Astec Industries Inc (ASTE) 2008 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Astec Industries second-quarter 2008 results. At this time, all participants are in 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 of Astec Industries. Thank you, sir. You may begin.

Thank you, Ryan. Good morning and welcome to the Astec Industries conference call for the second quarter of 2008. As Ryan mentioned, my name is Steve Anderson and I'm the 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. Don is in Idaho today traveling on business, so he has dialed in remotely. In just a moment I'll 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 this morning, I will note that our call 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 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'll turn the call over to McKamy to summarize our financial results.

Thanks, Steve. We appreciate each of you joining us this morning and are pleased to report to you on the most profitable second quarter in the Company's history.

The Company generated a 14.1% improvement in net income, and we look forward to continuing 2008 with a backlog of $264.6 million and reaching our sales goal of $1 billion for 2008. This morning, we will discuss the quarter. We were at $277.7 million in sales versus $226.4 million, or an increase of 22.7%.

International sales were $93 million versus $69 million for the same quarter last year, or an increase of 33.2% or $23.2 million. International sales composed 33.5% of the second-quarter sales. These increases occurred in Canada, Europe, South America, Africa, Asia and Central America.

Domestic sales for Q2 2008 were $184.7 million or 66.5% of total sales versus $156.6 million or 69.2% of total sales for Q2 2007 for a 17.9% increase in sales volume domestically. Part sales for Q2 were $50.5 million versus 2007 of $45.0 million or a 12.2% increase. All segments in the parts sales section had increases. Sales in total increased in all segments as well. And those are attached to your press release for your convenience and reference.

Consolidated gross profit for Q2 is at $66.3 million versus $58.9 million for the prior year, an increase of $7.4 million or 12.6%. The gross profit percentage actually decreased 210 basis points for the quarter to 23.9% from 26%. That decrease was in all segments.

Maintaining the margin, and Don will have more to comment on this later, but maintaining the margin is our greatest challenge right now. We have had multiple price increases by some companies. We are continuing to realize good benefits from our focus groups. We are continuing lean production initiatives and techniques. We're also continuing to utilize consolidated purchasing and many other actions to help offset the cost increases that we are seeing in steel and components.

In the SG&A area, our expenses were at 12.1% for 2008 versus 13.4% of sales for 2007. Income from operations for 2008 were at $32.7 million versus $20.8 million for an increase of $4.1 million or 14.3%. The income by segment again is attached to your press release for your convenience.

Net income is $21.1 million versus $18.5 million or a 14.1% increase. For the quarter, the diluted earnings per share were $0.93 versus prior year of $0.83 for a 12% increase in earnings per share. Our backlog is at $264.6 million versus 2007, and that is a restated number of $235.4 million, restated to include the 2007 acquisition of Peterson, although that did not occur until effective July 1 last year. In order to be comparative, we have to add that backlog in across the whole year of last year to compare to this year's backlogs.

I would also note that the backlog is $264.6 million compared to $263 million at the end of March, and this backlog, to slightly exceed March's backlog after a record sales quarter is certainly a nice backlog to begin the third quarter with.

The only decline in backlog is in the mobile asphalt paving segment, which is attached to your press release. This is a segment that is our least indicative segment as far as backlog is concerned, and it's not a strong indicator, but we did have a $6.5 million decline from 2007 to 2008 in the mobile asphalt paving.

On the balance sheet, the balance sheet continues to be very strong. We're positioned financially to certainly handle increasing volume and to consider other opportunities that are available. Our corporate cash available is about $45.6 million. Receivables days outstanding are at 35.3 days versus 33.1 days.

Inventory is up from $166 million to $234 million. This inventory increase has been increased by the buying of increased steel supply before further price increases are incurred. Our turns on inventory are at 3.35 turns versus 3.53 turns, so that has not been impacted dramatically.

We owe nothing our credit facility. Our capital expenditures for the second quarter are $8.1 million. Our total projected capital expenditures will slightly exceed $40 million, and that is an increase from what we have said earlier, because we are making capital expenditures at American Augers for the expansion of gas and oil rig production.

The depreciation was $4 million for the quarter and a projection of $18.2 million for the year. So that would be $18.2 million depreciation versus approximately $40 million in capital expenditures. Our cash flow will be attached to the 10-Q filing.

This concludes my prepared remarks on the financial details, and I will be available to answer any questions you 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 second quarter. Don?

Thank you, Steve. We had a very good quarter, in my opinion. Our revenues were up, as McKamy said, 22%. Our income was up 14%. Earnings per share were up from a record last year of $0.83 to $0.93 this year. Our backlog for the quarter at the end of the quarter was $265 million, which was up 12.4%.

International sales over the six months were up from $119 million to $185 million or a 55% increase. Domestic sales were up 10% over the six-month period. Our parts sales were up from $88 million to $103 million or 17%, again over the six-month period.

I guess the bad news is our gross margins have decreased from 26% for the quarter down to 23.9% or 210 basis points for the quarter. Year to date, they've decreased from 25.6% to 24.5%. During the first six months, I guess in my career, I have never seen inflation like it has been. Steel is up about 80%. Other component prices are up from 4% to 20%, depending on what the component is. We've increased our prices to try to stay with these price increases, but unfortunately, with our backlogs, our price increases are behind our cost increases.

We continue to grow in the and oil and gas business and the wood to energy business in international sales. The extreme rise in oil prices has forced states to really get more aggressive on increasing the usage of recycle, in conjunction with our warm mix system, which we can use that without changing grades of asphalt and increase the amount of recycle up to 50%. This is very achievable today.

We're beginning to see many of the states loosen -- I shouldn't -- I use the word loosen very loosely, because we're seeing them now being more interested in going to higher recycle. There's been a perception that it's not a good product, but in reality it is a good -- equal or better product than what we're getting with all-virgin mix.

Looking forward to the third quarter, international sales will continue to grow faster than domestic sales. Usually our strongest international sales is in the back half of the year due to the fact that many of the products are going to other parts of the world. We continue to diversify our products across other industries and to sell our products over a wider geographical area of the world.

Our biggest challenge, as we've mentioned earlier, is to manage price increases and try to keep them at least ahead of or up with cost increases. With the rapid increase in steel, unfortunately, we are behind. Our components, as I've said, have increased from 5% to 20%. We have offset some of these increases by controlling expenses, by buying ahead where possible, through our focus group efforts, through a concentrated effort to get better utilization out of the steel, and through continuous flow manufacturing, and finally, by raising prices.

With all of this said, we expect to continue to see during the rest of the year margin erosion. However, our volume will probably exceed our projections, and we expect our original guidance to meet our original guidance range that we gave earlier in the year, 280 to 295 range. I guess in summary, this is probably the most turbulent economy that I've ever experienced, but we're very pleased with the results and look forward to finishing with a record year.

With that, I will stop.

Ryan, if you would poll for questions, we would be glad to answer those.

(Operator Instructions). Arnold Ursaner, CJS Securities.

Don, a quick question to ask you. The price increases in steel is certainly not new. You have been talking about it for well over six months. It would seem to me that you would try very hard to either put in surcharges or do some other actions to fully recover your steel costs. Why are you having that much difficulty doing that?

Some of the companies, we have put in surcharges and have been able to get them if it is a long delivery. Unfortunately, a lot of our equipment, you know, is probably build it and ship it, and some of it we just -- we're too close when we get the order to when we're going to ship. And there's pushback from the customers on doing that. They say, I want to know what I'm paying for it, because it's critical in the cost of this project. So to answer your question, we have been able to get it in some products, but not in all of them.

I guess the key thing, Arnie, that gets me, I think we are all right if these damn increases -- pardon my expression -- would just plateau. I guess the steel companies just continue to push the prices on up, and we really have trouble understanding the need from where they are today.

But we have bought a lot ahead. And the thing that makes it difficult, some of the companies probably have steel out in through September, some have steel for certain components out through the end of the year. So some of the increases have not all hit yet. And when I give you some of these numbers, it's based on the current prices that we see coming. All of these have not flowed into our cost at this point.

And you have locked in very attractive steel prices certainly through June. Were you able or are you trying to lock in steel increases that will essentially cover the backlog you have in hand?

That's what we are trying to do. And those are at different levels along this 80% increase. We started in discrete plate around $0.40, $0.42 at the first of the year. We're seeing it in the $0.75 to $0.80, depending on which part of the country it is. So we have got some bought. We've used up probably most of the $0.42, maybe not all of it, then we've got some in the high $0.40s, some in the mid $0.50s and all the way up, I guess, Arnie, to answer your question.

Okay. So as a final question, to try to summarize the conclusion, based on the backlog you have and now the cost increases in steel, manufacturing efficiencies, I know you don't give formal guidance, but would you care to comment on what sort of margin, gross margin, you think you can attain for the balance of the year and perhaps into next year? What sort of gross margin should we be thinking about?

Arnie, it will range from 20% to 24%, in that range. I guess the thing that makes that a little difficult to answer is as our price increases catch up, we will be back in the 24% range. But getting them caught up with the backlog is a little, really, very -- I've struggled more with this call than any I've ever had to try to figure out -- our price increases are behind our component increases. And it's really, if the price increases will plateau and stop, then we will climb back up in that 24% to 25% range. But it will take on out for a period of time for that to happen.

Don, thank you very much. Look forward to seeing you in August at our conference.

Jack Kasprzak, BB&T.

Don, just on your last comment there, when you said a period of time for the price increases to catch up, is that sort of a six-month period of time, would you say? Would that be a reasonable guess?

Jack, if the cost increases of the pricing of steel and these other components basically were plateaued right now, I would say mid-fourth quarter we would be back in shape. But if the -- we're still seeing August steel price increases. Now, we have not seen any softening at this point. I guess I thought it would start to soften in June, and I guess now I think maybe in September, fourth quarter. With automobile manufacturing going down like it is, you would think there would be a real softening. But we haven't seen -- the steel companies still are very aggressive.

And just by way of review, I know you've given this number on previous calls going back in time, but steel as a percentage of costs currently?

At the first of the year, it was about 12% of our cost. Where it is right now, it's getting up more like 18%.

I wanted to ask, too, on the subject of state budgets, there's been a lot of press in the first part of this year about weakening state budgets. And your sales in the US have held up very well. But as we enter the back half of '08 and most states are into a new fiscal year, what would you say -- how would you characterize the outlook on the state budget side? You think there's perhaps some more weakness to come based on a new budgeting cycle taking hold?

Jack, I think there's going be more weakening. I'm at the National Stone Association. I'm speaking to their Board of Directors in the morning. And I guess we see their aggregates, the aggregate industries down, as you know, 30% to 40% over two years.

And the thing that has really helped us a bunch is this new warm mix process. We built the first ones in June of last year. We sold in excess of 120 of them and are getting -- well, we can sell more than we can build right now. And that process eliminates the smoke and the smell. It eliminates the drying cost. It's very green. The environmentalists love it. We can increase the amount of recycle up to 50% without changing the grade of liquid asphalt.

And all of that said, this is forcing our customers, even in a down market, to upgrade their facilities to double barrels and plants like that that will do more -- a higher percentage of recycling. It's also, I have talked to, in the last two weeks, to five different highway departments that have called us instead of us calling them, all interested in, now with the price of liquid asphalt going up, they're more interested in doing more milling, then it generates more recycle and allowing the higher increases of RAP.

So this is really helping the sales of the Astec products and Roadtec. And also, to go to the higher percentages of recycle, you have to take the material back apart and reprocess it, get it back to the sizes of the original aggregates and then recombine it. And that also helps the sales of some of our crushing divisions.

So in a bad and what I call a very weak market domestically, we are continuing to see a lot of product sales just due to this change in technology. Everybody is looking at, how do I drive my costs down?

Robert McCarthy, Robert W. Baird.

I want to ask you about your operating expenses or your SG&A expenses, because the number in the quarter was, well, startlingly good, I guess, after the number that you've put up in the first quarter. And it sort of creates the impression, if you will, that with a significant decline compared to the first quarter in a quarter when revenue went up sequentially, that there might have been some unusual expenses in that first-quarter number.

Rob, we had about $3.6 million, $3.8 million of ConExpo in that first quarter. That all went in the first quarter.

All right. So if I take that out, I'd still have a sequential decline in the second quarter compared to the first quarter. Anything unusual there, or Don, have you initiated some specific cost-cutting or cost containment programs internally?

We have, Rob. Obviously, this turbulent economy makes you pucker a little bit. And we have basically just tried to control expenses. In fact, many of our companies have set up focus groups just on SG&A expenses, you know, to really relook at everything.

I want to get a -- can we get a confirmation, McKamy, on your outlook for the effective tax rate for the full year? And I just want to make sure that I interpreted your remarks correctly, Don, about the full-year revenue outlook. I hear you saying that you think now that you probably will exceed $1 billion in revenue.

Well, Rob, part of that, just to be truthful, is increases in prices.

Well, of course.

I think our component -- probably our unit machines is going to be about like we were projecting earlier. But as these price increases flow in, inflation is a great deceiver.

Sure. And McKamy?

About 36.5%.

36.5%, which is what you'd been saying before, right?

Yes.

Correct.

Michael Cox, Piper Jaffray.

In terms of the price increases, I'm curious if there are certain segments within your business, whether a subsidiary company level or at some of the consolidated level, that you're having perhaps more difficultly implementing price increases, or is it pretty consistent across each?

Michael, I guess domestically is worse than -- is more difficult than international because of the weak dollar. So the big effect internationally that we're having is really increases in freight costs. But the dollar is so weak it certainly helps international sales a lot.

Domestically, we are selling a lot in -- let's talk in the asphalt side of it. We're selling quite a few plants, but a lot of componentry, just partial plants. And the economic benefit, with the cost of oil going up so much, is if you can reduce their drying cost and increase the amount of recycle, which decreases their material cost, there's not been a huge pushback in that area.

Other areas I would say more in the crushing equipment and some of those areas, we're seeing more pushback. But I think everybody, all of our customers, they also buy steel for their jobs, and they realize what that is doing, and less resistance in a time of rapid steel increases than there is when we just have other component increases.

Okay, that's helpful. In terms of the current backlog that you reported at the end of the second quarter, would it be fair to say that the backlog at the end of Q2 versus the end of Q1 would incorporate some of these price increases, or is it really something that would be going into effect more so in the back half of the year?

Generally, we have hat from two to three price increases since November of last year, and I would say most of the backlog has got at least one of them, and a good portion has got two of it, and some of it has got all three of them. But I can't give you a precise number.

That's helpful. And then in terms of inventory levels, have been up year over year, and you called out perhaps some prebuy activity to hedge steel costs. But should we expect that the inventory levels maybe on a year-over-year change basis to start to moderate as the year unfolds as you burn through some of that steel?

It will in the steel, but we're also planning on keeping more finished components in because of the -- when people get jobs and they want to buy, they want it quick. And particularly in track-mounted crushers and some of the Roadtec equipment, I have not been very aggressive in trying to get them to reduce inventory, because they can make a lot of quick sales and quick shipments. So with our cash position, we hadn't been real, real aggressive in that area at this point.

Okay. And my last question in terms of the demand, there's been a lot of concern around Europe and economic conditions there, particular Western Europe. I'm just curious what you're seeing on that side of your international business.

Europe is obviously softening. Where our business is coming from is pretty simple, is where there's minerals and where there's oil. You know, the two of them, the commodity prices are so high on any mining operations today. And as a result of that, that is where the bulk of our business is coming, either in the mining or the oil area. And there, we don't see a slowdown at this point.

Rich Wesolowski, Sidoti & Co.

Don, earlier in the call, when you estimated that the Company could get back to that 24% or 25% gross margin range by, I think it was mid-Q4, if steel costs plateaued, did you mean if the spot price stayed where it is today, or if the forecast that you held throughout the year held over that timeframe?

I'm saying if it stayed where it is today. And that's the thing -- I guess we've -- I have felt like the darn thing was going to -- the steel companies were going to back off a little bit. But we have not seen it. In fact, Newcor announced a $0.05 a pound increase for August, and we haven't bought any at that level, but they continue to push it up. I think you're going to have to see a weakening in demand internationally before you see these guys back down a little bit.

Okay. Second, if you look back on the gross margin within the last 10 years or so, you basically round-tripped from the mid-20s to the midteens and now back to 24% or so. If the margins do begin to come down with the cost inflation and with the economy, can you review what's different about Astec now that would suggest that even a pessimistic case would put your margins in the out years above that midteens level?

I think the two things that's quite different is our international sales are a substantial larger percentage of our business, and we're selling geographically in more areas of the world. That's number one.

Number two, our product mix is quite different. The oil and gas business is probably getting above 20% of our business now, and mining is in the 8% to 10% of our business. And we expect both of those to grow, probably oil and gas to 40% and mining to 20%, over the next few years. So we are applying our products in a wider range of industries that hopefully are countercyclic to each other.

Okay. On the last call, you had mentioned or almost inferred that you'd like backlog to come down because of the risk of losing orders, and here we have a surprising strong flat June backlog sequentially. Are you still aiming to bring that down even more so than we would expect in the back half of the year?

Where we were worried a little bit about too much backlog is particularly in the Roadtec products and some of those areas of mobile equipment, like a track-mounted crusher. When they decide to buy it, they want it tomorrow. We have also, during the year and last year, lost orders in asphalt plants because we just couldn't deliver.

We are seeing, I guess it's surprising, many of our customers are in financially much stronger position, and we are getting orders, fairly substantial orders, for first quarter next year for asphalt plants from quite a few of our customers right now that are generally private companies that are well financed.

So I'm less -- let me put it this way -- I'm less uncomfortable than I was in March, because I guess the second area is most of the jobs that were let are let in the first six months, and if they get a big job and they need a plant, if you're not able to deliver pretty quickly, you will lose the order. Now, most of it is more long-range planning for next year.

That's helpful. Is that the earliest you can deliver an asphalt plant if ordered today, is 1Q?

We're back in -- yes, we would be back in the first quarter.

Okay. And then finally, how many vertical rigs have you delivered so far, and how many more on order?

Probably 10 and 10, something like that.

Robert McCarthy, Robert W. Baird.

Your international business is running I guess little bit over a third of sales right now. Can you give us any visibility into your backlog? Does it have a comparable distribution of customers, or has it become more international?

It's probably 50-50 now, Rob. I expect to end the year at about 40% international. And generally, that's the back half. It's wintertime in Australia now. So, you know, at the opposite side of the hemisphere, you're going to find the buying cycle opposite.

Can I assume that it's easier for you to put through pricing changes after you've booked the order for an international customer than it is for a US customer?

No, not necessarily. I think they're both very similar in that if we book the order, they expect that to be the number.

They expect that to be the price.

Yes. They do a lot of fixed-cost work. And that's why I don't want it -- the other question that was asked awhile ago by Rich about the uncomfortable -- the backlog, if it gets much beyond this, you do get a little uncomfortable. I guess gut feeling is I don't think -- I think while we may see some more increases, it's going to get real nasty in the whole country if they keep increasing like -- inflation keeps going like it is. And I just don't expect that. I guess personally, I think we're getting close to a plateau.

I hope you're right, Don.

I hope so, too.

Scott Macke, aAd Capital Management.

I appreciate the transparency on the cost of goods sold. I was hoping just to kind of finish. I think you mentioned that steel was running at 18% of cost of sales.

Right.

How much would the components be of cost of sales?

Typically, we, in our sales price -- and it's not cost of sales, now -- in our sales price, the steel plus the components will be about 50%, 50% to 52%. So our cost of sales is about 75%. So the difference in the 52% and the 75% is our manufacturing cost.

Okay, so that 18% is 18% of sales, or --

Of sales, yes. I may have answered that wrong for Jack awhile ago. It's 18% of sales.

And then, again, the strong backlog number and the implied order growth, I was curious if you could give us a little commentary about the trends through the quarter. I know that, if I remember the number correctly, maybe about $40 million maybe followed on from ConExpo. And then also curious if, as you announce price increases, if customers are given an opportunity to buy ahead of those price increases, and if that had an impact in the quarter as well.

Probably yes in both of those cases. The April sales were very strong. May, we had increases, but I don't know. June was very strong. So it's been -- as I look at it, it's been pretty darn flat all the way through. They've been about the same. The last of June, in fact, early July, we've had pretty strong backlogs. More of it, though, Scott, is more international. We've got some substantial international orders that have come in in early July.

And then I'm trying to think of a better way to ask this. I'm just curious, in your backlog or maybe in the implied order number for the quarter, how much of that is price relative to volume?

It's, you know, we have seen, probably if we could take into account everything we see that is coming that we already know it's increases, we probably should have increased our prices in the -- strictly on price increasing, probably 16% to 17%. We've probably averaged 13% to 14%. And I would say that, number one, the 16% to 17% hadn't all flowed in because we bought ahead. Number two, we probably, of the 13% to 14% increases, we've probably got 8% or 9% of them, 8% or 9%. That's why makes it awful difficult. It's, as I said, some steel we bought out through the end of the year, not at the full-blown price increase, and some components we've bought ahead.

Okay. So if I look at the backlog up about 12.5% year over year in June, then maybe I'd be thinking about something in the 8% to 9% range being price and the balance being volume?

That's probably close to right, yes.

Seeing as there are no further questions, I'd like to turn the call back to management for any concluding remarks.

Thank you, Ryan. We appreciate your participation on our second-quarter conference call. 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 July 28 and an archived webcast will be available for 90 days. A transcript will be available under the Investor Relations section of the Astec Industries website within the next seven days. All of that information is contained in the news release that was sent out earlier today.

Since there are no further questions, this will conclude our call. Thank you.