Astec Industries Inc (ASTE) 2005 Q4 法說會逐字稿

Welcome to the Astec Industries for quarter and year end 2005 earnings conference call. At this time all participants are in listen only mode. A brief question-and-answer session will call the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Mr. Steve Anderson, director of Investor Relations relations of Astec Industries. Thank you Mr. Anderson. You may begin.

Thank you Dan. Good morning and welcome to the Astec Industries conference call for the fourth quarter and fiscal year ended December 31st, 2005. As Dan mentioned, my name is Steve Anderson and I am 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 and McKamy Hall, Vice President and Chief Financial Officer. In just a moment I'll turn the call over to McKamy to summarize our financial results and then to Don to provide some additional insight on 2005 and also to comment some on 2006.

In the way of disclosures, I'll note that our discussion this morning may contain forward-looking statements that relate to the future performance of the Company. These statements are intended to qualify for the Safe Harbor liability established by the Private Securities Litigation Reform Act. Any such statements are not guarantees of future performance and are subject to certain risks, uncertainties, assumptions and other factors some of which are beyond the Company's control. Some of those factors that could influence our results are highlighted in today's financial news release. And others are contained in our annual report and our quarterly and annual filings with the SEC.

As usual we urge you to familiarize yourself with those factors. At this point I will turn the call over to McKamy Hall to summarize the financial results. McKamy.

Thank you, Steve. We appreciate your joining us this morning. We are excited to have an improved year-over-year and quarter-over-quarter. We are pleased to have nothing owed on our credit facilities. We look forward to the opportunities we have with an outstanding backlog. Now I'd like to share a few highlights with you and then we will be glad at the end of the session today to answer any questions you have.

For the quarter our sales were up 21%; international sales were flat. Domestic sales are up from 85.4 million to 108.9 million. Parts sales are up from 28.6 million to 34.8 million or 21.6%. On the year we have a 616.1 million in sales for an increase of 22.1% per year. Our international sales were off slightly, 5.2% or $6.4 million. Our domestic sales hit 499.9 million up from 382 million. That's a 30.9% increase. Part sales are up to 144.2 million from 116.5 million or a 23.7% increase.

Attached to your press release is a segment breakdown, providing you a lot of information. Just a couple of highlights from that. The aggregate group provided 39.4% of our sales, asphalt 27.6, Mobil 18.3 and underground, 14.7.

On the consolidated gross profit, the quarter increased 5.4 million or 26.5%. All segment gross margin numbers improved except aggregate, which decreased 4 points. The year on the consolidated gross profit increased 30.2 million or 29.3% and we increased from 20.4 points to 21.6% or a 1.2% improvement in the gross margins.

Our ranking of segments by gross profit are attached to the press release as well. All segments had improved gross margins from the prior year with aggregate decreasing only slightly 4/10 of a percent. We look forward to the benefits of all the work done by our focus groups, application of lean design, lean manufacturing, material cost improvements and the benefits of increasing volume.

In terms of overhead utilization, our underabsorption decreased in the fourth quarter 2.2 million; for the year we actually had an increase in underabsorption of 2.1 million. The revenues for the quarter improved in all segments except for Mobil and it was only down slightly a couple hundred thousand dollars.

For the year our sales volume improved in all segments. In the SG&A area, our SG&A was up 19 million or 17.1%, just under the highlights of the increases -- salaries, wages, and benefits about 4.5 million for the quarter, R&D about .7 million, our non-cash charge on the (indiscernible) that's a mark-to-market charge. It's a non-cash charge of .5 million clearly advertising and exhibits up of about .5 million. On exploit expense up .3 million and legal up .3 million. On the SG&A for the year, salaries, commissions, employee benefits up some 7.3 million, R&D up 2.7 million, non-cash mark-to-market charges on the CERT were up 1.8 million. Our legal was up 1.1 million, printing advertising and exhibits up .7 million, QAM EXPO expense of (technical difficulties) travel up .5 million.

On the P&L we have a separate line for the gain on the sale of real estate, net of real estate impairment charge. And that presents and this is broken out for you separately on this segment analysis attached. But represents the grapevine sale of 7.714 million and the impairment charge of 1.183 million.

On the income from operations for the quarter, it was down $100,000 or basically flat for the year. We improved to 22 million. Again there is breakdown by segments attached for your convenience.

Our interest expense for the quarter includes a write-off of the [IRB] that was paid off of $200,000. And for the year we also have term loan fees in addition to that IRB fee of 500,000 for the payoff of the term loan. In the other income, the 705 -- I just want to explain sort of an anomaly there.

The extensions for Grapevine had previously been classified as other expenses; and in December we reclassified those to G&A and that was in the amount of $400,000 that makes the $700,000 increase by 400,000. So it was really $314,000 for the year but that one entry makes that look a little unusual.

In terms of the net income for the quarter, we are showing $0.05 versus the prior year of a penny. Don is going to comment on the quarter and unusual expenses; and I'm going to leave that to him to do in a minute. On the year of 2005 our diluted EPS was $1.34 versus EPS of $0.95 last year. In terms of continuing operations it was $1.34 versus $0.62 (technical difficulty) .

On the backlog we are very excited and very pleased that the backlog for December is up 36.6% or 34.2 million; and for January it is up over the prior year [to] 40.8% so that is -- we think it bodes well for the coming future.

The backlogs are very encouraging. Don is going to give you more insight on the customer outlook in a minute. The balance sheet is very strong. We are well positioned there. We have basically 36 days outstanding in receivables versus 38 last year. About 3.6 turns versus 3.7 turns last year. Nothing is owed on any credit facility and on current credit facilities, we have $75 million available.

The sale of Grapevine profits and options exercised provided a lot of the funds to pay off most of the funds to pay off the credit facilities. Our capital expenditures were 12.2 million versus depreciation and amortization of 10.6. Our projections for capital expenditures in 2006 are 29 million with depreciation projected at 12.4 million. The 123R stock expense charge, net of tax will be about $300,000 for the first quarter. And the cash flow will be attached to our March filing which we expect to file on time.

This concludes my prepared remarks on the financial details and I will certainly be available to answer any questions you have later in the call. We appreciate your interest in Astec as we strive to improve profitability and return to shareholders.

Thank you McKamy. Dr. Don Brock will now discuss Astec's business operations for 2005 and the outlook for 2006. Don.

As can be seen from our fourth quarter numbers, our fourth quarter of '05 was better than '04 but was still weak. The fourth quarter is almost impossible for us to predict, due to the inordinate number of holidays with Thanksgiving, Christmas, New Year's, vacations. But mainly getting our customers to take shipments, we will get orders for asphalt plants, (indiscernible) plants, large ticket items and the customers will want them in November and December but generally what you find in the paving industry is, in the spring of the year the state will not allow them to pave until it is exactly up to the proper temperature. At the end of the year they want them to finish the works, so they will drop all the barriers and they will work up until Christmas which generally leads to a delay of large shipments.

We are also constantly affected on a lot of these by permitting delays. It seems to take the bureaucrats more time to get permits out than it used to. We can find just in one single asphalt plant or crushing plant a swing sometimes can affect our numbers as much as $0.03 to $0.06 a share.

With revenue recognition being kind of a hot button now we are also very cautious to make sure that we have complete shipments before we book; and this makes our shipments sometimes lumpy. During the quarter we had three or four unusual items that really affected our bottom line by about $0.10 to $0.11 a share. Most of our products, we are doing an inordinate amounts of R&D at this point and introducing new products. Unfortunate (technical difficulties) you can't take an asphalt plant or a lot of most of our equipment and put it on the backyard and run 100,000 tons through it.

We generally make a deal with our good customers to try new products; then towards the end of the year, we and up having the cleanup costs of doing the final perfecting of the plant. So we had very heavy R&D expense during the year. Particularly that hit us in the fourth quarter. We also, as McKamy mentioned, we have the CERF expense that is really a non-cash item. The IRB payoff at Kolberg-Pioneer which is a non-cash item.

Also at Underground, the Underground operation was a disappointment to us but we had a lot up extraordinary expense there. We looked at last year as a year of building our brand-name which increased our advertising expense. And along with that building, the infrastructure to support the products that we were building. Parts manuals, building up a larger sales force than the dollar volume really justified, but we believe that we are preparing for '06 and '07 with the infrastructure we put together there.

We feel like to grow our businesses internally we have got to develop new products and while it hurts a quarter we believe we are building the products that we need for the future.

If you look at the year overall, '05 was a good year. Our revenues were up 22%. Our profits for up 128%. Our balance sheet is the best it's ever been. We have no debt as McKamy said. And I guess the thing we look for is how we manage our assets. Our return on capital employed based on the rolling 12 months was 13%. Our capital employed as a percentage of sales over the rolling 12 months was 35% of sales. We figure that says that we are using our assets as we should.

We've developed a large number of new models for our existing equipment and a number of new products during the year. The Highway Bill finally passed and we see state revenues increasing. We see customers beginning to replace older equipment and spending a lot more money on just upgrading old equipment which has certainly helped our parts business.

We ended the backlog -- the year with a backlog of being up 36%. And as we look forward to the first quarter we've started the quarter very strong. Our backlog, as McKamy said, at the end of January was up 41% to 161 million.

February sales have remained strong and our prospects continue to be strong. I guess the thing that I'm the proudest of is about 80% of our business is to repeat customers. Once we get the customer, they -- we have been able to develop a lot of customer loyalty.

Looking towards, looking out in the year I guess the negatives that still bother us is inflation is there and, finally, I guess the government is beginning to recognize that oil inflation oil prices certainly hurt that lead to inflation and is hurting our costs and the costs of our customers. We are also in certain areas of the country which is good news and bad news, but there is aggregate shortages and asphalt shortages in a number of -- for -- in a number of areas of the country.

On the positive side as we look forward, we continue to focus on improving our margins. Our focus groups are making progress. We look at lean design and lean manufacturing as a vehicle to certainly improve our margins. Our new products are very well being accepted. They finally came to agreement between the state of Alaska and three of the major oil companies to start the Alaskan pipeline and we think that will bode well for our Underground equipment over the next two to three years.

The directional drill business has certainly come back particularly in the larger rigs. We've seen a resurgence of that business and looks good for that -- Underground portion of the business looks very good for '06.

We continue to focus on growing our parts business, on growth in new products. And we believe that there is a tremendous opportunity to continue to grow in our rebuild business that we have at Roadtec and are starting in a number of the other companies.

In summary, I guess we are pleased with the progress we made over the year. We still have a lot of opportunities for improvement. Volume looks good to us in '06. We think our new products will continue to allow us to internally grow. I think as we look forward, we just have to execute our plan and continue to implement some of the strategies we've started. We will be glad to answer any questions you have at this time.

And, Dan, if you would open the lines for us, we would appreciate it.

(OPERATOR INSTRUCTIONS) Jack Kasprzak of BB&T Capital Markets.

First of all, I want to go back to the comments on the $0.10 to $0.11 in the fourth quarter impact from various items that I guess we're sort of viewing as one time in nature. Could you just walk us through again? I just want to make sure I understand the various impact of these items. Could you walk us through the -- how those add up again?

We had the IRB payoff at [Yankton]. It's about $200,000. We had the CERF expense which I really struggle with that but as the stock values go up the amount of stock we have for our senior officers, a supplement or retirement plan that we -- a number of years ago said that we will put money in there and buy Astec stock as the value of the stock goes up we have to take an expense hit on that. And it was 510,000 for the quarter.

At Underground we had two items. One is a case that had canceled a dealer and the dealer sued them and sued us for some reason. And while we ended up getting out of it, we spent $300,000 in legal expenses the, that's a onetime deal. We also spent about $.5 million in printing and legal expense -- I mean advertising expense at Underground and spent over 2 million for the year in branding what I would say building our brand-name. We've cut those expenses in half as we go forward this year.

The other expenses of about $1.5 million was related to new products. We are developing a new coal burner here at Astec that is -- the first one will go out in April. That is about a third of it. We developed a number of new products in the Underground or in the Underground and in the aggregate division and at Roadtec. And towards the end of the year we had a lot of I guess you could call it cleanup or R&D or warranty.

But where we put these products out, we generally find we've got certain things we need to go out and fix and upgrade on them. And a lot of that hit us at the end of the year.

That in total of all that R&D was about 1.5 million.

My second question is, just with regard to the comments in the press release on the results of the audit and I guess deficiencies or weakness in controls. Could you just talk about first of all, I want to make sure that is related only to the Underground unit and could you just talk about what other repercussions, if any, might occur? Could we be looking at write-downs, potentially, or do we feel like the situation has now been resolved?

We need to make it real clear it has nothing to do with our financial numbers at all. It is -- when you put material weakness in, it makes the back of the hair on my neck raise up because we generally think that is material weakness in our accounting. We take inventory at each of these companies at least once a year and do whatever necessary adjustments which corrects anything financially. But we had at Underground about a $450,000 adjustment. Half of it related to the way they were accounting for their steel and that has been corrected; and the other was a very serious -- various series of other adjustments but it relates to the internal controls at the Underground division. We think we have corrected that. We've put a number of things in place but it's really totally related to internal controls at Underground.

It's that one subsidiary and it's related to the Sarbanes-Oxley internal controls. McKamy, you want to add anything to that?

Jack, just to be perfectly clear about it, there are no no no writeoffs or anything like that expected. Let me just give you a few things that we've done to react to remedy this. One, we have a new controller in place. Very experienced gentlemen. We have also hired a seasoned veteran experienced with the computer system that we have there. We have also hired a seasoned employee that used to be with us at one of our other operations that is heavily experienced in that computer software, that will be working direct with corporate accounting and will be free to not get distracted and make the improvements that we need to make. People there in operations often get distracted with everyday operations and this gentlemen can devote 100% of his time to improvements.

We have put a lot of different controls in place. In addition as well as Don said, we've got a training situation that we had to deal with on the steel but we are also having weekly training courses in other areas that relate to internal controls. There's numerous other things that we've done but we think we are getting it all under control and moving in the right direction.

Frankly if you look at it and I just add to this and be glad to answer any other questions but basically Underground was a startup. We brought the controls, the computer system from Grapevine in there. We had practically all new people and to be frank, didn't do a good job of training them in the control system or in the computer software package that we had.

We also brought in another product line from Case and you had one set of part numbers for Case and one set for Trencor so you had two different companies putting them together, two different product lines and a whole new set of people. And it's kind of like changing your shoes while you run the hundred yard dash. Frankly before Sarbanes-Oxley it wouldn't have made the radar screen because we know our financial numbers are correct; but it's a matter of the internal controls.

That's very helpful. Thanks very much.

Scott Macke of Robert W. Baird.

Good morning, gentlemen. Want to dive into a couple of the segments here. If you will. First, talking about the Underground group maybe take a step back and just give us a tour of what is going on in relation to the Case Parts business, in relation to dealer network coverage? And in relation to Trencor and the Alaskan pipeline opportunity?

I guess to answer your first question, we have digested the Case Parts business. Seem to be doing well with it. And that's grown. If you look at Underground and all and (technical difficulties) you take everything out of it, the gain from Grapevine and everything. We lost between it and American [Augers] probably $1.5 million last year pretax.

So it's not the end of the world; but it's a little disappointing for us because we don't generally -- we try to correct these problems as fast as we can. The Trencor business has remained strong and continues to grow with pipelines around the world. That has been better than, really, the utility business. But as we add up, we probably got 60 to 70% of the dealer network that we need at Underground in the utility side, but we are continuing to grow that network.

The big trenchers (technical difficulty). I think the pipeline job we won't see much benefit of that for a couple of years. They estimate it'll take three years to do the design. We hope that they, as they give this to the engineering companies that some orders will start to flow within a couple of years. It's probably going to be 2.5 to three years before the work actually starts up there.

So it's going to be a while before we see that benefit.

The other thing I would say to you, though, I met with one of the major oil companies about two months ago. And one of the things that they say is, there is going to the more land pipelines built in the next few years than has been in many years. Most of the drilling's been offshore so you are laying pipe in the ocean. Now most of your oil is in remote areas like Alaska, Northern Alaska, Siberia. Places that are hard to get to but that are landlocked and there's really no infrastructure. So we think you are going to see a huge number of large pipelines going in.

Then, again, kind of taking a step back if I make these adjustments and what, plus or minus it looks like some of these adjustments and exploiting the sale on Grapevine that are operating somewhere around breakeven or a loss for 2005 and the Underground group. Is that correct?

Yes, you're probably -- McKamy -- .

It's on the page attached to the press release.

And looking forward in the fourth quarter revenue volumes (indiscernible) what it's comparable with with that of the, really, the two previous quarters and the quarters for the rest of the year. But looking out into '06 where is breakeven for this segment? What sort of revenue volume do think you need in '06?

I think basically probably we need between 90 and 95 million to break even. Between American Augers and Underground and the three and four Astec Underground group.

Which is to say that, essentially given flat volume growth next year you would expect to break even?

That's correct.

But I would surmise that you would expect to do better than that in terms of revenue growth?

Yes what we're seeing right now -- particularly the one I guess is really come back very strong in the Directional Grill business both small and big. The small end of course is hooking up fiber to the home. The big end is related to oil, water, various pipeline business. But we've got strong backlogs. The strongest backlogs we've had in about four years at American Augers.

That business grew in total about 40% last year. In terms of order of magnitude, as you look out to '06, what are your internal expectations? Do you think it's something 5 to 10% or is it something significantly greater than that? Just trying to get a feel for putting all the pieces together and what expectations are reasonable for that segment?

Scott, I still, I guess personally I'd like to see the business four to five years out at 250 million a year. And I think that's achievable. We expect it to grow faster than the other parts of the Company. And that's the reason we made the investment and gone through the pain we have up there in those two companies. We just feel like there's a lot of potential. There's just a lot of infrastructure in Underground that has got to be replaced. We are building a good brand name there. We acquired three good brand names; but we're trying to build it around the Astec brand name. So we think it's going to have higher growth rates than our standard, than our other products.

Arnold Ursaner of CJS securities.

Can you expand a little bit more? You obviously had a quite sizable jump in your backlog after December 31st and you've given us pretty good detail on the segments of backlog at that point. Can you give us a little better feel for where the incremental orders are coming from by segment?

I guess what we saw asphalt plan orders probably a little slow for some reason and they are better than normal right now. Or I should say they're very good. We got in the aggregate group tremendous improvements there. I mean, it's probably been -- most of it is asphalt and aggregate. Roadtec's backlogs are never very meaningful. I mean they can have up $12 million -- they can go into a month and have $12 million in sales and go in with no backlog. So I look more -- probably the ones that have we've seen the biggest pickup have been in the aggregate group, in the asphalt group and in the American Augers side of the Underground group.

In the aggregate space, can you give us a little better feel for the types of products you're seeing incremental demand for? What are the key drivers there?

Track mounted crushers are selling very well. The larger modular plants are selling. It's pretty well uniformly spread across all of them. BTI that builds the breaker systems and Boom Systems got an extremely strong backlogs. In South Africa we got the strongest backlog down there since we've owned the company. So it's pretty well all the way through. Look at each one of them, they're all up.

I've been involved with you in the past where you've had sizable pieces of equipment ready to ship at the end of the quarter as you mentioned here and customer asked you to defer it a few days and causes you a revenue recognition issue. Can you give us any feel for how many of those might have occurred this quarter?

At least two or three but it's getting where with Sarbanes-Oxley you can't make reserves for things. They don't want you to overreserve or underreserve. It's just where it's just like disrobing. There's no gains and I shouldn't use the word gains but I mean it's -- what's frustrating the guy that runs our Astec division told me last night, he said "You know we got, in February we got one plant that is 26 loads and we are probably not going to get the last load out." So he can't recognize it.

So that's what's pretty frustrating and that last load, the customer is managing the freight. So there's not much we can do about it. So you've got that kind. So we are White House some lumpy stuff guys. I don't know anything, any way to get around it. It's such a hot button on revenue recognition.

Thank you.

Rich Wesolowski of Sidoti & Co.

Don, where considering where the margin shook out for the various segments, where the bookings were in the fourth quarter, where the aggregate backlog is now, do you guys still feel very confident in the prior forecast for '06 we are going to see about 200 basis points increase on the operating margins?

Yes. We are about 70% confident I guess. The thing that bothers us I had a president's meeting yesterday and if you -- we kind of surveyed all of the things and we are still seeing a lot of inflation. We are getting some savings on items by group buying. We're getting some savings in our lean design approach and our focus groups. But we're seeing things go up as high as 18% on certain items. The typical is a 3 to 5% increase. We can manage that but inflation is pretty rampant. It still is there. I don't think -- at least it is in our part of it, in our segment of the market. And that's the thing that makes me a tad cautious.

The -- you've heard me say rising water covers a lot of stumps. The increase in volume will allow us to be overabsorbed in a lot of our facilities or get full absorption. That helps us and that will help in the margin side. My concern is the inflationary part on our material cost.

We are making progress in steel. Steel is not going up like it was. We are doing more mill orders of steel. We kind of with our balance sheet it is we are inventorying more steel because that's something you're not going to have any problem using eventually. So and we are taking advantage of buying that way. But there's certain items when you see 18% increases and you can't do anything about it, it's a little worrisome. That's my caution.

So basically it sounds to me like if the spending environment holds up you guys should at least come within that 200 basis point ballpark. How about the risk within the next year to 18 months we don't see the levels of (indiscernible) from the producers or from the transportation contractors that you expect?

At some point there will be a downturn. We got to adjust the businesses accordingly. That's about the only way you can do it when you do have that downturn. I guess we see a lot of demand out there and I guess I've given a presentation a couple of times this year on the future of our industry; and the need is so great for more roads and more infrastructure that it's got to be there. The $64 question will be the funding. Can we get the funding to do it?

We got 237 million automobiles on the roads and 8 million trucks and we're adding 17 million more vehicles a year. So we are getting into gridlock. And there seems to be some recognition on a lot of levels of that. So we think the need is certainly there. I guess the big question there is where will we get the money to do it.

Greg Coles of Metropolitan Capital Advisors.

Overall, I'm pleased with the backlog. Just had a couple of questions. Dr. Brock, No. 1 given I think you certainly answered this. Given the sort of unprecedented capacity constraints of the aggregate companies I'm assuming that you guys are going to be -- if you're not seeing it in your backlogs already you expect it to be beneficiary of that from the big eyes Martin, Vulcan and Florida Rock. And then if you just confirm that and the second question, basically, the gas pipelines we've been reading about from El Paso and Kinder Morgan, this Rockies Express and couple of over thousand mile gas pipelines which will be here in the U.S. If you guys will participate in that because I don't know if the dynamics of gas pipelines are universal. If they have to be underground for security reasons and the high PSI that runs through them. Or if you pretty much will benefit from the Alaskan pipeline but not as much from the sort of continental ones here in the U.S. from those guys?

To answer your first question, we see the large guys spending a lot of money, too, Martin Marietta, and Vulcan. They are doing very well. We do a lot of business with [Old Castle] which is CRH out of Ireland, and they are certainly -- I think their capital is as high as it's been in years. Their capital expenditures. So we will have about 50 of their people in here for a seminar on Thursday.

On the pipeline area, I think you'll see all the gas lines underground. If you have a problem with a gas line, if you have an explosion these high-pressure ones will open up like a zipper from one end to the other. So you don't want to have that problem. They are going to put them underground.

The Alaskan line will be down 16 -- 12 to 16 feet underground. So it takes a big trencher to do that. We're going to have a ditch six feet wide, 16 feet deep on that line. I would say comparable on a lot of these others which takes big machines to do it.

As a follow-up, Dr. Brock, I know the permafrost and thermal issues which will be sort of -- will result from the Alaskan pipeline in of course all the roads around it, getting people there will bode well for you. But from the pipelines here in the U.S., would you also need the type of aggregate and limestones to encase them? Because I don't think thermal issues will be a problem but you're probably going to need rock or something like that which I would guess would derivatively benefit your aggregate business. Is that a correct way to think about it?

Yes. One of the things that I guess I get excited about is, it's amazing the pipeline people basically know very little about crushing rock. And the rock people know very little about digging pipeline. So there doesn't seem to be information crossing industry lines and we build a huge number of screens. We probably build as many vibrating screens as anybody in the country and that we can take particularly if we are cutting rock or any of it, we can screen the material that we are trenching and make the bedding material that goes around these. Now what you've got to do, you got to have a material that is less than about three-quarters of an inch and generally less than half an inch.

You don't want to punch a hole in the pipeline with a sharp rock. So they put bedding material around it and they used to haul it in , haul sand and put around the pipes but now we can take and run our track-mounted screening units, pick up the material that the trenchers have trenched and screen the material and make the bedding material to bed around the pipe. So we see a lot of cross-industry type uses for our aggregate equipment on these pipelines.

It it's big rock that they've drilled and shot we can crush it down into a fine rock, screen it and make bedding material out of it. So there is a lot of -- believe it or not, there's some customers that own one products from every one of our groups.

(OPERATOR INSTRUCTIONS) Scott Macke of Robert W. Baird.

Wonder if we could take a quick walk through the aggregate mining segment this time. If I make these one-time -- first let me ask you about the topline segment. You've got 7% year-over-year revenue growth. But it's 63% increase in the backlog. Understand there's some seasonality to the business. Are we still butting heads with some capacity constraints here?

Yes. We are, Scott. We are adding onto the Kolberg-Pioneer plant. We are adding onto Astec mobile screens in those two companies and we are -- I hate to say it, but we are bumping into capacity problems there. We are bumping into a little of that Roadtec. We are not necessarily at Astec but we are adding on here just to build the coal-fired burners. We think over a period of time that we will be running all asphalt plants or the predominance on them on coal. It's so much more economical than natural gas or oil. So, but on the aggregate side I'd say every company we've got has got capacity problems right now.

Now most of our customers, unfortunately, if they order it today they want it tomorrow. They are not very tolerant. And when you get out three months which we are in most of these companies, it gets to be tougher. We are seeing more acceptance of that. In the downturn in '01, '02, 03 they got a little spoiled that they could order and get quick delivery. They are seeing this problem with about everybody in the business.

So we are out into June and on June deliveries in a number of our companies.

Can you give us a little more detail in terms of the pace at which we can expect these capacity expansions to proceed and the impact that might have on available capacity?

I think there's different progress in different companies. Astec Mobile Screens should be operating with just about doubling the size of their (technical difficulties). And by the third quarter the early part of the third quarter I think it will be late third quarter before KPI is up to speed. Roadtec will probably be operating in early third quarter so -- and I'd say the burner bay will be up to speed by the early third quarter here in the Astec division.

Looking at the margin and the -- back to the aggregate mining group, if I add back some of these onetime items I still what? I get a year-over-year decline in operating income. Is this reflective of a delayed shipment or two? Is this reflective of capacity expansion and constraints? Is this just more normal seasonality in the business? Is there something -- could you just expand a little bit on margins in that segment?

The margins were down just a little bit in that segment if you look at it for the year there. But it is primarily due to new products that really weren't up to speed. I can give you a good example. One particular new design conveyor that we got that's I think quite, quite revolutionary. We'll sell that thing for 165, $170,000. The first one costs you about 230 but we will get the cost on down. But a lot of R&D expense and we don't capitalize any of our R&D. And so, some of the margins in these companies are I'd say a big part of it is in fact that we're just pushing the heck out of new products.

One last question if I may. What kind of (indiscernible) in McKamy's comments about underabsorption being negative or detrimental for the year given capacity constraints? Could you help me understand how that happened or what contributed to that?

It's product mix.

It gets to be product mix but it's primarily the underabsorption was in the Underground, the Loudon plant. It's a big plant and got a lot of capacity and we just haven't got geared up, we haven't got the sales yet to fill it up. And that's the one that's the big one.

Have any initial impression on what that might do in '06 (technical difficulty) underabsorbed or create an aggregate underabsorption for Astec?

We don't expect to be underabsorbed in '06 and I guess we are adding some additional products there that, frankly, that we are purchasing in the aggregate and in the Mobile division. Some components I should say that we're building up at Underground that will add more manhours to that plant. And we believe that we will have that under control this year.

Arnie Ursaner, SJS Securities.

Don one of the numbers investors have been particularly focused on is your margin, operating margin goal that you've indicated you hope you could return to levels seen in the late '80s which would be around 11%. Sitting here today, can you comment on when you see that -- do you still see that as a reasonable goal and if so by when?

We see it as a reasonable goal. I guess if I'd say that there's a caution I come back as I mentioned to is managing this inflationary period that we're in. But to answer your question I would hope to see that by late '06, early '07. We'd better get it by then or we're not going to get it. So that's the bottom line.

Second question I have is, obviously, you are selling to people who expect equipment and need it for the beginning of the spring season yet you're mentioning things like June deliveries in some of these products. What steps, if any, are you taking to prevent either dupe orders or orders -- how do you reduce your risk on some of these orders that could be impacted if they are much later in terms of delivery?

I guess the first thing, we will run these plants seven days a week in times like this; and we are running some seven day weeks right now. We like not to work on Sunday but we will if we have to. We are working a lot of overtime. Some overtime doesn't cost you any money. Basically you're paying time and a half or double time but you don't have all of the fringe benefits. So it's not that much additional expense.

But we are, generally, in the first two quarters, we throw the overtime at it to try to increase our capacity. We generally are finding that the customers are willing to wait and they understand. But if they -- they're doing a little better planning than they were two or three years ago because they realize they can't get it overnight.

As I said it's the same problem with Caterpillar, everybody else in the business.

We show no further questions in the queue at this time. I'd like to turn the floor back over for closing comments.

Thank you, Dan. We appreciate your participation on this fourth quarter and year end conference call for 2005. Thank you again for your interest in Astec. As our news release indicates today's conference call has been recorded. A replay of the conference call will be available through March 7, 2006. An archived webcast will be available for 90 days. Transcripts will be available under the Investor Relations section of the Astec Industries website within the next seven days. All the information is contained in the news release that was sent out earlier today. Since there are no further questions, this will conclude our call. Thank you very much.

Ladies and gentlemen, this does conclude today's teleconference.