Astec Industries Inc (ASTE) 2010 Q3 法說會逐字稿

Greetings and welcome to the third-quarter 2010 results call for Astec Industries. 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. Thank you. Mr. Anderson, you may begin.

Okay, thank you, Melissa. Welcome to our conference call for the third quarter of 2010. As Melissa mentioned, my name is Steve Anderson; I'm the Secretary of the Company and also Director of Investor Relations, on today's call with 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 business operations and market environment. In the way of disclosures this morning I'll note that our discussion may contain forward-looking statements that relate to the future performance of the Company and these statements are intended to qualify for the Safe Harbor liability established by the Private Securities Litigation Reform Act.

Any such statements are not guarantees of future performance and are subject to certain risks, uncertainties, assumptions and other factors, some of which are beyond the Company's control. Some of those factors that could influence our results are highlighted in today's financial news release and others are contained in our annual report and our quarterly and annual filings with the SEC. As usual we urge you to familiarize yourself with those factors. At this point I'll turn things over to McKamy to summarize our financial results.

Thanks, Steve. We appreciate each of you joining us this morning. We'll talk about sales for the quarter first. We were at $177.9 million in Q3 2010 versus $166 million in Q3 2009 for an increase of 7.1%. Our international sales were at $79.3 million versus $64.8 million for an increase of 22.4%. International sales were up 44.6% of the third-quarter total sales in 2010. International sales were 39% of total sales in the third quarter of 2009.

Certainly many companies (sic) have not been impacted by the current economic conditions as strongly as the US. The increase of sales for the third quarter compared to the third quarter of 2009 for international sales occurred mainly in the Middle East, Canada, Australia, Africa and Asia. International sales did increase for all groups -- all segments.

Domestic sales for third-quarter were off slightly; the parts sales for third quarter were $49.2 million versus $46.1 million for a 6.7% increase. The parts sales were 27.7% of our quarterly sales in 2010 and that's basically in line with 27.8% in 2009. Aggregate & Mining Group had the largest increase followed by the Underground Group and the other group.

Segments by net sales for the quarter -- Aggregate & Mining composed 33.9% of our total sales; the Asphalt Group was 25.6%; Mobile Asphalt Paving was 20.6%; Underground was 10.8% and other was 9.1%. The net sales on a year-to-date basis for the year to date was $580.6 million versus $560.2 million for an increase of 3.6% or $20.4 million.

International sales for year to date were $223.2 million versus $197.8 million for an increase of 12.8% or $25.4 million. Those increases in international sales came mainly from Canada, South America, Africa, Central America and Australia. The international sales were 38.4% of net sales in 2010 compared to 35.3% for year-to-date 2009. International sales increased for the Aggregate & Mining Group, the Mobile Asphalt Paving Group, the Asphalt Group and the other group.

Domestic sales were $357.4 million versus $362.4 million for a 1.4% decrease. The parts sales on a year-to-date basis were at $149.7 million versus $136.2 million for an increase of 9.9%. The parts sales year to date were 25.8% of total sales in 2010 compared to 24.3% in 2009. Sales by segments year to date -- Aggregate & Mining were 32.1%; Asphalt was at 31.2%, so they were basically even; Mobile Asphalt Paving Group was at 21.7; the other group at 7.8; and Underground at 7.2.

The consolidated gross profit for the quarter was at $41.9 million, an increase of $7.3 million or 21.1% increase on a 7.1% increase in sales. The gross profit percentage increased 270 basis points for the quarter to 23.6% from 20.9% in 2009. The utilization of capacity impacted positively our gross margins in the third quarter and was much improved.

The segments by gross profit percentage -- the Mobile Asphalt Paving Group was at 28.3%; Aggregate & Mining at 24.6%; Asphalt Group at 24.2%; other at 22.8; and Underground at 10.4%. In summary, our gross margins were up because our part sales were up, our equipment sales were up and our plant utilization improved and our gross margins improved.

On the consolidated gross profit year to date was $134.8 million, that's an 11.1% increase. Our basis points increased 160 basis points from 21.6% to 23.2%. Again, plant utilization has improved on a year-to-date basis as well as a quarterly basis.

Our actual direct labor hours were down slightly, but the mix and the plant utilization improved even though the plant hours were down slightly. The gross profit percentage for each of the segments -- Mobile Asphalt Paving was at 26.3%; Asphalt was at 25.5%; Aggregate & Mining at 23.2%; other at 21.2%; and Underground at 6%.

Our SG&A was at 17.9% of sales versus 18.3% of sales the prior year. And the increases in dollars were scattered throughout the P&L. We are impacted in the SERP expense and in the stock option expense by the price of our stock and we had some slight increases there. On a year-to-date basis we were at 16.4% of sales compared to 16.7% last year. And again, the increases were quite scattered with no great big increases in any area, again, some increase in SERP and stock option expense.

Our increase from -- I'm sorry, our income from operations for the quarter was at $10.1 million versus $4.2 million for an increase of 125.5%. On a year-to-date basis we increased from $27.8 million to $39.4 million for an increase of 40.1%. Our other income and interest income primarily is the result of investment income by our captive insurance company.

The effective tax rate for the quarter was 30.2% versus 28.2% last year. This rate is a mixture -- this rate increase is a mixture of increasing state taxes offset by some prior year R&D credits and increasing domestic production activity deductions for 2010. And that is a reflection of both volume and rate for the rate itself.

The net income attributable to controlling interest was at $7.4 million for a 117.6% increase. The net income per diluted share was at $0.32 versus $0.15 for the prior year for a 113.3% increase. On a year-to-date basis our net income was at $26.5 million versus $18.5 million for an $8 million increase or 43.2% in net income attributable to controlling interest. Our diluted earnings per share were at $1.16 versus $0.82 or a 41.5% increase in earnings per share.

Our backlog was at $145.6 million at the end of September, just a slight increase, about $1.3 million over the prior year. Our international backlog at September was $68.1 million compared to $74.7 million at September 30, 2009. The September 30 domestic backlog increased from $69.6 million to $77.6 million for a slight increase. Our backlog by segment is part of the press release and is attached. The September 30 backlog is at $145.6 million compared to June 30 backlog of $139.7 million for a 4.2% increase.

Our backlog -- or I'm sorry, our balance sheet is very strong. The strength of the balance sheet continues. Our receivables are at $88.3 million. Our days outstanding are at 45.7 compared to 35.7. There is no concern there as far as quality is concerned; it is a reflection of the timing of the shipments and some extended terms and some other terms for unusual type shipments that we've had in the third quarter.

The inventory is at $242.1 million compared to $263.7 million for September of the prior year. We're at 2.4 turns versus 2.1 turns last year. Our raw materials are down, work in process is up, finished goods are down $19.6 million, used and rental equipment is up $1.1 million. We owe nothing on our $100 million credit facility. We have $81.4 million in cash and cash equivalents.

We are utilizing the credit line for letters of credit in the amount of $11.4 million, so our borrowing availability is $88.6 million. Our capital expenditures for the third quarter were $3.9 million, year-to-date they're at $7.6 million and that compares with depreciation year to date of $13.6 million. Our cash flow will be attached to our 10-Q filing. Steve, that concludes my prepared remarks. I'll be available to answer any questions you may have later in the call.

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. As McKamy said, we saw a marginal increase in our volume for the quarter with revenues being up 7%. However, due to the downsizing and the bringing online of a number of new pieces of fabrication equipment and machine tools that have been installed over the last 24 months due to increases in parts sales and better plant utilization and improvement in productivity of our employees, we were able to improve our net income by 124% as compared with third quarter of last year, which was, as all of you know, a weak quarter.

Our backlog remains steady at $145 million, level with last year but slightly above the second quarter. Domestic revenues continued to weaken during the quarter. However, we recovered the shortfall with increases in international sales, as McKamy pointed out. International sales reached approximately 44% of our volume and 38% year to date. We expect international sales to probably exceed 50% during the fourth quarter and probably operate at that level next year.

Looking forward to the fourth quarter in 2011, we expect to be profitable during the fourth quarter. As you know, our third and fourth quarters are always weaker than our first two quarters based on domestic sales. But depending on how much international, if international is on the other side of the equator, it tends to back fill the weakness domestically.

We have sufficient backlog to be able to equal revenues of the third quarter. However, we always experience more under plant utilization during the quarter due to the inordinate number of holidays, vacations, etc. At year end we also often have problems getting the customers to take deliveries or take shipments, meet boats, etc. So we expect fourth-quarter volume to probably be close to third-quarter, but profitability to be less. As I said, these variables kind of make the fourth quarter difficult to predict.

Looking forward we're positioning our company to be flat in 2000 (sic) and revenues to be flat in 2011. We expect domestic sales to continue to be weak. However, we believe that this will be offset with increases in international sales.

We also believe that a number of our new products should begin to bear fruit and add revenues to our business. We have not factored these into our sales forecast for next year. These new products -- a new line of concrete plants, horizontal drill rigs, geothermal drill rigs, pellet presses, wood pellet burners, thermal oil dryers, drum chippers -- all should begin to add significantly to our sales in the next 24 months.

And enactment of a new six year highway bill could change this outlook and change the attitude of our customers if it occurred in the fourth quarter or in early 2011, but that is not -- we really don't know what's going to happen there so we're not forecasting that as we look forward to next year.

We continue to look for acquisitions that are complementary to our businesses, but at this time are not close to closing any acquisitions. Our strong balance sheet gives us a lot of flexibility to respond when opportunities do occur.

We are increasing our international sales and service personnel in all areas of the world. We are increasing our parts sales forces both domestically and internationally and we think both of these will bode well for helping us in 2011 and forward.

While we are sizing and positioning our company to be flat in 2011 we are cautiously optimistic and hoping to see a return to growth due to the initiatives that we just mentioned. With that I'll stop and be glad to answer any questions.

(Operator Instructions). Tom Hayes, Piper Jaffray.

Thank you, good morning, gentlemen. Don, it sounds like a lot of the outlook for 2011 is kind of hinging in part to the highway bill as we've been talking about for the last couple of quarters. I'm just wondering if you could remind us what's a typical order pattern from the contractors. If we get a highway bill done let's say in the first quarter of 2011 would there be a one quarter delay in seeing some revived order pattern from the contractors, two quarters?

Yes, Tom, I think that's a good estimate. It really is just an attitude change is the biggest thing. You know, it takes -- the first work to come out generally is the resurfacing and asphalt type work because that's the fastest they can get out from an engineering standpoint. So generally we see an improvement in sales within a quarter after the highway bill passes.

I guess the longer-term effect of it, it takes about two years to get the big projects on out, but we get -- our asphalt customers probably get the best bang for it in the first 18 months of the highway bill. As I said, with the dysfunctionality of our Congress and probably going to continue going forward, we're not totally dependent -- we're not depending on that next year; we're looking more to international in parts and other products. But if it happens it would certainly be a great improvement.

That kind of leads into the second question. In your press release you indicated some opportunity in the energy business. Could you just maybe talk about that for a little bit where you think you have the best opportunity?

We're on the verge of getting a couple a pretty sizable wood pellet plants, it would be in the ones in the $13 million range, the other one is in the $21 million range. And we also have three of our new pellet presses out, we're building a larger version of it and should have running by early December. And each of these pellet plants -- one of them would have four of the larger units, another one would have seven of it.

So we're not -- again, we hadn't factored that into our forecast, but those are pretty sizable projects. And if -- I think we've really got some unique technology in that field and once we get those plants up and running we think there's a lot of opportunity going forward.

Great. Then just two quick questions for McKamy. Just your thoughts on tax rate for 2011? What's a good ballpark to use for that? And then should we expect any expenses for ConExpo in 2011 as well? Thank you.

Yes. The expenses will be expensed as incurred in ConExpo this year in 2011.

Okay.

And the tax rate --.

The tax rate should be around 35.

Okay, thank you.

We don't know what Congress is going to do about the R&D, that could have a positive impact for the fourth quarter if they approve it. And we just don't know.

And could you just remind us, what was the general ConEx spend back in 2008?

[3.5].

All right, thank you.

Jason Ursaner, CJS Securities.

Good morning. Aggregate & Mining, backlog coming into the quarter was around $49 million, which was down over 20% from 2009, but the segment did over $60 million in revenue, now showing flat backlog relative to 2009. So I guess I'm just wondering how did we get to $60 million for this quarter and what are lead times like in that segment and just any other comments on visibility and trends.

It's kind of -- you asked a good question, we just had -- we've probably received $25 million in orders -- $25 million to $30 million in the last two weeks in that segment. So, it's all international -- I shouldn't say all, but most of it is international, but we've had some pretty sizable orders. And we see them coming back pretty strong due to the international sales, Jason.

And in terms of lead times, when you get these international orders they would be shipping Q4 or next year?

Some in Q4 and some in the first quarter. Contractors don't buy anything until they need it and we've got one $15 million order we just received that they want very quickly and so we're going to be working a lot of overtime during the fourth quarter on that particular project.

And then just similar questions for Asphalt, except I guess it's more the reverse. The segment ended Q2 $66 million of backlog which was 20% growth and then puts up $45 million in revenue. Now backlog is almost flat with where you were last year, but Q4 last year really surprised on the upside. So did you see cancellations, customer delays? And should we assume that the backlog flat to last year with the international sliding to Q4 2010 might not follow the traditional seasonal pattern again?

You know, I guess to answer your question there, July and August was extremely weak on incoming orders, September was strong, October has been -- October is a classical month when the domestic customers generally do order and we are seeing orders but not as the biggest -- big orders as we used to.

They're probably people buying a half of a plant and not a full plant. So October and November is usually when we start seeing the domestic orders coming in. Number of international projects -- with the dollar being weak we are doing better in the Europe and against the euro and against other currencies, the dollar being so weak is certainly helping international there.

Right. I understand, but I guess I'm asking if I go back to 2008, Q3 backlog was over $130 [billion]. So being flat with last year is it -- would you characterize it more of a favorable indicator for Q4 or a negative indicator for the domestic first half of 2011?

I think really the wild card on that is the highway bill. People are only going to buy what they have to buy until they see when that highway bill comes out. I think sometimes we -- probably more important would be state revenues, but they still really watch the highway bill and when we're having a new one coming out it causes a lag and it causes people to be more cautious. So, I think the asphalt sales would certainly be helped a lot by the highway bill.

Okay, and then Mobile Paving revenue is flat year-to-year, but gross margin was up 350 basis points. I know it's not a backlog intensive business, backlog was down a little bit, but can you just talk a little bit about the stimulus and Tier 4 engine switchover, how much we have left to go from those two drivers heading into 2011 and what's been driving the operational improvement?

Well, the mobile has had a very good year and it's been surprisingly good, people are certainly continuing to replace that equipment. Personally I kind of felt like a lot of people are buying to get ahead of the Tier 4 at this time we'll have a decent fourth quarter there. However, I'd have to say our sales management at Roadtec and Carlson are pretty bullish that next year is going to be okay. We think we're probably gaining some market share, we are certainly doing better internationally there. So, we're real pleased with our performance.

Okay, great. I'll jump back in the queue. Thanks a lot.

Robert McCarthy, Robert W. Baird & Co.

I'm sorry, I didn't quite follow what you were just telling us. The guys at Roadtec and Asphalt feel pretty good about next year, but you're forecasting flat for the entire company. I mean, Aggregate & Mining is where the action is internationally, right?

No, really we're getting -- I'd say we've had more increase in asphalt plant business internationally than any of them. And I guess maybe I confused you. The mobile side of the asphalt pavers, milling machines, shuttle buggies, all of that, their best -- this year has been best domestically for them. I mean they've had a great year domestically. We are seeing more increases internationally in that segment as we've added more salespeople in that area and got better coverage.

In the asphalt plant side of it we're negative as far as next year because people will make the smaller expenditures on the mobile equipment where they're more reluctant on the bigger stuff like asphalt plants. So the highway bill is what I'm saying would spur the asphalt plant side of it.

We are doing -- asphalt plants internationally used to be about 15% and they're probably up to 30% right now. And I see that continuing to improve. And a lot of that has been driven by the fact that the management of the Astec, Inc. division has put a lot more effort on international and they have about doubled the -- or are in the process of doubling the sales people on the ground both in service and sales in that side of it.

Okay, thanks. That's a very helpful clarification. And as long as we're on the topic of the outlook internationally, unless I'm mistaken, you're now about a year into relationships with new partners on the ground in India and China? Can you give us some kind of an update on what you're seeing there and whether it's meeting your expectations and how you think it looks going forward?

I met with a group from India yesterday and they are building a new large facility there both for crushing and for asphalt. The same company is a licensee/partner for the Aggregate Group and for the Asphalt Group. They really are just getting up to speed. In India we expect probably to have -- build the first plants there in the next six months, same way in China. They'll just really be getting up to speed; both of them have built new facilities and kind of been waiting on that side of it, Rob. So we really haven't seen any revenues out of either one of those at this point.

Okay. But if I'm reading you correctly, then you're telling us that you think you will start to see some initial orders in the first half of next year.

That's correct.

Do you have any business from this incorporated -- from these initiatives incorporated in your outlook?

No, I don't.

Okay. And when you were talking about the new product that you have in the market, I had a little trouble keeping up. A lot of good information on the pellet presses, etc. You mentioned geothermal rigs.

Right. That's been slow to come to market, it seems like all of the oil well -- the water well drillers are gone to doing the geothermal drilling. And as a result there hasn't been as many rigs sold this year. We still are optimistic that that's a pretty good market that should be coming back as more home-building and commercial building starts to come back. But we're really dependent on government buildings and commercial buildings where they're all using the geothermal.

Oil drilling rigs, they are beginning to come back with the utilization of the rig count we have sold some rigs this year even the conventional directional drills are coming back. Weakness still in the trencher side of it, a number of prospects but still very weak in that segment. The drills though, the oil drilling rigs and the directional drills seem to have bottomed out basically first and second quarter of this year and their third was better and their fourth will be even better.

The other things on the -- I guess on the renewable energy side of it, the wood pellet presses are big -- those are big orders and when they happen it will make a significant difference.

There was something else you mentioned on the new product front though, Don.

The concrete plants (multiple speakers)

Yes.

-- kind of waiting on more larger projects on that. We -- I think there were probably three concrete plants sold this year, it's been a very weak market.

In the whole United States.

In the whole United States; we have not tried to go internationally with that product yet until we get a little more experience domestically. But that one hadn't brought any revenues much in. It should be an opportunity going forward though.

Okay, then if I may, the last one I wanted to ask was about the relationship between past price increases and what you're seeing on the cost front and whether that was a net positive contributor in the quarter. How does that affect backlog and margin outlook?

We see slight increases in parts cost. I'll be honest, I see a grisly behind the curtain, so to speak, though. If volume picks up substantially I think you're going to see inflation take off. People have downsized and as we see little pickups in the market we do see order deliveries for parts and components stretching out, people have reduced their inventory. So I think inflation is a great threat. Hadn't happened yet, but it wouldn't take a whole lot of increase in volume to see inflation go up. But (multiple speakers).

And pricing?

Pricing, we've seen it -- we're basically saying probably 3% increases in component cost and that's probably what we're seeing in our end too.

Okay, all right. Thanks a lot.

Eric Prouty, Canaccord Adams.

Great, thanks a lot. First a housekeeping question. If you haven't could you just give the D&A number for the quarter?

Depreciation and amortization?

Depreciation I think was about $13.6 million year to date, right?

Okay.

We expect to end the year probably around $19 million, Eric.

Great. And then second of all, you went through on the gross margin side in a lot of detail. It sounds like that's kind of a sustainable level given you're looking at consistent revenue run rates for 2011. I mean, would you expect to average out through the year at a similar gross margin of level for 2011?

Yes, I think so. I mean, the deterioration in margin last year particularly was -- we're trying to reduce inventory, as a result we had very much under utilization of our plants. And with the inventory down now what we're selling we're building. And so even though the revenues are not the greatest we're at least building most of the revenues and getting better utilization. So that gets to be a more normal gross margin number.

Great. And then some of the commentary you gave in the press release and on the call here was talking about additional hiring. I mean, should we take that to mean we should see SG&A levels starting to tick up in 2011 and in Q4 here?

No, I don't -- I think any additional hiring we'd do would be direct labor.

(Inaudible).

Oh, in the sales force, excuse me. Yes, you're going to see some -- we probably are -- we're probably overall, but probably adding $2 million to $3 million in sales areas. But as you look at a $120 million SG&A area it's not that great. But, yes, it will be slightly higher due to that. Hopefully the volume percentage wise will more than offset that though.

Right. And then you said there was going to be some additional expenses in 2011 in the SG&A line.

Typically we spend $3 million, $3.5 million on ConExpo.

Right, okay.

That's in the first six months. It would be basically in the first four months of the year.

Okay, great. And you attributed the $1 million sequential uptick in the SG&A primarily just to the stock appreciation. I mean, is that the vast majority of that $1 million sequential movement?

That is a part of it. It's very widespread. There's not any big numbers on any one thing.

Okay. Could we look at that then as a good run rate with a stable stock price in that $31.5 million, $32 million for SG&A going forward?

Well, I think you have to modify this year's numbers by the two things Don mentioned, the increase in the international sales effort and the ConExpo expenses.

Right, okay. But that's a good base kind of where we're at today to increase for those two numbers off of?

I think it's a reasonable base. Now if you're familiar with the way the stock costing works and the way the SERP works, those numbers are going to float up and down based on the stock market.

That's right, yes. Okay, and then you touched on this a bit, but you've seen a couple now quarters of good sequential growth in the Underground Group. Is that more on the telecom side or is that success on the drilling side of things?

It would be more on the drilling side of things.

Okay. And any rebound back yet on the telecom or is that still pretty weak?

The only thing we're seeing a rebound on is in some foreign countries, not in the US.

Got you, okay. And finally again, you touched on this a bit, but the sequential declines in the large Asphalt and then the Mobile. I mean, is that some seasonality at work? Are we starting to get some exhaustion from the stimulus rolling in there? What accounts for that sequential move?

The Mobile Group has been helped a lot by the stimulus because there's been just a lot of asphalt paving that's gone on. And people will replace that type of equipment because it is so critical and you don't want to block an interstate, something like that. So it's really benefited from it.

I can't say that the Asphalt plant side of it has benefited that much from it, Eric. Again, more people making large expenditures on a new asphalt plant. The only exception of the stimulus would be a large portable job that's away from their home base where they might have to buy portable plants. That would be the only exception to that. But we see basically the seasonality domestically, right now we are in the weakest portion of the year for shipments of that type of equipment. It's always weaker in the back half than it is in the front half.

Right. Okay, yes, I'm just trying to get my arms around especially in the mobile side. Is kind of the current run rate reflecting a without stimulus funding environment or do you still think that we're getting some help out of stimulus dollars in Mobile right now or have we exhausted that benefit?

I think we've exhausted that. I think that mostly what we're getting is maybe some increase in market share and the fact that people just need to keep those machines in pretty good shape. But I think -- I think we've done better in market share in the mobile side and we've been able to pick up a little bit there. Internationally also has picked up some there.

Sure. Okay, great. Thanks a lot.

Jack Kasprzak, BB&T Capital Markets.

Good morning, Don. I was going to ask a question about the stimulus, but I guess I'll ask it a different way. Now that you think maybe the benefit of it or the impact of it has rolled off or will roll off by the end of the year more or less and given no new highway bill, what would your expectation for highway construction in the US next year be? Do you think it could be down given those factors?

Jack, I think it could and that has to do with my cautiousness with next year. What we've seen is our customers generally have taken work awful cheap this year, but most of them have managed to breakeven or make a little bit of money. I talk to a lot of customers every day and every week and many of them are good friends that share their numbers. And their profit kind of parallels ours I guess, that they're not making near what they did in 2008.

But next year without the stimulus it depends on what Congress finally passes. The basic highway bill was for $41 billion in 2010 and the proposal out of the House was for $45 billion. The Senate was around $41 billion or $42 billion, they haven't passed that yet. So we don't know where that's going to end up on the appropriation side of it.

The extension runs out in December, so something is going to have to be done in the lame-duck on either extending it on out or something. The $50 billion Obama is talking about, God only knows what that is, that could even be worse. Because I mean if you look at it he's touting it, but he's talking about rail, transit and highways and we've spent that much this year without the stimulus.

So that doesn't -- while they're spinning it to be something special, I don't see anything special there. The stimulus probably added to the $41 billion that we had under the basic highway bill this year probably added about $12 billion from what we're seeing. So you're probably up around $53 billion. And if it ends up being $45 billion then you're going to be down about 15%. So that's kind of where I see it. And that has a lot to do with I guess our cautiousness in what we're saying here.

Got it, I got it. I was going to ask too, you mentioned your customers, domestically road contractors, some of the recent survey data that comes out of some trade associations is not all that encouraging with regard to the industry environment, I don't suppose that's a surprise at all. But what do you see through this winter period from your customers? Competition has been very tough, stimulus wears off maybe, the uncertainty really hasn't changed. I mean, it sounds like it could get worse before it gets better unfortunately for that segment.

Yes, I have to just be straight with you. I think that's what we see. We do see a number of -- the international business remaining better, getting better. There's a lot of privatized roads going on in South and Central America, a lot of large projects in Australia and Canada. Canada has been a good market for us.

So, we see -- as I said, we see probably domestic being down a little bit, international being up more than the domestic is down and some of our new products hopefully backfilling a little more. With the sum of all that we see -- we're forecasting our businesses to be flat but we see an opportunity to still see some growth for next year.

Got it.

But if I was to pin it strictly on domestic highway business, if that was what we were looking at, I could see us -- I could see that business being down 10% to 15%.

Got it. That's helpful. Thanks, Don, that's it for me.

Rich Wesolowski, Sidoti & Company.

Thank you, good morning, Don. And Steve McKamy, how are you? Are the spot prices for the types of steel you buy materially above or below supply agreements that you have in place for 2010?

They are probably right with them right now. We had a few supply agreements -- let me think to be sure. I'd say it's about on par right now, Rich, not much difference. We locked in at pretty good rates.

Okay. You repeated that you don't see a lot of topline growth domestically unless we see a highway bill. But your domestic sales here in the September quarter were the lowest in more than five years. How much of that revenue is ongoing replacement of the parts or anything else that you would consider maintenance or a steady-state recurring piece of revenue, how much further can that fall?

I don't see that falling much further. It seems to be -- we're seeing people spend more on replacement parts and replacement components than we are on new equipment. And there -- people on asphalt plants will buy a new drum, which may be a $200,000 item or something like that. But they're big -- some of it's pretty big replacement items, but where in the past they might have bought a complete plant or a complete component they may just replace a big portion of it.

But I see it -- I think we're at the bottom or maybe a little above the bottom. The underground businesses probably bottomed out in the second quarter. And the other business is probably a little bit earlier than that. But we're rocking along not much above the bottom when you talk about domestic.

Okay. And then lastly, would you give us some perspective on how you're expanding your marketing activity, maybe how big your sales force is currently, where that was a year ago, where you see it a year from now and in what end markets or countries you're implementing the biggest changes?

Well, it varies with each segment. We're probably in the Asphalt side of the business, that Asphalt Group, probably the strongest market. Obviously we've -- Canada has been good, Australia has been good, Central and South America we're probably adding more troops on the ground there. We've added more -- we're really adding people all over the world in that segment.

In the Aggregate & Mining we are adding a totally new mining sales force, which will be a number of people basically trying to sell more of our equipment in the mining industry where we have not been very strong at all in that. In the Mobile side of it, again, we are adding all over the world, but probably Europe is a good opportunity more for us in that segment of it. In the Underground we're adding more people towards the Middle East, so it varies with which segment.

Okay. We've heard for a while the Company aiming to get deeper into the mining segment; it seems like this is a re-doubled push in there. Was it formerly just maybe a thought that the rising tide would lift that share of the Company and now it's a recognition that it might be more of an internal effort required or what prompted the change?

I think we just see that there's more opportunity there. And finding the right people -- if you can't do it over -- it takes a while. We think we've got a good team in place now and we're getting business in that segment, we're just trying to do a better job of being on the ground and having branches there that are close enough to service them. You've got to gradually build the population up in the different areas.

Great, I appreciate it. Thanks.

David Wells, Thompson Research Group.

Hi, good morning, everyone. First off, in terms of under absorbed overhead, did you see any in the third quarter this year?

Yes, yes, we're still probably operating on an average of all of our plants at under probably 70% of capacity, maybe even less than that.

Okay. And how does that compare versus the second quarter in terms of like I guess the overall level of under absorption that you've had?

We've probably got that number, but my gut feel is it was about the same.

And then looking at the inventory build from Q2 to Q3, what were some of the drivers for the -- I guess you were up about what, $20 million or so sequentially. Just trying to get a sense of where you saw that inventory move upwards?

Some of that was just end of quarter shipments that didn't get gone. But I would think -- I would suspect it's primarily in the Aggregate & Mining and in Asphalt I would think is where the two -- are you looking, McKamy?

I'm looking (inaudible) about the second quarter versus third quarter.

What's the difference in under absorption to answer that question?

About $1.2 million.

About $1.2 million better in the third quarter than the second in under absorption and then an inventory buildup, I think it was -- there was nothing significant, but it was probably to do with just a year -- quarter end shipments is the most increase.

I guess I'm just trying to get a sense of how much of the improvement in margins was from the build in inventory just from being able to inventory some of those under absorption costs, but it sounds like it was --.

I think you're comparing the $20 million with last year to this year. Yes, I think quarter to quarter there wasn't much increase. Let me look at the number.

And the terms are improving.

The terms are improving. There's no -- to answer your question, there's no inventory buildup.

That's not what we want to do right now.

No.

If sales are flat then next year, I mean presumably you would still be operating with some degree of under absorption. And if you feel like margins are going to be flat -- I guess where do you -- or margins may be even better. Where are you seeing I guess the positive move upward for next year just given the sales force headcounts that are coming on the payroll here?

I see a growth in the Aggregate & Mining -- here's the unknown I've got, how deep is domestic going to be down versus international up? That's the unknown that we have. But the opportunity that I see is probably in the energy side of it with the pellet presses and the oil drilling rigs beginning to pick back up and the sale of these complete pellet plants is opportunity in that side of it.

The aggregate side of it, Aggregate & Mining, I see an opportunity for that to increase next year. Again, I'd reiterate, we are setting our budgets for flat, but we think there are some opportunities to see growth. And the highway bill would make a big difference in domestic asphalt and mobile sales.

That's helpful. Thanks.

Morris Ajzenman, Griffin Securities.

Good morning, guys. Just to follow up to the previous questions on the margins, I'd like to dig a little deeper. You've given us a lot of granularity on all the divisions, I really, really appreciate that. But actually I mean this looks like it's working to your favor, but I'm trying to understand better.

In the second quarter you had revenues of $209 million, in this most recent quarter $178 million, revenues are down let's call it $30 million. Gross margins went from 22.3% in the second quarter to 23.6%, so you had a 130 basis point improvement sequentially. And the previous question is correct, inventories actually went up $18 million sequentially, they were $224 million at the end of the second quarter and 200 and -- what was it -- $242 million in the third quarter.

So my presumption, I guess he was asking, it seemed to be you had greater manufacturing efficiencies by -- you used the word building inventories, not to say anything bad about that, but inventories went up which helps efficiencies. And then I'm not sure about the capacity utilization not changing.

It's a long-winded question, but you have a margin improvement on a gross margin basis of 130 points sequentially with revenues down, inventories being up some. What's driving it if not better throughput, better productivity from better utilization of assets, better -- an inventory build, etc.? I'm just trying to get a handle on that. And then to see the sustainability of that 23.6% if inventories don't rise, whatever. I'm throwing a lot at you, but it's really a gross margin question and improvement there.

I think the first thing I'd say on the volume of inventory, we can swing $20 million, $25 million at the end of the quarter just depending on did the darn stuff get on a boat or did it get out the gate or something like that with these big orders. And I think that's just a one-time deal. We are not -- I can to you we're not intentionally building any inventory.

The place we still have excess inventory is in the underground companies that have not worked off, particularly in the trencher side of it, like we need to work it on down and we're operating particularly the underground plant very underutilized, very underutilized. So that's the one area that we've got kind of a -- in the $25 million to $30 million inventory and one operation there that ought to be down $10 million less.

I think that's -- to answer the first question, I think that's just a quarter end anomaly that's going to occur from time to time. The other area on plant utilization, we are still underutilized but we're really not intentionally building inventory anywhere in that.

I think part of the thing that is really showing up that I mentioned earlier that you guys may not be picking up on is the fact that we have spent a lot of money on new machine tools, fabrication equipment, things like that that are really beginning to reap some benefits, been major changes in machine tooling where in one plant we bought one $1.3 million piece of equipment that replaced three pieces of equipment, eliminated about 6,500 hours of set-up time in a year. So some of that equipment is beginning to pay off and I think that would show up more in margin improvement.

And I think we laid off a lot of people starting at the end of the third quarter a year ago -- or two years ago. And our actual efficiency and productivity of the more experienced employees without the newer employees who were still being trained and learning, that has generated some positive gross margins by reduced hours per product or per part or whatever that is part of this mix.

And also, the mix constantly changes over all the number of plants and parts that we have. So, I think we've tried to right size and I think we've tried to control our expenses. And the margins on the international I think in general are a little bit better and we've also improved our parts sales and that's made a difference.

One of the things that's disappointing that we run into every time -- I've have been through five of these downturns, but one of the things that gets you is you have about five good years and then you think there will never be any end it, you keep growing and adding to buildings, facilities and adding personnel. And then every time it turns down you could probably lay off 20% of the direct labor and not see any downturn in volume.

And we've seen that this year, that's what McKamy is saying. I can tell you one plant we laid off 100 people, we brought 20 back and we're doing more volume than we did when we had the other 100. So you're training people, you're adding and they're not as productive and those kinds of things are probably showing up now as much as anything (inaudible).

That was very helpful, very helpful. Let me just take that one step further then. Again, next year, I mean flattish, maybe modest improvement. Can we still see further, use the term productivity gains, whatever, referring to gross margins, can that continue to rise over the next four quarters or are we kind of at a level that you don't believe there's more upside there based on the better mix, better improvements you've seen in your overall structure?

Yes, I think you can see potential of it continuing to rise. It's a pretty simple thing. After you've gone through the trauma of laying people off, which is -- if you've got a heart that doesn't go over very well. People are very -- our managers are very reluctant to bring people back and therefore we work a lot of overtime before we start to add people back.

And the over time, a certain amount of it, as long as it doesn't affect people being unproductive, if you work them too much they become unproductive. But generally eight to 10 hours a week of overtime generally doesn't cost you any more money and you see a lot of bang for that as you go forward as far as productivity.

Thank you.

Robert McCarthy, Robert W. Baird.

Thanks for stretching this out. I just needed to clarify a couple very specific things you said about orders, Don. The pellet plants that you were talking about that you hoped to book orders shortly.

Right.

This would all be for delivery in 2011?

That's correct.

And you mentioned when you were talking about Aggregate & Mining and how dead the business was in July and August and then got stronger. You talked specifically about $25 million to $30 million of orders. I thought you had said in the last two weeks -- you must have meant -- I'm sure you meant -- tell me if you meant the last two weeks of the quarter? Or was that --?

We got one for $15 million Friday, Rob, and one for about $7 million to $9 billion the week before. So, yes, in the last couple of weeks.

Okay, so that's since the end of the quarter.

Yes.

So Aggregate & Mining must have come back fairly strong in the month of September as well or you wouldn't even have the backlog you have?

That's correct. We've seen some of these big international projects start to kick in and that's mainly where it is.

Okay, all right, thanks very much, Don.

Jason Ursaner, CJS Securities.

Hi, Don, thanks for taking the follow-ups. The call is getting long, but I just wanted to clarify two things. The new product revenue opportunities, the wood pellet energy section, that's all going to be in the Ag & Mining Group because of its proximity to BMI?

Jason, that's a little -- the pellet plant's got products from seven different companies.

Okay.

And the Kolberg-Pioneer and JCI are both building products for it coming out of the Aggregate & Mining. Astec will probably be the largest single beneficiary from the Asphalt Group. Astec and Heatec are the two probably largest. And then BTI, which builds the pellet presses. So it's about half from the Aggregate & Mining -- I guess it's 40% from them, 50% from the Asphalt Group and about 10% from the other group.

Okay. And then just in terms -- if the opportunities do materialize to revenue in 2011, can you talk a little bit about the profitability expectations for some of these new products and what type of scale you would need for it to be in line with corporate averages?

I think the margins will be -- I want to think better, but gosh, until you build them, Jason, you don't know. I think we're figuring the margins being similar to what we've got right now. We're obviously hoping it will be a little better, but until you build them there are always some surprises.

Okay. And then just to make sure I'm hearing you right on gross margin. It sounds like you're clearly saying this quarter should be a relatively normal consistent kind of level. But the improvement is still being driven by the stronger parts sales and the mix and you talked about adding back personnel and sales service and parts. So if you're adding back equipment sales as you move into next year for the first half, I guess I'm just wondering why Q3 wouldn't be a short-term peak in gross margin?

Well, I think the difference is you've got low volume in this quarter and you've got an inordinate distribution of parts, which is a higher margin. We'll probably see revenues go up and as revenues go up you really get some leverage from your utilization and that's the big difference. So, any marginal improvement in revenues will make a big difference in your margin.

Okay, thanks a lot for the follow-ups.

Jake Crandlemire, Ramsey Asset Management.

Thanks for taking my question. I just wanted to follow up with something you guys said earlier on the international margin. Could you just give us a sense kind of on the growth and operating how different those are than domestic margins?

You know, it depends on how competitive the market is. I guess historically they were a couple of percentages better.

On gross and operating or on one in particular?

On gross.

On gross. And then is it similar on operating?

Probably a little more SG&A related to international, probably 1% on net.

Got it. Okay, thank you.

Alan Brochstein, AB Analytical Services.

Hey, guys, thanks for taking my call. I had one financial question, I think I'll save that for last. But congratulations on the international growth, I know it's a big effort there. And I also know that your company is very much into focusing on environmentally friendly or green products.

I'm just wondering, Don, if there's any connection between your success overseas in terms of market share gains, is it at all related to green? How does that resonate overseas compared to here and just in general if you could just update us on anything going on on that front.

Generally the green initiative certainly is more -- probably Europe is greener than we are. About all the wood pellets are going to Europe from the United States right now. So the US, if I had to line it up, Europe is probably more sensitive to green than we are here in the states.

As you get to other countries, Australia is very -- the green is important in Australia, a little less important in Canada, a little less than that in Central and South America. They're all -- I think everybody wants to see sustainability and more efficiency in doing it. But still it's -- I can tell you it's all going to come back to economics. Fuel prices and everything else comes back to people want to be green, but if it costs a lot more money they're not going to spend a lot.

So our mission is trying to make it as fuel-efficient and as energy-efficient as possible and still be green. The wood pellets are a good example, they are cheaper than diesel fuel, they're cheaper than propane, they're twice the price of natural gas and three times the price of coal. So, how green do you want to be?

Okay, my second product question is I think it's been about five quarters if I'm not mistaken that you guys have been talking about this shallow oil drilling equipment that you originally designed with customer input. And I'm just wondering now at this point, how many companies are you selling that to? And is there some sort of geographic or -- I think it's shallow drilling that's being done, but can you just highlight a little bit more about where your strength is in that area?

Of course in the Marcellus Shale is where there's a lot of it, it's not all shallow. These rigs were built and will go 15,000 feet deep. They are more automated, they require less operators, they're safer rigs. What happened after the downturn in the fourth quarter of 2008, of course everything slowed down in everything. It picked back up and a lot of people are still using the older rigs. And until you get really strong rig utilization people don't buy new rigs.

So we went into kind of a hibernation for about a year there, we didn't sell any, we sold a couple this year now. And it's beginning -- we've got more prospects as we speak. But it just seems to be beginning to pick back up in that area. But they're being used basically in the hot areas of the country, which is the Marcellus Shale up in Pennsylvania and New York and down in Louisiana and Texas. We've got a couple down in Peru, different areas of the world, we've shipped some out of the United States and some here.

I wouldn't ask most CEOs this, but you'll know the answer I think. Are these AC or DC current?

They're basically more direct drive hydraulic.

Okay.

Yes.

And then my last question is just back to the financials, and I'm sorry if I should know the answer if you guys addressed this. But you had this big jump in this variable controlled interest line. Can you just walk me through that and explain how I should look at that both for this quarter and going forward?

I'm not sure I know that --.

Tell us on the press release what you're looking at?

I'm sorry, I'll tell you exactly. It's net income attributable to non -- I'm sorry, it's -- it was a big jump, I'm sorry, it was --.

It's down there under [Osborne] probably.

That's Osborne.

Yes. We have in our South African operation some minority ownership, about 2% of it is minority owned and that has to be eliminated. It's right down in the middle there.

Yes, I know it is, nothing -- I mean it's --.

I'm sorry, bad question. I was confused, I see what my problem is. Sorry about that. Okay, guys, thanks a lot and good luck in 2011.

Thank you.

Thank you.

Thank you. Mr. Anderson, there are no further questions at this time. I would like to turn the floor back over to you for closing comments.

Okay, thank you, Melissa. We appreciate everyone's participation on our third-quarter conference call today and your interest in Astec. As our news release indicates, today's conference call has been recorded. A replay of the call will be available through November 2, 2010, an archived webcast will be available for 90 days.

You can look at our transcript on the website under the investor relations tab of the Astec Industries website and that will be available within the next seven days. All of the information for your reference is contained in the news release that was sent out earlier this morning. Again, thank you all and have a good day.

This concludes today's teleconference. You make disconnect your lines at this time. Thank you for your participation.