Astec Industries Inc (ASTE) 2009 Q3 法說會逐字稿

Greetings and welcome to the Astec Industries' third-quarter 2009 results conference call. 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, Steve Anderson, Director of Investor Relations for Astec Industries. Thank you, Mr. Anderson, you may now begin.

Thank you, Shea. Good morning and welcome to the Astec Industries conference call for the third quarter of 2009. As Shea mentioned, my name is Steve Anderson, I'm 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; McKamy Hall, Vice President and Chief Financial Officer; and David Silvious, our Corporate Controller.

In just a minute I'll turn the call over to McKamy to summarize our financial results and then to Don to discuss our business operations and market environment. In the way of disclosures I'll note this morning that our discussion may contain forward-looking statements that relate to the future performance of the Company and that 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 things over to McKamy to summarize our financial results. McKamy?

Thanks, Steve. We appreciate each of you joining us this morning. The sales for the quarter were $166.1 million compared to $237.4 million in Q3 of 2008 for a decrease of 30%. The failure of Congress to renew the Highway Bill on a timely basis always makes the visibility more difficult. International sales were $64.8 million versus $102.1 million and 2008 third quarter for a decrease of 36.5%.

International sales for the quarter in 2009 were 39%. International sales in 2008 for the quarter were 43%. International sales are being assisted by approximately 25 stimulus programs in foreign countries. The decrease in dollars occurred in the Middle East, Africa, Asia, Central America, Australia and Europe.

Domestic sales for the third quarter were $101.3 million versus $135.3 million for a 25.1% decrease. Park sales for the third quarter were $46.1 million versus $54.9 million or a 16% decrease. Aggregate and mining had the largest decrease followed by the Underground group. Asphalt group and mobile Asphalt Paving had slight increases. The reduction in volume at some of these parks areas is indicative of some machinery not being repaired as it normally would be in better economic times.

As far as the pie, sales pie, aggregate for the quarter provided 33.6% of the sales; Asphalt 26.8% of the sales; Mobile 22.2%; Underground 10.2%. For the year, year-to-date sales are $560.2 million versus $778.2 million for a decrease of 28%. The international sales year-to-date are $197.8 million versus $287.7 million for a decrease of 31.2%. The decreases occurred in Central America, Europe, Canada, Middle East, South America, Asia, Australia, Africa and China.

International sales were 35.3% of net sales year-to-date compared to 37% for last year. So the international has held up as a percentage quite nicely. Domestic sales year-to-date are $362.4 million versus $490.5 million, a decrease of 26.1%. Domestic sales are 64.7% of total sales in 2009 versus 63% in 2008. So a slight increase in domestic as a percent of year-to-date sales.

Park sales year-to-date were $136.2 million versus $158 million for the prior year for a decrease of 13.8%. Parks year-to-date were 24.3% of total sales versus 20.3% of total sales in 2008. Sales reduced by segment -- sales asphalt was 35.2% -- I'm sorry, let me start over on that. On the year to date pie, the asphalt segment provided 35.2% of the sales; Aggregate and Mining were 29.1%; Mobile 18.8%; Underground 9.7.

Consolidated gross profit for the quarter was $34.7 million versus $58.8 million or a decrease of $24.1 million or 41%. The gross profit percentage decreased 390 basis points for the quarter to 20.9% for 2009 from 24.8% in 2008. The ranking of these segments by gross profit -- Mobile Asphalt Paving was at 24.8%; Asphalt at 24.2%; Aggregate at 22.7%; Underground at 4.6%.

I think it is noteworthy that the Mobile Asphalt Paving had the only sales volume increase for the quarter and increased the gross margins by 1.4% -- or 1.4 points. It is also noteworthy that the aggregate segment had a quarterly sales decrease of 38.1%, but increased the gross margin 10 basis points.

The under absorbed overhead increased in the quarter and that's a reflection of the decreased sales and the underutilization of capacity. Our manufacturing man-hours for the quarter actually declined approximately 33% from the same quarter last year. On the consolidated gross profit year to date we were at $121 million versus $191.3 million or a 36.7% decrease. We were at 21.6% versus 24.6% or a decrease of 300 basis points.

On a pie basis, the aggregate group provided 25.3% of the margin or margin of that amount; Mobile Asphalt Paving 23.3%; Aggregate and Mining 22.8%; and Underground 7%. Under absorbed overhead increased approximately 200% as a reflection of the reduced volume. Our total manpower was down 18.8% and our manufacturing hours were down approximately 32% year to date.

On the SG&A, SG&A for the quarter was at $30.4 million versus $34.3 million, a decrease of $3.9 million and that's primarily in payroll, commissions, [surf], with increases in R&D. And these dollars certainly did not reduce as rapidly as our sales, as mentioned in our press release, therefore the percentage that we have as a goal was not met for SG&A.

On a year to date basis and the SG&A was $93.5 million or 16.7% of the sales compared to $106.6 million or 13.7% of the sales. We did have a decrease of $13.1 million. Those decreases were in the payroll commissions, ConExpo and surf areas with increases in R&D. Income from operations for the quarter was at $4.3 million versus $24.5 million or a decrease of 82.4%. On a year to date basis it was $27.5 million compared to $84.7 million or a decrease of 67.5%. Mobile paving is the only segment with an increase in income from operations.

The effective tax rate for the quarter enjoyed some additional R&D tax credits that were taken in this quarter reducing the effective tax rate from 34.7% to 28.2%. The net income attributable to controlling interest for the quarter was $3.3 million versus $16 million prior year. The diluted earnings per share were $0.15 versus $0.71 for the prior year. So a 78.9% decrease.

Year to date the net income attributable to controlling interest was at $18.5 million versus $54.6 million, a decrease of $36.1 million or a 66% decrease. The diluted earnings per share were $0.82 versus prior year of $2.41 or a 66% decrease.

The backlog at September 30, 2009 was $144.3 million versus $261.9 million, a decrease of 44.9%. Now the international backlog at September 30 was -- of 2009 was $74.7 million compared to $115 million at September 30, 2008 for a 35.4% decrease. The 9/30 international backlog was 4.6% higher than the 6/30 backlog -- 6/30 of '09 backlog. The September 30 domestic backlog decreased from $146.2 million to $69.6 million for a 52.4% decrease.

The Mobile -- the Asphalt Mobile Paving segment had the only increase in backlog over the prior year. The September 30 backlog is $144.3 million compared to the June backlog of 2009 of $133.6 million, so it was up $10 million sequentially from June to September or 8%.

Our balance sheet is very strong; we are certainly positioned financially to weather the economic conditions which we currently face. And we continue the improvement of our current products and development of new products. We also have the strengths in our balance sheet to allow us to evaluate strategic opportunities.

Our receivables are at $65 million versus $93 million, days outstanding were at $35.9 million versus $36.4 million, so we don't have a problem in that area. The inventory is at $263.7 million versus $249.4 million, that's an increase of $14.3 million, but $11.4 million of that relates to acquisitions that were made last year. To make it comparative you've got to take the $11.4 million out of the $14 million increase, so we're just about flat.

Our inventory turns are at 2.1 versus 3.2. The primary component of inventory that is up -- is the finished goods, our other components of inventory are down. We owe nothing on our Wachovia $100 million credit facility and we do have $36.1 million in cash and cash equivalents on the balance sheet. We do have letters of credit that are being utilized against the $100 million credit facility, that leaves our borrowing availability at $91.4 million at the end of September.

Our capital expenditures for Q3 were $3.2 million. Year to date our capital expenditures are $12.4 [billion] and that compares to year-to-date depreciation and amortization of $13.5 million. The cash flow will be attached to the 10-Q filing.

I would just close by saying that I think all of our subsidiaries are attempting to right size each operation and control costs. And at this level we certainly do need sales to absorb overhead and utilize capacity. This concludes my prepared remarks. I'll be available to answer any questions you have later in the call. We do appreciate your interest in the Company.

Thank you, McKamy. At this time Dr. Don Brock will review Astec's business operations and market conditions during the third quarter. Don?

Thank you, Steve. Our third quarter was very disappointing. As we mentioned, we had weak revenues during the quarter. While in the past we have talked about usually having about $12 million in volume on the bubble it could go either way at the end of the quarter.

This quarter we had approximately $26 million in delayed shipments. Delays were caused by lack of either both domestic or international financing, waiting on permits or the customers just not being ready to accept the products. Most of these delays, about $14 million were in asphalt plant type equipment.

In addition to shipment delays sales were very weak in the Aggregate, Underground and other groups. Year-to-date Asphalt and Mobile are basically down. As McKamy mentioned, Mobile was up during the second quarter, but year to date they're down slightly, but consider pretty good compared to the market.

During the quarter Tom Hill resigned as a director of our company. Tom was former CEO of Oldcastle Group and after leaving Oldcastle last year became one of our directors. Tom has launched a new startup company, Summit Materials and has made his first acquisition. Since he will now become a potential customer he could no longer serve as a director. We want to recognize how we appreciate his service and counsel on our Board and wish him well in his new company. We look forward to again having him as a customer.

In September we acquired the assets of Industrial Machinery (sic) & Integration, a small company in Walkerton, Ontario. This company has a very unique pellet press used to form wood pellets and bio -- other bioenergy products. We intend to manufacture these pellet presses at our BTI operation in Thornberry, Ontario which is about an hour away.

This product, along with the Peterson chippers, KPI conveyors, Astec dryers and Astec burners and Astec storage bins allow us to provide a complete modular wood pellet plant. We believe with the demand for renewable energy wood pellet demand will increase around the world and this will become an excellent product for us. During the quarter we saw credit remaining tight and our customers remained very cautious during the quarter.

As we look forward to the fourth quarter with the ending of the six-year highway bill on September 30 and little progress on the new highway bill in Congress, our customers are very reluctant to make major purchases. Partial plant upgrades are more normal and only mobile equipment needs for specific jobs are being purchased. We expect domestic sales to remain about the same level until a new highway bill is passed. With the various controversial bills in Congress at this time there is little interest in a new highway bill.

We also continue to see little improvement in residential or commercial construction. On the positive side the weak dollar and improvement in international economies has given us a pickup particularly in the asphalt and mobile segments in international sales. International sales represent about 50% of our backlog going forward. We saw a tremendous downturn in international sales when the dollar strengthened, but the volume there has begun to pick up as the dollar has reweakened.

We continue to push new product developments and expect to produce a number of new products during the next two quarters. A few of these examples are -- one, a high-capacity RCC or roller compacted concrete plant that will operate to produce base RCC or continuous concrete; secondly, a combination burner that will burn oil, gas, coal or wood for asphalt plants and can be retrofitted to power plants; thirdly, the new pellet presses that we mentioned above; fourthly a complete entire wood pellet plant.

These plants basically sell for in the $12 million range. We expect to see a lot of great potential growth for this in the years to come with the need for renewable energy. Peterson has produced a high-capacity drum type chipper which again feeds these types of plants. We've also introduced our first two models of the geothermal drilling rigs at Astec Underground and are developing parabolic solar mirrors for heating hot oil for asphalt and for other uses.

Our mobile equipment companies unfortunately are spending more of their R&D in design of 64 different models to accept the larger more costly Tier 4 engines now been required by TVA which must be -- EPA which must be in operation by January 2011.

In conclusion, with all of this said we do not expect the fourth quarter to be much different from the third quarter. With the most likely 18-month extension of the Highway Bill at its present funding levels with maybe a slight increase, we expect 2010 to be similar to 2009 in topline revenues. We hope that our many new products will help us to backfill lost volume from our existing businesses; however, the speed of development, acceptance and growth of these introductions is still uncertain.

Fortunately our balance sheet is strong and we see a lot of opportunities on the horizon for our new products and to increase the market share of our existing products. With that we'd be glad to answer any questions. Thank you.

(Operator Instructions). Jack Kasprzak, Branch Bank (sic).

BB&T, of course. With regard to the next highway bill, in your comments, in the press release and on the call here, did you guys sense or get during the quarter, the last few months that customers were disappointed that there was a new highway bill, that maybe there were orders ready to go and some sense of optimism that with stimulus and perhaps a new highway bill we could glide right through this but it didn't happen and so there was a bit of a downshift in sentiment and orders in the quarter?

Yes, Jack, I think that pretty well sums it up. I don't know how many customers I've talked to said we need to do something but we're just going to wait to see what happens. The proposed highway bill that's out there probably would be a pretty darn good bill for asphalt. It's not a good deal for the country. It has no new capacity but it's all for maintenance. It shifts more to transit, more percentage wise from like 18% to 22%.

And I guess while they're talking about a pretty good increase, there's still a real worry about where they're going to get it, nobody wants to increase the gas tax. And right now that's about the only way that they will be able to fund it. So as a result of all of that, it makes our customers very cautious. They, instead of buying new plants or doing partial upgrades on mobile equipment, they're buying it just when they need it.

I'd say in general the amount of work next year will probably be similar to this year, but they dislike the optimism. I think you pretty well hit on that. We seem to go through this every six-year highway bill. We'll pass through it; it does lead to a little pent up demand when it's all over. But there's a lot of cautiousness right now. I think also the potential tax increases and all these other bills just -- everything all together going on in Washington makes most business people nervous.

Sure. Secondly, and McKamy mentioned the inventory and that most of the increase was from the effect of an acquisition. But are the inventory levels at a point where it's a little more difficult to continue to build them and you might have to consider taking some further down time, idling capacity, measures like that in the face of this uncertainty?

Basically we did that that during the third quarter, Jack. We still are working inventory down or trying to and it's just difficult to get it done. We know with this type -- with this type of market. So, yes, we've continued to shrink and are continuing to shrink really the workforce a little more, we're down from about a 4,300 peak to around 2,300 now. I mean 3,300 now, about 1,000 employees. Maybe down another 100 or so; I don't see us going much lower than that.

Okay. And finally on the tax rate. Again, McKamy mentioned what happened in the quarter. But would you guys think it would bounce back up to that more normal mid 30s rate in Q4 and beyond?

Yes, I would think so, Jack. Although we are spending a lot on R&D in new products. We're pretty excited about some of these to backfill and as a result, since we have the cash, we are spending the time to do that. We're also -- I might say we haven't really done any shrinking of sales forces; we're trying to keep those in place.

Okay, great. Thanks very much.

Arnie Ursaner, CJS Securities.

Good morning. Starting with you mentioned $26 million in delayed shipments in asphalt. If I look at your backlog growth in asphalt, it was one of the few places where you actually had a pretty good sequential change. The materials that didn't ship, would that have been in the asphalt backlog?

There was about 14 in the asphalt at Astec itself, Arnie; the rest of it was scattered between the other companies. And I would have to say that that was kind of in their case 14 they expected to ship, a lot of them they shipped the week after the end of the quarter. Getting the money in right now, a lot of it we don't ship until we get the money is more difficult in this market, as you can expect.

Don, in your prepared remarks you indicated -- I think you said that revenues would stay at around the same level for a period of time. Normally you see a pretty sizable seasonal pickup in Q1 and 2 of next year. Should we think about -- when you say at the same level, around the $166 million of revenue we did this quarter (multiple speakers)?

No, Arnie, I guess the point I was making, I think the fourth quarter will be maybe similar to the third quarter and next year will be similar to this total year. But first quarter and second quarter will always be the strongest.

Okay. So you were not trying to mention the current level staying at that level going into next year would then not have a seasonal pickup?

No, no. We'll have the seasonal pickup. I guess I want to be cautious, but I think some of these new products were not in our budget and we don't have them kicking in much. When I make that statement I think that's our basic products, but we do expect to get some benefit from some of these newer product offerings.

One other question I have as a follow up to Jack on the inventory question.

Right.

He mentioned -- he focused on the impact from the acquisition, but I was more focused on McKamy's comment that it's primarily finished goods. If it's primarily finished goods and you're about to enter a four- to six-month seasonal slowdown period and it's -- how do you continue to manufacture without just overwhelming your facilities? And to the extent you have to shut them down in any material way, the gross margin absorption, leading to a question of can you even stay profitable in Q4 --?

Arnie, let me stop you a minute. What I was referring to was the change in dollar volume. The finished goods at 9/30 this year versus 9/30 last year, okay, was up $32 million. Just the primary changeup, okay, or increase. And of that I think $11 million came out of acquisitions. So we're only talking about an increase in finished goods of $20 million. We don't have a monumental amount of finished goods; it's only up basically $20 million over where it was last year.

Let me add to that. Year over year this time last year we were pretty well loaded up with steel and a lot of componentry that we had bought ahead due to the inflationary period we were in. We made a conscious decision before we did major, major employee cutbacks to go ahead and convert that to finished goods. And that's about what we're still living with today; we're not increasing those any.

And, Arnie, the other thing, it's more and some of the -- where we got these finished goods is more in the businesses that are not doing -- that are really off a lot. The Underground, Peterson and in the Aggregate companies are all down, some of them in excess of 50%. And whittling the finished goods down there has been very difficult. In the Mobile and Asphalt side we really don't have much finished inventory. Roadtec has worked theirs down very well and Astec has nothing that's finished goods inventory at this point that's not sold, I'll put it that way.

Staying on inventories for one more second. Steel prices have dropped quite materially. What is your cost of steel currently versus market -- cost of steel in your inventory versus market?

We're pretty close to market right now. We worked through most of the high-priced steel. What we would have would probably represent less than 10% of our steel usage. And it would be at numbers like in the high 40s versus market is in the mid 30s now or the high 30s.

If I can ask one final question on your new product. You mentioned a wood pellet plant that might cost as much as $12 million. Who would be your target market for that plant?

Arnie, with the renewable energy requirements in Europe and in Australia and most of these countries and it probably will be in the United States, it's anticipated they're going to require utilities to burn 20% renewable fuels. Their choice is either wind power, solar or wood. Wood is the big quantity of that. And basically a wood pellet plant consists of a -- taking either saw dust from saw mills or woodchips where you will prune a forest or trim a forest out they generally will trim it three times before they'll ever get to the lumber that they use for home building. Most of the wood is the younger type would.

But the Peterson unit will de-bark, de-limb and make a microchip that's about a quarter of an inch; that material is 50% moisture coming in and we have to run it through a dryer and dry it down to 10% moisture. There's over 100 species of wood, so you end up having to blend that together so we've got feeder bins somewhat like an asphalt plant, we've got a dryer somewhat like an asphalt plant. Then we grind the wood on down to about 2 microns, about 1/16 of an inch and then form it into a pellet where it's mechanically handleable and where you've really just densified the energy.

It has a BTU of close to Montana coal, but it has very little ash, no sulfur, it's real clean burning. A lot of wood pellet stoves for residential uses out there, but the big usage is for these utilities. Right now most of the pallets being built are being made in the states and are being shipped to Europe. And many of the suppliers have ten-year contracts with the European utilities, there's a shortage in Europe of wood pellets.

Thank you very much.

Rich Wesolowski, Sidoti & Co.

So summing up the earlier discussions on inventory, the profitability, does 3Q represent the gross margin you would expect Astec to report during a period where you are cutting production to draw down the inventory however long that lasts?

Yes, we think we're going to range -- stay in this same range. We've done a lot of adjusting to try to maintain that. And, yes.

Okay. Would you expect the sales of the -- in the asphalt business, the partial plants, the odds and ends can sustain the business at this revenue level until the demand for the big-ticket stuff comes back?

Yes, I think so. I think there's going to be a shift though, Rich. International sales basically for the asphalt plants pretty well stopped last October with the dollar strengthening during the third quarter, late third quarter and now we're seeking a real good pickup in international sales.

And we don't see any -- frankly, between Canada and the other international sales it's really been helpful to Asphalt and Mobile this year. Domestic sales have been weak this year and I expect them to stay weak next year. But I do see with the dollar weakening a continuing improvement in international sales. I might point out too; a big part of the wood pellet plants will come out of the Astec operation.

Okay. On the international business, and this is a tough one to answer I recognize. But with the dollar being down, do you think the Company and US manufacturers are getting a bigger share of a same size pie, or do you actually think the industry is selling more equipment now than they were three to six months ago?

I just got from New Zealand and Australia; I had to speak at a convention over there. The Australian market is very good, I mean, there's a lot of mining and I don't see the negativism that I see in the states in both of those countries. Generally what we see -- Europe is still weak, Eastern Europe is really not as weak, we see that as a pretty good market.

I think that the stimulus in these other countries, think they've got two things going on for them. Number one, they're spending a lot more of their stimulus money on infrastructure and on particularly roads and bridges and there is not as much -- I guess the simplest way to say it is there's not been as much radical change in the government that they have versus what we've got. With the change going on in Washington it's got a lot of the business people cautious and nervous and I don't see that in these other countries.

Okay. And finally, has there been any tangible progress you can point to on the regulatory side of the US as far as raising the amount of (inaudible) that's allowed in the road mix?

Yes, I think, as I mentioned over the years, we've personally put in a lot of time on that. And I would say the average amount of recycle has gone up about 10% and continues to increase. As they do more of it they become more comfortable with it and we see that as a real insurance against higher oil prices. And I think higher oil prices tend to drive that. So, yes, I'm very pleased to see that that is going up.

(multiple speakers) average now?

The average, I'd say, countrywide now is in the -- somewhere between 20% and 25% where it was probably 10% less than that. The other thing that's driving it is this warm mix technology or the lower temperature foaming the asphalt really is environmentally friendly, no smoke, no smell and you can increase the recycle. In Australia I was a keynote speaker over there at their convention and it's really -- they're very green and the ability of asphalt to be sustainable and recycled and run it with no smoke and no smell certainly sells.

Great, thanks, Don.

Thank you.

[Tom Hayes], Piper Jaffray.

Great, good morning, gentlemen. In the release you mentioned rightsizing the various units and you provided a little bit of color. I was just wondering if you could provide a little more insight to some of the work you're doing at the various units to adjust the SG&A for this new -- what seems like a multiyear level of business activity being down?

Well, in some of the businesses we've had to cut pretty deep. Obviously you try to maintain the sales force, but particularly in the Underground business, we certainly suffered a lot there and in some of the aggregate businesses we've had to make some pretty deep cuts. There gets to be no choice and it's very painful, but it's one of those things you've got to do.

Okay. On that last quarter call you had mentioned that at that time the $32 million recorded on the SG&A was a pretty decent run rate going forward. With a more muted outlook this quarter going forward than you had last quarter, has that number come down slightly?

It's down slightly, but I might point out that there's a lot of R&D in that. We are not -- we continue to keep engineering in place and shift them more into new projects and new products. I guess we see as an opportunity and with our balance sheet where it is to really strengthen our position so that when we come out of this we're going to be a much broader and stronger company covering more segments of the market and more markets.

I see us three years from now being 40% infrastructure, 40% energy and 20% mining. Not that we intend at all to neglect the infrastructure side, we just see our growth to be more in the -- particularly in the renewable energy and that part of it.

Okay. Then I guess just lastly, historically 3Q to 4Q has been a drop-off in the EPS. I was just wondering, provided you indicated that this year it would be roughly equal. I was just wondering what would be different this year versus in previous years.

We've got more international sales proportionately, it's [about] high for our backlogs international and most of the countries or a lot of the countries this is shipping to, they're counter seasonal to where we are, so they do want the shipments. I think that's probably the main thing. And plus we had some carryover, as I mentioned, this $26 million that didn't get shipped, a big part of that will get shipped. So we see it as being comparable.

Okay, great. Good luck to next year.

Thank you.

David Wells, Thompson Research.

Good morning, everyone. First off, starting with the Underground business. Maybe if you could talk about it. Continue to see decreases there at some of the drivers. Do you feel like we're reaching a bottom with regards to that business or is there still more pain to come? And what are some of the early indicators that you're looking for to show that the bleeding has stopped?

I guess, David, that thing that I see is there are two segments of that, the small utility items, I think we're going to be down there for another two years. That's driven by home-building and residential -- I mean commercial construction. So that segment of it of the small end, I don't see it improving a whole lot.

With the price of oil going up and gas strengthening a little bit, there's a disconnect between natural gas and oil prices right now. I mean, if you look at the price of natural gas, oil ought to be $43 a barrel. I think the weak dollar is affecting that some because natural gas is domestic, oil is a big part international and being affected by the weak dollar.

But there's still a real disconnect there. We believe that gas prices are going to kick up. When it kicks up into the $6 range you're going to see a lot more drilling going on. There is a lot of gas drilling but there's not enough to get them to buy new rigs.

So I guess the two things I see going forward is we're going to be drilling for more natural gas in this country. Number two, when the utilities start switching to natural gas, which they're going to have to do with a lot of these changes in the emission laws that are coming about, they're going to kick out coal and put in natural gas, they're going to suck these pipelines stripe.

So there are going to be a lot more natural gas pipelines and distribution systems going in. So for the bigger trenchers, the bigger directional drills, the drill rigs, those things, we believe as gas goes up that we'll see a real return in that business.

All right, that's helpful. And then looking at the parts sales in the quarter, I guess on a sequential basis it picked up a little bit. I was curious where you saw any sort of improvement? Are Aggregates volumes improving at the plant level and there's more utilization of equipment that's just drawing further parts down the channel or are there other parts of the business that are really driving that?

We're probably seeing the best parts increases both in asphalt and mobile. Aggregate is still weak. I don't know -- on the Aggregate side we really need to see residential and commercial construction come back for that to get to be strong. But our biggest pickup has probably been in the Asphalt and the Mobile.

That's helpful. And then as well, any color on how concrete plant sales are going and have they accelerated? Are you seeing more interest at the end-user level for that product?

It's taken a little longer than I'm patient with on this particular first plant and we are running it today, making roller compacted concrete, it's a pretty revolutionary concept that we're real excited about. I see the sales of that going to more dam projects, roller compacted concrete dams. Highway projects are still weak. Generally concrete is going to be used on new projects. This plant will be producing RCC for the Volkswagen parking areas here in Chattanooga at the new Volkswagen plant.

There's not much -- as much highway demand as there is more around the world for dams and projects like that where big high-volume continuous plants would really fit. But we're pretty excited that we've got something unique that will do well going forward. Smaller versions of that are ideal for bridge construction and things like that that I think will change the rules of the game a little bit in that business.

That's helpful. And then lastly, I was curious if you could give any color on what your priorities would be on an acquisition basis as you look at a fairly tumultuous market, are there assets that you're seeing come to market that you find attractive? And if so any color on where those would fit in with your product portfolio currently?

We've looked at one or two that would fit. Still we find that there are still people thinking about two-year-old prices on them and two-year-old performance metrics. So we see some books out on companies but we don't see many of them getting sold. And I guess we look at more how the performance of our company is right now and how we see the next year or so and we can't see them as being much different. So the pricing I think is still a little unreasonable on some of those that are out there.

All right, thank you very much.

[Chris Woltzer], Robert W. Baird.

Good morning, guys. Sorry to belabor this point, but just so we're all clear. When you say fourth-quarter similar to third-quarter you're talking about both revenue and EPS?

Yes.

Okay, thank you. Wondering if you could talk a little bit about pricing pressure and your ability to get price internationally? I think historically you talked about being able to get a little bit better margins on equipment you sell internationally. Is that still true?

It's certainly been -- it's certainly improved with the dollar weakening like it has. I mean, it just -- I think people don't realize the swings. Last October we acquired that company in Australia and it was AUD1.10 Australian and in three weeks it went to AUD1.65. This morning we're back to AUD1.07.

Well, obviously during the six months there we went into kind of nothing going on, we've been pleased that that little company has remained profitable during this. But now they've got a lot of prospects and obviously when the dollar weakens it's just like us cutting our price. So it's a lot easier right now for us to be competitive internationally than it has been. Domestic we see a lot of pricing pressures, more pricing pressures domestically than we do internationally.

Got it, okay. In your outlook for 2010 being roughly flat with 2009, does that incorporate a mix towards more international business relative domestic given your backlog is 50% in international at this point?

Yes, I think we will have a -- I could see us being up 40% international, Chris, it could be even a little north of that. I think the domestic market is going to be tough with this uncertainty out of Washington. I think that's a major thing. It seems though states are getting a little better shape, they've at least made some adjustments.

But the states are still short on revenue and the federal government is setting there like they are with the uncertainty of two things is how much is the funding going to be and where is it going to be spent? It's just the uncertainty that makes people cautious. So I see it leaning more towards international.

Got it, thank you. And then with regards to spending to get ready for Tier 4, is that going to ramp up even farther in 2010? And is there any way to quantify how much extra you're going to have to spend?

It's hard to tell. Some of the engines -- some of the big engines we're seeing as much as a 30% and 40% price increase on the thing. The biggest thing on the Tier 4 is the envelope that it takes it to fit them into a machine is about twice the size of the Tier 3. It's really a sad overreaction to me.

Tier 4's will burn more fuel and when you take the sum total we're probably going to have more emissions when it's all over with. Tier 4 can't be sold in most other countries because they don't have the ultra low sulfur fuel available. So we're going to have to build the machines to be able to fit Tier 3 and Tier 4 engines in them. If you put a higher sulfur fuel in it you'll trash the engine in about a month. So it's a major change not only for us, for anybody building mobile equipment.

What about your own R&D spending to get ready for this?

Basically I guess I'd hate to put a dollar size on it, but I can tell you in all the mobile equipment businesses any RD other than Tier 4 has stopped. We're just -- it paralyzes your R&D. Most of our R&D that's what I would say real productive is in the non-mobile businesses. Everything in mobile just about is in the mobile equipment at Underground, at American Augers, at Peterson, all of these things are having to spend a huge amount of time on just refitting the -- redoing the machines to make Tier 4.

And is that spending higher in 2010 than it is this year?

It's about the same as this year.

Got it. Okay, thank you, guys.

Thank you.

Walt Liptak, Barrington Research.

Most of my questions have been asked already. But let me just [throw in] a couple. You mentioned on the under absorption, manufacturing hours down 33% in the quarter. What's the expectation for the fourth quarter for manufacturing hours?

On under absorption, I don't see it improving a lot, Walt.

Okay, so you'd be down at least 33% in manufacturing hours, right?

Yes, it would probably be flat with the third quarter.

Yes, you've got a couple holidays at Thanksgiving, a couple at Christmas. It's always a little bit more difficult operationally with all of the holidays and everything.

Yes, that's right, okay. So given that would you think that the under absorption troughs in the fourth quarter?

Did you say troughs?

In terms of like gross margin, do we see a trough gross margin in the fourth quarter? Or do you think the third quarter is the trough?

Yes, I would think so. But I don't expect it to be much different from the third quarter.

Okay. And then let me try one [as to] cost cuts. When you talk about cost cuts (technical difficulty) are there consolidation opportunities to put the two plants together or anything like that to reduce cost?

Typically no. I mean the problem is we've got different products in each plant. I guess if we felt like long range it was going to stay in this thing, yes, there's probably one or two that we would consider something. But this is a cyclic business and it's -- I've never seen it drop off of a cliff where we lose 50% of our volume like we have in some of the companies. But I'm also convinced it's not going to last.

And I think with our present balance sheet we don't see the need of doing any -- you can do some real dumb things in these downturns and overreact. And we're trying to keep on balance. We don't see the need for any consolidations at this point.

Okay. So given that would you think that in terms of SG&A and engineering expense that we're sort of at a run rate we could stay at given your discussion about Tier 4 and --?

Yes, I think we're at about the same run rate. And there is quite a bit of R&D in that. As we said, it is Tier 4 and is regular new products. But we expect to stay about the same.

Okay. And then one last one, just talk about cash flow and inventory and working capital a little bit. In 2010 will there be more of a -- or is there an incremental focus or should there -- could there be an incremental focus on working capital? And if so how much working capital can come (technical difficulty)?

You know, I guess I can answer that in two or three ways. We're being very cautious on CapEx going forward, the main CapEx that we spent this year was finishing that plant at American Augers since we had it started. And we're going to be extremely cautious on CapEx for next year. We will generate cash obviously from that.

We intend in all of these businesses to get to -- to either maintain or get the inventory levels on down and back more -- I guess more to this run rate that we've got right now. The only thing that makes me a little cautious in that is as we develop some of these other products we're going to be adding some inventory related to them. But I would think, to answer your question, you will see a slight drop in inventory.

Okay, thanks very much, guys.

Kristine Kubacki, Avondale Partners.

Good morning. Most of my questions have been answered. But a little bit more bigger picture items, but what's your understanding on the used equipment population? Could we expect an overhang as the economy turns or when we get a highway bill? Or will the age and the use of that equipment drive a replacement cycle?

I think the age of it will drive a replacement cycle. And the asphalt plant side of it, we don't have a huge amount of used equipment. In fact, we actually acquired -- there's not -- the double barrel is popular enough that there's just not hardly any used ones on the market. We have this year actually bought four used plants and we've resold three of them.

And so in that area in the Mobile equipment and the other we don't see any inordinate increase in the amount of used equipment out there. Now there is -- you start looking at the grading equipment and excavators, there's a lot in that area, but in our business segments we're not overloaded with used equipment right now.

Okay, that's helpful. And then I know it's a little bit early to ask this question, but given how much right sizing you've done with your operation, what kind of lag would you expect when we get -- a highway bill does get passed and when you can ramp up production? Or is there enough leeway there as we see things to the workings in Congress that you'd be able to get the production back ramped up?

If they'll get the bill and bring it on, we can handle it.

Good answer. Thank you very much.

Thank you.

Morris Ajzenman, Griffin Securities.

Hi, guys. Not to beat a dead horse here, but one last shot at this working capital question that keeps on coming up. When I look sequentially from the second to the third quarter I think you generated about $20 million to $25 million in cash. And basically from reduction in accounts receivable it looks like (inaudible) up. So you had about -- let's call it a $20 million generation from working capital improvement.

We've gone around trying to get some sort of handle on how inventories play out going forward and I guess the rest of working capital. But is that $20 million -- is that number not a number that's representative that we can see improvement over the next few quarters?

Morris, I see some improvements I guess -- the ones that are hard for us is basically these businesses that are all 50%. It's hard to maintain any semblance of manufacturing if you are working that down. And to be frank with you, where we've got a strong balance sheet and we've got the finances we haven't seen the need of cutting it absolutely to the bone.

We think when it does come back that would be a major mistake. So as a result we haven't done anything crazy on getting rid of the inventory to work it down. We realize it's too high, but I would rather ride with it for a couple more quarters before -- I think the light is at the end of the tunnel, but I think you're looking out there at the end of next year before that happens if they don't do something with the darn highway bill.

And what about accounts receivable? That's down sequentially I think $22 million.

We manage that pretty darn good and we'll continue to do that. We don't see any -- we don't have any problems really with bad receivables.

Two quick things. One, you (inaudible) R&D being up, but if you gave out a number I missed it. But do you have a number of R&D year over year in the third quarter, the increase? And secondly, what that R&D number would be without the Tier 4 spending year over year?

Pardon? I think about $900,000 year over year. But there is -- we expense off all of that. So it's not anything that we're capitalizing.

So R&D is up $900,000 year over year?

Yes, close to $1 million year over year.

Lastly, we all know a few weeks ago that the Highway Bill expired without renewal. And I'm hearing different things cross currents. But what's your take on the current month-to-month spend rate? Is it the same monthly spend rate that was over the past six years less -- but are you seeing out there right now on the interim basis?

Well, I think you've got two factors in there, you've got, number one, the federal level was at $41 billion for the year and the stimulus adds to that probably about $15 billion this year and about $13 billion next year. So, federal level is way up. State-level though is probably down as much as the stimulus was in it.

So we're seeing year over year I would -- my estimation would be the spending level in the third and fourth quarter of this year will probably be 15% less than it was last year just because the states are spending less. The federal money has helped it, but most of the customers really on highway work are doing all right, there's just no commercial work out there. And as a result it makes the pricing extremely competitive for them.

I'd say that as far as our markets are concerned the bigger companies, bigger public companies are the ones that have really cut back the most and are being very cautious on any expenditures. The privately owned entrepreneurs with the tax credits that are out there, the accelerated depreciation, they still buy and our businesses turn more and more to the privately owned entrepreneur type operators than to the big companies as far as the mix of business.

Does that answer your question?

Yes, thank you.

Thank you.

Alan Brochstein, AB Analytical Services.

Thanks for taking my call. And gosh, everybody has kind of hit this inventory thing and it's been my keep focus. I just had a slightly bigger picture question and maybe a different angle. And that is I understand what you're doing; this stuff doesn't become obsolete, you can afford to carry it and so you've made that decision.

I guess I'm curious though, are your competitors doing the same thing? Or is there a chance you're missing out on some sales because your competitors are blowing stuff out at lower prices? What's your view on the competitive situation?

There's a different group of competitors in each of our segments. I really -- let's take the asphalt plant side of it. We've seen we have gained market share this year, we feel pretty good on that. The inventory levels in that is not -- it's not because it's not sold, it's because of the customer not taking it.

And I will repeat, in Astec, Inc. we're sitting with $35 million to $40 million of inventory on asphalt plants. But every bit of that is sold, it's just not shipped yet and we're waiting on shipments. So when I give that number that's parts and everything else. So that is not a problem and not one we need to adjust.

Roadtec we had a tremendous build up in inventory or a big build up in the fourth quarter of last year. We have pretty well worked that down and will continue probably at -- it's at a comfortable level now and we don't see that as being a problem. In the track mounted crushers some of those we've got more than we need in inventory and are slowly working that down. In the trenchers, the little utility trenchers, we've got more than we need. In the big trenchers we've got more than we need.

Those are two areas that are over populated, probably in the wood chippers we've probably got more than we need in that. So, I don't see it as a major problem other than one or two companies; it's an opportunity to work down. But as a result of, again, the fact that we are all right on cash; rather than dump inventory I'd rather wait and get the right price out of it and sell it as we can.

Pardon me. I just wanted to make sure I understand this correctly. Essentially there's no demand, so it's not that the demand is being filled by somebody -- an irrational competitor who maybe doesn't have the great balance sheet that you guys have (multiple speakers).

I think you're correct. I mean, it's just a lack of demand right now.

It makes no sense to cut your price if they're going to buy it at a higher price eventually.

Right.

Okay. And my second question is, if I understand -- you all go through distribution for your international to a great degree, right?

That's correct.

So your gross margins are probably going to come down a little bit as you ship more to international with the margin. But I was wondering, beneath the line will that change your net margins at all?

No. And typically the international that we go through is more of a -- I wouldn't call them brokers, but they're not stocking dealers. They're more of a representative but they do not stock the equipment. A few exceptions, we have a Russian dealer that does, but most of it -- on the mobile equipment they stock some, but, again, they're limited on how much credit we give them.

It's an agent commission versus a dealer discount.

Right.

Okay. So I guess as we think about next year, you guys were kind enough to share your preliminary views that it will be kind of a flat topline kind of year with the shift towards international. I'm just trying to look at some of the factors that might affect your profitability.

And the R&D is a little confusing I guess because you mentioned some of the R&D is not really productive, you just have to do some of the stuff -- I think you said R&D will be kind of flat if I understood. But you also had the impact of the tax credit helped your earnings this year. I guess just overall R&D's impact including the tax effect for year over year. Should we view that, since you made this bigger spend next year there's a possibility of less of an impact next year?

I think on balance there will be less R&D on the Tier 4 engines as we phase them in. Probably there will be more warranty with the Tier 4's that will come in that is an expense that we expect to have, we always have as these tier changes. On balance if I take all the companies I guess my best gut feeling right now is our performance next year is pretty well going to be flat. I don't think it's going to be (multiple speakers).

So bottom line also (multiple speakers)?

Yes.

Okay. And then just one last question. You were really excited when oil prices were higher. I can't remember, maybe it's more natural gas than oil. But this custom job that you did to help do some shallow drilling, was that oil and gas or just gas?

It's both. But, yes, we're quite excited that that still will come back. We built a factory to build on that.

Right. No, I was just wondering if it was changing because with oil prices jumping up, I guess it's too early to tell them, but natural gas prices seem to be picking up a little. I was just wondering if you're having any luck getting more customers for that type of thing at least in your backlog.

We saw it, basically Alan just totally stopped for about nine months. I mean zero. We are seeing more prospects, more quotations right now. There is a lot of gas being discovered and being drilled. But all of the rigs that we've built are working, but nobody is yet putting down the money to buy another one. I guess what I think is if we see some sustained time at about $6 a thousand on natural gas and with oil staying about where it is you're going to see a pretty good pick up in that business. But right now there is still people trying to overcome the shock of what happened last October.

Right. Well, do you think the growth in that business is going to be your existing customers ordering more or are you having success in selling the concept to other customers?

I think both. We've got a lot of people looking at these rigs. And I think there's opportunity for both existing and new customer.

Okay. And then one last question, and I appreciate you taking all of these. You talked about this $12 million pellet plant that's potentially going into Europe primarily at least initially.

It would be here in the states, but shipping their products to Europe.

Right.

Okay.

How many of those -- what's the size of that market potentially, do you think?

We think it could potentially be huge. But it depends a lot in the states here what they do on this cap and trade thing. But I was telling the guys, one utility we're talking about right now -- most utility power plants are coal fired and they just blow the coal into a furnace. If you take one of our asphalt plant burners, we can burn oil, gas, coal or wood, so it's a multiple fuel burner and we can burn various portions of them at any time.

We are looking at one utility of fitting three -- they have 12 burners on one power plant. You fit four of these asphalt plant burners on it and fired it with wood on those four burners, take a half million tons of pellets a year. And that could eat up a lot of wood fuel. So there is -- if the utilities, which are going to have to go renewable it looks like. I know in Australia they just passed a 20% renewable, in Europe it's about 10% and it will be up to 20% by 2020. As all of these kick in there's going to be a big demand for pellet plants.

Okay, well thanks and thank you for taking my call.

Yes.

Arnie Ursaner, CJS Securities.

I guess we're going to try to beat this to death a little bit more. On your inventory can you quantify what the dollar value of work in process is and the dollar value of finished goods?

No, Arnie, you think we keep records better than that, don't you? What do you want to know?

He wants to know finished goods and work in process.

Well, obviously steel pricing is down, so if the volume of steel inventory you had were the same your steel inventories would have been much lower. We know we have the impact of the acquisition which you have quantified. What I'm trying to get a feel for is the dollar value of finished good inventories versus work in process?

Well, finished goods is -- at the current year was $98 million versus $66 million last year.

Okay.

WIP was $56 million versus $54 million.

Got it.

Raw was $109 million versus $129 million.

$109 million this year versus $129 million last year.

Okay. And the final question from me is again I'm trying to -- obviously you mentioned your view that next year could be flattish with pretty strong performance from international up 40% or so. I guess I'm trying to focus on the domestic outlook that you're looking at. In this year we had the benefit of the stimulus package, contractors at least had some carryover work in commercial or nonresidential commercial activity.

As I look towards next year it seems to me we may or may not have any additional stimulus package next year. The highway bill not likely to be voted on until after the November elections, the states continuing under pressure. It would seem to me your contractors are going to be extremely hard pressed to place virtually any orders until 2011. Am I thinking about 2010 the wrong way in your opinion?

No. I'd say that's about where I am. That's why I say I think next year domestically is going to be down but it will be up internationally and the broadness of our products will be better. I think that, Arnie, if I have to weigh it all I think the oil and gas business will come back next year, will be better. I think we'll start to see some benefit of these renewable fuels. I think that international will be quite a bit stronger, but I think domestically it will be weaker.

Okay, thank you very much.

Thank you. At this time we have no further questions. I'd like to turn the call back over to the speakers for any closing comments.

All right, thank you, Shea. We appreciate your participation on our third-quarter conference call and thank you for your interest in Astec. As our news release indicates today's conference call has been recorded. A replay of the conference call will be available through November 3, 2009 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. We appreciate your time. Thank you.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.