Astec Industries Inc (ASTE) 2008 Q3 法說會逐字稿

Greetings, ladies and gentlemen and welcome to the Astec Industries third-quarter 2008 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.

Thank you, Rob. Good morning and welcome to the Astec Industries conference call for the third quarter of 2008. As Rob 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 business environment and business operations.

In the way of disclosures, I will note this morning that our discussion 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 to summarize our financial results.

Thanks, Steve. We appreciate each of you joining us this morning. The Company generated a 37.9% improvement in net income and we look forward to starting the fourth quarter (technical difficulty) $255.7 million. Net sales for the quarter were $237.4 million for an increase of 15.1%. International sales increased 37% and were 43% of the third-quarter sales. The increases internationally came in the Middle East, Central America, Asia, South America, Africa, Europe and Canada. Domestic sales were up 2.7% for the quarter. Parts sales were at $49.2 million or an 11.6% increase and composed 23.1% of the quarterly sales in 2008.

The sales increased -- let me start over. The breakdown of our sales as far as the looking at the pie concept is concerned, aggregate sales were 38%, asphalt sales are at 23.9% of the pie, underground is at 17% of the pie and mobile is 11.8% of the pie with other at 9.3%. And those breakdowns are attached to your press release for your convenience.

The consolidated gross profit for the quarter was at $58.8 million, up from $48.6 million, a $10.2 million increase or 21.1%. The gross profit percentage increased 130 basis points for the quarter to 24.8% from 23.5% and we are certainly very pleased to accomplish this with all of the cost increases that we have incurred over this year.

SG&A and engineering was at $34.3 million or 14.4% versus 15.5% of sales last year. Income from operations was at $24.5 million versus $16.6 million. That is an increase of $7.9 million over the prior year. Income by segment is also attached to your press release for your convenience.

The net income is at $16 million. That is versus $11.6 million for the quarter last year. That is an increase of 37.9%. The diluted earnings per share are at $0.71 per share versus $0.51 per share or an increase of 39.2% increase in the earnings per share. The backlog, which is also attached to our release for your convenience, is at $255.7 million, or up 6.6% and that backlog is broken down for your reference by segment.

The balance sheet is very strong. Our receivables are at 36.4 days versus 37.4 last year. Our inventory turns are at 3.2 turns versus 3.5 turns last year. We currently owe nothing on our Wachovia credit facility of the $100 million. We are utilizing that for $10.1 million of letters of credit.

Our capital expenditures for the quarter are at $5.4 million. We expect those to approach $42 million for the year. Our depreciation for the quarter is $4.4 million and our depreciation for the year would be around $18.5 million. The cash flow will be attached to the 10-Q filing and we will discuss 2009 expectations during our upcoming year-end conference call. That concludes my prepared remarks on the financials and I will certainly be glad to answer any questions you have later. Thank you and we appreciate your interest in Astec.

Thank you, McKamy. Dr. Don Brock will now discuss Astec's business operations for the third quarter of 2008. Don?

Thank you, Steve. As McKamy mentioned, our revenues were up from $206 million to $237 million or 15% for the quarter. Our gross margins increased 120 basis points. This was helped by product mix, a lot of pre-buying of some of our cost components and the volume of business.

Net income was up 38%. Our domestic sales were up 3% while international was up 37%. Parts sales continued to grow and were up 12%. Our backlog is up to $255 million versus $239 million, or 7%. We have seen continuous growth in the energy side of our business with American Augers, Astec Underground, Heatec and Peterson.

Looking forward to the fourth quarter and somewhat into '09, we've seen tremendous changes. As all of you know, in the last few weeks, oil prices have dropped down to $75 a barrel, which reduces cost to our customers. States are allowing more recycle in their mixes. Steel has softened somewhat, but both steel and asphalt prices have not caught up yet with the -- I would say they haven't decreased as much nearly as they have increased. Although most states are short on income, we are seeing some beginning to have increases in funding for roads as a stimulus. A number of states are putting more money in their roads. The leadership in Congress is certainly talking about a stimulus package that will have more funding for the infrastructure and that would be very important to us, particularly in '09.

Our backlog for the fourth quarter remains strong in most of the companies. We expect to finish the year in the middle to the upper end of our previous guidance of $2.80 to $2.95. At this time, there are too many factors that exist to give much light on where '09 will be. By the end of the year, we should have a better view of where we think it will be. We will know a little more about what stimulus packages occur and we will plan on giving you guidance at that time. With that, I will stop and be glad to answer any questions.

(Operator Instructions). Arnie Ursaner, CJS Securities.

Hi, good morning. Congratulations on a pretty good quarter. Can you expand a little bit on your backlog and give us a feel for the percent that is international and your best view of the timing of this backlog, how far out does it run, does it move pretty well into the beginning part of next season?

Arnie, McKamy is looking up the percentage there for you that he can give you in just a second. As far as -- it depends on the business and asphalt plants. We are running out into next season on oil drilling rigs. On the Heatec heaters, particularly for oil and gas, it is running out into next year. So anything related to the energy business is out there and we are pretty fortunate on asphalt plants in this period of time that we are backlogged still pretty good there. What is the percentage, McKamy?

Arnie, the percentage of backlog from international is consistent with our percentage for the quarter.

Okay. And my second --

That is 44%.

My second general question relates to margin improvement in the quarter. Obviously, you have had extremely attractive steel contracts that ran through June. We know that you tried to build up some inventory. I am trying to get a feel for how much of the margin improvement this quarter might have been impacted by mix, how much might've been impacted by lower-cost steel and how we should think about margin for the balance of the year.

Arnie, I guess I was a little surprised that our margins came in as strong as they did. It is more product mix than it is anything. We had some good orders in the Underground side of the business and their margins were improved somewhat over what they had been in the past. Steel has not -- it has affected us, but we did buy a lot ahead and that didn't come in or hadn't come into our cost as quick as frankly expected.

I think for the -- to answer your questions, I think we probably will be somewhere in the 22% to 24% gross margin in the fourth quarter as best I can tell at this point. I think I have told a number of people -- pretty well told you in the last call we thought we would see an erosion of margins. We just haven't seen as much as we thought. In fact, I guess, as I said, I have been a little surprised that we have held up as well as we have.

Two very quick ones for McKamy if I can. Could you just repeat your CapEx number for the year please?

$42 million.

Okay. And the final question I have relates to -- your stock price is down and I know 123(R) is impacted by where the stock is. Did that benefit the SG&A line this quarter?

On the surf?

On the surf, yes.

Let me look, but it was insignificant. No, it did not.

Okay. Thank you very much.

Mike Cox, Piper Jaffray.

Good morning, guys and congratulations on a very nice quarter.

Thank you.

On the international side of the business, I know the strength has been in some of the commodity-rich countries. I was just wondering if you could comment on the order flow now that some of these commodity prices have fallen, any change you are seeing from the buying behavior from some of these international markets?

Michael, we haven't seen a lot at this point, but frankly this thing has been so volatile so quick, it is probably a little too early to tell. I guess the question mark I have looking forward is the exchange rates between the dollar and the Australian dollar and some of these others. Certainly if they stay at the rates that -- we have seen a softening and a readjusting back down, a weakening of the dollar back against those currencies.

The way it jumped up about a week or two ago was not very attractive and that would certainly hurt us if it stayed up -- the Australian dollar got up to AUD1.55 to the US dollar. It is back at AUD1.43 now and we'd like to see it back down in the AUD1.20 something. We haven't seen the effect yet, but we will if it doesn't drop back off and stabilize a little better.

Okay, that's helpful. And on the price increase side, I believe on the last conference call, you had noted a couple of additional price increases you had planned in the second half of the year. Have those been pushed through or are you getting pushback from customers now that the headlines around steel are going in the other direction?

We are beginning to get pushback. We have had some of them that we put in place. Going forward, if steel goes back down, we will have to make some adjustments. Customers are very aware of what is happening there and they are more aggressive on negotiating now due to the current situation.

Okay, thanks. And my last question, on the mobile paving business, was a little bit lower than we had expected. Any read-through there on that business segment?

That business segment has experienced probably the most severe downturn. In September, things slowed down considerably in that area. It always does in September, but it is more severe than normal. We have had a layoff in that division, had to cut back.

Okay, thank you very much.

Jack Kasprzak, BB&T.

Thanks, good morning, Don. I wanted to ask about state finances and state budgets and you mentioned you are seeing some states push through some funding in an effort to stimulate their economies. Overall though, the state budget picture looks pretty bad and it seems to be deteriorating. So versus four or five years ago when state budget deficits were really problematic for the highway business, what is different today? Is it bonding and toll roads and maybe you guys have taken a little marketshare with some new products. Could you maybe just talk about that?

Jack, I think states like Louisiana, Texas, Southern Mississippi, that area is quite strong. Indiana has got money from that toll road that they sold and it is a strong market. Florida just released I guess $1.4 billion in funds they had to really try to stimulate things. But it is a mixed bag as you said. California, obviously, is suffering greatly right now.

But there is a mixture around -- Western Canada is still strong. Australia basically on road programs and a lot of that is privatized over there is quite strong. But typically, the funding for the roads is on a gas tax, but they do have creative ways of reaching to get it. It is normally supposed to be dedicated funds and we are seeing some of -- beginning to see that again as we have in the past. But I guess overall, I guess Florida moving some of their work forward is the first that we have seen of kind of a stimulus and I do think there is more of an awareness that infrastructure spending will create jobs and that is what is needed. I see a real, I guess, more awareness in that than we have seen in the past recessions.

Okay. With regard to, I guess, the potential for a federal stimulus, obviously, depends somewhat on the election, perhaps solely on the election, but what -- you guys have been pretty well in touch with what is happening in terms of discussions about potential programs on Capitol Hill. Are there any details right now? What kind of plans are floating around out there in terms of any dollars?

Yes, Pelosi is supposed to have hearings, I guess, right after the elections and they are talking about like $18.5 billion for a stimulus for roads and bridges is what we are hearing. There are also -- the suggestions I guess that various ones are making is that it has got to go out fast to do any good. It has got to be -- the other suggestion we have heard is it doesn't have to have matching funds from states and it does have to be new work. It can't be jobs they just pull forward and use that money to build something rather than using their own money to do it.

All of that said, I guess the encouragement it gives us is that, with that happening, one other suggestion was it come out -- that it has got to be let -- the job has got to be let by March and finished by next year. To do that, you are primarily going to see maintenance and overlay, which is very helpful to asphalt and so that is kind of the things that we are hearing. And I guess there seems to be more and more people getting on board, that infrastructure will help to stimulate the economy.

Right. Okay, great, thank you.

(Operator Instructions). Rich Wesolowski, Sidoti & Co.

Thanks a lot, good morning. Hey, Don, can you give us an idea to what degree does your internal forecast wing on whether or not we get the kick from a federal component -- infrastructure component of a federal stimulus bill? Is it that '09 is going to be great if we get one and okay if we don't or something of that nature?

Rich, I wish I could tell you that better. I think we will struggle for '09 to be flat. If we get the stimulus, it will probably be flat. The thing that makes it a little hard is the energy side of the business is very strong and growing, which tends to temper what we do on the infrastructure side. Mining seems to still be holding up and we are growing in that area. But without the stimulus, I think you're going to see -- everybody can tell you it is going to be a downturn in the market. There is no question; it is just a matter how deep it is.

We are fortunately in a good position to take care of that, but I have tried to write down all of the different scenarios and the pluses and the minus. I guess the first one real quickly is that $8 billion for the highway trust fund means we are going to spend a lot federally next year. It is a matter of the states matching it and the state funding. The state revenues, as everybody has said, in general is weaker, but oil prices going down will help the revenues and it will help them on the cost side. So that is probably tempering the oil prices getting down to $75 a barrel sure helps. The stimulus would certainly make a difference. Oil drilling, as long as we stay in the $70, $80 range, I think is okay.

The other big question mark, if the dollar stays strong, it is going to hurt our international business. Commodity prices going down is probably going to hurt mining. Credit on buying equipment is a negative because there is not too many people financing it. And then just the psychological effect of all of this that has gone on is going to hurt.

On the positive side, we are seeing a back-off in price increases. We are seeing steel back off some and probably got more to go. I guess on the positive side, our products are very innovative. They are cost-reducing type products and we continue to sell a lot of products to increase the amount of recyclable milling machines, the sizing equipment or processing equipment and the warm mix with the double barrels have sure made [it]. Most of the plants we have sold have been to upgrade, not to necessarily increase volume, but to reduce cost.

Thank you very much. That's very helpful. And can you envision a scenario given all that where, whether or not we do get a stimulus package, that the volume suffers a bit, but because of the pricing you have already pushed through, steel coming down that your margins don't come within spitting distance of the lows that we have seen in the prior cycle?

Yes, I think so, Rich, to answer your question. I think a lot of the things you see in a time like this is people will switch more to portable equipment and I think we are seeing a major retooling to try to do more recycle to reduce their costs and we have got better margins in that area.

The other thing is we are pushing more in the rebuild to grow our parts business. There is better margins in that area. So a lot of these -- the product mix is a little better, so I don't -- I think the other major thing, in the last downcycle, we went into it with $136 million in debt. We had about $25 million in recourse on financing where we had financed equipment. We had about $8 million to $10 million in used inventory. Today, we don't have any debt. We have got cash. We don't have any recourse. There is less than $500,000 and we frankly -- the unusual things, we have practically very, very little used equipment. So we are a lot better positioned to not be paying a lot of interest and a lot of fees right now.

Okay. And then finally, your comments and those of several other contractors have expressed some confidence in the mining strength despite the retreat in most of the commodity prices. How much visibility do you guys have into that general area looking past the projects that have already been started?

I think -- I guess our international guys, which primarily are in the mining, still are reasonably confident in that area. Prices went up so doggone high. I was looking at copper there this morning. It was $1.00 just not too many years ago or too long ago. It went to $4.00 and it's back down to about $2.60. It is still way high compared to what it once was and the same way on -- steel was at $0.42 a pound the first of the year, went up to $0.85 and now we are back into the low $0.60s and we feel good about it. But it is still awful darn high as compared in the increases that we have seen. So we have got a lot of fallback to go, a lot of slippage to go before it gets to be painful for them.

Thanks a lot.

(Operator Instructions). Chris Weltzer, Robert Baird.

Good morning, gentlemen. I just have a couple questions on how your international contracts are structured, if you will. Just want to confirm that they are still all priced in dollars and just wondering when do customers typically actually pay you the cash? Is it when they place the order? Is it when a new piece of equipment is delivered? And any visibility you have on whether they hedge that exposure or not.

I guess to answer the first question, about 90% of them are in letters of credit or if they are not in letters of credit, it is in cash before they ship. We have certain countries and certain dealers that dollars are a problem and they send us cash -- the dealer sends us cash to start building it and before we ship it, we get the rest of the cash. That does have a little lumpiness because they don't always get the dollars here when we are ready to ship. So that is not as good as a letter of credit.

Letter of credits are basically are either onboard ship or alongside ship. We try to be alongside. They want it onboard and I guess your third question was what, Chris?

Do customers typically hedge their --

Yes, typically they do. Of the deals we have got, I guess -- I know we have got a plant that just buttoned up in South Africa and we hedged that through our South African company and most of them do hedge it, yes.

And when you think back to, I don't know, maybe the 1997 Asian financial crisis, I know international was a lot smaller part of your business then, but what was your prior experience when there were sharp swings in currency exchange rates? Do you have order cancellations or anything like that?

We didn't see as much cancellation, but we saw new orders slow down and that obviously will happen. I see this strengthening of a dollar was just everybody running to what they felt like was the safest of all of the currencies. I see it readjusting about like LIBOR and back to something reasonable before too long. But that remains to be seen, but it is important that the dollar drop back more to something reasonable or it will hurt the international sales.

Got you. Okay. And then I was wondering if you could tell us if you have an estimate of what average price realization was in the quarter.

My guess on it would probably -- for the quarter itself?

Yes.

Probably 2%.

Is that a net number, net of raw material costs or is that just gross pricing?

I would say -- I have got to think about that one a minute. I would say that it is basically -- that is more of a gross and we have been behind on our price increases as compared to the others. So I would say if you took cost versus net, the only thing you can do is look at the gross margin and it was improved, but I would say generally our costs -- our increases were catching up kind of. We saw the price increases coming up getting some orders at new prices and our cost going down for the difference. It was more of a catch-up and getting back where we were at the beginning of the year.

Okay. And then I know you don't want to comment specifically on 2009 guidance, but I was wondering how you are thinking about CapEx and tax rate in '09.

We look for CapEx probably to be equal to depreciation in '09 and that's about where we --

Probably 36%.

Tax rate, yes, would be about 36%.

All right. That's very helpful. Thank you, guys.

David Fondrie, Heartland Funds.

Yes, good morning. Congratulations. Can you give us a little bit of an update how the capacity expansion is coming for the directional drilling business?

The foundations are in. They are going to start setting steel next week. So it is probably going to be -- it is probably going to be February or March before we are into the facility.

And Don, is that business still as strong as it has been or the outlook as strong as it has been?

Yes, it is. There is still a lot -- we have got some unique technology there that I think will hold up, David, in a down market. A lot of offshore drilling and stuff, some of that where people are looking at drilling onshore and turning the drill and going offshore. So there is a lot of interesting opportunities there. So we are still pretty optimistic about that.

And then maybe a question for McKamy. It appears that inventories increased modestly on a sequential basis, i.e. from June 30 to September 30. And that's -- at least that strikes me as somewhat strange because you're going into a little bit slower time in the December quarter. Is that pre-buying of raw materials or could you maybe just comment on that please?

I might answer that one, David. I guess with our cash position, we have not been quite as pressing the guys on inventory. The people who are buying now, if they buy today, they want it tomorrow, particularly on mobile equipment. And so we have got finished goods inventory that is a little higher than we would normally have. But it is, again, reactionary buying more than planned buying from the customers and if you don't have it, you're not going to get the deal.

Okay, great. Thank you very much.

Thank you. There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Okay, thank you, Rob. We appreciate your participation on our third-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 November 4, 2008. 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. We appreciate your participation. Thank you.

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