Astec Industries Inc (ASTE) 2014 Q2 法說會逐字稿

(Operator Instructions). Jack Kasprzak, BB&T.

Good morning, everyone. First question is on the issue of highway, federal highway funding. Are you saying that this lack of a stopgap funding measure that I guess has made some considerable progress in Congress, but has yet to be passed, is affecting order such that when it is passed, the $11 billion or so infusion that it might serve to relieve your customers and perhaps bring them back into the mix in terms of quarters?

Jack, this is Ben. It really would help move them along. The truth is in talking to our customers in the last month, their business seems to be better than ours. Particularly the asphalt side. The more we talk to them, there's work out there that they have got. The private is good.

They are spending money on the smaller ticket CapEx items, the Roadtec, the pavers, mills and things like that. So demand is slowly improved for that type of equipment, but there is pent-up demand on the large ticket items like the asphalt plants. They just want the visibility.

We went up to the fly in for the transportation construction coalition fly in and that we left not feeling very good about it, but the proposal by [Corker] is somebody stepping out and trying to get something done which we fully applaud. And it would help our customers' psyche for sure.

The other thing, though, is that what Congress has proven is is that they will continue to do extensions. So the message we are trying to send our customers with our salesmen is that it is not what we want, but it is there. They are spending some money on roads. And so a baseline is there.

But, yes, the mindset there is nothing like a Highway Bill to help their mindsets on big purchases.

Okay. And is there an average price or ticket for the pellet plants that you are selling?

Well, we sell them in 20 ton per hour lines. The pellet plant at Hazelhurst is a three line plant. So that is about a $60 million project. I think it is just under right around $59 million. But the ones that we are quoting are two line plants.

So at about $20 million a line.

That would be -- yes, it would be -- each one would be about $40 million.

And on your first-quarter call following the ConExpo show, I think you're -- you were happy with the attendance and the customer feedback and order potential but that maybe the orders would flow in over the course of the year. Are they flowing in as you thought? Are you still happy with how the return on investment from the show, if you will?

We are. We have picked up a few orders from leads that we picked up at the show that we didn't have before the show. Biggest example of that would be a polymer plant in Brazil. We are still working a few of the opportunities, but yes, we would still say we were happy with the show.

Okay. That does it for me. Thank you very much.

Mig Dobre, Robert W. Baird.

Good morning. Ben, just to clarify something on your cost of a coffee cup comment earlier. Those places coffee costs a little more than a dollar and change. So, just for perspective to keep that in mind. I do have a couple of questions on aggregate in mining.

Can you provide a little bit of color on the sequential uptick in orders? How much of that was Telestack? And maybe try to parse out what is happening from the pure aggregate side versus what you are seeing in mining.

Well, on the backlog side, part of that was them being added in. We are seeing some more bigger project work come toward our Telsmith division. So we are seeing some of that start to flow through as, like I mentioned, some of our customers as we are talking to them it seems things like they are doing a little better than us. And that holds true on the aggregate side, too. So we are seeing some of that.

Where they have been off a little bit has been on the international side. And we have seen more projects on that side, too, start to come up on [quota].

But is there a way to frame the year-over-year growth in aggregate versus what is happening in mining? I am trying to figure out is mining, say, down 20 or whatever percent and aggregate is growing, or how should I be thinking about that?

Well, most of our mining work, Mig, is at the Osborne division, frankly, as we have mentioned in the past. And what we would say is it's probably about equal. Although our Osborne group has a good backlog. But a lot of that is in traditional aggregates right now.

So, I would be thinking about it as being equal as far as the dollars.

Okay. And then sticking with Telestack, can you help us with the swing maybe in profitability? You mentioned that because of purchase accounting and whatnot, this acquisition didn't contribute really, or rather what the headwind to net income this quarter, but you are expecting it to contribute going forward. Can you calibrate that at all?

Yes, absolutely. This is David. The comment was that they were operationally profitable and that, due to acquisition accounting, that they actually had just a small loss for the quarter and we don't expect that to exist going forward. We do expect them to be showing accounting profit, reportable profit going forward.

And the reasons for that and the acquisition accounting is primarily the biggest chunk of it was the write-up of inventory when we bought it and allocated the purchase price. That inventory gets written up and then it gets sold.

Now the vast majority of that was that was written up was sold during the second quarter. And so, that increase in basis has moved through the P&L. So, we don't expect that to exist going forward at all.

I see. But you can provide me with a number on this so that I understand the impact? (multiple speakers) inventory write-up was.

I believe it was in the neighborhood of $800,000 to $900,000.

Okay. Thank you for that.

I am also wondering if you can give us a little more color as far as additional potential demand for the wood pellet plants. You did mention some folks are looking at the plants and you reiterated the fact that you expect to sell some by year-end. Has your conviction increased or unchanged or decreased as far as your ability to get additional orders this year?

I think for this year, we would say one to two for delivery in 2015. There could be more, but they would be next year. So we wouldn't say any more than that for now, really, for what we are talking to. We have more prospects than that, but those seem to be the two warmest that we have.

That was last quarter as well. But I am wondering have you made progress with these plans that you apparently have in your pipeline.

We have, we have. And, really, we do have some excitement around the plant. It has exceeded the guaranteed tons. We guaranteed 15 tons on the first one because it was our first one, but we have run over 20 tons an hour on the line. We actually -- we have gone through our problems. I mean it is a first, so we have had issues, but we did get it up running high enough to where we ran them out of their base material. They ran out of chips. So that was a good sign.

But we have had visitors on site. They are excited about the prospects. A lot of the comments are, nobody is close to you, you are doing great. So, it just takes so long for the projects because of the financing and getting the sites ready, and it is really a transportation business on the pellets. So getting all that lined up takes a long time.

But we -- when we can get people to the site, we have -- seems like we are moving into a lead position for opportunities to get deals. One or two this year, potentially more than that number for next year, but it is really too early to call. Because you have got to figure out which guys have the money. But that is where we are right now.

I appreciate that. Then, last one before I jump back into queue.

On energy, nice bump in orders there sequentially, and year-over-year as well. With that in mind and looking at the backlog, how should we think about margin here in the back half of the year for this segment? Is it reasonable to assume a similar run rate to what you have had in the first half? Or given your backlog mix, can we be thinking something else?

Well, part of that backlog is newer rigs. The newer technology and we continue to change that as we go along. I think the way to look at that would be the same type margins that if -- we think next year we can start raising those a little bit because we are getting a name for ourselves and on the comp trailers. But right now I would look at it as the same margins for the balance of the year.

Great. Thank you.

Jason Ursaner, CJS Securities.

Good morning. First, have a couple of questions on the infrastructure group. Normally, Q1 and Q2 look roughly comparable for the Company, but sales were up almost 20% sequentially. So would most of that increase relate to weather? I know last quarter you talked about that impact of some of the timing of deliveries. Trying to break that between weather and maybe ConExpo.

Jason, I would probably agree with you on the weather to a point. It was awfully wet in the first quarter, but the other side of that on the infrastructure is with Roadtec being in there and seeing the spending on the smaller ticket CapEx items and they are gaining some market share, we feel like, in the papers. But I think that is where you are seeing a piece of that. And also our small pavers with our Carlson group. They are doing as well as ever on sales and backlog that they have ever done.

Okay. And then maybe inquire, just on the wood pellets, the quarter included no revenues for any recognition on the initial line. That is still in the customer financing arrangements?

That's correct.

Okay. And in terms of the cautious commentary on short-term spending, maybe just a little more detail there. Is it -- because customers had already been holding off waiting for the Highway Bill, so is the commentary that this is just a continuation of that? Is it trying to signal maybe more of that, or is it just signaling normal seasonality that domestically second-half tends to be lower than the first half to begin with?

It is a combination, Jason. The hot mix plant business is pretty tough right now, frankly. And we are getting our -- our market share is really pretty good in a weak market.

The thing -- the fall buying season, our traditional buying season, we are starting to quote for that. But we don't -- we are on the short-term it is just going to take a while to get our customers through the work season and get them into the buying mode. So I think it is a combination of traditional buying season and the fact that we are on another extension to 2015.

Okay. And overall, parts sales obviously declined a couple of percent in the quarter on a year-to-year basis. You mentioned there has been an effort to increase the investment in sales there to grow that aftermarket portion. Was there anything specifically going on in the quarter or the first half that may have skewed that, or how are you going to turn that towards growth?

Well, we were frankly a little disappointed because we have been focusing on it. And we have seen a little bit more since then, at a quarter, parts coming back a little bit. Our info from the field is there's just not as many parts that have been bought on the asphalt side. In particular, one of our private power parts competitors has reduced some staff.

But as we get into it, we are going to continue. We are going to keep working on the competitive parts side of it. We have been -- some divisions have done better than others on that. So we have an opportunity there.

So, we are working through that. Frankly, Jason, we want to increase it and we are going to continue to focus on it during the quarter.

And part of that will be a little bit better effort on how we are covering the territory with our boots on the ground because we do have more boots on the ground. And we think we can get that back here going into the second half.

Okay, great. I think that is it for me. I will jump back into the queue. Thanks.

Nick Coppola, Thompson Research.

Morning. Can you add a little more color about the activity you are seeing at the state levels to get highway progress completed? And as a follow-up to that, are you seeing substantially stronger pocket to growth where additional funding mechanisms are being put in place?

Sure. The ones that we have talked about, we kind of talked about them in the past, Nick, the Virginia effort with moving to more of a sales tax setup. I was up there in late June and July with a customer and they are starting to see a little bit of that.

But they were busy but he kind of said, well, we are busy, but part of it is we had a wet first part of the year. But that the projects that were coming were looking good to them. They were in the northern part of Virginia.

The other states, Pennsylvania has done some work on that to try to get more sales tax going. And that is trying to -- part of that is it'll go away from some of the gas tax to go to some of the state tax or the sales tax side. But those are a couple of the examples that are out there that seem to be working.

Now, the other pockets where there's work, of course. is where there is oil. So we have seen Texas being strong, for instance, and it makes sense for what they have got going down in that part of the world.

Okay. That is certainly helpful. And in terms of international sales, we saw one of the strongest year-over-year growth we have seen in quite a few quarters. Assuming Telestack helped move the needle there, is there any commentary you can give us that to either quantify that or commentary about broader based international strength, that would be helpful.

Sure. Telestack did have an effect on that and, then, also in the countries that Dave had mentioned in his comments, Russia and post-Soviet states, have been good for us. And one of the questions that may come up is how are we seeing the Russia and Ukraine situation and is that affecting us. And we have not seen it yet. We are keeping a heck of an eye on it, but what we have seen is things are moving as usual.

We have had a lot of mobile equipment shipped into Russia. We have had an asphalt plant that is shipping. We got paid last week. It is on the way over. In Ukraine, we have got a project coming out of Telestack that is shipping this week. Started shipping yesterday. So we have not seen it affect us in that region.

All right. Thanks for taking my questions.

Ted Grace, Susquehanna.

Congratulations on a good quarter.

Thanks, Ted.

I was hoping to circle back on a couple of items and maybe parts because it was just discussed. And I apologize if I missed it, but specifically, where was the weakness most acute in the quarter that drove a decline and maybe we could just start there?

Well, we had -- on our energy side we were off a little bit with our Heatec parts. And they had a pretty significant quarter last year that was off a little bit for them. And our Telsmith group was off on their parts a little bit. So those were the two main culprits, if you say culprits, but they are working on getting it back up.

(multiple speakers) we have pockets where they are pretty good. Those were the two main ones.

So, energy, and I apologize I should know this off the top of my head, but Telsmith is in AMG?

Yes.

And the end markets they serve specifically are what?

Telsmith is primarily quarry and aggregates. They have some mining equipment and they are developing large 900 horsepower cone for the mining. And then Heatec is in the energy side and, primarily, a huddle of heaters and polymer blending systems, rubber [mining] systems.

So to your prior comment that domestic aggregates is okay in international, is it fair to assume that your domestic parts business for AMG was up? Or would that be reading too much into what you are saying?

No, I think it would be maybe reading a little bit too much in it. I think not to that degree.

Okay. But when you talk to customers on the domestic aggregate side that there -- volumes are clearly up nicely, production is up nicely in the second quarter. You just have yet to see that translate into the parts and consumables?

Yes, we think we are going to start seeing it.

Okay. And you don't think that that's a market share issue or third parties, you think it is just a timing factor?

We don't -- I don't think it's a market share issue.

Okay. Perfect. That's simple. Then the second thing I was hoping to circle back on and I apologize if I missed something, but in terms of the AMG margins, the incrementals were softer than trend. I know you at some one-time items related to Telestac, but could we maybe walk through what those one-time items were just so we understand what the underlying profitability of AMG look like?

Well, they have -- I think, of what you are referring to when you talk about their margins, frankly they had a couple of large projects that were price competitive. And I think that is what you are seeing, Ted. We don't really have anything other than that. When we talk, their product mix is pretty good. They just had a couple of big jobs that were price competitive.

Okay. So, pricing and mix we have more OE in that kind of -- and one-time items, I know I heard 800,000 to 900,000 of inventory step-up. Was that all realized in a quarter or is that what we are expecting for the year?

No. That was -- I would say 90% to 95% of it was realized during the quarter. I would say the lower end of that range was realized during the quarter. There may be just a little bit left. I think they had one piece of equipment left that existed at the acquisition date.

So, and that piece should move out this quarter, we believe, or at some point in the remainder of the year.

Okay. So the one-time items are buying this and things normalized 3Q and beyond?

That is correct.

Okay and clarity on the energy margin comment in the back half. Were you saying it would be similar year on year or the second half of 2014 should be similar to the first half of 2014?

The second half of 2014 should be similar to the first half of 2014.

Okay, great. Okay. That is helpful to hear. The last thing I wanted to ask is -- I know I have asked a few, is do you look forward two or three years? With lean and all the other initiatives you have underway, can you talk about the longer term opportunity you see to improve margin structurally? So forgetting volumes and mix and pricing and those dynamics, just in terms of improving your fixed cost structure, how much opportunities do you have any next two to three years? And I will get back in queue.

Well, Ted, we are working on the lean. Again, as I have said in the past, I think we have been slower than a lot of companies that maybe build one after the other of things because of our build to order in most of our businesses; set up. But we are making the journey and we are now ranking our divisions against each other which is a great best practices driver.

And we are starting to see that take effect. We do on quarterly reviews travel to the divisions and we are seeing some results visibly in the shops. And as they do what the companies that have already done that, as that comes through, we think we are going to see better margins and start to -- part of it will be volume. I mean, we are a volume story sometimes with the margin, but we are getting the thanks in place to be able to get back if we can get the volume to get back to our historical high margins. And so, that would be our goal is to get back to that point. And it is a combination of the lean effort and volume though. That is just who we are in our made to order setup.

All right. Well, that is very helpful. Best of luck this quarter.

Thank you.

Walter Liptak, Global Hunter Securities.

Good morning. Walt Liptak. Just a couple of follow-ups.

First, in your outlook, you commented a little bit about third quarter and I think you commented that revenues are going to be challenging. I wonder if you can review that with us and I think you said UPS might be up in the third quarter directionally. I wonder if we can get more color there.

Walt, this is Ben. I think we will be ahead of the third quarter last year at the end of this third quarter. And based on what we have in our backlog and the schedule shipments and I think that is about where we would leave it. We -- how much can -- with our quarters sometimes even we get a little frustrated because of permitting and sites not being ready and that type of thing. And we have a little bit of what I call creep in the orders over into the next quarter. But what we see right now we think will be ahead of last year.

Okay. And along those lines in energy where the order activity was strongest. Is that book and ship? Can that ship in the third quarter? Or were some of it shipped in the third or is it more weighted towards the fourth?

Some of it will and we have got our Peterson division is doing quite well. And a good portion of that is in that group and the Heatec group.

Okay, great. Thank you.

Larry De Maria, William Blair.

Good morning. Thank you. Couple of questions. First, on this sequential infrastructure incrementals, they were relatively weak sequentially, but obviously they're really large year-over-year. Is there anything to the seasonality to the cost in that segment that would affect 1Q to Q2? And how should we think about second half growth margins given the run rate we are at now? Thank you.

Larry, I want to apologize. I missed the first part of the question. This is Ben.

It is about the sequential infrastructure margins. Maybe weren't as hot as obviously they were year-over-year. Is there anything seasonally with the costs or anything like that that we should think about? Because we are trying to get a proper run rate I guess into the second half. So, trying to understand the seasonality and then what the second half might look like.

Okay. Thank you. I'm sorry about not hearing the first part.

We will see some seasonality. What will help a little bit at the Astec division, for example, is we do have the hours of the pellet plant to help on the hours absorbed. So, I think we will see about -- well, with the volume we have at some other divisions, I think it will be even to slightly ahead of last year in the infrastructure, probably a little ahead.

Okay. That's fair. Secondly, on the pellet plants, how do we think about strictly within that category? Obviously the gross margins probably start off lower than you hope and then they obviously, they grow as you come up the curve and get more quarters. But how do we think about the trajectory towards gross margins specifically for the pellet plant?

And then it sounds like you won't be financing subsequent orders for the customers. Is that an issue for you guys? Are your competitors thinking about doing that or does the industry need to evolve and that needs to just get better?

Well, the pellet plant margins we are seeing are in line with our major equipment gross margins. So we are happy to report that. So going ahead, we like to raise them and we will as we build one after the other. If we can get where we have got our order behind each other, we naturally do better.

Competitor-wise, it is really difficult for somebody to come in and be exactly what we are because there is a large investment to get to that point. As we stand right now, we supply everything on the plant with the exception of two pieces, pretty critical pieces, the appellate press itself and we have partnered with [Kohl] out of Germany and used their unit as our standard unit. And then we have some hammer mills that we brought out from another company but eventually we can design our own hammer mill.

But we are in a unique position as a build to order one stop shop for a pellet plant. Most of the other plants are engineering firms, pulling equipment from multiple suppliers together that build a plant. And where you have one finger to point at Astec because we take responsibility for everything -- and we will handle the press and the hammer mill because we don't do the training on them -- it is different when you have an EPC contractor or engineering company that brings in 10 different people and they can look at each other and say, who is the one causing this problem. It's pretty attractive to the end user. We are in a unique position right now.

That makes a lot of sense. And then, just finally, how do we think about capacity line given that you guys are, maybe, I guess I like to say a bit more vertically integrated than some of the competitors or more assembly and contracts role based? How do we think about the number of lines we can actually think about getting towards? Or is there no real limit? How do we think about that?

If you look at the charts and the projections that we see coming out of meetings and going to association meetings to general conferences, the 60 ton an hour plant you think of that as maybe a sweet spot in size which would be three lines. The market that is projected for Europe, which you know the pellets go to replace coal for the emissions reductions and so you look at the projection of the number of pellets or the tons that they will need, it would tell you that somewhere in the range of 35 to 50 pellet plants in the 60-ton hour range would be sold in the United States to supply that.

And of course, you will end up having some competition, Latin America will get into supplying pellets. And a lot of it comes down to transportation. They have got to be first in the fiber bed around the trees and, second, close enough to a cheap enough form of transportation to get it there economically for the price that they are willing to pay for the pellets. So that kind of -- that is where the limit comes, where it is not 300 pellet plants.

Right. I guess I am thinking about your guys' capacity in terms of how many lines you can do in a year. How limited you guys are if this market really takes off.

Right. Well, capacity-wise, we could handle six lines to nine lines in a year pretty well. Now if the hot mix plant business comes back, we will have an opportunity, but we can add on fairly quickly. We have got -- we already have the plans should that happen. So we are six to nine lines in a year right now would be where we would be.

Got it. All right. Thanks very much. Good luck.

Thank you.

Brian Rafn, Morgan Dempsey.

Good morning. Let me ask. You guys talked a little bit about parts. Is the parts sales levered to utilization? And I would ask that if you go with this kind of inept Washington and the Highway Bill and the ins -- field installation of equipment continues to age and the lifespans continue to get longer. I would think that over time that would cause a demand increase for parts. Or is it strictly on just utilization usage?

No. I would agree with your comment. I mean, as the plants continue to age, there will be more parts sold. Utilization of those older plants does matter. I mean, if a plant is mothballed then it is not working and they are not going to be buying any parts.

But one of the things we have seen is people have gotten a little more work and gotten busy and as they started up their plants, they have realized the cost that that has cost them in the back half of last year and the first part of this year. So I think that helps add to the pent-up demand. If we could get a long-term bill, we could see some movement on the large plants.

Yes, okay. And also, Ben, you talked about with 17 Company subsidiaries, give us a sense maybe from a 50,000 foot view what your running shifts and where your capacity utilization might be. You don't have to go through each one, but maybe the high to the low.

Well, as a group we are probably running about 65% utilization today. We could -- our current volume we could probably get another if you say we are a $900,000 to a $1 billion company we could probably get to $1.5 billion or to $1.6 billion with our current facilities. And that is adding second and third shifts and that type of thing.

Our lean effort will help that a little bit. Give us the ability to get more through the existing facilities.

Okay. I think -- correct me if I am wrong, I think you had 40 or 41 new products at the ConExpo. Is there anything that is tracking better or the reception adoption is better across any of those new products?

Well, at our Carlson Group their new screeds have really taken off. They have got a lot of orders. Their small pavers have done extremely well that they announced the show. So if there was one that I was going to pick out, I would pick that out.

But there's a lot of excitement through a lot of the divisions equipment. That new -- the Guardian system on the Roadtec pavers to be able to see what is happening on the road on your smart phone and that type of stuff was very popular. We have seen pretty good interest in the people carrier that PTI had at the show and they didn't even expect to get activity on it.

The new water drill rig that GEFCO had at the show has had a lot of interest. So we -- I would love to talk to you about those for about an hour, but we have had some pretty good interest in that new equipment that we showed there.

Okay. Of the -- just from a standpoint of the global scope for pellet plant, you mentioned Europe 35 to 50, 60 ton plants. Is that specifically concentrated in the UK or is that spread all over the European continent?

The primary driver that managed the UK, now the pellet plants themselves would be here in the United States and the pellets would ship to Europe. But we have seen an uptick with the price of natural gas come out of Russia at about $16, I guess, 1000 right now. The wood is competitive. So we have seen a residential uptick through the winter last year in Italy and Germany.

So our customers are shifting some pellets to that area too. And they get a little more money on the private side, which is similar to the asphalt business. But that -- we have seen an uptick there.

All right. Thanks.

Mig Dobre, Robert W Baird.

Thanks for taking my follow-up. Just a couple of clarification items.

First is on the SG&A run rate. If I remember correctly you mentioned Telestack added something like $1.2 million. Is that the right rate going forward? Or is that number supposed to come down some as the year progresses?

I would say that is a good range to use for a while.

All right. That's helpful. Then I am trying to triangulate where we are supposed to be really on -- what expectations on an earnings side for the third quarter. You did mention up year-over-year which would make some sense to me, just given the fact that you have got different absorption than what you've had last year.

But I am wondering as we are looking at revenue as well as earnings compared to say, for instance, the first quarter of this year, are we talking lower? Are we talking flat? How should we frame that?

Well, on the -- if I -- hopefully, I am hearing your question right, Mig. I apologize. The question is on the revenue side, will -- how much up will we be?

Right. Exactly. You are going to be up year-over-year and I understand that. I am trying to understand as to whether you can frame the third-quarter performance versus what we have seen thus far this year. Either versus the first quarter or maybe the average of the six months or however you can or want to do it.

It will be -- I have to tell you, it will be up versus 2013's, but when I am saying a quarter to quarter, third quarter to third quarter, it will be down versus the first quarter this year. I mean, if that is the question.

Okay. That is the question.

Yes.

And the last point here is on the tax rate which was a little higher than what I was expecting. Is this a good run rate going forward?

I would use this until they pass the R&D tax credit. If they do that, it could -- it will impact our tax rate and we will -- as soon as they pass it we get to -- we account for that whole credit in that period. But I think this higher rate is the new normal right now.

Got it. Thank you.

Mr. Anderson, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Thank you, Christine. We appreciate your participation on the second-quarter conference call and thank you for your interest in Astec. As our news release indicates, today's call has been recorded.

A replay of the conference call will be available through August 5 and an archived webcast will be available for 90 days. The 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.

So this will conclude our call. Thank you all. Have a good week.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.