Astec Industries Inc (ASTE) 2006 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Astec Industries third 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, Jeff. Good morning, and welcome to the Astec Industries conference call for the third quarter of 2006. As Joe mentioned my name is Steve Anderson. 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; Neal Ferry, Senior Vice President and McKamy Hall, Vice President and Chief Financial Officer. In just a moment I will turn the call over to McKamy to discuss and summarize our financial results and then to Don to cover our business operations and 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, assumptions and other factors, some of which are beyond the Company's control. Some of those factors could influence our results and they 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 financials.

Thanks, Steve, and good morning. We appreciate you're joining us. We are very pleased to report on a very good third quarter. I hope each of you have a complete press release with all attachments. The reconciliation sheet, which is the sheet following the financials and is a sheet reconciling net income to net income before unusual items for 2005, which is attached for your convenience. When we get down to the net income in the earnings per share line we would like to reference that. So if you can have it available, that would be helpful.

Net sales are up $22.4 million or 15%. International sales are up 102.1% or $29.6 million, and park sales are up 12.9% or $4.6 million. Attached to the financials is a revenue by segment statement. The asphalt revenue, the asphalt segment revenues are up 28.9% compared to the third quarter of last year. Underground are up 23.7%. Aggregate and mining are up 9.2%, and mobile asphalt paving are up 3.6%. So all segments are up in revenues.

At the gross margin line we are at 23.9%. That is up 160 basis points over third quarter last year. Also on your attached segment information gross margin for the underground group is at 25.4%. Asphalt group at 24.8%, aggregate mining at 24.2% and mobilized asphalt paving at 24.7%. (technical difficulty) at $25.3 million or 14.8% of sales compared to $23.4 million or 15.7% of sales for the prior year.

Let's try to discuss Grapevine and how that fits into the picture. On the reconcilements page you will look at that, you will find that the gain on sales breakdown property last year was 4,736,000. There was also a real estate impairment charge of 726 and a charge-off of prepaid loan fees of 319, which gets the net income before unusual items down from 10.059 to 6.368 million. The 10.026 million compared to the 6.368 million results in a 57.4% increase. And that is what we consider to be the operational income of the company, and that is why we provided the reconcilement sheet last year to point it out and we're providing it again this year to make sure that we can show you the net income excluding unusual items, and so that gives you a good comparison.

That same comparison at the earnings per share line gives you a $0.46 earnings per share compared to 0.16 -- I am sorry -- compared to $0.30. And if you go on down the reconcilement sheet we have taken the $0.47 last year, taken out the unusual items to get down to the $0.30 per share. So if you compare the $0.46 to the $0.30, we are up $0.16 per share for the quarter. I am sure we will have some questions about that later, and I will be more than happy to answer any questions relating to that.

We also next look at backlog, and backlog is up 73.4%. That is the highest third quarter backlog in our history. Within that backlog domestic sales or domestic backlog is up 54.6%, and international backlog is up 104.5%. On your segment backlog at the bottom of the attached [deed] you will find that underground is up 259.1%, and that certainly has been impacted by the large machines and I am sure Don will have comments, and we can add other comments later relating to that.

Mobile asphalt paving is up 104.2%. The asphalt group is 82.7%. Aggregate and mining is 44.7%, and I'm sure Don will comment also that asphalt today has had a lot of positive results since (technical difficulty) late at the end of the quarter. In terms of the balance sheet we have a strong balance sheet. Our (technical difficulty) [.9] on a volume increase of 15%; our days outstanding are at 36.9 days versus 37.1 days last year. Our inventory is up 16.7% on sales increase of 15%. Our turns are 3.48 turns versus 3.54 last year. We basically have no debt. Our capital expenditures for the year are [22.1] million. We have a budget of 28.4 million for this year. Our depreciation is 8.5 million through the third quarter, and our budget for the year to give you a comparison number is 12.4 million.

Normally we would provide a cash flow with the 10-Q filing. I will be glad to answer any questions after Don's comments are made. This concludes my remarks on the financials at this point.

Thank you, McKamy. Don will now discuss the (technical difficulty) third quarter 2006. Don.

Thank you, Steve. As you can see, we feel like we had a very good third quarter. If you exclude the unusual items from last year, we are up about 57%. All segments were profitable. Revenues were up 15%. Our backlog is up 73%, and I might add it has increased significantly since the end of the quarter particularly in the asphalt segment of the business. Our part parts sales continue to grow and is up 16% year-to-date.

Our gross margin as McKamy mentioned, is up 160 basis points over last year third quarter and up 210 basis points year-to-date. Our new coal burner hole for asphalt plants started in the second quarter and is performing flawlessly, in my opinion, have been very pleased with results of that. We have received orders for two more of the coal burners to go in asphalt plants and are developing additional sizes of those for the various sizes of asphalt plant. The new Roadtec stabilizer is performing well. We are also beginning to sell our directional drills into the oil and gas drilling market and are excited about the prospect of using the directional drills in that market.

We have moved in three of our new facilities that we've added, and we will move into the South Dakota facility during the fourth quarter when it is finished. Looking forward to the fourth quarter the completion of the sale of APAC by Ashland to Oldcastle, along with Oldcastle sale of a few of the divisions that they acquired should lead to the stabilization of the market, particularly in the southeastern United States. It has and will continue to improve our sales outlook in these areas as customers proceed to upgrade some of the equipment.

Our backlogs, as we mentioned earlier, are very strong. We continue to focus on our margins. The rate of price increase and component at least is not exceeding our price [increases] and we will see our price increases start to take effect in the fourth and the first quarter if we go forward. Oil prices have moderated somewhat, and asphalt prices are continuing to [soften] somewhat which is very helpful to our customers. States seem to be more amenable to looking at higher percentages of recycle if it is processed properly. We have the best equipment for milling, pressing, screening, reprocessing, recycle back into the mix. We think that will bode well (technical difficulty).

Our international sales continue to grow particularly in the aggregate and underground group. Federal highway spending next year will be up approximately 9%, and we see many states increasing their spending, although that is not universal all the way across the country, but there is more increasing than decreasing. As we look forward on we believe we will meet or perhaps exceed analyst expectations in the seasonally weak fourth quarter. How good the quarter will end up is very dependent on our ability to get our customers to take shipment between Thanksgiving and end of the year. Fourth quarter is always weak, as you know.

We have the backlog and can produce the equipment but the final number will depend on the ability to ship. At this point we feel a lot better than I did at the end of the second quarter. Looking forward to '07 we expect to grow organically about 10%. We continue to look at various acquisition opportunities as they come available and will continue to do that as we find bolt on acquisitions that make sense.

We would be happy to answer any questions that anyone has at this time.

(OPERATOR INSTRUCTIONS) Arnie Ursaner, CJS Securities.

Good morning. I want to try to focus a little bit more on the backlog which is again unprecedented. Normally your clients tend to not order a lot of equipment at this time of the year. Perhaps you can expand a little bit more, Don on why you're seeing this dramatic improvement in backlog. Typically again, customers unless they are concerned about availability would normally wait until January, February period to place orders. What do you see happening that is causing this pretty significant change?

Arnie, I guess just we will be frank with you. We are a little surprised at the magnitude of it. The Astec division is got a huge backlog, and to be honest, it is bigger than it looked like because we have had a tremendous amount of orders roll in the last three weeks. I think there are two or three drivers of this and I think there is some optimism due to the softening of the asphalt prices. Also the APAC Oldcastle acquisition is really I think they have sold off about 3 divisions of APAC. People that have bought these divisions are upgrading equipment. That's part of it. And I would say generally there's still an optimism for the amount of work that is out there. California is letting huge amounts of jobs. We have more orders in California than we've had in five years.

International business has been unusually strong. If you see the numbers, and it has been just a magnitude of different things. Particularly the strongest I guess is in the asphalt and the underground, the underground is driven a lot by energy costs and big pipeline projects around the world. So we've gotten a lot of orders for large [breakers] in the last few months. So it is a combination of a number of things, but the softening of oil prices sure helps a heck of a lot.

To follow up a little bit more on this, in Q2 you had roughly 10 or $11 million in backlog that was due to timing of shipments, and I know some analysts have higher revenue numbers. Where there any deferrals or timing issues that impacted backlog this quarter?

Yes, I would guess that just my estimation of it was probably 8 to 9 million. We had one large crushing plant that was $5 million that was completed, but we could get the paperwork and everything through. We had a number of international shipments. It was not as big as the second quarter, it was probably within $2 million of that. It seems like with the paranoia of Sarbanes-Oxley on revenue recognition and this is probably going to be an ongoing thing I guess as we go forward. That is why I am a little on the fourth quarter, we are going to have a good fourth quarter, but how good it is going to be dependent on getting it out and we got to ship it in order to recognize it.

Don, you mentioned two or three times the backlog if you were able to comment on it now would be much better in asphalt. Can give us a sense for what it might be and also remind us or give us a sense of expected timing on some of these shipments.

Some of them stretch all the way out into March or April of next year. We have the first quarter full in asphalt equipment. So it stretches out. Frankly I wish we could ship a little more in the fourth quarter, but we're going to be loaded in the first quarter.

What sort of incremental backlog have you seen in the last few weeks, sense of that?

I don't know if we can say incremental but probably 50 million above what you see on the backlog in the asphalt group alone. We've seen particularly on asphalt equipment. It's not all new plant. It is a lot of component; a lot of people changing to our double barrels to run more recycle. I guess we've probably got a large number of orders probably 10 to 15 orders for partial plant, the increase amount restock. I'm excited about the -- I gave a talk at the midyear NAPA convention on how to increase recycling. I've been asked to speak between 13 and 15 times between now and March of next year on increasing recycle, and I spoke the last week out of (technical difficulty) DOT and they immediately agreed to change about three jobs to increase the amount of recycle. So we see that as extremely positive but not only for us, but for the whole industry.

Thank you very much.

Jack Kasprzak, BB&T Capital Markets.

Good morning, everyone. There were a couple of things I just wanted to clarify, the line was breaking up a little while you guys were speaking. McKamy, the international backlog, can give us that number again please?

The international backlog is 140.5%, and it is $22.3 million. It is up $22.3 million.

Up, okay. And CapEx for 2006?

2006, I believe is 28 million is what our budget is -- $28.4 million. We have done $23 million of that, John.

Okay. And the SG&A, which you mentioned was $25.3 million, and that is down from Q2 in dollars a couple of million bucks. So just trying to get an idea of what you guys think the run rate there is. I mean should it be closer now to a $25 million level or why would it have been down from the June quarter?

I think that is a very difficult question to answer, Jack. There are so many things that change now related to volume. It is going to vary with the S-Ox expense. It's going to be vary with selling expense; basically our salary and benefit and selling expense and commissions are all up, our accounting fees are up some. I think it is going to run -- Steve and I were talking about this this morning -- I think our goal has been to run at 14. I think we're probably somewhere between 14 and 15 but some of these additional expenses that we have to live with now.

So 14 and 15% somewhere in that range as a percent of sales for the full-year now is more or less the goal?

Jack, I would add a couple of things. In a couple of our segments, a couple of the Companies we built our sales forces up, and the number of people at this point out running the sales that we've got again (technical difficulty) continuing to grow the business. So we probably are out in front a little bit of sales on it. The other thing, the extra expense related with Sarbanes-Oxley is we have had some of that, but that should be leveling. But I think I guess if there is anything that is up we're probably particularly in the sales and marketing area, we may be a little ahead of the volume that we are generating and we did that intentionally particularly in the underground operations to grow the volumes there. And particularly in our international in the aggregate side we built up a pretty good international sales force there.

Okay. That's very helpful. The last, Arnie's question about backlog, you guys went through that but I guess I just was curious, can we assume that the price of oil having come down, is that really what has sparked in such a short period of time this, I guess for lack of a better word, surge in orders, sharp increase in the backlog? Because it is pretty impressive. I mean I know you mentioned [storage] and APAC, Don, and that has sort of been underway but at the margin, is the price of oil coming down really what has made everybody turn around and say, I think I feel better about the situation and I'm going to spend some more money?

I think that is a good -- I think that's a big driver of it, Jack, but I would have to say there is a lot of it from Matthews in Georgia which is one of our big customers bought the Georgia operations of APAC and the South Carolina and eastern North Carolina operations are being sold again to our customers. A lot of these guys have got sufficient funds to upgrade, and Oldcastle particularly is putting a lot of -- will be putting a lot of capital into these operations. And frankly, a part of it is the upgrading of the old APAC operation that has come in, and I would say the rest of it would be to the optimism. But California, truthfully, we have sold very little in California the last four or five years, and all of a sudden they have got a huge program. We've got a couple of very large plants going out there, and again I guess the third aspect is international. We've got a couple of plants going to Australia, one going to Russia, one going to China. There's been quite a bit of that that has come in so it is a combination of all of them.

Okay, great. Thanks a lot.

Rich Wesolowski, Sidoti & Co.

Good morning. Let's say you guys are on target for the 200 basis points of gross margin this year. Can you talk a little bit qualitatively about the avenues for improving upon that number next year and perhaps give a numerical estimates of a range you think you can get to?

We like to see it 25% gross margin or better. It is getting harder to get, but a lot of this is dependent on how much if we get any softening of steel prices. We have created a culture of continuing effort with our focus group of reducing costs and frankly some of the Company's, particular our American Augers operation has done a fantastic job in improving their margin on equipment through really focusing on product, how do we take costs out of them without really affecting the function of them. Some of the other companies have been later in really embracing this approach but I would say right now we're just finishing our last reviews for the quarter of all the companies. I'm excited that they all seem to now have taken this on as really a challenge. So I think we have got opportunity to get another 100 to 150 basis points out of our cost.

That's helpful. Thanks. Can you speak about the pricing in your various products versus the component cost increases that we've been talking about in prior calls?

We, the thing that is extremely difficult for us to keep up with, and one of the things we are requiring all the companies to do is to do what we call cost grow ups on a monthly basis. We see price increases, anything related to copper, we've seen electric motors go up 12%, copper is about triple, and the problem we have is okay, it goes up 12%, what percentage of electric motors are you (technical difficulty). So we have to watch out what effect that has in total on all of our equipment. And in general I think we are seeing it affecting our cost from 2 to 6% depending on what the product is. We are trying to increase our prices along with that, but I would say in general we are probably seeing as much as a 5% price increase as we go forward.

Okay, thank you.

Scott Macke, Robert W. Baird.

Good morning, gentlemen. I just want to clarify that the answer to the last question. You are talking about your costs going up 5% generally speaking on the products?

That is what we are seeing on the high end of it, Scott.

And then if I understand correctly then with the price increases you have in the pipe, then you would expect those price increases to exceed that 5% cost increase that you are incurring?

Scott, probably we expect it to more equal it. We put them in, and we are usually again, with backlog generally four to six months behind them. And so what we are trying to get a little ahead of the curve probably on average, we are about equal to what they are, and I guess the big question is do price increases moderate on our supplier. And we are -- we don't know the answer to that question.

So if I understand correctly then you are now to parity, and plus you've got more price in the backlog. So if input costs stabilize and the price increase will offset or more than offset the cost increases you are incurring?

That is what we believe at this point. Steel is a good question. I think the steel companies are being very, very careful to try to adjust their capacity so there is not a softening in the price and that the real opportunity there comes from how much imported steel starts to flow into the country, and then you may see a softening. But we have not seen the softening we expected in steel price.

I see. You talked and I believe if I heard correctly expecting something in the ballpark 10% organic growth in 2007.

That is correct.

I was wondering if maybe you could break that down by segment or at least sort of rank by segment where you think the greatest growth opportunities are.

I think it is fairly level across the company. I think there is potentially more growth in the underground because we have less marketshare in that part of it. There's also a tremendous amount of interest around the world for large pipeline projects. We still watch and wait for the Alaskan line and there's another one in Canada, that is a big line that we are watching, those would all be real bonuses. There is a lot of lines going on in Russia and the Middle East, different places. So their potential probably for increase is better than the other areas. The asphalt side of the business, as I said, we've had a tremendous in rush of orders there, and that seems to be particularly in the plant side of the business seems to be very strong at this point. But I would have to say asphalt and underground are the two with the greatest opportunity right now.

Okay, and then as I look at the revenue in the quarter it looks like the increase in international revenue is more than the increase in -- well it essentially it implies a year-over-year decline in domestic revenue; am I my getting my math correct?

We are down slightly domestically. Typically third quarter domestically is slow, and international is higher because again, we are in the middle of the season in the Northern Hemisphere, you are in the middle of the winter in the southern hemisphere. So people buy and put in international equipment in the southern part of the Hemisphere more than in the summer months. What would be our summer months and then they will be working during our winter.

And then if I understand correctly the increase in the backlog, though, it sounds like it obviously that increase in the international side but also has improved significantly domestically.

Yes. Most of the increase in the backlog that is above what we are presenting here is domestic.

And one last question. I just want to congratulate you. As far back as our quarterly model goes the highest operating margin, the underground segment. Do you have, would you expect the underground segment to generate an operating profit in the fourth quarter?

Yes, I expect them to be -- they've done a great job, particularly on our directional drills and taking costs out of them. And what is exciting you can't even see any difference in the product other than it looks better. And they've done a -- the rest of the story is additional volume certainly they have, too. The margins there have improved significantly, and they have really been one of the best companies for us embracing the focus group approach and are continuing to work on that. We are also very excited there in the possibility we have the first one of our rigs, one of our customers had used one of our rigs for drilling oil and gas. We've got another one sold in that field, and I think there is a lot of potential for that way where they will go down for shallow oil and shallow gas and then turn horizontal. The fellow went down 275 feet and then turned horizontal for 2200 feet, the amount of gas he is getting out is about ten times what you would normally get out of a well. So there is a lot of potential it looks like for using our rigs for another application.

What exactly -- what product is he using when he's doing that?

It's one of our big directional drills.

How much those typically sell for?

About $1 million.

Thanks a lot, appreciate it.

Alex Mitchell, Scopus Asset Management.

I wanted to ask just APAC whether you had a sense as to whether they have been underinvesting and how old is their fleet and how much upgrade will be coming with the new owners?

Well, they had approximately 250 asphalt plants and them and Oldcastle were the two biggest in the business. Ashland generally gave them enough money to buy maybe two or three asphalt plants a year. The last two or three years they have not replaced a lot; particularly the last 18 months to two years. They have been, I guess their plan was to divest of it and have not really put a lot of capital back in it. So there is a real opportunity to see some upgrades in that over the next few years. Oldcastle I guess if you look at both of their budgets they probably spend three to four times on capital on what [I spend] at APAC. Oldcastle has been good for reinvesting in their business.

Okay, and finally when oil prices were going up too much the last couple quarters, where you seeing cancellations related to that?

No, we didn't see cancellations but what you saw, Alex, is a -- when prices go up and they've got fixed contracts with no escalators in them, the thing that does happen is it just takes the profit right out of the job for them. (technical difficulty) they can't spend on cap. We did see in a number of cases like in Florida (technical difficulty) and we have seen a lot of cases where states will have estimates of the cost of a job and then if the bid price the way it feeds the estimate, they won't let the job. And we did see quite a bit of that occurring. With the softening of asphalt prices you will see ramping up (technical difficulty) and you'll probably see counties start again let more work that they had delayed.

Okay. Thank you very much.

John Emerich, Ironworks Capital.

I missed the CapEx number for I guess you have it given for the year and year-to-date; I guess I am just trying to get the Q4 number, 3Q and Q4 CapEx.

For the year we are looking at around 28 to $29 million, and we spent 23, I think.

And next year a similar type number or do you have large projects you need to step up on?

We really are not there yet. I anticipate it to be slightly below that. Well, it is (technical difficulty)

Okay.

We have no brick-and-mortar projects for next year. We do have a lot of machinery that we do need to add or replace.

And lastly, can you clarify the comment about another 100, 150 basis points that you want to take out of cost. That is a goal over what period of time, and where do you think it comes from?

I guess that's a goal over the next 18 months. Where it will come from is basically as we do better jobs in our purchasing by grouping together all the companies in (technical difficulty) volume purchasing. Secondly in our fabrication techniques, some of this quite a bit of this new equipment could take cost out of it. That is why we are buying it. But there is a lot of fabrication equipment as we tend to continue to modernize that. And then the third area is just the concentration on our initiatives to count the pieces, take pieces out of the product, do a better job in designing and taking cost out of product.

So sometime June quarter of '08, not maybe a linear progression but by that time our run rate of operating margins you think is 100 to 150 basis points better than it is today?

I think it is assuming that our volume continues to grow, too. I mean you get a downturn in volume and things get tough to hang on to that. (multiple speakers) But assuming we could regrow at 10% next year, yes, your assumption is correct.

Super. Thank you.

[John Riley], [ACK Asset Partners]

Good quarter. Good morning, gentlemen. Question related to the Oldcastle and the rate of underinvestment they have had for a number of years. While I know it is tough, it is unprecedented to me that you have Q1 booked solid right now. What could the duration of their demand be for asphalt plants?

Let me make sure we understand; it was not Oldcastle that was underinvesting. It was Ashland that was underinvesting in APAC. Oldcastle is pretty deliberate in theirs. I don't know that I can give you a quantitative answer on that, but historically ten years ago Ashland was buying from 5 to 10 plants a year when Charlie Potts was, became President of APAC, I think they had probably ten or twelve continuous drum type plants. But the time he left they had really over 100, 120 of them; had a huge number of hot storage bins. So there was a lot of modernization in the '90s that APAC and Ashland went through. In the last few years they have really slowed that down, and I guess it is not uncommon you can vary your expenditures as you need to, but they really the last 18 months, it was pretty obvious that they intended to divest of it, and they pretty well shut down most capital. I know last year in September their year ended in September, and they usually -- we got a lot of orders in the fourth quarter, our fiscal fourth quarter from them, and they just practically ordered nothing. They pretty well just shut them down. So there is a pretty good (technical difficulty) that will have to be done. I think Oldcastle has got to see what they've got for [Pruit] of the orders we've got right now; it is very few of them that really came from the APAC side. Most of them is from existing Oldcastle divisions that as far as those two companies are concerned. But we have got quite a few orders from the people who bought the division (technical difficulty) Oldcastle (technical difficulty).

And it just seems to me given the timing of the year and such a strong outlook that you have early in 2007, what are your plans for possibly expanding capacity or getting a more favorable pricing environment for this segment?

John, we got the ability to work seven days a week and geary it up, and that's what we would do. We don't think we need anymore bricks-and-mortar in these companies right now. We will replace some equipment (technical difficulty) machinery but as far as an expanding square footage we don't need to do that.

That's great. And one last question you mention the acquisition environment. Is it more favorable now than it was six months ago given the kind of the correction and equity prices in the segment, and where do you think that you will have the ability to make acquisitions in the back half of this year and 2007?

Well, we've done more looking than we have buying obviously. Some of the prices are awful (technical difficulty) right now. There are some that we are seriously talking to a couple that would be I think in a reasonable range that we can make work. We will have more to say about that later.

And have you looked at the opportunity for stock buybacks versus acquisitions?

We've tried to weigh that. Our Board had a special meeting just for that question, and right now they said let's go through what (technical difficulty) company with some additional acquisitions first. If we strike out on that, well then we will relook, we will look at stock buyback.

Great. And then just one last question related to organic growth first time I've ever really heard you forecast for 2007. To quantify, are you talking about unit growth or unit and pricing on a revenue growth?

John, we're talking about unit and pricing. We said before we think week we can organically grow over the next (technical difficulty) that period we will have 15 to 20% growth we're going to have some flat. There's going to be a down year somewhere along here. But I think compounded I think you can count on us doing about a 10% growth, and our goal is to be at twice where we were last year, five years out that being about two-thirds coming from organic and about one third of acquisition. And to do that we got to grow at 10% a year.

That sounds great. Thank you very much, guys.

Arnie Ursaner, CJS Securities.

One quick question regarding the backlog again. Do you sense or can you perhaps even attempt to quantify customers placing orders to try to beat price increases which you are obviously talking about?

There is a little of that, Arnie. There is no question about it. Some of it is all just make sure they get in for next year ready to go to work next year. They've got big projects to work on, so it is influenced a little by that. And if I had to put a number on it, probably one-third of it is driven (technical difficulty)

We're going through a pretty significant capital spending plan this year, almost double your normal maintenance CapEx. You had some facility additions that were sizable at Roadtec, KPI and in Astec Screens. Are these pretty much up and running, and can you perhaps quantify if it had any impact on margin last quarter? And several of these are obviously driven not just by physical capacity additions, but by improving productivity, where you're moving to continuous flow. As these ramp up, what sort of impact could this have on margin going forward?

I think that is part of the estimate that I was giving of 100 to 150 basis points. At Roadtec if they did anything they hurt the margins in the third quarter because they are moving, and they are still not totally moved as we speak. They are moved out of parts of the old building but they are rebuilding the old building now and moving the milling machines over into that area. So they are doing that. (technical difficulty) they were moving at the end of the quarter. So they are in their building now and pretty well ramped up. But I would have to say it basically it did more harm to the third quarter than helped. Going forward it should be helpful. I think you will see a good difference. They have had Kolberg Pioneer, they will be moving during the fourth quarter. The way they are moving in I don't think -- it will hurt them but it won't hurt that much I wouldn't think.

And going back to your sales force you had indicated last quarter to avoid any sales disruption as you had expanded your sales force you had some overlap to make sure that in fact this process went smoothly. Is that still continuing, or was there some margin impact from that in Q3?

I don't think there was any margin impact. Where it impacts in your SG&A, you add salesmen. You've got to train them, and some of these companies that are like underground nearly being a startup, we had to gamble there of putting a good sales force into place. We had to train them. We had a (technical difficulty) football team. You've got to get them working together and you are really adding them ahead of what the sales are. And I think we are beginning to see those guys perform at this point.

I know you guys are not finalize with '07 CapEx budgets but normal maintenance still runs something in the 12 to 14, and I think you clearly indicated you don't have any major facility expansions planned. Is that correct?

That is correct, but we are looking at a lot of new machinery. But it will be less than this year is all I can tell you at this point.

Okay. Thank you.

[Jim Schwartz], [Harvey Partners]

In the underground group you surprise me on the revenue and gross and operating margins. Could you talk about the drivers in the underground group and kind of what you're seeing there for 2007?

Again, our optimism with that is in the big machines, a lot of international pipeline products going in. Some domestic pipeline projects. Again, oil and gas, there's a lot of gas here in the U.S., but the oil lines most of your oil is in remote -- the easy to get oil has been got, and a lot of it is in very remote areas and you got to have big lines to get it from there to where it needs to go. And so it is our optimism there is the big machines.

Okay. Thanks, guys.

Showing no further questions in queue; do you have any closing comments?

Thank you, Joe. We appreciate your participation on our third 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 October 30, 2006, an archived webcast will be available for 90 days. We will have a transcript available under the Investor Relations section of our website within the next five business days and all that information is contained in the news release sent out earlier today. If there are no further questions, we will conclude our call. Thank you.

Thank you. This concludes today's teleconference. Thank you for your participation.