Astec Industries Inc (ASTE) 2007 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Astec Industries third-quarter 2007 results. (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 third-quarter 2007 results. Thank you, Mr. Anderson, you may now begin.

Thank you, LaTonia. Good morning and welcome to the Astec Industries conference call for the third quarter of 2007. As LaTonia mentioned, my name is Steve Anderson, and I am the Corporate Secretary and Director of Investor Relations for the Company. Also on today's call are Dr. J. Don Brock, our Chairman and Chief Executive Officer, and McKamy Hall, Vice President and Chief Financial Officer. In just a moment, I will turn the call over to McKamy to summarize our financial results and then to Don to discuss our operations and business 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, 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 that could influence our results are highlighted in today's financial news release and others are contained in our Annual Report and our quarterly and annual filings with the SEC. As usual, we urge you to familiarize yourself with those factors.

At this point, I will turn the call over to McKamy Hall to summarize the financial results. McKamy?

Thanks, Steve. We appreciate your joining us this morning. We are pleased to report to you on a good third quarter. Overall sales growth is 20.2%, and 34.5% growth in international sales. We generated a 16% improvement in net income compared to the third quarter of 2006. We look forward to the fourth quarter of 2007, beginning with a backlog of $239.9 million.

For the quarter, our sales were $206.2 million for an increase of 20.2%. International sales were $74.5 million for an increase of the 34.5%. The large increases came in Australia, Africa, West Indies, Canada, Middle East, South America and Asia. Domestic sales were $131.7 million versus $116.1 million for a 13.4% increase. Our [perk] sales were $49.2 million versus $40.2 million for a 22.4% increase.

In terms of the pie, where the sales came from, aggregate was 39.7%, asphalt 25.1%, mobile 16.2%, underground 13.7%. The sales by segment and other information relating to the segment as well as the backlog is attached to your press release.

The consolidated gross profit was up $7.6 million or 18.5%. The gross profit percentage decreased slightly for the third quarter. First-time manufacturing costs for new equipment and new models was the primary reason for the reduced margin and is not a situation that we expect to repeat in the upcoming quarter.

The two primary factors in the increase in SG&A were, number one, the cost of the Supplemental Executive Retirement Plan as a result of the large increase in the value of our stock, and also the addition of the acquisition of Peterson. The income from operations was up 5.1%. The income by segment is attached to your press release also, and all segments had increases.

The net income is $11.6 million versus $10 million. The earnings per share was $0.51 versus prior year of $0.46 or a 10.9% increase in the earnings per share. As I mentioned earlier, the backlog is attached, and the backlog is at $239.9 million versus prior year of $131.2 million, for an increase of $108.7 million or 82.9%. And that's broken down for you by segment, attached to your press release.

The balance sheet is very strong. Our days outstanding are at 37.4 versus 36.9, so basically no change. And the inventory is 3.5 turns, both current year and prior year. Year-to-date capital expenditures are $30.6 million. Year-to-date depreciation and amortization is $10.8 million. The cash flow will be attached to the 10-Q filing.

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

Thank you, McKamy. Dr. Don Brock will now discuss Astec's business operations for the third quarter of 2007. Don?

Thank you, Steve. As McKamy mentioned, our revenues were up 20.3% and our income was up 15.2%. Our gross margin slipped a little for the quarter, from 23.9% to 23.5%. This was caused by an inordinate number of new products that we introduced, which is typical -- our first introduction of products are at either no margin or very little margin.

One of our big expenses was the introduction of the Green System at Astec for the asphalt plants, where we have been able to lower the mixing temperature, eliminating the smoke and the smell of the asphalt. This reduces the fuel consumption and ups the amount of recycle. Since the introduction in the middle of June, we have sold over 50 of these systems. But at this point, those that we put out were at very low or no margins or at a loss.

We also had introduced a model of larger track-mounted crushers for the aggregate industry, which was little or no margin. We had an introduction of a new wheel machine at the underground operation. Our oil drilling rigs, we also introduced two new models of road tech machines, two models of small drills, two models of small trenchers, and as I traveled to visit the companies, we had an inordinate kind of change in the product mix, selling more of our lower-margin products and less of the higher margins. We don't see that, as McKamy said, as lasting from quarter to quarter.

We also had an abnormal number of shipments that were delayed, caused particularly the international shipments [by LAX], of receiving the final letters of credit. We had some delays in manufacturing due to component problems of getting engines in on certain models of our machines. And we had a delay caused by permitting on a number of the asphalt plants or delays on the West Coast.

The good news is our backlog was up 83% to $240 million, and we see the fourth quarter being better than normal. For the nine months, our revenues were up $100 million, up 18.2%. Our income was up 35%. And our gross margin year to date is up from 24.4% to 25.0%.

Looking forward to the fourth quarter, we find it difficult as usual to predict the fourth quarter due to the holidays and delays in very year-end shipments, but we certainly expect fourth quarter to be substantially better than fourth quarter of last year. As we've tried to look forward and try to keep everything in perspective, we have decided to start giving annual guidance on the Company, and we expect this year to end with earnings of somewhere in the $2.40 to $2.50 a share range. This is versus $1.81 for last year, or up approximately 33%. Our industry is weathering high oil prices much better than it has done in the past. We believe this is due to the higher amounts of recycle that is being used, and today, there seems to be a disconnect between the prices of oil and the prices of asphalt in most areas of the country.

Our Green Initiative, which will allow our customers, as I mentioned earlier, to reduce fuel costs, be easier to permit because of the elimination of smoke and smell and particularly to increase recycle -- in essence, we can reduce the carbon footprint caused by the asphalt plant. We believe this will bode well as we go forward in the future, and the acceptance in the market is no less than a green tsunami.

We have now sold five oil drilling rigs and believe our technology could revolutionize the shallow surface drilling in this area. A large number of our products today are going to the energy industry, with our drills, our Heatec heaters, wood chippers, trenchers and a number of other products, and we believes this offsets slowdowns that may occur in the infrastructure side of it. Our international business is as strong as it has ever been, particularly helped by the weak dollar and our increase in our sales forces in the international side of it.

In summary, we believe we had a good quarter, although the earnings were a little disappointing. As compared to our previous increases in earnings, we expect to end with a good year. Our backlog is excellent. However, we are running into capacity problems in certain products, particularly asphalt plants. We see some softening in the East and Midwest part of the country, but this is more than offset by improvements in the infrastructure spending in the West, and particularly in the international market, which is very strong and gives us confidence that we will continue to grow our business in 2008.

At this time, we would be glad to answer any questions you would have.

(Operator Instructions). Arnie Ursaner, CJS Securities.

The first question I have is you obviously have a number of unusual expense items on the SG&A line. Can you perhaps help all of us by quantifying a couple of the key ones that you highlighted that impacted the results?

I think probably the one thing that is frustrating to us, Arnie, is in this Supplementary Retirement Plan that we have for all of our senior officers, our Board started this years ago, where we put in Astec stock in that. It's a noncash expense, but it affected us nearly $2 million this quarter because of the increase in the price of our stock. So it is a noncash deal. As the stock goes back down, unfortunately -- it's just the opposite. If stock goes down, it will come back in as earnings. As it goes up, it takes away from our earnings. And again, it's one of these FASB regulations that we don't quite understand.

Other items, I guess, McKamy, you've got --

The main thing other than that or the main quantity was just the acquisition of Peterson and their normal SG&A for the month.

In other words, Peterson came in for the first time, Arnie.

Can you also quantify -- you mentioned, obviously, you lost some money, I guess, on initial shipments of your Double Barrel. Can you quantify how that -- what the financial impact on gross margin might have been from that?

It was not -- it was actually the attachment that goes on the Double Barrel, and we have sold over 50 of these systems. We've probably got 20 of them shipped now, and all of them have been at a loss. It's mainly -- the main expenses is the expense of getting it in place and the R&D related to it. We will make money on future systems. But it was in the million-dollar range for this quarter. Larger trenchers hit us. The track-mounted crushers hit us. A number of them -- there's probably a total of $4.5 million for the quarter that was hit by all of these new products in margin.

That's very helpful. Your backlog in asphalt is obviously stretching quite a bit. You mentioned some manufacturing issues or capacity issues. How far out does that backlog go at this point?

We're out into May of next year. One of the frustrations a little bit with it, a lot of the West Coast orders that we have for out there are kind of unpredictable on when they will ship. And we constantly are rearranging the production of those plants because the permits seem to get delayed. We have a couple of orders that stretch out nearly a year right now that anticipated shipping as early as March of this past -- of '07 that haven't shipped yet. And they have to select the plant, they choose the manufacturer and then they have to go through all of the permitting processes, and it's just very difficult for the customer to predict exactly when they will take it. We have some ways of -- some of those, we can escalate prices on them. Some of them we can't.

A final question for McKamy, if I can. You have previously spoken about a percent of revenue that you are targeting for SG&A, and you were well above that range this quarter. Are you still comfortable with the range you have had previously?

That's an annual range, Arnie. And typically, the third quarter is one of our slower quarters, and typically it does as a percentage of sales hit a higher level there.

But you are still comparable with the annual (multiple speakers) on SG&A?

That's still -- I think that's still our goal.

That goal is different than being comfortable, though.

Well, we've typically, our range has been around 14%, and SG&A as a percent of sales, and we believe we will stay in that range.

Jack Kasprzak, BB&T Capital Markets.

The Peterson acquisition -- can you tell us what it added to sales in the quarter?

Just a minute, I think --

I believe it was $11 million.

About $11 million is I think what it amounted to.

And Don, you mentioned in your comments that the East and the Midwest, there was some softness there. Was that -- where is that? Is that across the board or is it more in nonres or --

What we see, Jack, probably particularly in New England, we see some of the quarries with big stockpiles shutting down earlier this year. We see more in the Midwest and Illinois, some of those areas, Wisconsin, some of those as slowing down quite a bit. As I travel around to visit on our quarterly reviews, I guess the consensus is the Southeast is okay; from Texas on West is pretty darn good. Even though homebuilding is down in Arizona and some of those, seems like the highway work has somewhat picked up. Commercial work is still good in about all of the areas, but it seems like the New England out through the Midwest seems to be the slowest or the ones that are slowing down a little more.

That's primarily in quarries, right?

Yes, primarily in the crushing and even in asphalt also.

Okay. And then, on the strong side, you mentioned the West, and of particular interest I think is California. Are you seeing, with the bonding money, I guess, in place now, are you seeing a continued ramp there in projects and interest among customers?

Yes, we've got California, Arizona, Nevada -- in Las Vegas, the building side of it is certainly -- homebuilding has been hit hard in Las Vegas, but still there's a lot of commercial work in that area. Western Canada is very strong. And then international is very strong, Jack. That's the areas -- we just see it kind of like a wave going westward.

Okay. And you mentioned shallow surface drilling that you say you have some products that could, quote, revolutionize drilling in this area, I think is what you said. If not, please correct me. But I wonder if you could elaborate on that. I mean, how new -- I guess that's a relatively new opportunity. How big of a market do you see for that?

Well, if I listen to the customer who bought the first five, he says we better gear up for about $500 million in that area, but we hadn't quite knocked the walls down yet.

What he tells me, and I guess -- and we've talked to a number of customers in that area, but typically if you go down to 5000 feet on a regular oil drilling rig, you're depending on the weight of the steel, of your drilling steel, to push your cutter down. We have the ability with our rigs to push and pull. They were horizontal rigs that we've turned up vertically. And he says at 5000 feet, we are equal. He says at 3000, we're better. At 1000 feet, there's nobody even in the market. If you read about oil, there's probably about 43% of it that's less than 3000 feet and we pass by a huge amount of it.

He drilled wells in Indiana, drilled one, went down 379 feet. His conventional rig, if he could have done it, he said he would've gone at about 10 feet a minute. He was going at 100 feet a minute. After he got down at 379 feet, he turned and went horizontally 4800 feet. And then he pulled back out and he made a wagon-wheel pattern, and he said you generally, with oil, you go into pay zones or vertical -- vertical rig, personally got some oil wells up in -- or some interest in oil wells in West Virginia, and they get about three pay zones and 6500 feet. He got 108 pay zones.

And so there's quite a bit of excitement that there's a lot of shallow oil in this country that we pass by, and this is a great opportunity. The other thing on our rigs is that HDD or horizontal directional drilling is a relatively new market, less than 15 years old. Technology is new. We've got -- what we do is very automated, where you automatically load the drill stem into position. You have automatic wrenches that decouple and couple the drill stem in place. Again, we go much faster. We've got a little -- probably a little better sensor technology in the drill stem, of exactly where you are.

So we could get extremely excited about it. I'm trying to be cautious on it. Our guys at American Augers want to triple the size of the plant. We're kind of being a little more cautious until we get a whole bunch of orders before we do that.

We had 11 customers there last time.

Yes, we had 11 customers in to see the first vertical rig, or second.

Robert McCarthy, Robert W. Baird.

I wanted to make sure I got that last point correct on the drill rig opportunity of one customer and 10 or 11 more prospects at this point.

Yes, the first customer has bought five. He bought the first rig, which was a slant rig. It could go up to 70 -- run at about 70 degrees, Rob. The second one was a vertical rig, and he has bought three more of the vertical rigs. We had 11 different customers. He has been a little reluctant to let anybody go in and look at it. So we made an agreement on the last rigs that we can go take customers in to see what he's doing, which I don't blame him.

I wanted to get a couple of clarifications on numbers that we've already heard. On the parts comparison, McKamy, did Peterson contribute something to that?

I'm sure. Just let me help -- get the number for you. But it's --

I'm also going to ask about year-to-date stock compensation expense.

Year-to-date Supplemental Executive Retirement Plan?

Yes.

We'll get -- give us just a second.

Rob, on the parts, where the $137 million in Peterson contributed about $3.8 million of that, and that's versus $127 million last year. So on existing companies, it would be about $133 million versus $127 million.

I guess my biggest question, or at least to me it is, what exactly is going on in the asphalt group, where it's pretty remarkable that your revenue run rate went from around $65 million, $66 million a quarter, and I understand the seasonality of the business, but you of course have been hiring people, adding hours, and I believe are basically sold out well into next spring.

But I'm trying to understand how the quarter could have been so disappointing, and one of the things that sort of obviously suggests itself is that you had some revenue ready to go late in the quarter and for delays of one reason didn't go. Now, you have talked about some of the causes, and have in the past of course as well. But I'm wondering, did you have additional business? You had several plants that have been delayed and waiting for an opportunity to ship. Did you have more new issues like that in the quarter?

Rob, I would say, to answer your question, yes, we had a number of them there. We're bumping capacity in the asphalt side of it right now, both at Astec and at Heatec. Heatec has been hurt -- I shouldn't say hurt -- been helped a whole lot by oil and gas stuff. A lot of their heaters are going to that. But Astec is strictly asphalt plants, a number of international plants. Most of the delays on the asphalt plants are permitting delays, though. The letter of credit delays is more in the crushing side of it. We -- I think -- I guess why we've got such a strong backlog is still a little bit a puzzle to us. Our market share is excellent, but we're surprised at the backlogs that we've got, quite frankly, and they continue to keep coming. The prospects are very good for the asphalt. But we are hitting a whole lot stronger proportional amount of international business.

If you have been able to ship what you think you should have shipped in the quarter, what kind of a hit did you take on the top line in the asphalt group?

In total, we were -- now, in the whole Company, I looked at -- we were probably $12 million to $13 million short of -- that was on the bubble. How much of that was in asphalt, I guess a third of it or something, wouldn't you, McKamy?

I'm looking right now.

McKamy is looking right now. So we've had a couple of plants that have been sitting here for just about nearly all year.

Yes, we've talked about that, of course. While he's looking that up, can I infer from this that you will break the traditional or that you should break the traditional seasonal pattern in this segment in the fourth quarter? I mean, even in years when business is really soft, you almost always ship a little more in the September quarter than the December quarter, if nothing else because of the holidays. But do you have enough accumulated product out in the yard that you probably go up in the fourth quarter?

If we can get it shipped in December, if people will take it. If people will take it, our fourth quarter could be equal to the third quarter. But what makes us a tad reluctant and a little more cautious is you've got so many darn holidays, and people tend to stop in December. But if we can get them shipped and if people take what they say they are going to take, and I've asked everybody to be conservative because it's very important what we tell you on the fourth quarter, but fourth could be close to the -- very close to what we've got in the third. But that end of month, being in December, is kind of hard to predict.

I understand. McKamy, you come up with the numbers?

I've rounded off some of them here, but actually, the aggregate is more like $8.6 million of the $12 million. And the heater side is about $2.5 million. So then it's scattered beyond that. But that gives you about $11.1 million of the $12 million.

And the asphalt side, there were plants that they just didn't even put on the list as on the bubble, because they, again, the customer delayed them a month ahead of time.

Rich Wesolowski, Sidoti & Company.

Don, you mentioned you shipped only 20 of the 50 asphalt -- green asphalt amendments that you sold, and the --

We've got orders for about 55 of them right now.

Okay. Well, the question is, can you give us some kind of yardstick about how the new products that you've already sold but not shipped will roll out and the effect on margins in the coming quarters?

These next 30 -- I mean, we're talking a $50,000 to $70,000 addition. So it's not a big item. What it will do, though, is the change in the way we're doing it, Rich, will sell milling machines, it will sell crushers, it will sell screening units and it will sell more of our double barrels. It is a long-range effect, but all of these that are sold today -- I shouldn't say all of them, but most of them are retrofits. There are -- practically every new plant we're selling, they're selling them with this attachment on them.

So a lot of it has been retrofits. A lot of it has been -- we've had seven different demonstration projects where the customer bought it. You guys need to come over and help us. We're going to have all of our customers in, and last week we had one in South Carolina. They had between 80 and 100 people in there from all over that area and produced 50% recycle at 270 degrees with no smoke, no smell, and it looked like just brand-new mix. So it's an exciting process.

Was Peterson profitable in the quarter?

They were about breakeven, just about breakeven. And this is their normal down quarter. And as we told you, I think, when we bought it, they are in a low ebb right now. We expect it to start to improve in the fourth quarter.

Can you discuss general margin expectations for that?

No, not at this point.

All right. How about a comment on the expected margins in your new work versus what you were seeing a year ago?

We have been -- we continue to see price increases. While the dollar has been very helpful in sales, it's been costly in imported components, and it's also been costly a little bit particularly with our Canadian operation. They've been hit with about $0.5 million in exchange rates. But we expect to either hold the margins for the rest of the year that we've got, or hopefully -- we have initiatives to continue to work on improving them. But right now, we're starting to increase prices, but that won't come into effect until probably the first quarter. So that's why the fourth quarter is kind of a wild card on margins. But I think we will end up the year close to where we are now.

Okay. On the asphalt capacity issue that we've been speaking about, you mentioned in a prior call extending the work shifts. Has that already been executed, and are you at all considering bricks-and-mortar investment?

We are not planning on any more bricks and mortar. We're adding machinery to it, and we're growing the night shifts. And they're doing it as rapidly as they can to bring people in and train them, and that takes some time. But yes, to answer your question, we're proceeding on the same path we were.

Okay. And finally, your general economic comments kind of fly in the face of some of the other industrials that we have heard recently, especially Caterpillar on Friday. Is it the focus of your end markets that makes a difference or is it something else?

Our end markets are different from Caterpillar's. We're not affected as much by homebuilding. Our customers obviously do sell some of their products into homebuilding, but we're not affected as much by that as they are. We probably touch the energy business more than we used to. And we've got strong market shares in each of the areas we've got, and our new products offer some differentiation. So I guess we're cautiously optimistic that we will continue to grow, not probably at the pace that we have in the last -- as I've said all along, there's usually a flat or down year. But we don't see next year yet being down.

One comment I might just throw in, Rich -- if you haven't gone to the trouble to calculate it, and I probably should have pointed it out, our international sales year to date are 29.9% of our sales, and the backlog is very strong, and it's going to be very strong for the fourth quarter.

Rob Young, Wm Smith & Co.

Last quarter it was mentioned that there was some lag time related to the California permitting process. Can you update us on that?

Continues to be. We have shipped some plants into California, but we still have some delayed, and we have obtained some additional orders since then. But it's just a -- it's a long process for California particularly, getting -- they require so many different types of permits, and you can eventually get them, but it's just hard to predict exactly the ship dates.

Okay, and then what are your long- and short-term targets for having an international presence? I know you spoke that Q4 is supposed to increase. But what is your long-term anticipation for that?

We would like to see it in the 35% range. Fourth quarter will exceed that, but year to date certainly won't. We will probably be north of 30% year to date, but we believe we can get to where 35% of our business is international, somewhere between 35% and 40%.

And then how is the patent process proceeding with the Double Barrel Green System?

The application is waiting on the patent office, obviously. It's in, and so it's just a matter of that. It's an exciting process. So I've got to leave here in a little bit and go to Texas and give a talk on it. I gave one in Hawaii about two weeks ago, and we shouldn't be talking about putting water in. A guy came up to me and said we were to call it dihydrogen oxide instead of water. So that's our new term for what we put into the asphalt.

Okay, and then just one last quick one. There's a few countries that you mentioned last quarter as excellent growth opportunities. Are there any others that you are developing relationships with other than those?

I don't know, we're scattering our equipment all over the world, I guess. We've seen a lot of growth in the asphalt side of it. Of course, Australia has been good. Canada is obviously a close neighbor and very strong market for us. We have put some of our soil remediation plants in England. We've got one going to Australia and one going to Singapore. A number of different locations -- South America is very strong right now for us on smaller plants. Middle East obviously is a strong market.

And then, I apologize, I just have one more. With the backlog contracts, how much flexibility is there as far as looking at increased commodity prices, and how does that affect it?

We see prices, at least as I have visited the companies the last two or three weeks, the general tendency is they are seeing a considerable moderation in price increases, you know, more in the 3% range, in most cases. We're getting some savings, but we're seeing a little slowdown in price increases.

David Mills, [JBM] Capital Management.

As far as the shipments of products that have either no gross margin or very low gross margins, is that as a percentage of your revenue stream? Is that more or less peaked out this quarter or do we have more to look forward to?

David, typically, when we build a new model or a new version of a machine, we may end up from zero to 10% gross margin on them, and then it generally takes four or five of those models, of those particular machines before we get it up to our normal level. Part of it is just product development. We can't build many of these machines and put them on the backyard and run them. So you have a higher warranty expense when you have it, which flows into your gross margins. So we just had an inordinate number of them kind of hit this quarter, which was unusual. But to answer your question, generally after we've built four or five of them, and in most cases that's about where we are, so we won't see as much of an effect in the fourth quarter as we did in the third.

I think, David, too, you need to always keep in mind, it's an investment in the future. And that's what (multiple speakers)

I'm not criticizing it. I'm just trying to get a feel as to the gross margin progress over the next four or five quarters. Do you see first half of '08 being better in terms of this or about the same?

We continue to push product development, and normally, it's not as much of an effect as you would see in this quarter. It seemed like just a bunch of them hit at the same time. But I see it to be less next year than it is this year.

Okay. And the other question I had is, you've talk about a disconnect between oil and asphalt prices. Do you have a sense of why that is happening and whether you expect it to continue?

I think the main reason it is happening is the price of heavy crude as related to light crude is always from $10 to $20 a barrel less. But there seems to be an inordinate amount of heavy crude coming into the country, and as they produce the heavy crude, they've got a choice of making asphalt, or if they have cokers, to coke it. Most -- the predominant number of refineries don't have the ability to coke it, and those that don't, they have to get rid of that asphalt or they can't keep the refinery running. So as a result, they will dump it on the market at a somewhat depressed price as compared to what you would expect it to be. And that is the main difference.

Robert McCarthy, Robert W. Baird.

I'm sorry, McKamy, I didn't get the nine-month stock plan compensation number from you.

It's a $3.1 million increase.

$3.1 million this year greater than last year.

Correct.

Of which almost $2 million was in the quarter.

$2.5 million, I believe. It went from -- I think the stock went from $42 to $57 on the calculation of the averages.

I see. All right. And then your forecast for the full year assumes what tax rate?

Basically 36%, Rob. 35.26% is the effective rate year to date.

36% for the year. Okay. And as a follow-up to the dialog you just had, Don, about concentration of new product expenses, etc., what would you suggest is a more normal quarterly level of impact from these kinds of expenses?

That's a good question. Typically, about a third of what we had, I guess, Rob. I mean, we're constantly putting new things out. That's the only way we can grow.

My point exactly.

But this time, and to be truthful, some of these we didn't expect -- we expected better margins, but you always have some of that. But looking at the list that I read to you, there's not too many of that -- the green system is pretty well -- what we sell them for now, we will be making money on. About all of these we should be profitable on, but I also know we've got a pretty good stream of other stuff coming in, and not near like this. But typically a third of what we saw in this quarter.

Okay. And last one. You mentioned engine -- delays getting engines. Are you comfortable saying from where?

From Germany, from an outfit that the first name starts with a D. I will say no more.

And auto diesel is long dead.

Yes, talk to [Bill Gale] and talk to some of the others. I think the whole world is waiting on those engines.

This affected which -- was this a Heatec or an aggregates problem?

It was an underground.

Underground problem. Okay.

Yes, one -- a couple of models of small trenchers we got a bunch of orders for. We just can't -- waiting on engines.

And you expect to see that clear in the fourth quarter?

Well, they've got enough castings to furnish us, but they say their castings, they can't predict whether they are good or not. Never had a supplier that really won't tell you. If they do what they've said, yes, it will be okay. But we don't know.

I understand. Okay. Thanks a lot, guys.

Alan Brochstein, AB Analytical Services.

I am relatively new to your Company and your industry, so pardon me if my questions are a little off base. But I understand that you guys have a hard time telling exactly which markets you are selling into in terms of the commercial market, which I know you have a small exposure to, and also state and local versus federal. But how do you see -- if the economy remains weak or weakens further here, how do you guys go about planning your business with respect to your exposures to those markets?

Well, our markets do not go direct to the end market. We sell the equipment that produces the asphalt mix, and it goes to interstate highways, state highways, and residential pavements and parking lots and a wide variety. So we have to watch our customers, because when they have a headache, we have a heart attack, generally.

Typically, of our customers' business, 60% of it is public works related. 40% is either commercial or private-type business. And that is in the asphalt side of it. The aggregate is about parallel to that. The underground business is more driven by -- our small utility line goes into more into homebuilding. The directional drilling doesn't. It goes into more of existing markets.

So we have a wide variety of different products going to a lot of different markets. We also see 50 different states and different countries, that when one is up, the other one is down. So we have to kind of weigh what they are. In the U.S. today, I would say probably half of the U.S., the states are down, and half of them, they are up.

Okay, so as far as any sort of reads that you're getting or anecdotal evidence from your customers, are they taking their Tylenol or what have you, or is it not really an issue at this point for them in terms of starting to get headaches?

The thing I have seen this year, I guess, in the Midwest and in the East, that their markets are down but their profits are not hurt as bad because -- this is in the asphalt business -- they anticipated major price increases in asphalt that didn't occur, even though oil has gone up. It's one of those disconnects I was talking about. And most of them kind of smile and they've made decent profits, even though their volume was down. So it's difficult for us to -- all we can do is read on the average, and without international business, we would probably be looking at Tylenol a little bit. But with international business being as strong and the dollar being as weak, we feel reasonably good.

Jack Kasprzak, BB&T Capital Markets.

One follow-up. Don, you referred earlier to a slower rate of increase, of 3% on something. And I missed what you were referring to there.

That was purchase components, Jack, on average of our purchased items that we buy.

And also, too, you mentioned some aggregates. You referenced some maybe slower operations specific to aggregates in the New England area and maybe some other Midwest areas. But when you look at the bigger aggregates companies, is there any commentary you can give us about what you're seeing there in terms of their behavior? You know, there have been some CapEx plans announced. It seems relatively healthy, but has there been any change that you can discern recently?

We haven't seen any change in that, Jack. They seem to -- they've been able to get good price increases, as you well know, and their volume seems to be down. In the Southeast, the volume is down, but they have certainly pushed their prices up, and I think their profitability is good and they are continuing to spend money.

[Shawn Daley, THM Holdings].

Could you repeat your annual guidance?

Our annual for this year is in the $240 million to $250 million range.

So I know you hadn't given prior guidance to this, but the consensus was $267 million. And you are missing this quarter by $0.15, let's call it.

Right.

So you are not really seeing much -- you don't anticipate the fourth quarter to see the problems you saw in the third quarter, is that correct?

No, sir, we don't. Basically, we could be on the high end of that if we get to December, if shipments are strong in December and probably on the low end or not. So it makes it difficult.

And where are you in terms of -- did the Board authorize a repurchase earlier in the year, or--?

Basically, the Board is kind of on -- if it's something that happen where they wanted to do it, they are available within eight hours to vote on it. But if our stock plummeted or something and we had the cash available, that would be our intent, to buy back.

And do you consider 17% a plummet, or--?

Well, at the range we are right now, we feel like we've got some opportunities in acquisitions that would probably be ahead of that.

Robert McCarthy, Robert W. Baird.

I guess just a refinement of -- or a refined follow-up to what we just heard. I was going to ask you to update some of what was going on on the acquisition front, Don. Would you rule something out for the balance of the year?

No, we've got a couple that's going on, Rob, that we -- could happen. There's relatively small -- we're looking (multiple speakers)

Okay, we'll keep an eye out. Thanks.

Gentleman, there are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Thank you, LaTonia. 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 29, 2007, 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 our news release that was sent out earlier today.

Since there are no further questions, this will conclude our call. Thanks very much.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.