Astec Industries Inc (ASTE) 2006 Q1 法說會逐字稿

Greetings ladies and gentlemen, and welcome to the Astec Industries first quarter 2006 earnings conference call. (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 of Astec Industries. Thank you, Mr. Anderson. You may begin.

Good morning and welcome to the Astec Industries' conference call for the first quarter of 2006. As Tina mentioned, my name is Steve Anderson. I'm the Director of Investor Relations and Assistant Secretary for the Company. Also on today's call are Dr. J. Don Brock, our Chairman and Chief Executive Officer; McKamy Hall, Vice President and Chief Financial Officer; and Neal Ferry, Executive Vice President. In just a moment I will turn the call over to McKamy to summarize our financial results, and to Don to discuss business operations.

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. At this point I would like to turn the call over to McKamy to summarize our financial results.

Good morning. We are pleased to present a much improved first quarter. Net sales are up 14.9%. Our international sales are at 34.7 million, being 18.7% of our total sales. And that 34.7 million is up from 28.5 million for the prior year. Parts sales are also up. They are up 15.6%, up to 44.7 million from 38.6 million.

Attached to your press release is a breakdown by segment of the source of our segment sales is Aggregates at 38%, Asphalt at 30, Mobile is at 20, and Underground at 12. The Mobile and the Aggregate had the largest increases. On the consolidated gross profit, we are up to 45.1 million from 35 million. We have a gross profit margin of 24.3 million versus 21.7 million. And as you know, we have had a lot of initiatives that we have put in place to try to improve the margin, and we're very pleased with the 260 basis points increase in the margin for the first quarter.

Going on to the ranking of the gross profit percentage, that is also attached to your press release, the Asphalt Group, 26.1%, Mobile Asphalt Paving at 25.5, Aggregate Mining at 24.2, and Underground of 18.9. All segments do have improved gross margins from the prior year, and we certainly will continue to focus on the initiatives we have in place to further improve them.

In terms of the income from operations, our income from operations -- I'm sorry -- the income by segment, Asphalt for the first quarter is at 8.3, Aggregate at 8.0, Mobile at 4.9, Underground 302,000. That is also -- represents improvements in all segments.

In terms of the interest expense, that is primarily an amortization of credit lines that we have available. Basically we have no debt, therefore, we basically have no interest. On the net income, our net income is up 4.4 million, or 60.4%. In terms of earnings per share, we were at $0.50 per share versus $0.33, for a 51.5% increase.

In terms of profits by segment, Aggregate and Mining is up 54%, Mobile Asphalt Paving up 43.8, Asphalt up 46.6, and Underground up 92.4.

In terms of backlog, our backlog -- overall backlog is up 30%. If you look at it by segment, Asphalt is up 18.4, Mobile Asphalt Paving is down 43.3, Aggregate is up 39.1, Underground is up 120.7. As those of you that have followed us for a long time know, the Mobile Asphalt Paving backlog is not as good an indicator for that segment as backlog is for the other segments. So we do not look at this reduction as a weakness, because the sales for the first quarter were up 26.2%.

In terms of the balance sheet, it is very strong. As I mentioned earlier, we do not have any debt. Our receivables are up 19.6% on 14.9% sales increase, but our days outstanding is at 38.2 days. Our inventory is at 13.9% on a 15.9% sales increase.

In terms of capital expenditures in the first quarter we have spent 6.2 million against our plan for the year of 29.4 million. Our depreciation in the first quarter is 3 million, against a plan of 12.6 million for the year. And in the first quarter contributing to our good cash flow is stock option proceeds of 5.4 million. We will have a detailed cash flow attached to the 10-Q when that is filed. We're certainly off to a great start for 2006 as we lay the foundation to return to the gross margin targets that we have and profitability targets that we have in gross margin and profitability levels that we have achieved in the past.

This concludes my prepared remarks, and I will certainly be glad to answer any questions you may have later in the call.

Dr. Don Brock will now discuss Astec's business operations for the first quarter of 2006.

Thank you. As can be seen, we had a good first quarter. Our sales, as McKamy mentioned, revenues were up from 161 to 185 million, a 15% increase. Profits increased 60% from 6.8 million to 10.9 million. Our earnings per share increased 51% from $0.33 to $0.50. Our backlog was up 30% from 111 million to 144 million.

Last year we started a number of initiatives to improve our gross margins. We believe the efforts are beginning to bear fruits since we saw a 260 basis point improvement year-over-year from 21.7 to 24.3%. We continue to drive these efforts, and I might say we're trying to outrun inflationary pricing pressures on both components and steel.

Our balance sheet continues to be strong with no debt. Internal growth is generating at more than sufficient cash to cover our expansion and our increased working capital needs. Over the rolling 12 months our return on capital employed is now exceeding 14% at 14.2%. And we hope to see that continue to improve.

Looking forward to the second quarter we started the quarter with a strong backlog of 144 million. And as McKamy said, some of the backlog is not very meaningless, particularly in the Mobile or Roadtec operation, but we are up 30% over 2005.

We continue to grow our parts business. Looking forward I guess for the second quarter my concerns are continuing oil price increases, and asphalt prices certainly have a negative effect on our customers. We also see inflationary pressure on component pricing, and we see some upper pressure on steel.

On the positives, our customers have a high volume of business and that continues to grow. The need is certainly there. Our new products are very well accepted. There is a trend to use more and more recycling as the virgin prices of rock and liquid asphalt increase, the value of the recycle equally increases. We have a stable of products that we believe that differentiates us from our competition. And also some of our products differentiate us enough to carry complete package sales that others don't have that opportunity.

We see the pipeline business worldwide growing, which will certainly -- and is certainly helping our trencher and big drill business. We also continue, as mentioned above, to focus on the growth in our parts business. That is our [a new area], and that is a business that we feel like that we can continue to do better in. We believe that we can make -- if we continue to make a constant focus on cost reduction and product improvements, we will make this a Company culture. And we think we made a lot of progress in that area. In the coming months we need to contain our margins, during this inflationary period and increase them further during the year.

I guess in summary we are pleased with the quarter. We continue to sustain our backlog and improve it. Our customers like our products, and we are continuing to execute on our growth plan. I would be glad to answer any questions, if anyone has any at this time.

(OPERATOR INSTRUCTIONS). Arnie Ursaner with CJS Securities.

You gave us backlog numbers which were excellent. Can you update us perhaps on trends in April, and if in fact the strength is continuing?

Yes. It has continued. I guess the thing we have seen this year, it is kind of like an automobile, it has got water in the gas -- in the gasoline. We see spurts of three weeks with orders being weak, and then we see three weeks with it being extremely strong. Early April we picked up a number of orders in April. It seems though the whole industry is a little bit goosey, so to speak. But they order when they get work, and we have seen a pretty good pick-up in April.

Focusing on gross margin again, can you give us a little -- or expand a little bit on issues in the first quarter that could impact the balance of the year, specifically what sort of utilization are you running at now? How much capacity do you have? As you build backlog in places like the Underground Group, can that help improve the gross margins there? Your view of again gross margin over the next several quarters and the factors that could drive it please?

Every year we have a better first quarter on parts sales. Although first and second quarters is always your strongest for parts sales, parts margins are larger, and they probably gave us a hike of maybe 50 basis point improvement in that 260.

We see a continuing improvement in our machines' gross margin. And going forward the opportunity -- there is opportunity in Underground. There's opportunity in really all of the different businesses, but probably obviously their gross margin is the lowest of all. We just completed most of our quarterly reviews. We have -- Neil and I have three more to make. The focus group initiatives we had of really focusing and reviewing the products is paying off. It will take probably 12 months for the total benefit of that to flow in, but we think we have got opportunity to continue to improve the margins.

A final question, if I could. The Alaskan infrastructure build, which you occasionally have highlighted as having significant longer-term potential, can you update us on that please?

At least I think they have agreed with the three oil companies that will be building -- that will have the line. It is anticipated that probably orders for equipment may start as early as '07. The engineering will start probably this year on the line. But they have agreed to the route that the pipeline is going.

The only thing -- the only negative I know on that, it seems like one group has sued them over that. And I don't know whether that will cause a delay or not. But it was announced that it was going to be the 1,800 mile line, down going into Edmundson. And it went down through Alaska and then cuts through the Yukon.

We see pipeline work all over the world coming in though. There is some big lines in the U.S., a huge project in China. Even -- it affects our Underground business, it affects our heater business. They use on oil pipelines, depending on how viscous a crude oil is, the pumping stations will use two to three heaters. And so we've got a large order quoted in our Heatec operation on the Chinese line. A lot of stuff coming out of Siberia. It seems like all of the drilling is going in remote areas where it will require big lines. The easy to get oil has already been gotten.

Robert McCarthy with Robert W. Baird.

Could you spend a little bit more time, Don, on the Underground Group? Talk to us a little bit about how the two different businesses theyre performed in the quarter. What you are seeing in terms of order activity for both, and whether you think we are looking at a level of business that is going to be fairly typical for the balance of the year, or is there something that held us back here in the first quarter?

There was one large order at American Augurs that didn't get shipped, waiting on -- really just waiting on the freight. The customer is lining up the shipment of it, which will go into the second quarter. And some of these big orders are obviously lumpy. We see -- I might say the Underground Group's first quarter is their weakest. Normally they do better in the back half of the year. We see continued improvements in both companies, particularly at American Augers. They are performing quite well. They should have a very good second quarter.

At Loudon, or at the trencher side of the business, a lot of orders -- a lot of potential orders on the big trenchers. We have three real large units going out in the second quarter. The small trencher market, we're not growing necessarily in that. We have got a strong initiative to kind of now relook at the case line and upgrade it. It is a great performance product, but we need to improve our ergonomics on it, make them quieter, make them sleeker, make them more user-friendly. And we have an initiative doing that, which we think will grow that side of the business.

But we're not unhappy with it. It is like all of these businesses, people would like you to give up on them if you don't get them fixed in six months. But some of it is a slow process, and we think it will make money this year. And we think it will continue to be a real contributor to us.

If I understood, you are saying the smaller drill business is doing fine, it is really the ex case trencher line that (multiple speakers).

I guess I may have misled you. The smaller drill business is okay, but it is not growing as much as I would like to see it. We think we've got to upgrade the products to do it. The big trenchers are the ones that is doing the strongest right now. I may have misinformed you there or you may have misinterpreted --.

I was trying to read between the lines. Did you have any of that large trencher business go out in the first quarter?

Not as much as we will have in the second quarter.

How much is that roughly? What kind of ballpark is the value of that American Augers business that has slipped from the first to the second, it is that as much as a couple of million?

It was about $1.5 million.

Thanks, Don. That is real helpful. As we sit here in mid-April, late April I guess, I am a little surprised that we have as yet to see you guys getting anything done, consummating anything on the acquisition front. Could you talk a little bit about what you are seeing in terms of landscape, and what the obstacles have been, and whether that is something you think might change near term?

We have looked -- seriously looked at about three acquisitions the first quarter. And I guess prices are pretty lofty right now. Expectations of what people are looking for are pretty lofty. And we do know, I guess maybe we have been at it too long, but we know that these businesses go through cycles, and the expectations are really kind of at their peak right now from what we are seeing. We're not going to I guess -- we've got to average would they do in these cycles, and right now, at least a couple of them we looked at, were just way out of line with what we thought it was worth. We will wait for the proper time to make those. Put it that way.

Well we're hearing similar elsewhere. I will get back in line. Thanks, Don.

Jack Kasprzak with BB&T Capital Markets.

I wanted to ask about Asphalt sales. Obviously the performance in the quarter was very good with that area. In terms of year-over-year growth, it was a little lower than what we saw in the other areas. I was wondering if you could talk about that issue. I would have thought it would have been a little better given the seasonally strong period of the year. That is obviously the area you guys are most known for, I suppose. Were there any revenue recognition issues there, or could you just talk about your expectations for Asphalt?

First, there was not a revenue recognition area there. We did make all the shipments we planned. I guess the problem is is that one of our major customers -- I should say one of our major customers -- is somewhat in a restructuring mode, and really has cut back on CapEx. And that has -- normally we would have two or three plants this time of the year -- additional plants. We had one from them, but they're not doing a whole lot this year, and so that hurts.

I guess the other thing we see is a certain amount of cautiousness due to asphalt prices. We do see a lot of interest in upgrading to do more recycle. We're selling a lot of just double barrels, just the middle part of the plant to allow people to increase the amount of recycle. But I think until -- the industry is going through some changes with -- particularly with this major player, and what they do will affect buying in the next year or so of upgrading equipment.

Overall we see the western part of the country beginning to come back. We have a number of sales out West that -- California has been extremely slow, and Arizona and different places like that, it is just for various reasons they have been slow on the asphalt slide of it and on the highway construction. California has cut a good program this year. A lot of interest out there at this point. So to answer your question though I guess we just see a continuing cautiousness due to asphalt prices in that segment.

That's helpful. Thank you. The tax rate, McKamy, in the first quarter it was about 36.8%. What could you guide us as the -- what you think the effective tax rate for the year might be?

I think that will be about what it will be. The difference in this year and last year, last year we were able to get some R&D credits that helped us get that a little bit lower than this year. But I think this first quarter is pretty indicative of what we will have.

John Riley with ACK Asset Partners.

Good morning and a very good quarter. The first question I have is to your SG&A expenses. They were higher than I had anticipated. Could you break down what some of the components were that drove that number much higher?

One of the things, obviously, is we have a good quarter, your profit-sharing that we have where our Company basically we give 10% of the after-tax profit back to the employees. And when we have a stronger quarter there is more of that that will show in there. It shows up in SG&A. We also, with the stock prices going up, we had some non-cash expense of about $400,000 in that CERT that I still have a problem understanding why we do that, but that is the accounting laws.

I guess the other thing for the first time we've had to -- we expensed off stock options that we had last year of $360,000. There was a number of unusual items like that.

There was a $400,000 surcharge that we can expect, or was that one time in the quarter?

That is just something you can't predict. It is based on the price of the stock. It is a phantom type item. It is not -- it is in a non-cash expense.

The way -- a number of years ago we set up this CERT for the senior officers of the Company, and we actually put cash and then required them to buy Astec stock with it -- required the CERTs to. Now the way the law is, I guess the theory is if the Company were to go bankrupt, that the CERT could be reached and gotten. And as a result of that, as the stock goes up, we have to take an expense based on the number of shares that are in that CERT. It is kind of crazy when the stock value goes down, it will come back in as profit. It is an opposite effect than what the Board intended it to be. In other words, it is a non-cash expense that we have to take.

The share options of expensing them off, obviously everybody understands what that is. That is understandable and the profit-sharing is understandable. But those are the major kind of what I would say issues in that.

I just wrote down that you had expensing the stock options for 360. You had the 4400,000 CERT, and what were the other ones that you had mentioned?

The other one was the amount of cash that we put in reserve for profit-sharing is based on the earnings that each Company makes and their performance, and that was up about 800,000 for the quarter.

That was up 800,000 versus last year?

Right.

Is there any way to forecast what that would be?

It is formula thing, and we can, but we would be forecasting earnings if we told you that, so can't do that.

Excluding these charges, it really would have been a powerful quarter.

Right.

Robert McCarthy with Robert W. Baird.

In the Aggregates segment, you had a terrific quarter in terms of revenue growth. Backlog relatively unchanged from the end of the fourth quarter. It indicates -- number one, it indicates you had very good order development. But it made me wonder if maybe, just like you had a little bit of lumpiness hurt you in the Underground business, I thought maybe you might have had a little bit of lumpiness help you in the Aggregates segment. Or is this a number -- seasonally guys traditionally see sales go up in the June quarter from March, is this a number you beat?

I would say, I'm not sure I totally understand what you're asking.

Let me just -- maybe I do. There is not any big orders in there. There is no big systems. There's not a lot of [fastback] orders. It is very much unit machines, which is what we love, and it is very broad based. So I think that is what he's getting at.

Yes, it is.

The other thing that we have had a pretty good pickup in international sales in that particular segment, which has been better. We've got -- that is one area -- a couple of those companies we do have capacity problems. At Astec Mobile Screens and that at Kolberg with Pioneer we have -- we are kind of capacity limited there. We have got orders out into August in some of those companies. In both of those we are adding on to the facilities. That is the other thing I think you were alluding to that we are building all we can in those two particular companies.

That helps. Thanks. Did you all give us -- maybe I missed it -- did you give us a number for total international sales in the quarter?

The international sales for the quarter was 34 million 692.

About 18.7% of sales.

That is up from about 28 million.

(OPERATOR INSTRUCTIONS). Alec Mitchell with Copia Asset Management.

I just wanted to ask about capacity utilization in the segments, all of them that --.

Alex, we got capacity -- we don't have a capacity problem I would say in the Asphalt side of it. In the aggregate side, we have -- all of these -- some of them we've got plenty of capacity, some of them we hadn't. I will put it that way. But two of the -- I might say three of the six in the Aggregate, our South African operation is up to their ears right now. Kolberg-Pioneer and Astec Mobile Screens, both are pretty well at capacity, but we're adding to both of those facilities.

Some of the others are running pretty high capacity, particularly during the second quarter. Roadtec is running right on the edge. We're adding to that. We're adding to those facilities. The Underground in operations are -- we still have capacity available in the trencher side of it and the drill business with pretty good inrush of orders there. We're actually moving some of their products, or actually building some of their products, in the Loudon Underground facility.

I would say, if I had to put an average on it, we're probably running at 80% capacity. But I'll remind you one foot in boiling water and one foot in freezing water, the average temperature is comfortable, but you're not necessarily, so we've got some of those situations.

You're adding capacity in the Roadtec line. When does that capacity I guess (multiple speakers).

It will be in the middle of the third quarter before we see that. It will be, I would say end of third quarter before we see it at Kolberg. It will be at the end of the second quarter at Mobile Screens. We are adding a building to build our new burners in at Astec, which will probably at the end of the second quarter.

Are you absorbing the expense of that now, or you're going to -- how does that work?

We won't absorb the expense of it until it is utilized.

Is there anything I guess you are looking -- you think you would be adding to in terms of capacity after the third quarter?

No, we don't see that. We may as we go into '07 be adding and updating more machinery, but we don't see any more bricks and mortar.

Robert McCarthy with Robert W. Baird.

You talked, Don, in your prepared remarks about rising material costs, although you guys have been doing a lot to bring down your total build there. That is a theme that we've heard from some other machinery manufacturers. How do you feel about what you have already done in terms of pricing relative to cost? And do you see the need for incremental price increases during the course of the year, or what is your strategy? Are you going to try and do something now? Are you going to wait, try to live with what you did coming into the year? Can you just talk about the dynamic price and cost?

We are constantly looking at that. As we have done the quarterly reviews, I guess we've encouraged everybody to take their standard products and roll them up on a monthly basis to watch what effect these component increases are doing. It will vary all over the map, all the way from a 2% increase to an 18% increase depending on what it is. You've got to weigh -- what is -- what damage is that doing to you.

We're trying to stay out in front of it. We've got some effect where we had increases at the first of year that really don't take effect until the second quarter because of the backlogs we had. We think we'll see some help there, but it is extremely hard to protect what it is going to do right now. Steel seems to be trying to edge up. But we have been able to kind of control than a little bit through the mix of where we buy and what we buy. But some of these other components, it is just difficult to predict. It is a fast-moving target. The only thing I can tell you is we're watching it like a hawk.

McKamy, how much of the inventory increase in the quarter was raw materials? You guys had talked about maybe needing to carry a little bit higher levels to support what you're trying to get on the pricing front.

Just a second, and I'll get it.

While he's getting that, we have encouraged our people to increase the amount of steel that they carry, and go ahead and buy it from the mill. But basically they have been using it about as fast as they got it in.

To answer your question, our raw material and purchased parts combined is up about $11 million.

Okay, so a big piece of it.

That is the primary. There is -- the work in process is up about 5 million, of course indicative of strong business. And the finished goods are actually off about 1 million.

Arnie Ursaner with CJS Securities.

Expand a little bit on your capital spending, which is going to have a pretty good jump. How much of that would you view as growth versus maintenance CapEx? What sort of an expected IRR do you hope to get on that capital spending please?

Our maintenance capital expenditures generally is around 10 to 12 million. And the rest of it is for growth. It is adding on to facilities, adding machinery in the facilities.

What sort of IRR -- meaning you return on equity has been growing anyways in a very nice manner. If these plants come on as expected, do you expect your capital return on capital to improve with this additional capital investment?

We expect it to improve, because obviously you're not going to increase -- we won't be increasing SG&A and things like that with it. We expect it to improve our -- we wouldn't be doing it if we weren't expecting a good return.

Would it be fair to say these improvements or expansions are primarily volume driven, cost driven, or perhaps a mix of both?

It is a mix of both. They are volume driven, but in each of the facilities we have tried to go to more lean manufacturing, which is a continuous flow type manufacturing. The Kolberg plant, for example, did not lend itself to that. What we're doing there is extending four of the major bays, which we will convert to a continuous flow type manufacturing of the major products in that one. A similar thing at Mobile Screens. Roadtec has had a continuous flow. Their is more growth. We've got a new product there called a soil stabilizer. We've really grown our milling machine business. And so it is more volume driven, where the others -- Kolberg will increase their volume, but they will also improve their manufacturing with a continuous type flow.

The last one which is at Astec facility we are putting out our first pulverized coal burner. We did not manufacture the burners for the asphalt plants until about 2.5 years ago when we had a very small -- have a small facility for that. This will be dedicated facility for the burners and for the pulverizers for the coal. It is volume improvement.

That is going to be a very energy efficient -- Don, if you want to speak to that.

We just see with the price of oil a number of -- as the price of oil goes up, a number of dynamics changes. One, the biggest cost in producing asphalt as far as the manufacturing cost is the drying of the aggregate. And if I go into pulverized coal, we can cut their cost 60% or to 40% of what it was. So substantial savings there. We think you'll see a big shift to that. We think -- it is one of the products that I mentioned that will differentiate us and help to sell asphalt plants by having that one component there.

There are no further questions at this time, sir.

Thank you, Tina. We appreciate your participation on our first quarter conference call, and thank you 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 May 1, 2006, and an archive webcast will be available for 90 days. A 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 news release that was sent out earlier today.

We appreciate your participation, and this concludes our call. Thank you.

Thank you. This concludes today's teleconference. Thank you for your participation, and you may disconnect your lines at this time.