Astec Industries Inc (ASTE) 2009 Q2 法說會逐字稿

Greetings, and welcome to the Astec Industries second quarter 2009 results conference call. At this time, all participants are in a listen-only mode. A 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. Thank you. Mr. Anderson, you may begin.

Thank you, Claudia. Good morning, and welcome to the Aztec Industry's conference call for the second quarter of 2009. As Claudia mentioned, my name is Steve Anderson, and I'm the Corporate Secretary and Director of Investor Relations for the Company. And 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'll turn the call over to McKamy to summarize our financial results, and then to Don to discuss our operations and market conditions.

In the way of disclosures, I'll 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, and assumptions, and other factors, some of which are beyond the Company's control. 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. Good morning to each of you joining us. The net sales for the second quarter of 2009 was $188.8 million compared to $277.7 million in Q2 2008 for a decrease of 32%.

International sales were $59.6 million in Q2 2009 versus $93 million in 2008 for a decrease of 35.9%. International sales were 31.6% of the second quarter sales in 2009; they were 33.5% in 2008. The decrease in dollars occurred in Canada, Europe, Australia, South America, Central America, China and Middle East.

The domestic sales for Q2 '09 was $129.2 million compared to $184.7 million for a 30% decrease compared to 2008. The domestic sales as a percentage of total sales for 2009 was 68.4% versus 66.5% for 2008. Parts sales for 2009 was $44.4 million versus $50.5 million for a 12.1% decrease; 23.5% of the quarterly sales in 2009 versus 18.2% sales in '08.

Aggregate and Mining had the largest decrease, followed by the Underground group, the Asphalt group and Mobile Asphalt Paving -- I'm sorry -- the Asphalt group had an increase; Mobile Asphalt Paving was flat. The ranking of the segments by net sales -- Asphalt, and this is attached to your press release, the ranking was Asphalt at 36.8% of the pie; Aggregate at 29.4% of the pie; Mobile, 19.5%; Underground, 9.1%; and other, 5.2%.

For the year, net sales year-to-date was $394.1 million versus $540.8 million for a decrease of 27.1%. International sales was $133 million versus $185 million for a decrease of 28.3%. And those were also very widespread as far as the decreases were concerned in the countries concerned. International sales were 33.7% of the net sales in 2009 compared to 34.3% for 2008. So there's not a lot of shift in mixture.

The 2009 year-to-date segment ranking by dollars of decrease Aggregate and Mining, Asphalt, Mobile Asphalt, Paving, and Underground group. The domestic sales year-to-date is $261.1 million versus $355.3 million for a 26.5% decrease. The domestic sales as a percentage of total sales was 66.3% in '09 and 65.7% in '08.

Parts sales year-to-date were at $90 million versus $103.1 million for the prior year for a decrease of 12.7%. Parts sales for 2009 were 22.8% of total sales. The consolidated gross profit for the second quarter was $42.8 million versus $66.3 million for 2008; it's a decrease of 35.4%. The gross profit percentage decreased 120 basis points for the quarter compared to the prior year -- 22.7% versus 23.9%.

From the first quarter of 2009 to the second quarter of 2009, the gross margin improved 150 basis points. On the consolidated gross profit year-to-date, we were at $86.3 million versus $132.5 million in 2008 for a 34.9% decrease. The margin was 21.9% year-to-date versus 24.5% last year or a decrease of 260 basis points.

The SG&A and engineering for the quarter was $31.6 million or 16.7% of sales compared to $33.6 million or 12.1% of the sales. We had decreases in salaries and fringes, and offset slightly by R&D increases. The SG&A on a year-to-date basis was $63 million or 16% of sales versus $72.4 million, a decrease of $9.4 million.

We had decreases year-over-year and again in the fringe benefits area, and the one thing that would be unusual as a reduction also was the fact that we did not have any ConExpo expenses compared to the prior year.

Income from operations -- $11.2 million versus $32.7 million for a 65.7% decrease. Year-to-date is $23.2 million compared to $60.1 million for a 61.4% decrease. Again, the income by segment is attached to your press release for your convenience.

The effective tax rate was 34.9% versus a rate of 36.1%. This slightly reduced as a result primarily of additional R&D tax credits, based on our increased R&D expenditures that we are making this year. The net income attributable to controlling interest was $7.7 million versus $21.1 million for the quarter.

Our earnings per share was $0.34 versus $0.93 for the prior year. On a year-to-date basis, we were at $15.2 million versus $38.6 million for a decrease of $23.4 million or a 60.6% decrease. The earnings per share were at $0.67 versus $1.71 for a 60.8% decrease. Our backlog, which is also attached, for your convenience, to your press release, was $133.6 million versus $267.9 million for a 50.1% decrease.

International backlog at June 30 was $71.4 million compared to $107.9 million for 2008 for a 33.8% decrease. The 6/30 backlog was 16.9% higher than the 3/31 backlog for international sales. The domestic backlog decreased to $62.1 million for a 61.2% decrease. And the backlog by segment is attached also to your press release for your convenience.

The balance sheet is very strong. We're positioned financially to weather the current economic conditions, and be able to continue our improvement of current products and development of new products. The strength of the balance sheet also allows us to evaluate any possible strategic opportunities that we might have.

Our days outstanding are at 42.3 days versus 35.3 days; our inventory is at $266.8 million versus $234.2 million. That is primarily an increase in finished goods. Our terms are at 2.3 versus 3.3 turns for inventory.

We owe $11.9 million on our Wachovia credit facility. We are utilizing $8.9 million of the letters of credit, and we have a borrowing availability of $79 million that is unutilized.

Our capital expenditures for the quarter were $5 million -- [at] 16 -- let's see, capital expenditures were, I'm sorry, $5 million for the quarter. Our capital expenditures are being limited with more emphasis on product development. The year-to-date capital expenditures are $9.1 million against a budget of $18 million for the first six months. Our depreciation was $4.8 million. The year-to-date depreciation was $9.6 million against a budget of $20 million.

That concludes my prepared remarks on the financials, and I'll certainly be available to answer any questions you have later in the call. We do appreciate your interest in the Company.

Thank you, McKamy. Don Brock will now discuss Astec's business operations for the second quarter of 2009. Don?

Thank you, Steve. During the second quarter, we saw an improvement in our business that was helped by the stimulus package, namely in the asphalt plant and particularly, in the paving equipment business. Roadtec saw an upturn to a somewhat normal quarter after six months of very weak sales. The asphalt plant business continued at a normal level, although consisted of many more components and less new plant orders.

The aggregate, underground, and wood chipping business saw continued softening of their businesses. As seen from our numbers, this is the first time in the Company's history that the volume in the second quarter has been less than the first quarter. However, we were able to increase our gross margins in spite of the lower volume, less production man-hours worked, and heavy competitive pricing. Lower steel and component cost was the primary driver of offsetting the above negatives.

International sales, other than Canada, continued to be very weak during the quarter. We see large public companies continuing to be cautious on capital expenditures. Most of our sales are from private-owned entrepreneurial companies with strong balance sheets and with local lending.

While the politicians talk about encouraging banks to lend, the Federal regulators have not gotten the message. Borrowing continues, for many of our customers that need money, to be very difficult. We're fortunate to have a strong balance sheet, as McKamy said, with little net debt. This allows us to develop new products and broaden the base of industries that we serve, and to develop more products in tough times.

Looking forward to the third quarter, we've seen a pickup in international business in other countries that have previously been quiet. The weakening of the dollar has helped, along with higher oil prices and infrastructure spending -- infrastructure stimulus money in these countries. In the US, the stimulus money began to flow in April and May. This certainly helped the Mobile group and will continue in the third and the fourth quarters.

Although asphalt plant volume has held steady, it has been less complete asphalt plants, as mentioned above, and more in components. The Aggregate business is just now beginning to see marginal improvements, as stimulus jobs get started and aggregate inventories are reduced. The Underground and Peterson businesses have only seen slight marginal improvements from a very low level.

Federal highway spending continues at approximately $40 billion per year plus about $14 billion to $16 billion more from the stimulus monies. Most of the spending only started April 1, however. As you know, the six-year highway bill expires at 9/30/09. The trust fund is broke and will require approximately $8 billion in August for work to continue.

At this time, there are -- will be either one of two different bills that will pass, in our opinion -- either an 18-month extension with spending levels of $41 billion, plus the remaining stimulus that is not spent this year. We expect that to be better because of the late start this year, where most of the money didn't start to flow or jobs didn't start to flow until after April 1.

Further, the states are supposed to have a maintenance of effort in order to receive stimulus funds. We have not seen that occurring yet. Most of the states are delaying their normal spending and spending just stimulus money.

The alternative would be a new six-year highway bill that would be much larger, in the neighborhood of $450 billion. The House favors a six-year bill that they believe will be a great stimulus to the economy, and we agree. The Senate and the Administration, however, favors an 18-month extension. I would give the six-year highway bill probably a 50/50 chance of passing at this point. We'll really know more about which occurs in the next two weeks.

With all of this said, what do we see? We see a domestic market that is basically sending mixed signals -- good one week, and bad the next week; very inconsistent. What Washington is doing is scaring everyone. Everyone buys only what they must have, waiting to see how the law will change and what will be the new rules. We see international, however, improving. Their governments are much more predictable at this time than ours is.

With our present backlog and our recent incoming orders, we believe our revenues will be better in the second quarter; however, September 30 quarter usually experiences more delays due to customers delaying deliveries in the peak of their season; having more international shipments, which are prone to delays at the last minute and ships another; and more difficulty in obtaining financing.

In summary, although the market remains challenging, it also provides many opportunities. We are increasing our marketshare in many of our companies; we are developing many new products that reach other segments of the industries we serve; we are improving our existing products; and we are reducing our cost.

We will continue to operate our businesses to generate positive cash flow and generate profits. I am extremely proud of our Company Presidents and Group Vice Presidents in how they have -- and are adjusting their businesses in such a rapid and severe downturn. We will come out of this recession a much stronger and better company with higher marketshares and serving more industries with a wider variety of products.

Be glad to answer any questions any of you'd have at this time.

(Operator Instructions). Michael Cox, Piper Jaffray.

Thanks a lot for taking my questions. My first one is on inventory levels. It looked like up year-over-year. I was just wondering if you could comment on where you feel you are in terms of inventory and what sort of back-half order activity would need to be required to maintain the margins that you've put up in the first-half here.

Michael, we, I guess if you take the different segments, in the Mobile segment, we really had a buildup in inventory and they are gradually working that down. And it will continue to work down in the third quarter. In the Underground businesses, particularly the trenchers, in those, we have too much inventory. Unfortunately, volumes are still very low, and while we are making every effort to bring it down, that's probably the most difficult area.

At Augers, American Augers, their business is down, but their inventory is controllable. I'd say, in general, when we went through a period of where we had loaded up on componentry the way last year was running, we made the decision to go ahead and convert that product. And we -- if you could see the inventory mix, we've got less raw and purchase items and more finished goods, so that we'll be able to ship quickly when we do sell something. But we see that continuing to reduce down.

Okay, that's helpful. And I'm just trying to reconcile some of the commentary about improved trends in the second quarter. And looking at Mobile, it was up sequentially, but the year-over-year decline was very consistent with Q1, the backlog down 65% year-over-year. Just trying to get a better sense of what you're seeing that gives you this confidence that this is materializing, because it doesn't seem to be showing up in the numbers to this point.

Yes, I guess the Mobile is -- my comments concerned where it was the second quarter versus the first quarter, not year-over-year. And maybe I didn't make that clear.

First quarter and fourth quarter was terrible for Mobile and it was a -- we saw quite an improvement first over second for the Mobile. And I guess we're optimistic that that will continue in the Mobile area. There are more of these jobs -- the states, while they are -- a lot of them have got budget problems, they continue to spend the stimulus money.

There was a rash of orders to try to get the first half of it spent within -- or put to work within 120 days. They used up a lot of their engineer jobs and are now engineering other jobs. And in talking with the customers, I guess I'm pretty optimistic that, at least in the Mobile side of it, that theirs will continue to be a better-than-we-expected third and fourth quarter -- not necessarily that great as compared to last year, but when we get in the fourth quarter, it's a pretty easy comparison. It will be better than last year's fourth was.

We've seen also, I guess, a little more -- other than Canada, most of the international markets have sure kind of been dead for the last six months. We're seeing, with the dollar kind of stabilizing in a weaker level or at a weaker level, we're seeing -- and with the stimulus in the number of countries beginning to kick in, we are seeing more international business right now coming in than we've seen in the past.

Okay, that's helpful. And my last question is on the SG&A side. It looks like it's about flat sequentially, but sales were down a little bit quarter-over-quarter. Now, should we -- is this $32 million per quarter a good run rate that we should be thinking about? Or are there some cost-cutting that is not embedded in that at this point?

It's probably a good run rate. We are -- I guess, we are -- the two areas that we are not cutting is in sales and in engineering. We are doing a lot of product development or prototyping new products, and we'll continue to do that.

I guess our mission here is to kind of build products that would backfill for us in this down economy. Sometimes I feel like we developed all these new products and then when the market turns, it turns for all of them, and then we're back knocking out the walls of the building and adding again and upping our capacity. But we are developing some new exciting products that will expand our base of the products that we offer.

Arnie Ursaner, CJS Securities.

Don, I'm trying to get a little better feel. You obviously interact with customers all the time. We've had the highway bill delayed 18 months. We've seen contractors have much more aggressive bidding on various products.

I guess I'm trying to understand, if I'm the contractor, what's my rush to buy your product this year versus perhaps waiting until the highway bill is passed? Typically, you see a dramatic improvement in your business in year two and three of the highway bill, not before it or the first year. So could you comment a little bit on that and what you are seeing among the customers deferring eventual purchases?

Arnie, it kind of varies with the products. If you take something like a $4 million asphalt plant, they're going to defer that. And the only thing they're buying on asphalt plants is, they're buying a lot of the green systems, which reduces their drying costs and helps in the compaction of the asphalt. They're buying a lot of recycle bins, and in many cases, buying just partial plants. They'll put a double barrel on and stay with all of their existing equipment, maybe change the controls and put a new drum on, but they're not buying as much of the new plants or looking at expanding their markets.

On the mobile side of it, however, they're pretty -- we have many of them that basically have a large number of customers that trade about every 5,000 hours. It is so critical that you don't have any breakdown of equipment, pavers or milling machines, or shuttle buggies, when you're out on the middle of an interstate paving at night, the reliability of that equipment is critical. So, many of them will just very methodically trade -- and they basically buy that type of that equipment as they get the work.

It really is driven -- a lot of it is driven by these stimulus packages. As they get more stimulus, see more jobs, they're -- the other thing -- I was with one in Texas the other day, and he's -- due to the amount of stimulus work that was going out -- and he worries about going forward. But he says right now, he's got more than he can get done. So they're having to add a paving crew, so you end up with pieces of equipment to be added to that.

So, I hope that answers your question. But that's kind of what we're seeing. Most of what's buying is something they need right now.

But even on the work where there is stimulus activity, the bids are coming in 15%, 20% below the engineer's estimates. The bidding has been extremely aggressive for the limited amount of work. I'm trying to understand how that would affect the capital decision of the contractor.

I think there's some reality to what you're saying, but there's the rest of the story to it, too.

The state estimates are not very sophisticated. They basically look at what the last few bids and they use that as what they come up with the estimate. Last year at this time, we were seeing $600 to $800 a ton liquid asphalt. A lot of the states didn't factor in this downturn in the prices of liquid asphalt. We're seeing more like $350 a ton liquid now.

So, the state estimates were probably, in some cases, way too high. Now that does not -- there is a lot of substance to what you're saying too, in that people that were out of work typically in the asphalt side of the business, 50% of that goes to commercial and private works. And that part of the market is basically dead. So you've got more people coming in and there's a lot more bidders on jobs, and it's a lot more competitive.

This also, though, drives a customer that [too] he has to run more recycle to be low cost. And we're seeing, in every state, increases in the amount of recycle. And again, that's not factored in their bid estimates either. When I say their estimates, the state estimates.

So they're able to lower their costs substantially due to the recycle and due to the lower prices of the new liquid asphalt. But it's competitive, don't let me mislead you, but it may not be quite as bad as it sounds.

One or two more very quick questions. One, I assume you're not changing your willingness or amount that you're financing for customers in this downturn?

Well, we're doing -- our financing, basically, is zero. We have -- we've had one case, and that's only one case, our recourse is about zero where we have to guarantee. We had one case where a good customer had a bad year last year, that was very -- when I say bad, he didn't make any money; if they didn't make any money last year, they can't borrow any money.

So we've had a couple of cases where we were very familiar with the customers and we end up having to guarantee it. But mainly, there is not as many sources -- GE is not in the game any more. Probably the most aggressive is -- or I shouldn't say aggressive, but the best source is Wells and some of those that are doing financing, and local banks.

A quick question for McKamy. Repair and replacement in this quarter versus let's say a year ago, if you have those numbers?

On the CapEx?

Well, no. What I'm trying to get a feel for is when you have parts work, you tend to get much higher margin. I'm trying to go back to the very positive gross margin number and see if that was impacted (multiple speakers) --

Yes, your parts is down slightly.

Yes, they're down slightly but as a percentage of overall, typically, they're running 20%; they're about 23% this quarter. So it's -- but it's -- we're seeing, with the stimulus money, we've seen a pickup. There's a lot of -- parts business was down and continues to be. It was down 12% while our revenues were down like 32%. So -- and we're seeing people not spending on parts, again, until they start running the equipment, particularly the public companies.

Okay. We'll see you at our conference soon. Thank you very much.

Jack Kasprzak, BB&T Capital Markets.

I wanted to touch on the gross margin as well. That was up nicely in the second quarter from the first quarter. You mentioned some costs were down and I guess there's a mix improvement there. Would you -- but with competitive pricing, do you think that's sort of sustainable, closer to 23%, as we're moving into the back half of the year?

Jack, I guess I'd have to answer it by saying, I hope so. We saw a downturn in steel prices and there's, like everything, there is a delay in it. And while we are -- basically, are still probably using the last bit of the steel that we bought at higher prices.

Now, when I say higher prices -- last year, started the year on discrete plate at around $0.41 a pound. It went to [a size $0.75] on the East Coast and [$0.80] on the West Coast. And you can buy discrete plate in the 30s now. And I would say that probably our average during the quarter, cost of steel was more in the $0.48. Now there's a mix of that and there's some T-1 and heavier plates, or harder plates that are much higher prices. But we haven't really realized all the benefit of the decrease in steel prices, so that should help some more in the third quarter.

Component prices and other things like that, I'd say have leveled at a lower level. Again, as we eat up inventory and replace other, we'll probably get some more help from that.

We see probably a little better absorption in the third quarter. We've had a pickup in our aggregate business. I need to be careful how I say it -- it's pickup from a very low level. But I think we will probably have a little less under-absorption during the third quarter. So we're hoping we can maintain that margin. It won't be any better, I'll put it that way.

Okay, fair enough. I was going to ask too about the aggregates business. As you mentioned in your comments, the aggregates companies are ramping up production to meet stimulus projects. But at least when you look at the most recent guidance from some of the public companies, it seemed to be getting worse, not better, in terms of volume. So maybe if you could elaborate on what you're seeing there. Is it more private companies? Or how do you reconcile that?

I guess what we're seeing is they, the aggregate companies, were very -- some of them were very late and just cranking up, because they had huge inventories. And what we are seeing is that they are at least reducing their inventories and starting to buy wear parts now.

One thing that -- their product mix has changed a lot. As you start to do more asphalt jobs, most of that work is maintenance and overlay, which is half-inch minus aggregate, which requires more crushing, lower production rate through the plant because it's going through three crushers instead of two. And a lot of the inventory they have may be the larger aggregates that they've got to re-crush and make it smaller.

So there's been a ramp-up in the finer sizes of the aggregates, probably is a better way of saying it. New construction is practically -- is very low right now, not a lot going on. So base stone and things like that, they're not selling a lot of.

But the other thing we're seeing, Jack, is the movement to portable plants. And in a bad market or a down market, we sell, in the asphalt side, we've always sold plants with wheels on it when things are bad -- or in bad downturns. And we sell stationary and relocatable plants in good times. We're seeing somewhat the same thing in the aggregate side of it. Practically everything that we're selling right now has got wheels on it.

Okay. Also I wanted to ask about the highway bill. You mentioned also in your comments about a 50/50 chance of a new highway bill. Were you, Don, referring to a new bill by -- a 50/50 chance on a new bill by the end of September when the current bill expires? Or some other timeframe?

Jack, I guess the way I see it, by the time it expired or maybe during the fourth quarter, maybe with a small extension and fixing this shortfall. The House is very determined, and both Pelosi and Reid have both expressed that the highway bill would be a great second stimulus package. And we certainly would agree with that.

Of the stimulus money that has been spent, I mean, there's then $16 billion worth of contracts put out. Now, it all hadn't flowed through to spending the dollars, but the contractors are darn sure spending the dollars and they're buying some equipment based on those jobs.

But the Senate, obviously, is going along with the Administration. There's some thought that if the House would pass a bill with a strong support, that maybe the Senate would be forced more to look at a six-year bill this year. And that's why I put it at 50/50. The ARPA people feel like that there's still a good chance that we might end up with getting a bill this year. But (technical difficulty) that's one of those GOK deals -- God Only Knows how it's going to come out.

Well, one wonders, too, where the money's going to come from to fund a $450 billion bill, if that's the size of the new bill.

Yes, the only way they can do that, obviously, is we're going to have to have a tax increase or a gas -- a user fee increase when you buy a gallon of gasoline. But that -- with all that's going on with healthcare and everything else, it's concerning.

My concern on the 18 months, too, is that there is a lot of [log-in] for more transit and more things like that. And the bill may be a little different if we go 18 months. But it's anybody's guess right now. If you can predict what those guys are going -- guys and gals are going to do up there, you're better than we are.

Certainly can't do that, so -- but thanks anyway. Appreciate it.

Robert McCarthy, Robert W. Baird.

I wanted to ask about your outlook, Don. You talk about third quarter -- in the release, you talk about third quarter revenue being, in your expectation, similar to second quarter. And as you know, you always have a -- and I understand, you're talking about less of a seasonal effect in the second half than you'd normally see.

But I -- just so that expectations are set correctly, I just want to make sure I understand what you mean by that. Is that, for example, the likely high end of a range that you'd put on third quarter? Or is it a good midpoint, for example?

Oh, I think that's a -- it's a mid or lower point. The thing that we're seeing, Rob, I guess -- I hate to even bring it up, but we probably had $12 million short right on the bubble at the end of the quarter. And there's no need -- we usually go $12 million one way or the other. With a couple of asphalt plants, we had a big drill rig -- it didn't ship -- and other things like that, that fell into the third quarter, which gives us a good start in the third quarter.

But on average, of the first and second quarters probably in the range, I would think, that we could be at -- we've got enough backlog, we've got enough orders, incoming orders that it looks like it's reasonable, revenue-wise, in those ranges.

What do you think is -- just again, in terms of the short-term outlook, what do you think is the primary wild card coming?

Really, I guess -- if we had a major drop in oil prices, we'd be a lot better off if oil would get up in the $75 and stay there. The fluctuation in the oil prices and the fluctuation in the dollar can certainly affect it. We've got some international orders that -- I'll say firm verbals internationally right now, that if we had a certain drop in oil prices, they'd probably delay them, that -- and they may -- they'll be late third and early fourth quarter shipments. You know, there's things like that, that would be the wild card.

Right. And if, for example, the third quarter works out as you suggest, and given all the positive contributors to gross margin you were talking about -- you know, better absorption, lower material costs, lower man hours, et cetera -- why wouldn't you expect gross margin to be at least as good as it was in the second quarter? I mean are we talking about -- I guess we're talking about a greater impact from pricing in the third quarter?

It's a tough market right now and I guess that's the main thing that's the wild card that I can't -- that worries me, to be truthful. And to be honest, I mean, our guys are kind of taking the approach we've got to do what we've got to do to keep the shop and keep these plants filled. And right now, with pricing the way it is and the competitive nature, there's a real fine line between being brilliant and being stupid. And we may slide over on the stupid side a little bit in this kind of market.

Finally, isn't this the kind of market where some of your smaller competitors might be more compelled to fall on the stupid side, as you put it?

Yes. Yes, there's no question. The thing we've -- in a lot of the equipment, we've really got strong market shares and we've got really technical advantages over some of them in the advanced technology in our products. So sometimes the customer is going to buy from us, but they're going to beat us over the head with a cheaper price. So, we see a lot of that.

It's -- and I guess, Rob, I'm answering the question domestically. Internationally, it's a little different. There will probably be more international sales or volume going out in the third quarter than there are domestic. The domestic market is still tough-tough.

And I mean, how do we think about -- I mean, historically, I would think that domestic sales would carry higher margins than international?

Historically, no. Generally, international has been a little better.

Okay. So more upward pricing -- more pressure on upper (multiple speakers) --

Yes. Don't talk me in going above where we were, though, because I just won't see that.

Fair enough. And although it's -- I mean, you just recently suspended guidance. And I'm not asking you to start doing it again, but I'm wondering how you're thinking about it. I mean, visibility has clearly improved some. Is it just -- let's see how the year works out and maybe we'll think about it for next year? Or are you maybe of a mind that it's just not necessary?

No, Rob, I think in fairness we need to do it and we'd probably look at it for next year. You know, frankly, the guidance I'd have to give is if the 18-month extension is what's passed, I think next year is going to be another '09. I mean, it's practically going to be a repeat of this year.

With some hope that the domestic market may start to improve in things other than highways and international should -- if the overall economy starts to improve next year, it would help. But if I had to give visibility to the next 18 months, if they pass that bill, we're just going to wallow along at this same level, about where we are, through next year.

Yes. So there's the difference-maker for 2010.

Right.

Can I just ask McKamy for a couple of numbers and then I'll (multiple speakers) -- of delay?

Sure.

McKamy, can you give us the revenue contribution? And maybe I should say net revenue contribution -- to acquisitions -- from the acquisitions of Dillman and your Australian distributor?

The bottom line to that, there's a quick answer I can give you, is a penny.

So that's the bottom line, but you don't have the revenue contribution?

I can get it, just a second.

Okay. And the other thing I was going to ask was -- when you were giving the domestic versus international backlog, at the end of the quarter, did you give the prior-year comparison? I mean, I missed it but --

As a percentage of total sales, Rob, is about the same percentage. But on backlog, though, I think probably international was stronger.

Are you asking for the international backlog?

From a year ago.

Okay. I can do that in just a second. (multiple speakers) I did not give it to you. Right here it is, though -- last year, the international backlog at the end of June was [$107.9 million].

Thank you, McKamy.

Now, your first question -- David, have you got the revenue?

Yes, $9 million for the quarter.

$9 million for the quarter is the answer to the first question.

Okay. Thank you very much.

Walt Liptak, Barrington Research.

My question is on the inventories. You addressed some of it, talking about the Underground having too much inventory, but that's a relatively small group, and with the inventories at $267 million. I wonder if maybe you could talk about where the -- what kind of products you have in finished goods inventory.

When we were out recently, there was a lot of mobile products that were in the parking lot -- and just what you're going to be able to do to get those inventories down over the next two quarters, six months, something like that.

Yes, the Roadtec really -- I don't know another way of saying it, but their inventory just basically started -- I mean, their sales started in April, is about what it amounted to. It was kind of a tough -- basically, first quarter, there was nothing happening there. It was very slow. Everybody was waiting on the stimulus.

We see that continuing to decrease. I see on the Aztec operation, which is the largest of all of them, is probably staying level. They had, as I mentioned, a couple of plants that didn't go out and it could have changed that. We -- strange as it may sound, there is not much used in used equipment and asphalt plants. We actually bought three used ones that we will rebuild sell, and that kicked our inventory up in the $4 million range there.

So -- but I would say basically, in all of our businesses, the finished goods is where the bulk of the inventory is. As of the end of June, we were -- we started the year at $104 million in finished goods and we're about $96 million, so we worked it down a little bit. [Raw and] purchase is down more than that, so we're gradually working the raw and purchase on down, so.

Okay. How much of that $96 million is in the groups that are getting the operating losses, like the Underground group?

Basically in the underground, you've got about $30 million -- in finished goods, about $33 million of it.

Okay. And just looking at the profits, the operating losses in Underground and in All Other, could you talk about what you can do to get to a lower breakeven level? And when you would think you would be at a breakeven?

Well, I guess the two underground companies are Astec Underground and American Augers. American Augers, first half of the year, had a number of the large V500 drill rigs, which were the first ones of the larger 1500 horsepower that we've built. And there was very low margins, if not a loss, in the first couple that we built. Just -- they basically were the first out of a certain model, and that's not unusual.

While their volume is down, their breakeven has been lowered and we have actually laid off employees there. We still -- sales are very slow. We've tended, at underground, where the trenchers are, the utility trenchers are really very, very slow. And we have -- we basically continued to downsize that business, go to short work weeks, do everything that we can to reduce the losses there.

Okay. Thanks very much, guys.

Rich Wesolowski, Sidoti and Company.

I want to revisit pricing for a second if we could. Don, you talked about under-absorption, which is, I imagine, par for the course, the industry. Your inventory is up, steel prices are down. I would have expected that by now you would have had to significantly lower your prices in the US. Would you expect that you're going to eventually emerge from the recession without having to go through a more painful round of cuts than you've already gone through?

I think we've done all we're going to need to do. And I guess one thing that helps -- there is less pressure on pricing when you are selling components than there are on complete plants and larger pieces of equipment.

The thing we're probably seeing, Rich, is most of the work we're doing in the aggregate and in the asphalt, there is a heck of a lot of engineering required because you're fitting into their existing equipment. Not everybody is really capable of doing that. So we don't have quite the pricing pressure when we're doing a lot of retrofitting, and the pressure is not near as strong as it is on a complete package.

We're fortunate in a lot of areas with the technology we have, too. In certain products, there's just nobody got anything quite like it. So, while our customers are tough buyers, we still are able to -- I don't see it any worse than it is right now, to answer your question.

Okay. So on the back of that answer, pricing doesn't seem to be a huge worry -- it's not a plus, but it's not a huge worry. You have a good balance sheet. The margins are holding up. Are there any big risks out there? Is there some event or aspect of your business that you see as a potential shoe to drop? Or is the risk merely that you don't rebound too soon from where you are now?

I think it's just strictly on the rebound. we're in good shape and we've got a lot of exciting products coming out. The geothermal drill rig is working very well; got some early orders for that.

We are in the process of setting up the first concrete plants, which we think that's going to make a major improvement in the concrete industry. The combination of Peterson, Astec, Heatec, and Kolberg-Pioneer, we're in the process of putting together a package on wood pellet plants, that where we would take full trees and take them down, convert them into complete dry wood pellets, that's like a $8 million to $10 million plant. A lot of exciting new things that will be good products for us in the future.

Eric Glover, Canaccord Adams.

I was just wondering if you could comment on the trend toward utilization of more mixed asphalt? And if part of the stimulus spending is accelerating that trend at all?

The fact is that we've got more work with the stimulus, is certainly helping that. We've been very fortunate; that is growing very -- that's continued to grow and be good for us. We put out over 200 of the modified -- the package modifying the equipment now, and continue to build on that, probably 5 a week, something like that, which has been a good package for us.

It reduces their drying costs by 14% to 15%, if they drop 50 degrees in temperature. So it's kind of a no-brainer on ROI's, if they're running any mix, their ROI is about six months on it. So it's -- and on top of that, they get the bonus of being able to, in most cases, eliminate one roller on their compaction train, which is a big number.

So that -- we see that continuing. We see it as probably becoming the standard in the industry. Norm Smith was out at an open house at one of Old Castle's companies had in Montana the other day. And there's a neighbor that lived next to the guy that owns the plant, and he -- they just started up the new plant about six weeks before.

And the guy said he ran into the neighbor and he said, when are you going to start the new plant? And he said, well, we've been running for six weeks. And he said, well, you can't see it, and you can't hear it and you can't smell it. Surely, you hadn't started it. So, I see that as a major driving environmentally as well as the economics going forward.

Okay, thank you very much.

Kristine Kubacki, Avondale Partners.

Just a couple quick questions. And forgive me if you answered this, but I was just wondering if there was a little bit of a jump in other income quarter to quarter? And so I was wondering if you could just give us some color there.

It's just a small amount of investment income, primarily related to the funds that we have set aside for our insurance company -- it's an internal and captive insurance company.

Okay. And then a little bit on the asphalt plants. You mentioned that you were seeing more components than whole plant. I'm just wondering, do those components go into backlog? Are they a relatively -- I hate to use the word, off-the-shelf kind of item, but I was just wondering -- seeing -- trying to dissect the backlog a little bit more on the declines there, if you're seeing that, the shift towards components, is that maybe augmenting the decline there? Maybe it's not as bad as it looks?

In some cases, yes; in some cases, no. Generally, we've got the same number of parts sales as we do new equipment sales. I mean, it kind of depends on which side it comes through.

Typically, a replacement drum on a dryer or something like that will go through the Parts Department. And those have been fairly strong. If it comes through New Sales, it goes through there; it kind of depends on which salesman got it (multiple speakers) --

As far as backlog goes, it's counted either way.

Yes, it's counted either way, generally. So, backlog is about flat with the first quarter, is about what it amounts to.

Okay. And then you were just talking about the environment, environmental kind of regulations. And I've been watching carefully with -- about the Cap and Trade legislation. I was wondering if you guys had any thoughts there, if that would drive any -- either customer behavior negatively in terms of asphalt plants, or would it -- could potentially be a positive, as you try to push it more into the environmentally-friendly --?

I think the driver of all of that will be more -- continue to save energy costs and continued to reduce costs. Economics will be the winner more than that. I guess the Cap and Trade, as we see it, is just a tax on everybody. And I don't -- I'm not very much of a fan on that. I think if you can reduce energy costs, people will do that and they'll do what helps the pocketbook. But really, the amount of fuel that we re-use on this equipment is kind of insignificant as compared to a power plant or something like that.

Okay. Thank you for the time.

Morris Ajzenman, Griffin Security.

I want to revisit one last time the inventory question, the issue. When I look at the numbers here, you exit calendar 2008 with inventories of approximately $286 million. And for the first quarter, you brought that down about $8 million, $9 million, to $278 million. And then this most recent quarter, it looks like it's $267 million.

So it has come down, but if you compare it to June '08 of last year, it's about $32 million up. And last year, in calendar '08, you had revenues of $975 million. This year, you'll probably have $800 million or so. So it's down significantly.

Is it fair that extrapolating those sorts of numbers, that the inventory levels should be at least as low as it was June of last year or even lower?

We'd like for it to be. If you're ever riding on a high-speed freight train and have the thing hit a wall, that's kind of what happened about October. And basically, our volumes went down and we had a choice of making -- you convert the raw to purchase and slow the thing down as fast as you can.

And at the same time, in a down economy, trying to reduce it when you're trying to not have any more over-absorption or lay off any more people, that's kind of the balance you run into. It's not a -- there's room for it -- to answer your question, it should be down in the $234 million -- or probably below that. But getting it there takes a little bit of time.

After you've -- we've laid off about 950 people from a peak of 4,300. And you're trying to balance not having any more under-absorption -- over-absorption in the plant -- under-absorption in the plant than you can stand. So you're still manufacturing, but trying to reduce inventory while you're doing it. So that's the challenge you've got.

So it's a balancing act. So that if the 18-month extension happens rather than the new renewal of the six-year highway spending bill, then in the ensuing quarters, you're going to see a continual reduction in inventories to levels like that.

Yes, you'll see it continue to come down, but it will come down slow on the cost (multiple speakers).

Understand.

And your highway bill is not necessarily going to help your Underground segment.

Right, that's [going to stay up].

Yes.

And one last comment/question or whatever, backlogs -- what are they, $134 million? Based sequentially kind of on changes, though, do you want to go forward and say that we've actually reached a low in the backlog?

Yes, I think this is about a sustainable level where we are right now. The other thing that should be added to the inventory -- McKamy just handed me a note, too, is -- we bought $14 million in inventory with the Australian company and Dillman. So, that -- it's really, even though it's up $32 million from last year, it's really up about $18 million.

Okay, so $14 million is not in year-ago numbers?

That's correct. That came in, in about November.

Okay. So from a perspective of cash flow drag, that $14 million increase is really not a drag to cash flow. Okay, fine. Understand.

Okay.

Thank you, guys.

Stefan Mykytiuk, Pike Place Capital.

Yes. Actually my questions were answered, so thank you.

Alan Brochstein, AB Analytical Services.

Hey, Dr. Brock. Thanks for taking my call. I just had two quick ones. First of all, on the acquisition front, are you seeing anything? Or is that really on the back burner?

And then second of all, in terms of -- last year, you were going through with a customer and started to deliver shallow drills. I think you've talked about it a little. I was just wondering, with other customers? Or is that [sort of] a one-customer product?

We've sold a number of them, to probably six different customers at this point on the drills, to answer that question. And it's, frankly, with the price of oil and the price of natural gas where it is, it's slowed considerably. We have a brand-new plant up there that we built in anticipation of building a bunch of these. And unfortunately, it's just sitting there practically empty at this point. So we could be helped if we get up to $75 a barrel.

Some of the equipment is operating well. There's probably close to 20 of them out. So, it's a great product and we're still excited long-range; but short-range, it's not -- we just don't have the business in it.

And then your first question was -- acquisitions. We've looked at a number of acquisitions, but I guess people want to sell them based on '07 and '08 earnings and multiples that we had last year. And with the market the way it is right now, we haven't seen people getting very humble at this point. So, at the range of prices that they're presently -- we're presently seeing, we're not being very successful.

Okay. Thanks for taking my questions.

Arnie Ursaner, CJS Securities.

Hi, Don. A couple of quick follow-ups. One, what is your non-residential exposure -- non-residential construction or exposure?

(multiple speakers) I guess I'm trying to follow -- the only residential of our products that go in, that the major one would be the small trenchers and the small drills, which in dollar volume, I guess, at our peak was probably $40 million or $50 million in volume. The customers, the asphalt customers in residential now, I would say probably there's 15% to 20% of their business of asphalt payment go to some type of residential pavement.

What I was trying to get to, Don, maybe I'll word it a different way -- is obviously, the highway bill, you've tried to explain to us over the last few years, you've reduced your exposure directly to highway, and expanded in other commercial type applications. What I'm trying to get a feel for is, many people think that in 2010, non-res construction activity will be non-existent. I'm trying to understand, if we were to have a shortfall in non-res construction activity, what percent of your revenues would be tied to that part of the equation?

I would say our customers probably, of their products, probably -- in the stone and in the asphalt, in commercial and residential combined, it's probably 40% of our customers' business goes to commercial and residential. And the commercial and residential basically has about stopped, and has been stopped this year.

So going to, again, trying to clarify, not your guidance but your comments regarding the 2010 outlook, I just want to make sure we all understand what you're trying to say. Obviously, the 18-month hiatus on the highway bill would affect the public piece of this. I'm trying to get a feel for what (multiple speakers) --

Yes, and Arnie, domestically, that's all we've got right now. Our customers are basically just doing public works. I'm saying that commercial and residential is basically, absolutely dead right now. And that if -- to rock along at this level, we're basically depending on public works.

So if we were to think about 2010 embedded in a global view, would be a pretty good improvement in the public sector, offset by continued weakness in the private? Is that (multiple speakers) --?

That's what I am seeing, is basically, it's just -- if, with an 18-month extension would be, we would have another year just like this year, which is started -- it got a late start due to the stimulus money. I think 2010 will be, domestically, very much the same, with the caveat that you put in that maybe by this time next year, you will start to see a pickup in the overall economy, which would bring back the residential and commercial a little bit.

But even to be flat with '09 next year, you are embedding in that an assumption that there will be a pretty good recovery in public spending, offset by the weakness in private, even to be flat year-over-year.

Yes, I'm really saying, public spending will be about like it is right now. I mean, what I see, with 18 months, they're proposing to spend $41 billion federal money, and they will have another carryover of about $14 billion from the stimulus. So that makes that federal funding about level with this year, maybe up 2% or 3%. I think the state spending will be about like it is at this low level. But I don't see any commercial work much next year until this economy recovers. I do see an improvement in the international for next year.

I guess I'm still trying to understand the math. If non-res construction and commercial, if you will, is 40% of your business and it doesn't recover next year, and you only have a very modest improvement in the public work, I'm unclear how you would get to flat.

Well, what I'm saying is, we're flat over where we are right now. The 40% in the aggregate, in the asphalt of our customers' business is non-existent today. It's already dropped off that much, Arnie. That's what I'm saying.

That was prior years.

That's prior years, when it was 40%. Right now, it's nothing. I mean, that's where I probably confused you. But in '07, if you go back then, it was probably 40% commercial and residential for the aggregate and asphalt customer. And today, it's been dropping off. And today, I'd say it's just practically non-existent. So we're just saying we're going to wallow around at this same level for next year.

Okay, thank you very much.

We have no further questions at this time. I'd like to turn the floor back over to management for any closing comments.

Okay, thank you, Claudia. We appreciate your participation on our second 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 August 3, 2009. 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. And all of that information is contained in the news release that was sent out earlier today.

Thank you very much for your time.

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