Astec Industries Inc (ASTE) 2006 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Astec Industries' second-quarter results 2006 conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow 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 of Astec Industries. Thank you, Mr. Anderson; you may begin.

Thank you, Tina. Good morning and welcome to Astec Industries' conference call for the second quarter of 2006. As Tina 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; 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 then to Don to discuss our business operations and general environment.

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, and assumptions and other factors, some 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 to summarize our financial results.

Thanks, Steve. We appreciate your joining us this morning. We're certainly very pleased to present to you the second best net income quarter in our history, as we continue to gain momentum. We’re only $354,000 short of this being our best net income in history.

Our sales were up 12% to $191.3 million. Our international sales were up 62%. That came from four primary areas, Middle East, Canada, Africa, and Europe. Parts sales are up 19.9%.

The total sales for all segments increased in the quarter. For your information, those of you that are familiar with us, that is attached to our press release on the additional segment income sales gross profit sheet and backlog.

Our consolidated gross profit was up 20.6% in dollars. The gross profit percentage increased from 23.5% to 24.8%; and also from first quarter to second quarter, it improved from 24.3% to 24.8%.

The gross profit margins for asphalt, aggregate, and mobile as you can see from your attached sheet were grouped around 25%, with underground as being slightly behind that. Don will speak to some of the conditions that were beyond our control that would have also improved that percentage had we not had some factors that were beyond our control as far as shipping goes.

Our SG&A is at 14.2%. As you know, our goal is to hold that to 14%. Most of the increased costs are manpower and benefit related to volume.

Our net income is up 21%. The profits by the different segments are also on your attached sheet, and I won't read those to you. Our earnings per share for the second quarter is up from $0.49 to $0.56 for a 13.8% increase. Again, attached to your segment release are the breakdowns of the change in profit, with all being up.

The backlog is at the bottom of that sheet as well. Our backlog is up 38.2%, which gives us a nice start for the upcoming quarter. We only have one segment that has backlog declining, and that is mobile. That normally, as we have pointed out over the years, is the segment that has the least indication of the upcoming business shown in the form of backlog. Our international backlog is up substantially as well.

Our balance sheet is very strong. We have no lender debt. Our inventory is up from $124.7 to $151.1 million; but our turns are 3.49 as opposed to 3.51, so we're basically maintaining the same turns that we were last year.

We have plenty of borrowing capacity available to. We do not have a need for that at the moment. I would point out to you that in this first six months, from the exercise of options, we have generated $9 million of cash.

Our capital expenditures for year-to-date are $15.2 million versus a year-to-date depreciation of $5.7 million. The projections for our capital expenditures for the year are $29.4 million, with depreciation and amortization expectations at $12.4 million.

This concludes my remarks on the financial details. We will certainly be glad to answer your questions later and are very pleased with the quarter.

Thank you, McKamy. Dr. Don Brock will now discuss Astec's business operations for the second quarter of 2006. Don?

Thank you, Steve. As can be seen, we believe we had a very good second quarter. As McKamy said, it was the second best in the history of the Company. All of our operations were profitable.

Our revenues were up from $170 million to $191 million or a 12% increase. Net income increased from $10.2 million to $12.4 million for a 20% increase. Our backlog at the end of the quarter was $121.6 million versus $88 million last year or a 38% increase.

Our results were actually right on our internal budget that we set late last year, but as you can see were less than market expectations. If you really look at what happened at the end of the quarter, we had a few unusual situations that seemed to eliminate about $10 million in shipments that could have been recognized had it not been for various reasons.

We had a $3.3 million asphalt plant that was shipped; but the payment was in the mail; didn't get here. We have to meet exact terms with the Sarbanes-Oxley revenue recognition now, so we could not count that one.

We had a $1 million directional drill that was dropped while it was being loaded at port in Oakland, California, about two weeks before the end of the quarter; had to be sent back for rebuilding.

We had one drill that's comparable size at another port that the ship didn't show up. We had approximately $5 million in crushing equipment that was waiting on arrival of letters of credit.

With these items, we would have exceeded any market expectations, so it was disappointing that we disappointed the market; but as I say, it was about like what we had forecast earlier in the year.

Also, during the first half of the year, one of our largest customers, it was announced about a month ago, was in discussions of being acquired by our largest customer in the asphalt side of the business. This has slowed down equipment purchases by that customer, as you might expect.

As McKamy said, our gross margins increased about 500 basis points from over first quarter, and about 180 basis points over the second quarter of last year.

Our parts sales continued to grow, increasing about 20% year to date. We have added more salespeople, particularly in the asphalt and the mobile areas, to continue to grow this business, both our parts and our competitors' parts.

During the first half of the year, we have put a lot of emphasis in new product development. We continue to do research to improve and enhance our existing products.

Looking forward to the third quarter, Neal Ferry and I have just completed -- along with McKamy on some of the visits -- visiting 10 of our 13 companies since quarter end. We will complete our visits this week.

I guess, just briefly, what we hear is backlogs are good. All of the companies are continuing to focus on margin improvement. All have very positive outlooks, with the exception -- or, I would say, however, the asphalt and mobile group are a little more concerned about energy prices, asphalt prices, and asphalt shortages.

As I mentioned, one of our larger customers in the asphalt area is in the process of negotiating to be acquired by another company, and that causes a disruption in their purchases. We believe after that is over that you will see more capital expenditures in those two companies.

The other real positive we find is international business is good and continues to grow. Our underground businesses were profitable and are continuing to grow. We are seeing, particularly in the big end of these businesses, the pipeline are being planned and started all over the world. There seems to be a positive long-term outlook for these businesses.

Our challenges, as I look forward, basically is controlling expenses. Healthcare for the half is up about 10% to 20%. Energy prices affect us in a number of areas. We have intentionally added more salespeople, both for parts and new equipment.

We have added more service people to make sure we continue to be the leader in servicing this equipment. But this increases travel expenses; and we find that hotels, airlines, fuel, everything is increasing as a byproduct of energy increases.

We have also had a number of increases year-over-year related to Sarbanes-Oxley or internal control cost. We have expanded our internal audit staff, and that again adds more to our overhead areas.

Inflation in component prices continues to be a concern. We continue to see increases in those areas and trying to make sure we stay out in front in our pricing.

On the positive side, the federal highway funds as set forth in [SAFETEA] will increase approximately 10% next year. Both the House and the Senate committees have approved about a $3.5 billion increase in funding there.

As I said earlier, I think with our larger customer in the asphalt acquiring our second largest customer, that will stabilize and be positive as we go forward this year.

The other thing we see is a continuing increase in the demand for recycled equipment. With higher AC prices, the higher the virgin cost, the more valuable to recycle. And we see a tremendous upsurge or interest in both the states and the federal government in trying to expand the use of more recycled material.

Our four expansions that we have had of our facilities are on target. We have moved into one of them. The other three will start operating in the third quarter, and we believe this will give us a considerable increase in our capacity in those four companies, which is needed at this time.

As McKamy mentioned, our balance sheet is strong. We have a number of opportunities available to put our money to work in these -- our cash to work that we have available.

As we reach a period every time this year, I might say things tend to slow down because our customers are all working in the summertime. It is difficult to analyze whether this turndown -- we see a little turndown always this time of the year; and we always wonder, is this seasonal, or is it a long-term trend?

The counteracting forces of higher interest rates and higher energy costs are pitted against the increasing need to improve our infrastructure, which makes it more difficult to see which one of these is going to win out. Obviously, there is getting to be more money, more emphasis on infrastructure spending. But as higher interest rates do up, that tends to slow down certain commercial segments of the business.

Based on our backlog and our strong inquiry level, however, we are cautiously optimistic about the rest of the year. We would be glad to any answer any questions anyone has.

(OPERATOR INSTRUCTIONS) Arnold Ursaner with CJS Securities.

Obviously, in the body of your press release you spoke to some certain negative events occurring at the end of the quarter beyond your control. If I heard you right, I think the quantification on those is about 10 or $11 million of revenue.

That's correct.

When I went through the various margin performance you had and go through the math, the sum of those would only be about $0.03 a share in the quarter. Again, I could walk through the entire math; but is that sort of the magnitude of what you think the hit was from these items?

No, it would be more like $0.11 a share. If you take $10 million and you take 24.5% margin, you add our SG&A to it, you are up to around 39%. So you are looking pretax at like $3.5 million. So you know, many of you have you heard me say, rising water covers (inaudible).

As I say, I will double-check my math. Thank you. The second item I have is you have a very strong backlog. I think we're sort of minimizing the backlog you have at this time of the year, up 38%. One question I have very specifically is you have two companies in the process of perhaps merging. Approximately what percent of your backlog might be tied to those two companies?

Well, neither one of -- there is not a lot tied to either one of them. Both of those companies buy generally in the 20 to $30 million worth of equipment a year from us. The one of them that is being sold probably is less than half that this year.

So it's -- obviously, when you're going to sell you are not going to spend as much money; so that has had a negative effect on us. I would have to say that is not necessarily a quarter effect. It is more of the last six months.

Okay.

I might comment a couple of other things. If you take the $10 million that we had at quarter end, and you take that off of our increase in backlog, and say you had of shipped it, if we had got that recognized in the second quarter, our sales or revenues would have been up 20% and our backlog would have been up about 20%.

So it is a pretty steady growth rate, I guess is what I am saying. It is not quite as lumpy as it looks like.

I think the number was 62% growth in international.

It was for the quarter. For the six months it's about 43%.

What is driving this unusual strength?

I think, generally, I guess it has been different countries. We had a couple of asphalt plants that went to Australia; you end up with that. We are getting more components.

The smaller plants that CEI builds are going into South America, South Africa, some of those smaller Third World countries. We have shipped partial plants to Europe. We got orders right now for partial plants in Europe and in China.

As energy prices go up, we do have the equipment that [towards] the asphalt plants and the milling machines and things like that, that really benefit from higher energy prices. I guess if I had to look at it, that drives it as much as anything.

The other big item is our trenchers and drills worldwide. About half of their business is international. As the energy prices go up, there's more pipelines, there's a lot more of that type of business going on.

Okay, I will jump back in queue. Thank you.

Robert McCarthy with Robert W. Baird.

It may not be the most important line you reported, but I just have to ask you about this. I'm sort of struck by, Don, you mentioned you had a couple large drills that didn't happen in the quarter. Yet you put up a nearly 8% operating margin in the underground group. It sounds to me like if I just to do some back of the envelope math that you might have had a shot at close to 10% in that business.

Yes, it has come back pretty strong. The utilities side is still a struggle. It is not -- it is okay, but it is not great. But the big trenchers, the big drills, that market is really -- we have somewhat got a capacity problem in the big drill end of it.

So can I infer from that that in the backlog that you have in that business, even though it is, again, relatively small, that you have more high-margin business, like the bigger machines?

Yes, yes.

I'm sort of struck, Don, by if I back out the increase in the international business, if I have done my math correctly, your North American business or U.S. business -- basically flat in the quarter.

That is about right, Rob. You know, these higher energy prices have -- it's particularly in the asphalt segment, is the one that has struggled the most. They are about level with last year.

But if I took parts out and I took some of the other out, they would probably be down a little bit. That's some of it got to do with this acquisition; and some of it is the fact that with energy prices going up like they have, it has got people watching what is going on pretty close.

Sure, but you say that that would be true of both the mobile business and the plant business?

Yes, if you really look at it, asphalt really covers both of those. They both are very dependent on the asphalt business.

Yes, right. So you did see some growth in your aggregates business. Can you talk about constraints there?

Then I was wondering if you could tie that to -- I have not asked you this before; I don't know if you guys have commented before. Can you speak to what the revenue impact on a combined basis of the capacity expansions might be worth? On a full-year basis, not next quarter or anything.

Right, I guess, first to answer your first question, there is a real change in the trend in the aggregate business in all of our companies, in that typically in the past most of your roads and most of your everything is built from virgin materials. As the price of the virgin materials go up and the shortages of new aggregate, transportation problems, and all of that, that makes recycle a lot more valuable.

The equipment that we are building, a lot that is the growing side of the aggregate business, are the track-mounted smaller crushers that, typically when you open a rock quarry, you've got 80 million tons of reserves or some large number of reserves before you move in. When you move in on a demolition site, where they have torn a building down, you might have 1,000 tons of reserves. So you've got to have a very portable unit. But you can go in there and make good base material out of it. So we are seeing a real shift to more and more recycling.

Europe today, half of the aggregate in Europe comes from recycled products. America is not as old a country, so we are just, in certain portions of the United States, we are just getting to that point.

So that is really the growth, is in that smaller, relatively speaking, track-mounted machines that will go into these demolition sites and crush and turn it into something that is usable.

Likewise, more and more emphasis on milling machines, and milling the road, and leveling it, and then replacing it, and then converting that back to mix. So as the prices of energy goes up, you see a major shift towards recycled products.

Right, okay. The question about the capacity expansion?

The capacity, I guess, most of our capacity has been strictly to add these products, Rob. I guess to answer your question, my real quick guess -- and I have not analyzed this -- but I'd guess that we have the added the ability to typically, if you take our plant property, and equipment, it's about 20% of our capital employed. So, typically, I would say, we have added enough capacity to increase it about 60 to $80 million in volume.

Very good. Okay, thanks. That's helpful, Don. I will get back in line.

Jack Kasprzak with BB&T Capital Markets.

The 60 to $80 million you just mentioned on capacity expansions, I'm sorry, what was that referring to?

Well, how much -- I think, Rob asked, what would be the volume that we could build out of that additional capacity on an annualized basis where we have added on to Kolberg-Pioneer, Astec Mobile Screens, Astec, and Roadtec. That is about the additional volume that we could get out of that addition. That is kind of my quick guess, Jack.

I think I know the answer to this, but since I have the opportunity to ask I will. The $10 million or so of revenue that could have been recognized in the quarter, do you think you will recognize it in the third quarter?

Sure.

Yes, I think there is no question. Part of it -- most of it has been already recognized. But it seems to be right at the end of the quarter where we go ballistic here.

But as I said, I think to put everything in reality, if we would have recognized that in the second quarter, our revenues would have been up 20% and our backlog would have been up 20%. So it is kind of that type of growth.

Right, okay. Then you just talked about this a little bit, but I was going to ask about the aggregate segment, which had a 19% increase in revenue in the quarter. Pretty strong.

Aside from the smaller crushers that maybe are related to more recycling activity, what else do you see going on, specifically on the aggregate side? Are you seeing the bigger companies continuing to invest in their capacity? What kind of look-through can we take, if any, from you business on the aggregate side?

I guess the one thing, we made a concentrated effort about two to three years ago to increase our international sales in the aggregate side. A lot of the increases, if I had to look at both, the most increase has been in the underground and in the aggregate side in international business. So we have got more international business in the aggregate side, number one.

Number two, to answer your question on the other, we do see the domestic producers still upgrading their facilities and adding to their facilities. The problem that they have got, I guess, in the U.S. is it just takes forever. One guy told me he should have filed for the permit when he was in high school.

So it doesn't appear to be getting any easier.

No.

Then on the issue of higher asphalt costs, which of course are through the roof, and there are states of course delaying I guess some projects -- although the overall awards seem really strong as of this point in time. Cement prices and concrete prices are up too.

But are you seeing any [swit] changeover from asphalt to concrete, even though the price of both are up? Is it asphalt up enough? Are there enough shortages that make it worthwhile now to shift more toward concrete?

Jack, it's a combination of things. If you look at asphalt, a substantial amount of it, in the 80% to 90% of the asphalt produced, is going for maintenance and rehabilitation. You can't do a 2-inch overlay with concrete or a 2-inch inlay where we mill it out.

So from that standpoint, since so much of the work today is in maintenance and rehabilitation, asphalt really does not have any competition from that standpoint.

If you look at new construction, about $300 a liquid ton is about where the breakover is. Concrete and asphalt get on par when asphalt hits $300 a liquid ton, and we are beyond that now. We are up in the $350 to $360 in many areas.

Again, the offsetting effect of that is we can, as we put in recycle, if you put in 20% recycle, you can reduce your cost 20% just about. So the recycle does help us temper that somewhat.

But on a straight virgin new construction, concrete starts to get more economical right around $300 a ton.

We are seeing concrete being more competitive, and they are very aggressive in their sales program. But we are seeing them on new work being more competitive than in the past. That doesn't bother our aggregate side, but it does bother the asphalt side of it.

Right, great. That's very helpful. Thanks a lot.

Rich Wesolowski with Sidoti & Company.

Don, I'm confused. If you just talk about the domestic sales growth trends in the past three or four quarters, they have been receding. Even if you add that 10 or $11 million to the domestic revenue number, you come up with a high single-digit growth rate, which is below what we have seen previously. Yet if you look at the CapEx trends from the major customer groups, they look pretty good.

I just want to make sure that, recognizing these separate items that we talked about in the call, there is not a shift in market share going on.

No, our market share, as best we can tell, Rich, is going up somewhat. The CapEx of most of the -- probably the customers you are looking at is probably in the aggregate side; and they are spending money in aggregate.

But one of our biggest customers there, which we are very close to, you look at their CapEx and half of it is for acquiring new reserves. They put it as CapEx, but they are acquiring land and they are acquiring additional stone reserves. They are not spending as much on crushing equipment or asphalt equipment as you would think.

I see that trend hopefully changing in the next year. But market share as best we can tell, we have increased our market share in asphalt a little bit in the last year. It is just the market, truthfully, the market is down.

Okay. You spoke again how the component inflation remains a key risk to your business. Can you talk about how your pricing power has changed, if it all, in the past two or three quarters?

We did not get much pushback when steel was going up. We were just behind the curve on it. I think about everyone was. It was very visible, because our customers have built bridges and things like that; they obviously saw it. So a there was not as much resistance.

Smaller components, copper, for example, electric motors have just gone up 12.5%, popped up in the last month. With copper going from $1.60 a pound to $3.60 obviously, we cannot push back a whole lot on that. But they are not as visible on those things; our customers don't see that as often as we do and we begin to get more pushback. But we are continuing to increase prices. We have to.

I would say the other thing is, you see from our margins, I guess our strategy is to continue to just continue with our groups working on taking costs and improving our products, re-looking at how we price them, re-looking at options, things like that, to try to get better margins on our products. So when the downturn does curve, we have got margins to cushion us on that.

Okay, just speaking lastly on the operating margins, your SG&A number has grown a good deal above your rate of sales growth for the past three quarters or so. Is that a trend you expect to continue?

No, we don't expect that to continue. But when I look at that number, we constantly look at it, healthcare is a big item in it; and energy cost is a big in it; and research in R&D. We are spending more on R&D, is a big number in it.

We have intentionally built up our sales forces to kind of take us to the next level. So that it is a big item. Energy affects travel. Hotels have gone up a bunch, I think as travel has increased. So there is a lot of those items that are just, again, byproducts of energy.

Okay, you mentioned the sales force and the service personnel. How many people are you adding versus how many do you plan to add in total?

I think what we are doing, we've got two things going on. We have got a lot of our older soldiers retiring, and we have got a lot of new ones coming in. We try to have a year or so overlap on them.

The other thing, we have increased our sales forces probably 20%. We have increased them more than our revenues have shown, I guess. That is particularly the case in international. It's particularly the case in the underground side of it. It is also in the parts area of the mobile and asphalt side of it.

Rich, I think that is an area where you can't capitalize that cost, but it truly is an investment in the future of the Company. As Don is saying, we've got to make orderly transitions with people and we've got to continue to expand.

Okay, thanks a lot, guys.

Greg Coules with Metropolitan Capital.

I just had a quick question, Don, on -- in the past, and again not asking really for specific answers, because I know you can't give them. But given the state of your balance sheet, and also your plans as you look out for acquisitive expansion of your Company, you have talked about sort of the white side of the business, concrete. I'm just curious if you still feel that that is a possibility, given what you've talked about on the call, that you think that the market still remains robust for cement and concrete.

Because you said, talking about recycling materials versus virgin materials. But as I understand it, that there is some parts of putting in new roads, you know, base material may be good for recycled, versus the top couple inches may not be completely replaceable with recycled material.

So generally just wanted to know how you feel about the state of that business; and if it is still strong that you would still look to perhaps expand into the white side of the business. Thanks.

The things we are looking at is, I guess, to answer your question, yes, we're still looking at that side of the business. Neal and I have looked at a number of acquisitions; unfortunately, buying at the top of the market is not the best time to do it. And we are trying to be -- trying to I guess, use good judgment in what we do here.

But complete concrete plants make a lot of sense for us. From that, we would hope to get into the paving business. We have a courtship going on with a number of different companies. Some of them, on concrete plants, we see the opportunity to do some things that would really differentiate us and improve the product and improve the market.

Anything we look at we like to see if we can add value to it. People talk about synergies, but there's a lot of things we can do in our buying power and our engineering power that can help some of these companies that we have looked at. But yes, we are still looking at that side of the business.

We are also looking at other add-ons that would makes sense that's within our own business here. So we intend to put the money to work before too long.

I got you. Don, can I just ask you? A lot of people are sort of concerned about when they talk about slowing in the second half and going forward, and inflationary issues. But given that you're a veteran in this business, the $286 billion highway program, when -- and no pun intended -- do you actually see the rubber meeting the road? Where the actual expenditures happen, and the actual building happens, where you're going to actually see the equipment on the road in earnest? Do you think that is more we see that '07 and '08?

Yes, '07 and '08 is when they will really spend the money. You know, I'd temper this, though, by saying with inflation with these liquid prices and other things, you can't buy as many tons when the price goes up. Unfortunately, they're not going to get as much out of this highway bill. They will get it out in revenues; but in tons of new material and tons of the pavement and new concrete, with prices going up, it is not -- .

We're going to have to have a user fee. I hesitate to say gas tax; but we're going to have to have an increase in that in the next couple of years. There seems to be a real trend and a real recognition of that. But everybody is talking about we've got to have more money for the roads. We're just getting into gridlock.

Understood, good. Thank you, Don.

Mr. Arnold Ursaner with CJS Securities.

Don, in previous comments, you have indicated your view that you thought you could achieve or exceed previous peak operating margins, which had been 11.7% reached in '98 and '99, by year-end '06.

Given the various changes you are seeing in your customer end demand and other issues, and also given the major capital spending plan that you're going to be wrapping up by the end of this year, do you still view that as a reasonable assumption?

Yes, I think we can still be there. We haven't given up on margin increases. I will be honest with you, I'm a little disappointed in our SG&A area. Again, some of that has been driven by Sarbanes-Oxley and some of it -- surprisingly, a lot of it is this darn energy cost flows through a whole lot of things. But I think we have kind of leveled out in that area.

But I can tell you we are dead focused on continuing to improve our gross margins, and we intend to keep working on that. I would say Neal and I are not satisfied with just achieving what we did before.

We believe we have got a culture trend change here, where that everybody is going to be focusing. Our focus group initiative has really paid off in a lot of the companies. To say all 13 have embraced it the same, I can't say that; but they are beginning to now, as we travel from company to company. We think we've got some more low-hanging fruit there.

Another specific follow-up, if I could. I know you recently have spoken about the pulverized coal burner, which obviously should benefit the higher energy prices continuing to move up. You had I guess tested it in the earlier part of the year. Can you give a status update on -- are you seeing the expected savings you thought you would see? And are we likely to see a broadening of this program?

Yes, the first one is in Colorado now and is just -- really due to some delays is just being installed; but it will probably be running next week. We have got very good results out of it. There is a little -- I guess if there is anything that we see no negatives on it. We see the economic value still being there.

But if you look at gas prices, natural gas prices have dropped down; and we see a lot of our customers switching back to natural gas. Oil is still up, but there is a tremendous disconnect between gas prices and oil. If you take natural gas and you want to buy a gallon's worth of BTUs in natural gas, you could buy it for $0.75 a gallon today versus $2 on diesel fuel for example or $2.25. So there is a real disconnect in energy cost.

Now natural gas is probably going to be back up to $10 or $12 a 1,000; but it's been down in the 550, 560 range, and that is equivalent to about $0.75 a gallon. I told our guys -- plan on these things burning gas and coal, not oil and coal if this disconnect says like it is. But we see that as a good product, and we see it as a growing product.

You were asked before about using cash for possible acquisitions. Could you comment on how you evaluate any potential acquisition versus share repurchase, given the net cash position you are in and your free cash flow characteristics?

What we look at is -- all of our companies, we are earning about 14% return on capital employed after-tax. That is kind of the metrics that we look, in looking at these businesses. We may not be able to achieve that the first year or so with them. But we think generally we're going to think that we could do enough to them where we're will get a plus-14% after-tax return on capital employed as we look at them.

Frankly, at the prices some of them have asked or some have been looking for, that is why we have tended to back off. But we have got a couple that we are looking at as we speak; again, how far we get remains to be seen. But we have got to get a decent return. If we don't, then we're going to be looking at buying stock back.

Well again, at your current prices, I would think that the return on buying back shares is probably fully competitive with potential acquisitions.

Yes and no. It depends on the acquisition.

Okay, thank you.

Robert McCarthy with Robert W. Baird.

I wanted to follow up on costs. But I think probably first I'd just point out there is a lot less risk associated with investing capital to buy your own stock back than it is to go out and buy a company that you have not owned before, right?

Yes.

I wonder if we could explore just a little bit more on the price-cost equation, which of course has been a considerable focus over the last several quarters. First off, I think it would just maybe help me in particular but maybe everybody if you could -- where are you on steel costs relative to where you were last year? You are paying higher prices at this point?

I would say we are about the same, maybe some less. But steel discrete plate prices are up probably 5% over last year. Neal, would you say that is about right?

Yes, that's right. Again, as we look at steel, we're continuing to find other avenues to explore other than discrete plate. We have been able to essentially hold our steel pricing in place with where it was last year.

You guys have been doing a lot of work on trying to aggregate purchasing power. Can you characterize in any fashion where you think you are in that process, maybe in terms of a nine-inning ballgame?

I would say that we continue to find new ways to improve that. Quite honestly I think we are probably at the fourth inning. We continue to see best practices from all of our companies that we are cross-supplying to, all the businesses, that helps.

It is a matter of still discovery and implementation. I think we still have plenty of room to improve on that as Don mentioned earlier.

What makes it quite difficult is with these inflationary prices. If we could have done this -- and it is kind of sad to say it -- but if we had done it when things were stable, we would have probably done a heck of a lot better. It has been more of a price retention that it has been price reduction in a lot of cases.

Right, right.

So we're trying to hold off the increases as much as we are get a savings. So as compared to someone sitting there asleep at the throttle, we have done pretty well. But to say that -- and if we can increase our prices and hold our cost, we will obviously help that margin. But it's been a struggle with these things increasing.

That was going to be my next question, Don. Where do you think you are at this point? Do you think you have been able to get prices up enough cumulatively that you have now caught up with the cost inflation? Or are you still lagging behind?

Neal, you want to --?

Yes, we are still lagging a bit behind. Again, as Don mentioned, it's a daily exercise of understanding where we are at, what we are doing with our prices and our costs. Again, I think we have caught up some, but we continue to find ways to improve. We think there is still plenty of room for improvement there.

Okay, so if I can put words in your mouth -- and correct me if I am wrong -- you guys are generating very attractive gross margin improvement and incremental gross margins, but you are really just doing it with operating leverage and some ongoing headwind from the price-cost relationship.

That is pretty close. The volume certainly helps that a heck of a lot, but staying out in front of the price increases has been difficult.

The other thing we have, whatever product we got, if you get a 12% price increase on something, what is the significant effect of the total piece of equipment? We are constantly rolling up our costs, practically on a monthly basis, on each standard product we have to see what the gross effect is of these various increases.

None of them are as bad as the steel increases were a couple of years ago. But the cumulative, they have really -- we are seeing a lot of inflation.

Okay, all right.

I think, Rob, the main point here to take away, though, is that we are still making that improvement from first quarter to second quarter of those 500 basis points.

That is the point of my question. It seems to me that at some point you will be able to add something to the operating leverage that you are showing now.

I think the best thing, if there is anything in the overall slowdown of the economy -- and we are seeing that with the suppliers; they are not as stretched out on deliveries and things like that as -- when we do see some stuff, some fall-off in prices, that hopefully we will see that margin improve more.

Thanks, guys.

(OPERATOR INSTRUCTIONS) Alex Mitchell with Scopus Asset Management.

I just wanted to ask a more macro question about inflation in general and how it affects the state budgets and projects. You have been -- you have obviously seen a lot of cycles. What would the -- if it is going to affect, if it is going to take away from some of the dollars available for projects, what would be the early signs of that? Would it be cancellations of equipment? Are there any signs that you would see? Cancellations of equipment and -- just comment on that in general.

What we try to watch, Alex, a little ahead of that is the highway lettings, as they call it, where they let the contracts to the customers. The thing we are seeing some, with the sudden increase in prices in asphalt, the estimates that the states have for the work that they are putting out to be built generally are much lower than the bids. In some cases they will not award the contract; and they will have to redo their estimates. That puts somewhat of a slowdown.

However, if the money is there and if the revenue is coming in, they're going to spend it, even though it costs more. It may cause a little delay, as I said, due to their estimates being too low. But generally, the need is there and they will go ahead and spend that.

Probably the telltale sign is when the general economy goes down, sales tax revenues goes down at the state level. You're going to see a pullback. That is more than anything else.

The federal money, that is all brought about by gas tax. But as people stop traveling and as the general economy goes down, you're going to see things slow.

Just commenting on previous cycles, have you seen increases in asphalt and aggregate, maybe in percentage terms, like you have seen recently and not having an effect (inaudible)?

No. If it gets too darn high, it is going to slow it down; there is no question. It -- say how much? I think we are in kind of an unusual situation here, in that there is tremendous amount of needs and there is a pent-up demand. A lot of the roads are getting in terrible shape, and there is a pent-up demand.

But as I said kind of at the end of my remarks, we have tried to weigh that against the higher interest rates and the higher energy cost. The demand is certainly there, but it is going to take -- for it to be sustained, I think you're going to have to see some additional revenues, like an increase in the gas tax. We are all right for another year or so, but for it to sustain, we are going to need some more tax.

Okay, thank you.

Thank you, sir. Mr. Anderson, there are no further questions.

We appreciate your participation on our second-quarter conference call and thank you for your interest today in Astec. As our news release indicates, today's conference call has been recorded. A replay of the conference call will be available through July 31, 2006, and an archived webcast will be available for 90 days. A transcript will be available under the investor relations section of the Astec Industries website within the next seven days. All of that information is contained in the press release sent out earlier today. If there are no further questions, this will conclude our call. Thank you very much.

Thank you. This concludes today's conference call. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.