Astec Industries Inc (ASTE) 2005 Q1 法說會逐字稿

Good morning and welcome to the Astec Industries first quarter earnings conference call. At this time, all participants have been placed in the listen only mode and the floor will be open for questions following the presentation. At this time, it is my pleasure to introduce Steve Anderson. Steve, the floor is yours.

Thank you. Good morning and welcome to Astec Industries conference call for the first quarter of 2005. 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; McKamy Hall, Vice President and Chief Financial Officer and Neil Ferry (ph), Executive Vice President. 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 operations in the current business environment.

Before we begin, I'm sure all of you have the chance to read the press release that we've issued on the first quarter dated March 31st, 2005. In the way of disclosures, I will 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 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 include influence our results are highlighted in today's financial press release and others are contained in our annual report in 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 Hall to summarize our financial results.

Thanks, Steve. We appreciate your joining us this morning. As our press release indicated, we are certainly pleased with this quarter but not satisfied and we forward to continued improvement. Just as a reminder I will mention that the operations of Superior Industries are classified as discontinued operations. That operation was sold June 30th of last year. The net sales for the first quarter were the sales were up 19% for continuing operations from 135.7 million to 161.6 million. Our international sales are basically flat. Our part sales are up 32.7% and for fear that some of you might think that, "well, most of that's coming from utility trenchers," the utility treasures only provided about 20% of that part sales increase.

Our part sales increase is well spread almost evenly across all the segments. So we are pleased to see that spread and not a concentration just from utility parts.

As far as the source of our total sales for the first quarter, with Superior removed the aggregate is now 36% of the pie, asphalt 33, mobile 18 and underground 13. We did have sales increases in all segments. As far as the gross profit is concerned, we had a gross profit increase of 21.5%. We certainly have some opportunities to improve this gross margin and I am sure Don will talk about those and we will talk about them in general later. But we have an opportunity still to improve the utilization of our facilities. We have an opportunity to react to the cost increases that we are facing with some of our parts and some of our products. And we have an opportunity to improve our manufacturing variances and operations, efficiency of operations in general.

In terms of the writing of the segments by gross profit those are attached to your press release for your convenience and our mobile asphalt paving group is at 24.4%, aggregate at 23.5, asphalt at 19.9 and underground 17.6. All the segments did have improved gross margins from the prior year. We certainly look forward to improving these margins as volumes grow and as we improve the utilization of our plants and improve the pricing where we have escalating cost of parts and products.

In terms of the SG&A, our goal is always to hold SG&A at 14% or less of sales. It was 14.4% for this quarter, 14.6% a year ago.

Terms of income from operations. Income from operations was up 31.6%; in terms of the income by segment, we had an improvement in all segments. In terms of the net income per diluted share we were up from $0.27 to $0.33 and if you focus on income from continuing operations we were up from $0.24 to $0.33 or about 37.5%. So we are pleased with that.

Also, attached with your segment profit information down at the bottom of that sheet is the backlog information. The backlog is up about 7% from 103.5 to 111.2 and that is apples to apples without Superior and compared to current operations. That is also provided for you by segment.

Our balance sheet is very strong. We are positioned financially to take advantage of opportunities and to grow the business. Our receivables are at about 36.8 days versus 44.7 days a year ago. Our inventories are up but that is -- I think -- a healthy sign of the volume of business that we booked, are doing a volume of business that we expect. Our debt is down 27.9 million or 39% from a year ago.

Our debt to capital is 17.9%; our CapEx for the first quarter was 4.2 million. Our projection for the year is 14 million. The depreciation and amortization for the first quarter was 2.9 million and for the year is about 10.8 million. That concludes my formal remarks and we will certainly be glad to answer any questions or explain anything that you would like to ask later. Thank you, Steve.

Thank you, McKamy. Dr. Don Brock will now discuss operations for the first quarter of 2005 as well as the general business environment. Don.

Thank you Steve. As can be seen from the numbers that McKamy just went over, we had a good first quarter but not a great first quarter. Our volume increased 19% while our profits increased 21%. If you take the Superior earnings that we had from last year -- the subsidiary that we sold in June -- our profitability increased 38%.

However I guess I should point out a few negatives and a few positives of where we see the market going. While we increased our volume 19% there was about 9% of that driven by inflation. So we really had a real increase of about 10%. We continued during the quarter to see price increases. Steel tended to flatten out, but we saw substantial increases in many components that we buy that go on our equipment. It seems as though most of our suppliers held back like we did. We are behind the curve on -- as steel increased we didn't believe that it would stay at that high level. And we saw substantial increases in other components during the fourth quarter and, frankly, we didn't keep our price increases ahead of that. We seem to be from three to five months behind that.

We also experienced high cost as everyone else did from Sarbanes-Oxley; and the cost -- not only for -- from our accounting firms, from advisers on setting up all the procedures that are required but the disruption that it caused in the companies for our auditors and for our controllers and the other people. It was very costly for us during last year and the first quarter.

We also saw a continuing increase in health care cost. That seems to be a very frustrating and challenging thing.

On the positive side, our volume is stronger. It is actually stronger than our backlog reflects. We had ConExpo in March and it was in late March we received, for the first time, a number of orders at ConExpo. We believe that we had an extremely good show as well as I guess everyone there felt the same way -- that it was one of the better shows that we had had in years.

Secondly, that did result in us having a somewhat buildup in inventory there at the end of the quarter. And we received a lot of large orders in early April. It is not reflected in our backlog numbers. So we expect our backlog is higher today than it was at the end of the quarter.

All but one of our companies during the quarter was profitable and that company will be profitable during the second quarter. Our margins would have been better with the higher volumes and frankly that -- as I just mentioned, it was hard to keep up with price increases as fast as we had component increases. On the positive side, as McKamy said, we continued to reduce debt and we believe that we are on plan to be out a debt by the early summer. Our working capital is very high at this point. We are scheduled to close on the Grapevine (ph) property on June 15th and with that and with the reduction in working capital, plus the additional earnings, it should take us to a level where we will have sufficient cash to be out of debt.

Looking forward to the second quarter. We expect the second quarter to be strong, stronger than the first quarter. Our backlog is strong in each company. We believe our margins will be better and we believe that we see a stabilizing of prices in our purchase components. As I mentioned earlier, steel prices seems to at least flatten and maybe in some areas reduce slightly.

Our parts volume continues to grow in each of the businesses which is reflective of our customers doing more work. The underground division is growing and is profitable. The new dealer implementation plans of putting more dealers in place is growing and increasing our market share. We see strong growth potentially in the next few years in the hookup of the last mile of fiber optic cable. That seems to be a steady growing business and increasing every month.

The highway bill seems to be prodding or moving through Congress. Depending on who you talk to, it looks like it may pass by early June. Some bets are that it may go on out into October but I guess regardless of whether it passes, the appropriations money is very strong. There is a lot of money coming out and, frankly, you don't get all of the earmarked or pork barrel projects with what we are doing now. And while it doesn't allow states to do long-range planning, we continue to have funds available.

We also see state and local spending improving across the country and I think this bodes for -- just as the economy continues to improve -- they will spend more on roads. The weak dollar while -- has not helped us as much the first quarter or the first half in international sales but we expect international sales to be better in the second half of the year, primarily driven by the weak dollar. And I guess that depends on other economies in other parts of the world, but we have a lot of prospects internationally that should help the second half of the year.

We have introduced in the last few months and the last year a record number of new products. These products, we think, are more operationally efficient. They are products that really meet the needs of the customer in -- particularly in this area of high oil cost and high fuel costs. They are more productive, get more tons for the -- more production for the same amount of energy.

I guess in summary we believe we had a good quarter; but we expect the second quarter to be even better. We continue to focus on operational improvements, product improvements, and cost reduction initiatives to improve our margins back to the level that we had in the late '90s. We believe that we have assembled the best team of managers in our business units in the industry. We are excited about the continuing improvements that we see in our products, our customer support and our internal operations.

Thank you Don. Lynn, at this time we'd like to open up for questions if anybody has any.

(OPERATOR INSTRUCTIONS) John Reilly with CJS Securities.

First question I have is what are you seeing on the pricing of your equipment, the environment? Are your customers willing to accept further price increases? Given the price increases you put through last year?

We got more acceptance last year than we have this year. I guess we see -- we are beginning to see some push back on that. Although they are all aware they are seeing increases in everything and they are aware of the problem but I guess nobody anticipated this level of inflation. And I guess that's the -- they were seeing it in the fact that many of them use steel, just as we did. But they don't see it in these other components as well and are not as acceptable of increases as they were, I guess, to answer your question.

Do you expect to put any price increases on your equipment this year?

Yes we have and we are.

I don't think we have any choice. We have got to keep up -- as Don explained earlier -- we have got to keep up with the curve on these cost increases.

Getting into the next thing. As you mentioned further efficiencies and manufacturing variances that you are going to be targeting cost-cutting, could you just describe some of those?

We have taken initiatives in about every plant to try to go more to the lean type manufacturing to eliminate any waste that we could have. And we are working very diligently in that area and have made some good improvements. The other areas probably that we, in the past, have not done as good a job on is trying to group the commonality of components from company to company and buy more of the same product and increase the volume of those products and help our purchase cost. The purchase cost on an average in our Company is 50% of the sales price. And I think that is pretty typical and we have to work in that area.

We have got everybody's attention and everybody is working together to try to have more what I would call corporate buying agreements and help us reduce our costs in those areas.

I might just say, John, that this group is visiting every company at the end of the quarter and that is a practice that we have tried to be involved in over the years. Sometimes we have to do it by phone and not in person. We prefer to do it in person and as Don said, we are trying to address any nonvalue-added practices that we have potentially in manufacturing to eliminate those as part of this lean program. And we are trying to address these component price increases and the price increases in general in a -- I guess -- a coaching type manner. But we are encouraging our people to get in front not behind.

Could you tell some of the components that you saw of the largest percent of price increases in the quarter?

Anything related to commodity pricing. John, it's just about the whole gamut but anything that's got copper in it, electric motors, electric cables, rubber belting. It is just a wide variety of different components that we see there. Anything made of steel. When you figure that steel prices actually doubled last year, anything made of steel is going up. And I think there was a little bit of reluctance on a lot of our suppliers, not too dissimilar from us. But it was one of the things that we have seen is, we believe that probably or should I say that I believe -- I didn't believe steel was going to go as high as it did and I didn't think it was going to stay up there as long. But it certainly has and I think everybody came to the reality that they had to increase their prices. And this seemed to hit real strong in the fourth quarter, at the end of the fourth quarter.

Items like tires and bearings particularly are very difficult. There is a shortage of the tires or off-road equipment because the mining increase -- the industry has increased so rapidly. Large bearings for our crushers and screens and things like that also has seen significant increases. And in those two areas -- the tires and bearings -- we faced some shortages.

Jack Kasprzak, BB&T.

My first question relates to the margins. Was hoping to drill down a little bit -- I don't know how much detail you would like to give but I will ask anyway. The gross margin in the first quarter was 21.6% and you seem to be indicating that you think it is going to go up in the second quarter. Just what sort of increase? 10 or 20 basis points or something more substantial than that? And at least to my second part of my question which is, all else being equal if -- given your level of pricing right now and if costs don't change from where they are now -- what sort of gross margin do you think you're targeting for the year? For the full year?

Jack, I don't know to just be truthful that we can answer it. Frankly, when you look at our gross margins they are a combination of all of our products -- including parts. Parts, obviously, is a stronger segment of it. And frankly the margins on our equipment was worse than -- with the increase in parts business, you can pretty well analyze it. Parts sure saved us during the first quarter and our -- if you had to sum up our major problems is, we had more significant price increases than we expected. And our cost -- our price increases on our equipment were behind the curve about four months. We have brought those prices along. If component prices stabilize, as it appears that it is, we could start to see a correction in that. It could be a pretty significant correction, but I underline if. If component prices stabilize.

Clearly, it's been quite unexpectedly volatile but I guess that is what I was leading to. If they stabilize, all else being equal, I guess that is what you're suggesting, that you've implemented price increases. So the margin should go up.

That's correct.

But the order of magnitude is hard to give us at this point.

It's hard to give you and, frankly, before we see the effect of that would probably be June or July. Because we are sitting here with backlogs just about with the second quarter about filled with orders right now. A lot of these price increases were implemented in March and early April. So just everybody was under the impression that we were so focused on steel, frankly, that -- and steel being the largest single think that we buy, we've been watching it like a hawk but then you get little things that just keep coming in. You get a 15% or a 5% increase in this component and that. And on the surface it's not that bad but when you add them all up it's pretty significant.

So turning to the backlog and the sales, obviously, your comments are pretty positive there. Are you guys to the point where you're about -- you're not at full capacity yet in terms of your orders and your backlogs?

Nowhere near.

Jack, we are not anywhere near full capacity. The only thing that we are, though, we cut about 600 employees out during the downturn. And we are bringing employees back as fast as we can and it's a kind of a slow ramping up process. And our managers I might say are a little reluctant to get too excited here and bring too many many people back. We are ramping up in about every plant that we have.

Would you think that the rate of sales growth which was about 19% in the first quarter, given what you said -- the backlog is up. It's even up from what you reported here March 31st as well as some orders you took at ConExpo that rate of change could improve in the second quarter?

I think you could see a slight improvement.

Slight improvement.

Right.

John Reilly, CJS Securities.

Are you seeing any push back from your customers related to the price of oil increases that they are -- is it impacting their profitability and their purchase decisions at all?

What we are seeing, related to the oil, is a lot of initiatives to use more recycle, particularly in the asphalt business. In the asphalt segment of it, it's a lot of initiatives to try to increase the amount to offset the price of oil. That's the -- that's probably the biggest change that we are seeing. Push back -- they just really don't have a lot they can push back. The oil companies, it's going to move with crude oil. There is, as I have mentioned in previous calls, there is kind of an imbalance depending on what area of the country it is. Heavy crude's coming in causing an imbalance in the amount of asphalt that you get out of heavy crudes and generally makes the price a little lower than those areas where they are getting in the heavy crudes.

We see that the products if you can offer a product that runs higher recycled, does it clean and does it without burning any more fuel that's the popular product today. And that's the product we have. We are seeing more effort towards milling, to get more recycle. So there's a lot of -- in this high-priced economy, we do have a lot of equipment that really meets that need.

Also you targeted that -- you mentioned on the call you expect to close the Grapevine facility in June. Are you disclosing how much you expect to net from the transaction?

We are talking around $13 million that we'll get for it. And we do not have that factored in any of our forecast but it is on the books for around 5. There's pretty good gain on it.

Lastly, just with SG&A in the quarter, you mentioned some of the things that are impacting it. Can that dollar amount come down in future quarters from the 23 million it was in Q1?

Yes, I think so. We were -- Q1 was pretty expensive because we had a lot related to different shows, ConExpo. Some expense related on that. We level that out or spread that expense out but we had a lot. During the first quarter we had a heck of a lot of training. People coming in to our factories, things like that. And it's usually the highest quarter.

Because you have done a great job of prior periods of maintaining and keeping SG&A at good levels. The highest rate of increase I think I've seen.

We want to do that and some of that expense, John, you've got to almost look at it as an investment. As Don said we are pretty -- we are encouraged by the quality of sales forces we have. And we've had to spend some money to get those sales forces and with the volume you've got higher sales commissions and higher sales salaries.

We have been pretty aggressive in trying to bring the underground group particularly we have built it up and I would say our sales force is ahead of the sales that they are generating at this point. You've got to bring them in, you've got to train them. They are a little out, expenses are out in front of the sales volume right now and in every company -- particularly the direct sales company -- we are adding salesmen and somewhat shrinking their territories so we can get better coverage.

And part of the reason for the part side as well is we were taking an aggressive stance on putting people in the field to sell parts and it is paying off. But you've got to have the SUNA (ph) to support it.

Bentley Offutt, Offutt Securities.

In your last conference call, a question arose, relating to the annual revenues necessary to get your subscription rate back to a level similar to where it was several years ago in the late 1990s. And based on the quarter results and assuming my annual estimate is nearly correct which places it around 580 million. You should be close to an area where you are getting a much better absorption than a year ago, and yet your basis point drop in gross margins were roughly 200 basis points. And I know part of that relates to the problems you just mentioned -- higher steel cost and the component cost increases. But nonetheless, you are talking somewhere in the order of about $3 million. Is that -- in difference -- is that the higher cost for steel and your higher cost for components or are there other problems?

It may be a lack of courage here to go up on prices as much as we should. Basically if you really take the cost of the component increases and steel and everything else, our price increases have basically been somewhat equal to our components and our steel increases. We hadn't really -- we really haven't gotten the increases related to the value that we add to it. The cost again I can tell you one of the divisions -- we have our divisions to roll up and cost probably every month the way this inflation has been. One of them is using a target of January '04 and steel and component costs have increased 33% since then. Basically we hadn't gone up 15% in that area and we should have or we should've gone up 16. And so a lot of what would really flow in the better margins has been eaten up by that now. And we have increased the prices and we are trying to catch up with that.

But your analysis is pretty correct and we just haven't been able to keep ahead of the component increases. Which we haven't -- and I guess I'd just say one other thing that -- excuse me for interrupting. But as we go from company to company none of our managers and myself included, I lived through inflation on a (indiscernible) period like this in the late '90s but we have had such stable inflation, pretty low inflation for a number of years. And a lot of the managers we've got running these companies has never lived through a cycle that's got this kind of inflationary price movement.

Which leads to my next question. Is -- the hardest thing is to try to recoup (MULTIPLE SPEAKERS). And in the latter half of this year or whenever, assuming that you are still in a strong market and your backlog is growing, as we hope will occur, are you going to try to recoup your losses over the last year?

Well, obviously, we are going to try. And we think we are making a number of initiatives to do that. I think that the biggest, if you really want to know the biggest concern I have, I think we have seen steel and oil with the two major major drivers that went up last year. Everybody sat there for six months saying, "This is not real." Then we had this wave of other people catching up in component prices. And we kind of see that stabilizing and if our read is right and prices stabilize here, I think we've got an opportunity to get ahead of the curve again.

If prices keep increasing then it's a harder story. And I think probably every manager in the country is facing that same thing. It's just, has inflation stopped? The other concern we have is the government's been in 12 months behind on reading inflation and they usually get it read about the time it stops. And overreact and we hope that doesn't happen.

My second question relates to your underground backlog. That had a significant decline almost cut in half. According to the years I'm looking at.

Yes and that's another one of the companies that had strong sales in April and I think the other thing I should say. It's somewhat of an adjustment period. We took over the dealers in first of October. We set up new dealers. During the fourth quarter we built up substantial backlogs. Excuse me -- not backlogs -- substantial inventory in anticipation of bringing on new dealers. We are gradually working that backlog down. And as a result as soon as an order comes in, they ship it in about two days. So they're not showing a whole lot of backlog there. The other place is, we've received a number of big machine orders in April in the big trench or line and the big drill line that we didn't have in the first quarter. So it's better than it looks, I guess, Bentley.

Rich Wesolowski of Sidoti.

All my questions have been answered.

(OPERATOR INSTRUCTIONS) There appear to be no further questions at this time.

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 Saturday, April 27th, 2005 and an archived webcast will be available for 90 days. The transcript will be available under the Investor Relations section of the website within the next seven days. All of that information is contained in the press release that we issued today.

Again, thank you for your participation in our first quarter conference call and this will conclude our call.

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