Astec Industries Inc (ASTE) 2005 Q2 法說會逐字稿

Good morning and welcome to the Astec Industries second quarter results 2005 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 you host Steve Anderson, Director of IR. Sir, you may begin.

Thank you Shay (ph). Good morning and welcome to Astec Industries conference call for the second quarter. My name is Steve Anderson as Shay mentioned 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; Neal Ferry, Executive Vice President; McKamy Hall, Vice President and Chief Financial Officer. In a moment I'll turn the call over to McKamy to comment on our financial results for the second quarter and then to Don to discuss the Company operations in the current business environment.

Before we begin, I'm sure that all of you have had a chance to read the press release that we've issued on the second quarter that ended on June 30th, 2005. And 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 liability established by the Private Securities Litigation Reform Act. Any such statements are not guarantees of future performance and are subject to certain risks, uncertainties, assumptions and other factors, some of which are beyond the Company's control. The comments that we will make today during the conference call are commentary and our answers to your questions are commentary as well. Some of those factors that could influence our results are highlighted in today's financial press release and others are contained in our annual report and our quarterly and annual filings with the SEC. Naturally, we urge you to familiarize yourself with those factors before making investment decisions regarding Astec Industries.

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

Thanks, Steve. Good morning, we appreciate your joining us. We are pleased to present a much improved second quarter compared to 2004 and we look forward to continuing the improvement. This is the best quarterly earnings per share since the second quarter of 2000. Our net sales are 171 million compared to 146 million for 2004 same quarter, an increase of 24.9 million or 17% for continuing operations. This is a quarterly sales volume record for the Company as well.

International sales for the quarter are 33.1 million versus 38.1 million, a 14% decrease. As a percent of sales, international sales were 19.39% in 2005 or 26.1 in 2004 for the second quarter. Our part sales for the second quarter were 35.1 million versus 29.8 million, a $5.3 million increase or 17.8%, which is in step with our total sales volume increase. Aggregate and mining are number one, underground is number two, mobile is number three, and asphalt is number four in terms of part sales. All segments sales volume increase for the second quarter as is shown in the segment report attached to press release. Asphalts of 7.8%, aggregate 14.4%, mobile 30.5%, and underground 28.6%.

On the gross profit line, our gross profit was 39.3 million for the second quarter versus 31.2, a year ago. It's an increase of 8.1 million or 26%. The gross profit for 2005 versus 2004 improved from 21.4% to 23% in 2005 and from the first quarter to the second quarter of 2005 had improved from 21.7% to 23%. Also attached to your press release is the ranking of the segments bad gross profit with aggregate and mining at 24.7, asphalt with 23.4, mobile asphalt paving at 22.1, and underground group at 18.9.

In the SG&A and engineering we are at 20.9 million or 13.4% of sales versus 19.9 or 13.6% of sales for the prior year. That's an increase of 3 million on 24.9 million increase in sales or incrementally 12% increase. I think most of you are aware, our goal is to keep that below 14%, and other than increase in personnel cost, there were no really unusual or major outstanding expense increases. There obviously were increases but nothing really outstanding.

Income from continuing operations, as we noted in our press release is up from 6.3 million in 2004 to 10.2 million in 2005, has an improvement of 61.6% for continuing operations. By segment, Aggregate and Mining 7.5 million, Asphalt 6.4 million, Mobile 3.7 and Underground 0.7 and that information is attached to your press release. Really no comment on interest expense, rather income, very minor changes there, and on the earnings per share, the income from continuing operations is up from $0.49 -- is $0.49 for the quarter, compared to $0.31 for a 61.6% increase for continuing operations. The net income is $0.49 for the quarter versus $0.62 last year, which included $0.31. That was really a comparison of 49 to 31 when comparing to the prior year if you would exclude the discontinued operations.

Second quarter change in profit by segment is also attached to your press release. Underground is at 35.3%, Mobile is up 31.8, Asphalt 28.5 and Aggregate and Mining 22.1. The backlog is at 88 million versus 68.7 million, an increase of 19.4 million or 28.2%, which is a mass way to start the third quarter. Our segment is also attached in your press release and I want to read those numbers to you. The international backlog which is not disclosed in the information at the bottom of the attached sheet is down 2.7 million in the backlog or 13.5% from the prior year. The balance sheet is very strong, we are positioned financially to handle the growing volume and consider any other opportunities that may become available down the road.

Our receivables are at 67.9 million up from 63.8 million, that's 4.1 million. But the days outstanding are 36 days versus 38 days last year. The inventory is 124.7 million versus 103.4. This reflects the levels that are needed to support the increased sales that we expect in the backlogs that we have.

Inventory turns are at 3.51 versus 3.68. Our debt is at 30.6 million versus 37.7 million in 2004, or in the first quarter it was at 43.4 million. As all of you know, many of you choose to calculate debt percentages different ways. Our debt is very low depending on how you calculate it, from 6% to 15% of whichever base you choose to use. We certainly have more than adequate borrowing capacity available for increased volume as well as any other opportunities that might come our way.

Capital expenditures are at 7.1 million. We project this year 11.3 million. Depreciation and amortization is at 5.3 million -- I am sorry depreciation is at 5.3 million but the projections for the year is 11.3 million. Free cash flow, again you all, all have your formula for that but our net income was 17 million, depreciation and amortization is like 5.9 million, CapEx 7.1 million.

So this concludes my remarks on the financial details and we will be glad to answer any questions you may have later in the call. Thank you Steve.

Dr. Don Brock will now discuss the Company operations for the second quarter of 2005 as well as the general business environment. Don?

Thank you, Steve. As could be seen from our numbers that McKanny just went over, we had an excellent second quarter. Our sales were up 17%, our earnings were up approximately 61%. All of our groups were profitable. All of our groups had increased revenues, profits as compared to first quarter of this year and second quarter of last year, all increased.

Congress just passed last night, the not extension to the federal highway bill, it's a two-day extension this time, however, I guess the money has continued to flow at a higher rate than previously. We see states continue to struggle however because they don't have long-range view, maybe in the next few days, we will finally get one. We at least expect it to be passed by January, the 29 before the recession. The problem, I guess, is that the major discrepancy seems to be arguing about the owner, how much that owner states get on the guarantee where it's 90% or 92%. One of the bill prices just rewarded, it's worth, I guess it's going to be a six-year bill, but it's going to be based on September of '03, so we are into it a year-and-a-half, or a year and 21 months now. So, we will have about 4.2 years -- two months.

During the quarter, we saw a slight reduction in steel cost and the stabilizing in component cost. These items certainly helped in our margin improvement from 21% to 23%. If you look at -- for the year -- during the quarter, actually we reduced our debt about $13 million, and as McKamy said, it depends on how you look at it to take our net debt to capital, it's about 8 to 9%. Also if you look at our first six months, our parts went up from -- sales went up from 63 million to 73 million, a 16% increase. International sales for the six months were down from 68 million to 61 million.

Looking out into the third quarter, our backlog -- we started the quarter at about 88 million. We continue to have additional -- some large additional sales after the quarter ended, in the last two weeks on some crushing plants. Our backlog is 28% above last year. Despite the higher asphalt prices and the fuel prices, our customers and what I would estimate to be 75% of the stakes seem to be have plenty of work and to be doing okay. They are certainly suffering due to the fuel price increases and many of them have taken initiatives to try to reduce drawing (ph) cost and use more recycle to reduce their asphalt cost. There are a few states that remained very depressed, but there are more pockets of prosperity than there is a depression, I would say. There is an aggregate shortage in many areas of the country and our aggregate customers are continuing to try to expand and add to their facilities.

In the Underground segment, there has been resurgence in the last mile hookup of cables, and we see a growth in the water in the sewer area in the underground side of it. We felt for the last year or two, the weak dollar would certainly help us in international sales, but what we have seen is while the dollar has been weak, the European and number of other economies around the world have equally been sluggish, and so our international sales as I mentioned above -- as earlier -- is just as weakened somewhat.

Outlook for the rest of the year though appears that the international sales will be better during the second half. Countries south of the equator, which is counter-cyclic to what we are here saying that we have a number of prospects in those areas. We continue to try to execute on our initiatives to increase our gross margins. We have hoped to get these back after the levels. Our goal is to get them up to the levels we had in the late 90s.

As you hear from everyone, I guess from other companies, we are also very frustrated in our inability to control the cost of Sarbanes-Oxley and the control of healthcare that seems to be the one negative that we can't totally get our arms around. The Grapevine Texas property is under contract and expected to close in late September. With the proceeds from that and the working capital improvements, reductions that we expect to have along with our earnings for the third quarter, we expect to have cash during the third quarter. Although we don't really give guidance, we look for our third quarter revenues to be somewhat similar to our first quarter, which is better than expected for our normal cycle. We normally see our sales drop out, revenues drop out considerably at the end of the second quarter. We've not seen as rapid a drop out this year and business remains strong. Yes, in summary, we believe we had a very good quarter, but we have more to do in our operations. We continue to focus on operational improvements and improvements in our products and various cost of reduction initiatives. We look for the third quarter to be good, not as good as the second but probably comparable to the first. If there is any question, we will happy to answer at this time.

John Reilly, CJS Securities.

It looks like a great quarter and it looks like it's going to continue in the September quarter.

Thank you, John.

The first question I have is related to the backlog. You really showed a tremendous improvement in the Asphalt group. Is there any particular change with customer orders or any particularly large orders within that backlog?

John, now they are pretty normal orders. I guess it's -- we just see a continuing growth in that area or really a resurrection to where we were in the late 90s. And it is mainly from existing customers, a few new ones, but we're little surprised, frankly that normally at this time of the year, you don't get that many orders but a lot of this seems to be from long range planning. I think our customers are planning a little better and Don is getting -- probably had some things like that slow down the installation of plants any more. So, there seem to be planning ahead a little better than they used to.

Got it and then the next question I have is related to your production capacity. What do you think revenue lines could produce, given your current operating overheads, your manufacturing overhead?

John, we could -- inflation is the deceiver. I guess I have told you the four-week, we will have the capacity to do 750 million a year. Probably, we could do 800 million a year, but where we are today, we have got over capacity in some areas and under capacity in others. So, some of the companies are really stretched and can't do a whole lot more, we are going to have to ask some equipments that breaks them all in two or three locations. Others, we've got plenty of growth rate. So, how that depends on each company -- the product mix that we give. We were a little short in part of the aggregate groups, Mobile Screens that we will be adding on to that plant. We are kind of close to capacity at Kolberg-Pioneer and adjacently you have both of those that are doing quite well. We are probably going to need to add, probably some to the Roadtec facility in the next 12 months.

Great and then one last question, I'll be back in the Q&A. Based on what you are seeing, that you expect Q3 to be similar to Q1, which is outstanding. What are you thinking of this incremental demand despite -- without the highway bill being in place? What are you hearing from your customers?

Well, if you give (indiscernible) in the US, there are still an enormous amount of growth in home building and migration mode to the sales, I guess, which is -- Florida is just booming, Texas is booming, a number of states, south of what I just called the Interstate Board, that area seems to be -- that's the area where there are shortages in aggregates. And I'm seeing many areas in country though New England is coming back, it seems to be better up in that area. California seems to slowly begin to straighten out, of course their highway bill it's been terrible. But they are coming back with a pretty strong highway bill. There has not been any slowdown in residential building out there. So, it seems to be just an overall improvement in the economies much as anything, John.

Thank you very much, great quarter.

[OPERATOR INSTRUCTIONS] Robert McCarthy, Robert W. Baird

The underground group showed nice progress on margins. I recognize that it is not a backlog business, but nevertheless given what's been going on there in terms of expanding the dealer base, I thought we might see some backlog growth. Could you talk about progress on building up the dealer network there and --?

Rob, we have over 40 dealers now and they are making progress, there is lot of training going on with the dealers and this is mainly on utility side of it. The big trencher order business so has come back pretty strong. Since the end of the quarter, we have obtained some very large orders for trench or -- we have had decent orders from the larger trenchers, but we found the trench or line for most of the year and it's contingent. We had a review yesterday with them and they are quite bullish about particularly the big trencher orders during the third and fourth quarter. Utility side of it, which is the smaller trenchers, we continue to add dealers and to develop dealers, allow the dealers we have had and have to be trying to -- it's a slow steady growth in that area.

Where do you think you are on geographic coverage at this point, Don?

I would say we probably have 65 to 70% of the US. We don't have about seven international dealers. We are still looking for a dealer in California, which is a great market in Ohio. We got most of the other critical areas covered, but we are still seeking out dealers in two or three critical areas.

And the recent management change there, just look at that as their natural progression?

Yes, that was a natural progression, Alan (ph) came with this about a year-and-a-half ago and that was founded in the plant and he's done a great job and we've got a good team there now. The other part of it is we, as you recall, we took over the Case parts business in October of last year. We got just to that quite well and continue to grow that big part of the increase and parts came from the underground and they continue to grow every month in that parts area.

Did you get that 3 million for Case parts in the quarter?

You were about that. Yes, I guess that was about -- we were about that level.

That level, okay. Just one more question and I will get back in line. The way we look at it, your corporate expense looked a little light, McKamy, about 1.9 million on allocated in terms of operating expenses. I am wondering if there might have been one or two little positives in there that helped temporarily bring that number down?

We did have a more favorable quarter this quarter in health insurance than we have been having. Not a big number, but I think it's around $300,000 favorable compared to what has been running.

But something that we ought to consider temporary?

I am not sure if I mentioned it or not. I meant to only -- I guess the SG&A one of the thing that I meant to say. Did I say something about CONEXPO?

No, you didn't.

Okay, on the CONEXPO number for the quarter and I knew everybody would want to know that. (indiscernible) I just skipped over, was $266,000 for the quarter.

And to my question about the health insurance, the favorable variance probably isolated to the quarter, right?

Well, it's unpredictable, you know.

I understand.

We just want to finish this, enjoy a little more favorable experience on that.

Okay, all right. Okay, right.

I guess, we just have to ride along with it. That's just dying uncontrollable.

Jack Kasprzak, BB&T.

Good morning, Don. First congratulations on a great quarter. My first question is on the tax rate. You know the second quarter was a little lower than the first quarter. What should we be thinking about, McKamy for the second half of the year on the tax rate for modeling purposes?

Yes, I think in general what we booked this quarter, Jack.

Okay, and how about CapEx for the full year?

I believe I said 11 million. I believe gross budgeted. Let me look around here. I believe at 11.3 million, I believe it was closed in.

I thought that's what you said was for D&A. That's cap?

Well, I think they are equal.

And they are the same.

Jack, we are probably in that 11 to 12 range. Our depreciation should cover most of our expenditures.

Do you see any need for looking out even beyond this year? I mean you have revenue capacity as you just stated again, Don, so even if business were to remain pretty strong into '06, there wouldn't necessarily be a need to ramp up CapEx. Would that be correct?

I think that's about right, Jack. We will be spending that, some on bricks and mortar. We are going to have to add about 3 of our facilities, the ones I mentioned earlier. We have got to add some capacity. Roadtec continues to grow, Kolberg-Pioneer continues to grow, and so we will be adding, but it will not be of a magnitude that will exceed our depreciation by very much.

Okay, and Don, you have talked about the aggregate shortages that seem to be occurring mostly in the southern, sort of, tier of the country where we know that population growth, it's of average in this migration. But could you maybe drill down in a little more detail are there any markets that really stand out in your mind as far as being short aggregates?

Florida and Texas particularly are the two that are in most of the pockets there, we have got pretty much, we have got a lot of problems. Some of it is the shortage of just being able to get aggregate. A lot of it is related to railroad cars of that and the cost of shipping, cost of getting it from Nova Scotia from Northern Canada to the Hard Rock and is certainly going up a lot, hitting the Florida and the East coast markets, it has increased the price of it due to the cost of shipping. Railcars, particularly in the Texas market and in the Florida market is -- there is just not enough railcars available. They are being used for other things. And, I think the other thing is the railroads are going after higher rate an hour (ph). I guess the freight rates on Rock is probably the cheapest thing they haul and they make more money hauling other things. So, we are not putting as much focus on the aggregate side, but that's where many of our customers in Texas particularly, and some of them in Florida have had to shut down from time to time, just due to the lack of aggregate. One customer in Florida has got an aggregate -- EP sales aggregate central Florida. He said his customers watch when the railcars are coming in on the north end of town, his yard is on the south end and they are waiting there when the car gets there. Who said it's that bad?

It has changed a little bit over the last two or three years.

It sure has.

Jack, let me make one correction on that CapEx. The budget is actually 14 million. There has been a $3 million group of capital expenditures that have been sort of in question, and that's were the difference is for the projection of 11.3, but their actual budget is 14.

Okay.

And the depreciation is 11.3.

And finally, Don, you know you had said the, with the backlog and then some orders after the end of the quarter still gained strong, large orders. Q3 revenue looks a lot like Q1. No reason to expect that would assume that going down the income statement it should look too dissimilar as well. Would that be a correct assumption or somewhat accurate?

I think that is somewhat accurate.

[OPERATOR INSTRUCTIONS] Rich Wesolowski, Sidoti Capital.

Thank you. Don, I assume that everything is lined up for your (indiscernible) construction activity is strong. We're talking about the aggregate strategies, increase in demand. What do you see over the long term, you know, past 2005 in to mid 2006 and beyond that could not be relative but even you know put all this at risk for you?

I think Rich, the biggest thing is, we have about seven good years and three bad years and I'd like to think these cycles would not continue but its sure saying like that's what you are going to have and I expect that somewhere along you are going to see a downturn probably with a year-and-a-half or two years, left home a highway bill somewhere. I think we've got a couple of good more -- at least two more good years out there in front of us. We just don't plan to go in the next cycle owning a lot of money. We're not going to get in those craps again. I can't guess any better than anybody else, homebuild (ph) and this certainly helped. But I see a couple of good more years out there but logic will tell me there is always going to be these down cycles and its normally at the end of these highway bills.

I guess this question is for Neal. Have you guys made any progress in consolidating your supplies that you will be facing in the second quarter?

Yes. We've worked on that process. It started last year, we're continuing to see some improvements from working close to it with more suppliers. My think is, we continue to gravitate to fewer suppliers. We see interest from other people who have come forward with the same opportunities with us. I believe there is still lot of work to do on that area and certainly the time and effort we put in to it pays off.

I mean this were main initiatives they talk about in the press release to increase the gross margin?

We're looking at each of our products and how we built it, we have lay in manufacturing of initiatives, but we are approaching it, I guess it's been interesting as we look at each product, the team that look at them seem to be more interested in coming back now to do more corporate purchasing where we can get reductions in costs. And we're basically looking at the cost of the product, our manufacturing procedures and our purchasing in those three areas.

Robert McCarthy, Robert W. Baird

In the (indiscernible) business, while the show margin expansions, some good sales growth and operating income growth was in line with sales growth, several assets, it seemed to me that given the size of the revenue increase that we might have seen a little bit of operating leverage there. So, I'm wondering if the ongoing remanufacturing initiative, there might be a stage where its still not really contributing anything. Might even be creating a little bit of inefficiency as they change some of the profits etcetera -- or maybe shift mix or maybe models is no good. Can you talk about it?

I think your own turn-on point is they are obviously, giving up their capacity problem where we've got a lot overtime. Probably helps a little bit. We also saw a lot of component in -- creases in those particular components in that particular division in the mobile side of it. I don't see that, as much going forward. Some of the initiatives that we made in products, in our product design and cost, it will take 6 to 9 months for all that to flow in. And I think their margins simply has been just their price increases and then quite covered up with their component increases plus they have been working in an ordinary amount of overtime.

With the over time problem, well do they go away seasonally in the third quarter?

Yes, it will start drop off, it's dropping off now, but still our volume is pretty good. I mean, you annualize that group and you are at 126 million, so their account is struggling little bit in capacity, that's one and we've got to add some, bricks and mortar too. -.

The comments about the 11 million and the 14 million on CapEx, etc., I want to make sure I understand. Yes, there was that the swing factor, which a large part of that was going to be the expansion at mobile screens, I think, and I think I heard you say that you're going ahead with that. So, the 14 million, I guess, is the number we ought to be expecting?

Yes, I think that we will end up with Rob for this. We are a little bit still struggling with one or the other companies exactly. It's going to be (indiscernible). We are not going to do it and not have a little bit of political problem there, internally. We know what works in the -- sometimes we continue to do the same thing, and what we are going to change, one of the companies (indiscernible) flow of work through it, and we haven't quite got that laid out that's where we will then spend that money.

Last question. In your prepared remarks, you talked about the strength in the aggregate mining segment, and where they had a really terrific quarter. I think in response to one of the questions that you talked about, plant orders continuing, little surprising. In response to one of my questions, you're talking about some big trencher orders. I mean it starts to add up to, you are seeing somewhat surprising seasonal strength across most of the business?

That's correct.

Alex Nicholas (ph), Fulcrum Asset Management (ph).

I have a question on steel and the guidance for steel cost going forward?

We see it's softening somewhat. We have seen a little softening during the second quarter, little backing off kind of areas, again our West Coast operations, it's not softened as much out there as it has in the East, and it depends on a little -- but basically we see it continuing to soften a little bit, but it kind of depends on what happens with John and lot of other things. Your guess is as good as ours on that, but it has at least moderated and decreased a little bit.

I think there is a margin catalyst going in?

Well, there is some point of improvement in margin, but it then -- probably we have seen it go from some of our operations from $0.42 to down to $0.40, not great amounts, 5% drop as compared to when it went up it is not going down but.

Bentley Offutt, Offutt Securities.

I have two questions. First, going back to the steel issue, there was a recent article in the American Metal Magazine publication indicated that there was excess inventory in the plate market, and prices had come down roughly 30 to $40 a ton for larger orders. And that would probably continue until this fall, and we expect that the already good demand to pick up further and the excess inventory to be worked off. Would that be in line with your thinking or--?

Yes, and in fact, we have seen maybe a little more than that and sometimes, Bentley, I mean when you look at $20 a ton, that's about a penny and a high is what's you are looking at that $30 a ton, that's about what we are seeing.

$30 a ton. And what is in your case, steel cost etc., or what 15% of cost of goods sold, is that what you have told us?

About 12% there. Went from 7 to 12, that's an increase.

And your mix of products used would be plate -- largely plate and hot coal or--?

Largely plate, that's been mainly, and it goes from three-sixteenths in plate all the way up to (indiscernible).

And the second question relates to your recent pace by ARPU (ph) the economist there that indicated that with the current, assuming the passage of the program is around 285, $286 million over that length of period of time that because of the very sharp increase in highway construction cost in the last year, and then up to the first six months of this year.

Right.

But it largely negates the 4% nominal increase. And so my question is, if that's true, what do you think the real implications of this safety program will be for Astec?

I think the main thing it does, it gives the customers confidence that there is going to be a continuation of work. Frankly, the highway bill as I said in this call many times, the highway, federal highway money is only about 25 to 30% of the money spent. Big part of it comes from state revenues, private work, I mentioned once before in 2002, there was 130 billion spent on highways and 31 of that came from federal money. So, there was about 100 billion came in from other places and that's obviously gone up since 2002. So, it unfortunately is not enough, and I know everybody hollers there that the inflation has been terrible. While asphalt goes up with all process, fuel all process certainly goes up with a federal law (ph). And the thing I was saying, it's led to the customer looking it be more efficient, changing products that will burn less fuel, products that run more recycle, other things to reduce their cost to plan the hedges inflation. So, we see probably if you look at the plants we are selling today, a huge number of them to be able to run more recycle, lot of our crushing equipment is related to that.

And last question, on your Fast Pak, you mentioned the fact that, there is a -- it's becoming more and more difficult to transport the aggregate because the higher costs, and therefore the smaller aggregate pits probably are becoming more in demand. How are your sales of the Fast Pak currently going?

It's been excellent. We have -- in fact, since the end of the quarter, we saw three of them so --.

So, that's terrific. Well, that's a good quarter and thanks.

Thank you. At this time, we have no further questions. I would like to turn the floor back over to speakers for any closing comments.

We appreciate your participation on our conference call this morning and thank you for 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 27, and an archived webcast will be available for 90 days. A transcript will be available on the Investor Relations section of our website with in the next seven days. All of that information is contained on the press release sent out this morning. Again, we thank your participation in the conference call and this will conclude our call.

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