Astec Industries Inc (ASTE) 2007 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to Astec Industries' second-quarter 2007 results. 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 for Astec Industries. Thank you, Mr. Anderson, you may begin.

Okay, thank you, Ryan. Good morning of welcome to the Astec Industries' conference call for the second quarter of 2007. As Ryan mentioned, my name is Steve Anderson, and I'm Director of Investor Relations and Corporate Secretary. Also on today's call are Dr. J. Don Brock, our Chairman and Chief Executive Officer, and McKamy Hall, Vice President and Chief Financial Officer.

In just a moment, I will turn the call over to McKamy to summarize our financial results, and then to Don to discuss our business environment and overall operations. In the way of disclosures, I will note that this morning our conference may contain forward-looking statements that relate to the future performance of the Company, and 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 are resulted and 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 ever to McKamy to summarize our financial results. McKamy?

Thanks, Steve. We appreciate you joining us this morning. We are pleased to report to you on an outstanding quarter. This quarter had the highest net sales, net income, and earnings per share in the history of the Company. With sales and gross margins improvement, the Company was able to generate a 49.2% improvement in net income. We look forward to a second half of 2007 beginning with a backlog of $228.9 million.

The net sales for the quarter are $226.4 million compared to $191.3 million in 2006, for an increase of 18.3%. Our international sales are $69.8 million versus $53.5 million, for an increase of 30.5%. We had outstanding increases in Australia, Canada, Central America, China, Japan, and Korea. Our domestic sales are $156.6 million versus $137.7 million, for a 13.7% increase. Our parts sales are at $45 million versus $42 million, for a 7.2% increase. Sales increased in all segments.

If we look at the Company from a standpoint of a pie shape, the Aggregate generated 39.3% of the pie and the Asphalt segment generated 29.4% of the pie. Mobile generated 17.8% of the pie, and Underground generated 13.5% of the pie. We did have sales increases in all segments. I would just remind you that attached to our press release is a breakdown by segment with a lot of information relating to each segment.

The consolidated gross profit was at $58.9 million compared to $47.4 million for an increase of 24.3%. The gross profit increased 120 basis points for the quarter to 26.0% versus a prior year of 24.8%, and up from the prior quarter -- which I know many of you are interested in -- of 25.2%. We will continue our efforts for additional improvement in the upcoming quarters.

In terms of the ranking of the segments by gross profit, the Asphalt Group was number one; Mobile was number two; Aggregate & Mining number three; and Underground number four.

In terms of the SG&A, as most of you are aware, we have a goal of trying to hold SG&A to 14%. We were at 13.4% for this quarter versus 14.2% last year.

Income from operations were at $28.6 million versus $20.2 million for a 41.6% increase. Net income or earnings per share -- earnings per share is at $0.83 versus $0.56 last year; that is a 48.2% increase in earnings per share.

Our backlog was at a very strong $228.9 million versus $121.7 million for an 88.1% increase. Again, I would remind you that the backlog by segment is attached for your convenience.

We have a very strong balance sheet. We are positioned financially to handle continuing growing volume and also to consider other opportunities. In relation to other opportunities, I would just comment that we plan to finalize the acquisition of Peterson on July 31.

Our days outstanding are at 33.1 days versus 38.1 days last year. Our inventory turns are at 3.5 turns versus 3.5 turns last year.

We owe nothing on our credit facility. We do actually have some letters of credit outstanding against that facility, but we owe nothing.

Our capital expenditures for the quarter are $6.7 million. The projected capital expenditures for the year are $28 million. The projected depreciation for the year is $15 million. Year-to-date, we are at about $14.5 million.

Our cash flow will be attached to the 10-Q when that is filed. As you can note from the balance sheet, we have a lot of cash available. That will be used partially for the concluding of the acquisition.

This concludes my prepared remarks, and we will be certainly glad to answer any questions later in the call. We do appreciate your interest in Astec as we strive to improve profitability and return for the shareholders.

All right, thank you, McKamy. Dr. Don Brock will now discuss Astec's business operations for the second quarter of 2007. Don?

Thank you, Steve. As can be seen from our second quarter, this was one of the best quarters we have had in history. All operations were profitable.

Revenues were up 18.3% from $191 million to $226 million. Our net income was up 49.2%, from $12.4 million to $18.5 million. Earnings per share, as McKamy had said, is up from $0.56 to $0.83.

For the first half, we were up about 17.2% in revenues from $397 million to $442 million. Our net income is up 45.5% from $23.3 million to $33.8 million. Our earnings per share increased from $1.06 for the first half to $1.52, or up 43%.

Our gross margins reached 26% for the quarter, up 126 basis -- 120 basis points. For the six months, were up 100 basis points to 25.6%. Our capital employed for the consolidated Company reached 17.5%, our return on capital employed.

International sales year-to-date reached $119 million versus $88 million last year. Our parts sales are up slightly, but not as much as the other businesses, but are up from $87 million to $88 million or up 1%.

Looking forward into the third quarter, we start the third quarter with a very strong backlog of $229 million versus $122 million last year, or up 88%. We normally see a slowdown in domestic sales in the second half of the year, as many of you know. But, however, our domestic sales continue to be okay; but international sales is very strong. International is helped by the weak dollar, by growing economies in a number of countries, especially those with minerals and with oil.

Many of our products also support the sustainability economy and help to reduce greenhouse emissions. Our Peterson acquisition puts us in the middle of the green waste business where equipment is used to prepare wood fuel to firewood driven energy plants. It converts what I would call a waste product to a usable product.

We recently introduced our new Double Barrel Green System, which is a modification of our existing double barrel asphalt plant that allows the complete elimination of smoke and smell of the asphalt. It allows us to use 11% less fuel while producing 11% more product. It also allows us to increase the amount of recycle while staying with a standard grade of asphalt.

Normally, states require that you use a softer asphalt to compensate for the harder asphalt in the recycle. Since the process that we are using does not harden the asphalt, we are able to go to much higher percentages of recycle without having to increase the price by changing the grade of asphalt.

Our track-mounted crushers are certainly helping to convert waste into usable products, which conserves our resources while reducing energy costs.

We are also excited that we have now put out two directional drills being used to drill domestic oil at very shallow levels. These units allow us to reduce the disruption of the environment while we reach more oil than previously been available.

While oil prices in the industry is high, it is about the same as it was last year. The states have seemed to adjust a lot to this by adjusting their estimates for the cost it takes of building jobs, so they are continuing to let work. Recycling has offset some of these cost increases, and we see a continuing gain in that as we increase the percentage of recycle that we are now using.

I guess in summary, we are very pleased with the second quarter. Our backlog is strong. We expect to finish '07 with a great year. Be glad to answer any questions that you would have at this time.

Ryan, if you would open the line for questions, we would appreciate it.

(OPERATOR INSTRUCTIONS) Arnold Ursaner with CJS Securities.

Congratulations on a very good quarter. I'm trying to understand kind of looking forward. You had a comment in your prepared remarks regarding international, where you see international demand steadily increasing and you're enthused, it sounds, about the third and fourth quarter of this year. What I'm trying to determine is -- your operating margin is getting back to your historic high levels.

What I'm trying to figure out is normally your margin declines or slows down in the back half of the year, when you work down your domestic business and go into more of a pause. With international now increasing as a percent of your business, how do you think that would impact your margins in the back half of this year? Can you in fact, in your view, exceed prior peak operating margin levels?

I guess the first way I would answer the questions is, obviously, we have got the volume; we have the absorptions; and that certainly helps our cost and helps our margins. It looks like we are going to have strong volume in the second half. We continue to receive a lot of international business. Last week, just this prior week, we had an additional $15 million just in the Asphalt Group and it is all international.

We think it will help us. We -- from a full-year standpoint, I guess our best year was '99 with 25.4; and we are tracking ahead of that and I think we will sustain that. A lot of our initiatives that we have done over the last couple of years to improve the margins also are kicking in; and we continue to execute on those. So we are very optimistic that we will meet or exceed that for the full year.

Well, that leads to my next question. You basically are only about halfway through your projected capital expenditures for this year, and most of it, as I understand it, is for productivity improvement -- machines within your factories, not for buildings per se.

How do you think that will -- again, are you incurring costs now for these machines? Are they likely to be disruptive in the back half of the year?

Most of the new machine tools that we are putting in will probably be -- two of the big ones have -- I guess one of the big ones has been installed at Roadtec. One at Underground is being delivered, and one at Telsmith is being delivered. These are very large machine tools.

I think you will not see the benefit of those until probably the fourth quarter we will start seeing benefit from them. From a disruption standpoint, where they are being placed it does not disrupt the manufacturing. We are changing at Telsmith more to continuous flow type manufacturing. Where it will be positioned is not -- doesn't think take anything else out of service.

Final question from me if you would. Could you comment specifically on California and what you are seeing there with their pretty substantial increases in expenditures for highway?

We have more business there than we have had in years, particularly in the asphalt side of it. Unfortunately, we have a lot of business but we are just now delivering the first plants out there. There is generally a longer lag time on getting permits in California than anywhere else in the country. As a result, we have got an excellent backlog for there.

We see a continuing growth out there and a lot of interest in continuing to add more equipment. They have been so down for so long, a lot of them really need to upgrade the equipment.

The other thing, with some of the new initiatives we have had with -- particularly in the asphalt side, we are real optimistic we could really -- out there, we had to put fume systems on the plants. The new lower-temperature asphalt that eliminates the smoke and the smell will help the cost of the plants significantly and help us to be -- give us a real additional competitive advantage.

We have got to go through proving that to the environmental authorities out there. But we are pretty optimistic that is going to be a great market for us.

Thank you. Look forward to seeing you at our conference. Thank you.

Jack Kasprzak with BB&T.

Thanks. Good morning, everyone. I wanted to ask some questions about Peterson. Where will it be classified in your segment reporting? Or will it be a new segment?

Right now, Jack, it will just be in the Other category. If we make other acquisitions in that area, we will probably create a Green Waste category, as we call it.

Okay. What is the depreciation component of that, that comes with that acquisition, if you know, yet?

They have historically spent $2 million a year, somewhere like that. They are about a 60 to $70 million business. They -- we are spending and I had a deal with Neil Peterson if --.

This acquisition has taken about a year. Neil is a great guy, but it was like giving up one of his children to sell the business. He is staying with us, and he just -- he has got a great comfort level with Astec. JCI is in the same town, and they know how we treat subsidiary companies.

But we had agreed to go ahead and spend $3 million on metalworking equipment, and about half of that is already in. The rest of it, the major, largest expenditure will be arriving in August. So we will be spending $3 million in '07 out there.

Okay. Okay. Just if you could address housing, what percentage of your business do you think, Don, was or is related to any kind of housing development activity?

Jack, it is indirectly related, but not on a big scale. Obviously, you use aggregate to make concrete and you use aggregate to make asphalt. The asphalt side of it, it affects the -- what I would call the FOB sales or the sales to other, smaller people that -- our customers will produce asphalt and sell to guys that put in driveways. Our customers put in subdivisions for development.

So I would have to say percentagewise it probably affects 5%, on average, of our customers' business. In the Peterson thing, it probably affected 20% of theirs. Theirs is helped by hurricanes, and certainly hurt by homebuilding going down.

Their business, generally where you are doing land clearing to put in houses or a housing development, you can't burn today. One of the drivers of our looking at that type of business was -- many of our customers own these machines today and said, you know, you guys need to get into that business. Because our customers do do some land clearing, some utilities, when they are putting in residential building.

But if I had to weigh it, it's from 5%, 5% to 10% in what I would call our existing businesses; and probably 20% for Peterson.

Okay, great. Thanks a lot, Don.

Robert McCarthy with Robert W. Baird.

Good morning, guys. I would likewise extend my compliments on your profitability in the quarter. Very impressive. Can you give us an update on what you are seeing in terms of --? You have talked before about seeing signs, early signs, of maybe a little reacceleration in costs this year. Could you talk about what you are seeing there?

Also talk about where you feel you are today and going forward in terms of your own price increases, relative to what you are seeing with costs.

Rob, what we are seeing now is probably in the 3.5% to 5% increases -- modest compared to what we have seen in the past. We see our price increases at about the same level, from 3.5% to 4.5%, somewhere like that.

You're talking about a run rate so far this year, Don, or going forward?

That is correct. Run rate this year. We have had a lot of initiatives to try to do a better job at corporate buying and group buying. As I just completed about three weeks of quarterly reviews and that is one of my hot buttons.

In general, we think we have got about as many reductions or savings in our purchasing as we have seen increases in cost. But it is a little hard to quantify, quite frankly. But I guess we see a moderation of inflation somewhat right now as compared to what we have seen the last three years, Rob.

By extension, no barrier to you achieving your gross margin targets, as long as it stays contained where it is?

No. And we continue -- and I guess the thing we have tried to develop a culture in the last two or three years -- to continue to focus on better manufacturing of our product through these focus groups, through doing a better job in buying. So we think we have got a little bit more room to work on the margins.

I think there is still -- we have still got some room. To say we have been through every product and done a great job, we have probably been through 40% of them, frankly.

Okay. That provides a good transition for me to ask you about Neal's departure. Quite a surprise. He of course has been heavily involved in getting a lot of this cultural change you're talking about off the ground. Could you tell us what you can about his departure and what effect you think it has?

Well, he had some personal situations and he has not been able to sell his house in Omaha, and had some other personal problems that -- just unfortunate that didn't work out.

The initiatives that we have had, the focus groups, I have driven myself. The thing Neal brought, two great assets and did a lot of good for the Company while he was here, he was really a safety champion coming from Kiewit. He has allowed us to really reduce our safety incidences, and which really affects your product liability costs.

He also was a great help in the purchasing area which was his main background. That, we have got to make sure we continue that initiative. But that is the major area.

He was still functioning primarily as a Group Vice President over the Aggregate. The other Group Vice Presidents were still reporting to me, so the hole we leave is in that one area, in the Group Vice President and in the purchasing area.

Okay, thanks, Don. Appreciate that update. If I could ask you two kind of smaller technical -- well, not technical -- questions about current business trends.

One, just to continue the discussion about the Asphalt Group, you guys have been hiring there. My understanding is you are sold out into next year; certainly reflected in the backlog number at the end of the quarter. Traditionally, this business has been a first-half weighted business. That proportion of full-year sales has been declining.

Last year I think about 55 percentage of the revenue in Asphalt Group was in the first half of the year. Given the level of activity there, any reason why we wouldn't expect that proportion, the first-half weighting, to continue to climb this year?

Rob, generally what you are saying is exactly right. I guess the thing that Ben Brock, my son, that runs that division, was showing me Saturday -- kind of map of where all the sales were going. It is kind of like a East-to-West tsunami.

The first half of the year, bulk of their business was in the Eastern part of the United States. Third quarter, it kind of moves West toward California and international. Fourth quarter is extremely strong international.

We sold a lot of plants into Australia this year. It is kind of an unusual situation. California is being strong. Eastern Canada strong. We got an order -- he did -- recently, for four plants in Colombia. They got one going to Vietnam, one going to Korea. It is all over. Russia.

So it is more the slanting more than the last half of the year will be very strong international.

Very good. I will let somebody else go now.

(OPERATOR INSTRUCTIONS) Rich Wesolowski with Sidoti & Company.

Thanks, good morning. Don, last year, oil was in the mid-70s, cited as a big roadblock for DOT project letting, for your business. Now we are back there and it doesn't seem to be having much of an effect on, of course, the results or also the outlook.

Is the difference there a factor of the oil having less of an effect on the DOTs? Or more of a factor of you guys having some products that benefit from energy and -- offsetting that?

It is a combination of both of those, Rich. But I guess the first thing I would say -- as far as letting the jobs or when a highway department puts out contracts, they have a state estimate of what the cost is going to be. If you exceed that by generally 10%, unless there is unusual situations, they will not go ahead and award the job.

They base those estimates -- you think it would be more scientific -- but they base it on prior bids. Last year, with the sudden relatively quick ramp-up in oil prices, they were getting bids that were way above their estimates and, as a result, not awarding the jobs.

They have raised those estimates, so that eliminates the awarding of the job, that problem. However, the money doesn't go as far, as you can imagine, so there's not as many tons.

But the other offsetting thing we are seeing, and probably one of the drivers of our business, our plants are probably, without question, the most suited for running high percentages of recycle. We did a demonstration project of this warm asphalt or the lower-temperature asphalt here in Chattanooga and ran 50% recycle. You couldn't see -- it didn't smoke, it didn't smell. It turned out great. And ours is the only plant that will do that. It is the only one that will run high recycle without burning more fuel.

I'm on the expert task group for the Federal Highway Administration to increase the amount of recycle in the country. It is primarily highway department people. I say I'm the only commoner on it.

But we see a great -- the barrier to increasing the amount of recycle has really dropped down. They're very interested in doing that because they can extend the resources. It is environmentally the right thing to do today. You add to it the getting rid of the smoke and the smell, we see a real great advantage.

By increasing the amount of recycle, it reduces the effect of the oil prices, I guess, is what I'm trying to lead up to. In other words if you are running 50%, that cost is half what it was.

So basically, so long as the DOTs anticipate the inflation, it is not going to have a great effect on the business, but it's not going to be disruptive?

That is correct. I mean, they have adjusted their estimates to take care of that. The second thing, they are increasing the amount of recycle; that drives the cost down.

Okay. Separately, when is the earliest you can deliver a new asphalt plant if it was ordered today?

Oh, man. We are out into February or March. But you know the problem; it is a constant juggling act because we have various delays due to permitting. We have got one going to California that's been -- permitting has been going on for two years. If you looked at our schedule, it is out into February or March.

Okay, so considering that the sales growth leading the way, high utilization, are you considering expanding the capacity in that line, much as you did in many of the other products last year?

What Ben is doing in that area is they are trying to build up the night shifts up, to be closer or more equal to the day shifts. We are adding capacity, adding employees. But we are trying to get more manhours through the plant within a 24-hour period without adding bricks and mortar.

Our people who have been through downturns before are just very cautious on adding more bricks and mortar. So I think in all the companies we are trying to get -- beef up the night shifts to run more hours per day through the plants.

Okay. Finally, just can you comment on the composition of the sales within the asphalt plant segment? Are you selling an atypically high proportion of the components as opposed to a complete plant?

In the first half of the year it was probably a pretty good high percentage people changing just the double barrel drum to -- from another type of plant to the double barrel. It was more of a -- more of that.

The back half is more complete plants. We also build some soil remediation plants. One of the large ones we sold last week was going to Australia for cleaning up a site in Sydney. It is a 5 to $6 million plant. We sell a couple of those a year. We put one in London last year. Internationally, we see more effort in the cleanup side of it, where it has kind of tapered off in the US.

Okay, thanks a lot.

Jim Schwartz with Harvey Partners.

Okay, Don. I had a quick one, just on the double barreled plant. If you could talk a little bit more about that and what percent of backlog it is.

Also, just as far as the international exposure goes, I know Australia has been pretty strong. Where else are you seeing nice growth internationally? Thanks.

Answer the back half of your question first. Probably California is kind of international, sometimes. It is different in their requirements from the rest of the United States environmentally and other. But California is strong. Australia has been strong.

Pretty well with the weak dollar we are seeing places we have not seen before. As I said earlier, Colombia, Barbados, Vietnam, Vietnam, Korea. Western Canada is very strong with the improvements of their infrastructure. So more in those markets.

We did put -- Russia is very strong for us in a lot of areas there. It depends on the product mix and most of what I was telling you there was primarily asphalt.

Back to the question on the double barrel, the exciting thing I guess about that. We have come up with a new process that actually you -- simple as it sounds -- spray 1% water into the liquid asphalt, which foams it and gives it workability at a temperature below where it will smoke or where you can smell it.

Typically you run the asphalt mix at 300 to 330 degrees. If you produce it below 285, you eliminate boiling of any light oils out of it, which is where your smoke and your smell is coming from, from a fume standpoint, which you see on the pavers or out on the road or from the trucks.

By mixing at 270, in that range, we are able to have workability all the way down to the boiling point of water. It kind of creates a shaving cream looking type foam, but it gives you the workability at a lower temperature.

That has created an enormous amount of -- some people referred to as green asphalt. But it has created an enormous amount of excitement in the industry. I see of as a great vehicle to bring along the -- increase the amount of recycle.

We had four state highway departments here when we had the demo project; and one of them in particular is extremely conservative. They went back and called, said they will up the amount of recycle from 10% to 30% if we use this process. So we see a lot of opportunities going forward to kind of change the environmental effect of asphalt in to a real positive -- on a real positive note.

That's great. Do you have patents around the process?

We have patents pending on it, yes.

Great, thanks.

Robert McCarthy with Robert W. Baird.

Don, I just wanted to follow up and ask you about what you are seeing in US highway market in a little bit different perspective. Caterpillar yesterday talked about weak contracting activity in the first half of this year, and their expectations that I think really related to the timing of federal disbursements. Thought the contracting activity would likely pick up in the second half of the year. Is that the way you guys are seeing it?

That is kind of the way we are seeing it, Rob. Cat obviously is -- we are a pimple compared to them. But our business is basically -- the asphalt generally is used more maintenance and rehabilitation overlays, that type of thing, which that is done pretty well on a continuing basis. There is more money spent for maintaining the road than there is building new ones. So we are affected a little different than they are.

But we see a continuing increase. There is obviously that thing hanging out there, as we are -- the spending level is about equal or a little -- it is about to exceed what they have taken in now. There is a need for more funding in that area.

We believe that will come. We believe the next highway bill you will see some substantial increases. But right now, with a lot of big private jobs, the private toll roads, a lot of state spending, I guess we see a little -- as I have said in the past, there's pockets of prosperity and there's pockets of recession in highway spending. It varies all over the country. In general the Midwest is the slowest and the West is the strongest right now. Of course Texas, Florida, some of the -- and Georgia -- doesn't seem to be affected by -- seem to be pretty recession proof.

Okay. Then, I also wanted to ask you specifically about the Mobile business. You had a somewhat uncharacteristic revenue decline there in the second quarter compared with the first. To what extent does that have something to do with timing of deliveries, because of your direct model? Or is it a leading indicator of further weakness in the market? Have anything to do with the implementation of lean manufacturing principles there?

I guess to answer your question, I think the difference is pretty simple, Rob. We went into -- we finished the year going into the second quarter with some inventory. We finished the end of the first quarter with zero inventory.

Roadtec, basically what they sold in the second quarter, they built. Every bit of it. It is probably just coming strictly from that. We don't see a lot of softening there. In fact, they are doing great.

So it was the first quarter that was unusual, not the second.

That's correct.

Thank you, Don.

Thank you. Seeing as we have no further questions in the queue, I would like to turn the call back to your host, Mr. Anderson.

Okay, thank you, Ryan. We appreciate your participation on our second-quarter conference call and thank you for your interest in Astec today. As our news release indicates, today's conference call has been recorded. A replay of the conference call will be available through July 30, 2007, and an archived webcast will be available for 90 days. We will have a transcript available under the investor relations section of the Astec Industries website within the next seven days. All of that information is contained in the news release that was sent out earlier today.

If there are no further questions, this will conclude our call. Thank you very much.

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation.