On the revenues, as far as how the pie is cut up between the segments, our aggregate segment is at 41.4 percent from continuing operations, again, excluding Superior; asphalt 28 percent, mobile 18.1 percent and underground 12.8 percent. And the sales by segment is attached in the segment report attached to the press release.

On the consolidated gross profit, in Q4, we had an increase of 9.6 million. We did have some underutilization, about 4.6 million in the fourth quarter, and we also had a true-up, as you will notice down in the discontinued operations line, of the final tax and gain for a negative 0.4 million that affected the quarter. For the year on the gross profit, we ended the year at 20.4 percent compared to 16.2 percent for the prior year with an increase of 57.9 percent or $37.8 million.

We had improved sales volume in all segments. The ranking of the segments by gross profit, the aggregate and mining was at 24 percent, the mobile asphalt paving at 22.5, the asphalt at 18 and the Underground group at 14.2. All segments had improved gross margins from the prior year and we certainly look forward to improving margins as our volume grows to take advantage of the capacities we have available in our plants.

On the SG&A and Engineering, for the quarter, we had accounting fees of about 0.6 million that primarily relate to SOX. We had legal and professional, an increase over the prior year of about 0.5 million, and recruitment and relocation increased over the prior year of about 0.5 million. On the year, our sales commissions were about 2 million more than the prior year; health insurance about 2.6 million, not a good year for the health insurance; legal and professional about 0.5 million, and those two numbers are the same for the quarter and the year. That's not a mistake. And the Sarbanes-Oxley for the year, actual cash paid out to auditors and those assisting with the Sarbanes-Oxley outside of the Company did 0.9 million for the year.

Income from operations from the quarter, we had an improvement of 25.4 million. The big difference here is that we had no goodwill impairment in the current year. That was 16 million last year. For the year, income from operations, we had an improvement of 48.1 million. We did have an improvement in income for each segment. On the interest expense, it's down 3.4 million, or about 46 percent from the prior year. The net income we have is 3/10 of a million for the fourth quarter, or diluted earnings-per-share of 1 cent, and that compares to a negative diluted earnings-per-share last year of 1.23, or $1.23. For the year, our net income diluted earnings-per-share is 95 cents. For continuing operations, the diluted earnings-per-share is 62 cents.

Our backlog is now attached for your reference. That's something that all of you always want and are always trying to keep a record of, so it is now on the attached sheet for your reference so I don't have to read it to you, and you don't have to try to write it down as we have these conference calls. The backlog at December 31 is up 23 percent. The backlog at January 31 since this conference call takes place a little bit later than normal, we have that additional month to give you an update from and all of you like to normally know what the latest is so you can see what the situation is at the end of the quarter is continuing in January. So it's up 31 percent from the prior year.

On the balance sheet, our balance sheet is very strong. We are positioned financially to handle growing volume and to consider other opportunities that may be available. Our debt is down about 37.7 million. Our debt-to-equity ratio is 19.7 percent. Our CapEx for 2004 was 11.2 million, our depreciation was 11.1. For 2005, we are budgeting CapEx at 14 million with depreciation of 10.6. And that concludes my remarks on the financial details. I will be glad to be available for any other questions that you may have available later in the call.

Thanks, McKamy. Dr. J. Don Brock will now discuss our business operations for 2004 and the outlook for 2005.

Thank you, Steve. The fourth quarter came in about as we expected. It is usually our weakest quarter. However, it is a great improvement over last year as you can see from the numbers. Typically, our October and November is very weak because our customers are finishing work and are not in the mood of ordering. And we saw that again occur this year, but a very strong pickup in December and it has continued into '05.

We were very pleased with the improvement for the whole year, but we still have a lot more to do, I might say. We were somewhat surprised and did not react as quick as we should have on steel price increases. It was very difficult to predict how quick they would rise and as I mentioned in prior conference calls, I certainly underestimated that they continue to increase. We saw steel prices double during the year.

Oil price increases equally hurt our customers' profitability. Again, the way they continued to increase and at the levels they are right now is probably the highest we've seen in history. The cost of Sarbanes-Oxley as McKamy mentioned was slightly south of $1 million, but that does not include the internal effort was associated with it. We find it to be very counterproductive and very costly, but it is the law we have to go by.

Health care and R&D expenses, as McKamy mentioned, were also up, at least with R&D expenses. We believe they will pay big dividends. So we continue to increase our R&D effort.

On the very positive side for the ,year our revenues were up 25 percent and are continuing to increase. We continue to reduce our debt, as McKamy said, approximately 37 million for the year. Our debt to capital is around 16 percent at year-end. And if you netted the cash, it would be around 12 to 13 percent. We have our Grapevine property again under contract and hope to close by the end of April. And we are normally at this time of the year, our working capital is at its peak will continue to decrease during -- by midsummer.

Other areas that we're very pleased with, our part sales, we have an initiative to grow part sales in all of the businesses. They grew to 116 million for the year versus 97 last year. And as McKamy mentioned, we only got a small help from the Case part business, but we think over the next 18 months, just that the utility trencher business, parts business, will add about 12 million more to our Parts business. Our Underground business continued to improve and is growing and we believe will be a good profit contributor this year.

As we look forward to '05, our backlogs are strong. They were 93 million at the end of December, 114 million at the end of January, up about 31 percent over last year. The Highway Bill looks like it is going to pass at about 284 billion. All parties are in agreement on it. If you really look at the Bill, there's some interesting iterations that are going on there. Last year, due to the fact that there were just extensions of the Bill, there was 1.9 billion that was earmarked for -- was set aside for earmarked or pork barrel type projects. They were not spent -- that amount was not spent last year, so this spending level was in the 31 to 32 billion category. That will flow over into the normal spending for '05, along with an additional 1.9 billion for hurricane relief, which throws this year up to about $38 billion in federal money. '06 with the Bill will drop back in the 35 to 36 range and then grow up in '09; it will be up to around 45 billion if the Bill is passed, as the three parties have proposed now.

The attitudes obviously of our customers are much better. The weak dollar certainly helps us on export and hurts some of our competitors who are importing and that bodes well for us as we look forward in the coming year.

On our margins side, we continue to focus on improving our margins through better cost containment in the purchasing area. Steel prices seem to be stabilizing, or at least there is minimal increases as compared to last year. We continue to increase our volume through our facilities, running more man hours and this certainly helps the absorption and lowers lower cost. We still have a lot of work to do in our margins. We hope to continue to improve them to where they reach, again, reach levels that we saw in the late '90s.

As I mentioned previously, our R&D expenses, we think that a lot of the development that we put in are really developing products for a high-energy price environment that we now are in. Oil prices drive the need for more recycle in our business and we see recycle going to the next level where we will be putting 40 to 50 percent back into the mixes.

Our mobile screens, our track-mounted crushers, the double-barrel asphalt plant with the new burner and new control system takes us to another level, allows us to produce a high-quality mix without any additional fuel consumption and reduce the cost of the asphalt mix per ton significantly. The new milling machine line is very again adaptable. It's a mining machine, as mining the recycle. The other area we see is there are shortages in aggregates all over the country, particularly in Florida and Texas. The highly portable FasPak (ph) allows you to go into smaller deposits that might not have previously been economically feasible. Our new surface miner that the Underground Division has developed allows you to mine material where it previously could not be gotten because of the not being permitted to drill and blast. The modular aggregate plants allows us to put them together quicker. And so we see with a continuing source of aggregate, a shortage of aggregates around the country, a real good business for our aggregates groups.

We also see a drive for the customers which is a traveling public want us to get in and get out and don't bother them while there they are. So we see a lot more night paving, we see a lot more milling and inlaid paving where you mill out 2 inches, put 2 inches back down. Our new paver line, and particularly the new paver that we have that has the tack or as asphalt tank built into the paver allows you to do close couple type paving where you can mill and go 200 feet, put the mix right back down and close the road back up.

In the Underground business, we are excited about the progress we've made there. It has been a real struggle for the last couple of years but we have a new line of small drills out, a new midline of trenchers. We have a number of new dealers signed up. We really have control of the dealer network as of October 1. Neal and I were at a meeting last night, a four-day dealer meeting and the excitement is very contagious of these new dealers who are selling this product line. The parts business in that area will continue to grow and we believe will be a real positive contributor this year.

Our concerns are continuing high oil prices, inflation of all of our components and making sure we contain our cost in this inflationary atmosphere. However, our outlook we believe is good. As you've heard me say before, rising water covers a lot of stumps. And with the revenues going up we have a lot and more volume going through the plants, it certainly helps on margins. With that, I will stop and we would be glad to answer any questions.

Ian, if you could, open the floor for questions.

(Operator Instructions). John Reilly, CJS Securities.

Good morning, gentlemen. First question I have is you mentioned that you saw a significant pickup in the month of December which continued into January. Across which segments did you see them, and what do you think triggered that improvement?

John, I guess we saw it in all segments, starting I guess with the last one first, the Underground Division. We see a lot of pickup and a tremendous amount of sewer work going on and water line type work, directional drill business is coming back very strong this year. I think it was up nearly expected to be up industrywide about 100 percent this year. The highway work, volume of work there, is certainly continuing to grow and increase. The high oil prices certainly hurt from that standpoint, but I guess we in the aggregate due to the shortages, we see that growing. And again, the shortages are driven by more roads and more buildings. So it's pretty well all over all four segments of the business.

Could you quantify what the impact of steel was versus last year's fourth quarter?

Well, it is an estimate, but our estimate it's about $16 million pretax for the year that it did to us. We saw just about a doubling in prices. We increased our prices, but we were usually about three to four months out of phase due to the backlogs. And I would have to say that we struggled with really if it was a real thing I guess. A lot of our people, and I would have to say I was one of them, we thought it would go up to about 30 cents a pound. but we didn't expect to see it up in the 40s and 50s. So we were a little late in raising our prices. But our best estimates, it reflected us about $16 million.

One last question and I will get back in the queue. You mentioned in your final comments that you believe you can get your margins back up to where they were in the late '90s. What kind of revenue number do you believe you need for that? And where are you with regard to capacity right now?

We believe that if we could up north of 600 million, we'd get back in that range. And I guess I caution a little bit because we are seeing a continuing increase of component prices, electric motors, anything that has raw materials like copper or -- brass, copper or steel, anything is going up. It is obviously not going up as fast as the steel prices did, but it certainly has an effect on us. And that makes me a little bit cautious. But with volume's north of 600 million, we can get close to that. We have the capacity probably to do more like 800. The reason I go up on that, we had not added too much bricks and mortar, but inflation is a great deceiver. And we've gone up on our prices too. So our capacity is based on units, not on dollars.

All right, thank you.

Todd Vencil, BB&T.

Good morning gentlemen. With regard to the Grapevine property, can you give us any details on that contract you have on the property?

I'm going to let Steve answer that; that's his project.

Todd, we have a contract on that property for $13,200,000. You can expect a closing date in late April. There is an option to extend if they will pay us some more deposit money for 30 days. And we are hoping that is a second quarter closing.

Can you tell us what the intended use is going to be for the buyer?

They have not told us.

It is all commercial in that area, and so it certainly won't be used as it was.

I apologize if I missed this, I don't think I did. Can you talk about quoting activity and just what you're hearing in terms of -- I think the real issue has been and probably continues to be visibility in terms of your customers' backlogs. And I know that the Highway Bill will help that some. Can you tell us if you've heard any material change so far in that?

We just got back from the NAPA meeting, which the National Asphalt Pavement Association, and the attitudes are probably as good as I have seen them in five years. The customers have gotten pretty decent backlogs and the states seem to be catching up. The states are not out of the woods yet, but state spending is coming on and they will have to money to match this. There were about 16 to 18 states that have increased their user fee or gas tax or done various initiatives to put more money on the roads. And so I guess what I see is a much more optimistic attitude from all of our customers.

Good, thanks.

Richard Wesolowski, Sidoti & Company.

Good morning. Don, is there a tangible event that needs to occur before your asphalt group customers are eager to maximize the proportion of recycling their own product, or is this something you guys just expect to see gradually over time?

I think we'd expect to see it over time. Probably, the problem we have had on that Richard is -- and I am partly guilty for this, I should say. But we started putting recycle in at 10 to 15 percent. Well, that's like using a bathroom in the ocean. You can do that without doing anything but basically crushing the top size of the recycle and putting it back in. As we go up to higher percentages, you're having to process it just like we do virgin aggregate and make it the same size as a virgin aggregate, re-separate it. The liquid asphalt goes with the surface area of the material. I'm probably over-answering your question. But what happens if you screen it back to the same size as virgin aggregate, then you can either choose black rock or white rock. And as a result, this has allowed some of our customers to go as high as 50 percent.

The states have got to see this and believe it and buy into it and we've got to go through a series of processes with 50 states, and it will catch on pretty quick because the economics are a great driver. But they have to permit it to occur and we are seeing that take place as we go forward. The equipment is ready now to do it. It's more the inertia of getting the states to allow it, getting the contractors to realize they can do it. So I think it is something that over the next two or three years, if oil prices stay up there, it is a great driver. You will see it happening.

Do states now have a maximum for the proportion of recycle?

It varies from state to state and it varies on the type of mix, but yes, to answer your question. Some states will allow as high as 30 percent in the surface mix and as high as 50 in the base and the binder their lower mixes, the blinder is an intermediate coarse. So it varies depending on the state. Some states, there are a fee that don't even allow it in the surface mix. But the thing we're trying to do, I have to speak in Maryland tomorrow, but is convince the states you know it is all the same age. It doesn't matter where it has been -- on the road or in the rock quarry. And when you really look at the economics, we have got to do more of it. The other thing -- the more inlays we do, the more we generate. So there are some areas. A guy in the L.A. area told me a few months ago, he said Don, it doesn't matter the economics. He said, we have to do it to get rid of it because we're going to get buried with it. So it is going to happen and it is really a way for our industry to control the cost. We can get more tons of mix down with the same dollars.

Okay. Within your remarks, you mentioned the suppliers. How much in aggregate cost savings do you think you have to gain from consolidating the suppliers of your various commodities or inputs?

I think there's a potential for us to save as much as 10 million a year in some of the consolidations. With the 13 decentralized companies, this is a challenge. And when you look at it, there is about five of them that use mobile equipment. In the aggregate group, we're using on our FasPak, we use a lot of mobile equipment. By that, I mean diesel engines, hydraulic components. In the others, we're using electric motors, things like that. So some of them has been easier than others. So there are certain preferences, there are certain requirements that are different on a paver than you have on a trencher because you're running at higher temperatures. So it is a challenge to make sure you do not compromise the quality of what you're doing, but we're making pretty good progress on that.

Lastly on the parts sales, would you expect that you're going to see similar dollar increases in the part sales in '05 that you saw in '04?

The answer to that is yes. It may be a little better as we are, we will build up to probably an additional 12 million a year from the Case parts and then you take the internal growth of the others, we have a number of initiatives to try to keep growing our parts businesses. We have in the pavers the plants and the crushers are selling competitive paver parts, and that part of the business is also growing.

Was there a competitor here that exited from the picture?

We have had some that has consolidated and exited and some of the consolidations, they have not taken as good care of the business. We had one in the aggregate side that has closed their American plants and is bringing out of Europe and they had some parts problems. And I would rather not name any names, and some of the others in their consolidations have had some problems of supplying the customers, which gives us an opportunity.

Okay, thanks.

Thank you.

Bentley Offutt, Offutt Securities.

A couple of questions here. On your components, you mentioned that the --.

Bentley, we can't hear you.

You had mentioned the concern of rising pricing on components. My question is -- have you had any problems as far as delivering -- deliverability of components, particularly when you talk about your FasPak and the use of diesel engines. I'm wondering if that has caused some manufacturing inefficiencies and what your status is on that?

I guess I would have to say we've been on the ragged edge quite a few times. Engine deliveries are out with the agreements that we have with a couple of our major suppliers. We give them forecast and they have so far taken care of us. There's a shortage in tires, there is a shortage in a number of things that are out there. So far, it has not created a lot of problems, but it doesn't -- if it continues, it will do that. We have been -- I guess everybody cut back so far in the last couple of three years, it has been slow in them ramping up.

Okay, but -- so do you see this problem getting worse or basically a stable situation?

We see kind of a stable situation. I think a lot of people have ramped back up and they seem to be taking care of it. But we don't see it getting any worse. But as I said, we've been on the ragged edge quite a few times.

You indicated that you had a net loss on steel I think last year of about $16 million. Your pricing situation right now, what is it? Have you put a standard price increase for certain products, or is it based on your customer? How do you range your price increases?

What we've tried to do is on a monthly basis roll up our costs on each of our products, particularly last year the way inflation was going and we continue to look on a monthly basis at what our costs -- what is happening to our cost and try to increase prices sufficiently. We did not see a heck a lot of resistance to price increases in '04. We're seeing more pushback now. Seems to be flattening out.

More difficult to put price increases into (indiscernible)?

Yes. And, again, we're not pushing that many into the effect at this point. We're seeing people begin to -- everybody saw the increases in steel prices and seemed to have an understanding. I think our customers don't realize or see the cost of electric motor going up 10 percent or 8 percent, or a hydraulic motor going up. They don't see those as visible, so you get a little bit more pushback in those areas when they're going up.

Why, in your aggregate business, for a couple of years now, it has shown pretty steady and significant growth, and is this because of new product introduction or just generally a stronger industry segment than your other businesses?

I guess to answer your question, it has been as much -- it has probably been 70 percent new product and 30 percent just the industry growing.

So by new products, you're talking about FasPak and other similar products?

FasPak, track-mounted crushers, track-mounted screens. The track mounted units go into a little different area than just what I call the pure aggregate area. They go in more to construction and recycle areas. Contractors who are doing excavating of rock, they will put in a track-mounted crusher and make their own base material on the job. It is kind of a new market while it has been under our nose, it's kind of a market that we have not really covered as much in the past.

Thank you very much.

Thank you.

(Operator Instructions).

Okay, Ian, we appreciate that. We appreciate your participation on the 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 March 6th 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 7 days. All of that information is contained in the press release that we sent out today. Again, thank you for your participation in our conference call for the fourth quarter and fiscal year ended December 31, 2004. This concludes our call.