Transcript of
Astec Industries Inc (ASTE)
First Quarter 2008 Results
April 22, 2008
Executives
Stephen Anderson
- Director of Investor Relations
McKamy Hall -
Vice President and Chief Financial Officer
Dr. J. Don Brock - Chairman and Chief Executive Officer
Analysts
Arnie Ursaner – CJS Securities
Michael Cox - Piper Jaffray
Rich Wesolowski - Sidoti Company
Jack Kasprzac - BB&T Capital
Markets
Neal Miller - Fidelity Investments
Chris Weltzer - Robert W. Baird
Alan Brochman - A.D. Analytical
Services
Garo Norian - Blackrock, Inc
Operator
Greetings, ladies and gentlemen, and
welcome to the Astec Industries First Quarter 2008 Results Conference Call. At
this time all participants are in listen-only mode. A brief question and answer
session will follow the formal presentation. If anyone should require operator
assistance during the conference, please press “*0” on your telephone keypad.
As a reminder, this conference is being recorded. It is now my pleasure to
introduce your host, Mr.
Steve Anderson, Director of Investor Relations for Astec Industries. Thank you
Mr. Anderson, you may begin.
Stephen Anderson – Astec Industries Inc – Director of Investor Relations
Thank you, Doug. Good morning, and
welcome to the Astec Industries conference call for the first quarter of 2008.
As Doug said, my name is Steve Anderson and I am the Corporate Secretary and
Director of Investor Relations for the Company.
Also on today’s call are Dr. J. Don Brock, our Chairman and Chief Executive Officer, and McKamy Hall, Vice President and Chief
Financial Officer. In just a moment I will turn the call over to McKamy to
summarize our financial results and then to Don to discuss our business
operations and market conditions.
In the way of disclosures, I will
note that our discussion this morning may contain forward-looking statements
that relate to the future performance of the company. These statements are
intended to qualify for the Safe Harbor Liability established by the Private
Securities Litigation Reform Act.
Any such statements are not
guarantees of future performance and are subject to certain risks,
uncertainties, assumptions and other factors, some of which are beyond the
company’s control. Some of those factors that could influence our results are
highlighted in today’s financial news release, and others are contained in our
annual report and our quarterly and annual filings with the SEC. As usual, we
urge you to familiarize yourself with those factors.
At this point, I will turn the call
over to McKamy Hall to summarize our financial results. McKamy?
McKamy Hall – Astec Industries Inc ‑ Vice President and Chief Financial
Officer
Thanks, Steve. We appreciate each
of you joining us this morning. It is certainly a beautiful day in the
Southeast, and we are certainly pleased to report to you on the most profitable
first quarter in the company’s history. The company generated a 14.4%
improvement in net income, and we are looking forward to '08, starting out with
a backlog of $263 million for the quarter.
For the quarter, our net sales were
$263.1 million, and that is an increase of 22% over last year. International
sales were $92.5 million, being an 88.4% increase over last year. Those
increases occurred in Canada, Asia, South America, Central America, Australia. The domestic sales were up 2.5% over the quarter for last year. Parts sales were up
22.3% at a level of $52.6 million, and we did have parts sales increases in all
segments of the business. We also had sales increases, as you can see from the
attached information, information attached by segment, to your press release.
On the gross profit, the gross
profit was at $66.2 million, an increase of $11.8 million or 21.7%. The gross
profit percentage for the quarter remained flat at 25.2%. Again, that
information is attached, by segment, to the press release.
On the SG&A, our SG&A was at
14.7%. This SG&A increase included an increase of $3.5 million for ConExpo
expenses and the other primary increase in the SG&A was in the form of
salaries, commissions and benefits. Income from operations was at 27.4
million, that's an increase of $3.6 million or 15.1%. The effective tax rate
was up just slightly, 36.63 versus 36.26.
Our net income per share was at
$0.78 versus $0.69 or an increase of 13% in earnings per share. The net income
was up 17% at $17.5 million versus $15.3 million or 14.4%. The backlog is at
$263 million as we mentioned in the beginning, and that backlog is down 1.2%
compared to the prior year, but we have to keep in mind that it is down after
having achieved a 22% increase in sales, and certainly we have spent money on
capital expenditures and have improved our throughput to process orders during
this last 15 months.
On the balance sheet, our balance
sheet continues to be very strong. We have corporate cash available of $31.3
million. We have receivables at 39.8 days versus 36 days a year ago,
inventories at 3.4 turns versus 3.5 turns a year ago. While we owe nothing on
our credit facility, we are utilizing our facility for $7 million of letters of
credit, leaving a borrowing availability of $93 million. Capital expenditures
are at $7 million thus far through the first quarter out of a scheduled $31.9
million. Our depreciation and amortization is at $4.1 million out of a
projection of $18.2 million. Our cash flow will be attached to the 10-Q when
it is filed.
That concludes my prepared remarks,
and I will certainly be available to answer any questions you have later in the
call. We do appreciate your interest in Astec as we strive to improve
profitability and return for the shareholders. Don?
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
Good morning. As McKamy said, we
had a good quarter. We are very pleased with it. The revenue has increased
from 215 to 263, 22% increase. Our income was up from 15.3 to 17.5 or 14%, and
earnings per share were up from 0.69 to 0.78 or a 13% increase.
The ConExpo expense: We generally
have taken that in the past over an eight-month period. We took it all in this
quarter based on some of the new rules in accounting that required it. If we
had taken that over the two year period that we have in the past we would have
probably had...our earnings per share would have been about $0.08 to $0.09
higher than they are showing. ConExpo was extremely good this year, but it was
expensive, as McKamy said in the $3.5 million to $3.6 million range. Our
backlog for the quarter is flat; basically down about 1%. Frankly, this is a
little more comfortable level that will allow us to make deliveries. We are
still a little high in some of our segments, stretching the deliveries out a
little bit longer than we would like.
International sales, as McKamy had
said is up about 88%, 35% of the revenues for the quarter were international
and 65% domestic. Domestic sales were up only 2%, but we continue to grow our
international sales. We look for that to continue to increase over the next
three quarters. We are pleased that parts sales were up 23%, and this is an
area that we focus on and continues to grow.
Our gross margins were flat at
25.2%. We see this as probably one of our biggest challenges, with the
continuing inflationary pressures that we have in commodity prices of
maintaining this gross margin or our gross margin for the year. We think that
is going to be one of our biggest challenges.
Looking forward in the second
quarter and the rest of the year, while ConExpo was very expensive, it was the
best one that we have ever had. Historically we have never obtained many
orders there, but we received approximately $40 million in orders at that
ConExpo throughout all of the companies, so that ended up being a very good
show.
Our April order intake, as a result
of ConExpo, was very strong, both domestically and internationally. And this
event helped a lot by our new products, the green systems on the asphalt
plants, the need to increase recycling both in asphalt and in aggregates, and
particularly in the new oil drilling rigs that we are building at American
Augers.
Looking forward, we are confident
that we can meet our growth projections of 15% this year. We are still
comfortable with our annual guidance in the $280 to $295 range, but our
challenges are going to be managing the rapid increases in steel prices. We
are very comfortable with second quarter. It is a little hard to see out
beyond the second quarter. We are doing everything we can to offset increases
by efforts of our focus groups and our improved manufacturing operations, but
as I said, the visibility is a little hard when you get out beyond three to
four months.
We continue to work on a couple of
acquisitions that hopefully will close in the third quarter. The growth in the
energy market looks very good to us. We are doubling the size of the American
Augers facility to build drill rigs to have a dedicated factory just for that.
In summary, we had a good first
quarter; second quarter looks good to us. We continue to diversify into other
markets that are counter-cyclic to the infrastructure market, and that will
level our volumes and earnings. We will also continue to increase our sales
coverage geographically around the world to apply our products throughout the
world. With that, we will stop and answer any questions.
Operator
[OPERATOR INSTRUCTIONS]
Thank you. Ladies and gentlemen at this time we will be conducting a question
and answer session. If you would like to ask a question, you may press “*1” on your
telephone keypad. A confirmation tone will indicate your line is in the question
queue. You may press “*2” if you would like to remove your question from the
queue. For participants using speaker equipment, it may be necessary to pick
up your handsets before pressing the “*” keys. One moment please, while we
poll for questions.
Our first question comes from the
line of Arnie Ursaner with CJS Securities. Please go ahead with your question.
Arnie Ursaner – CJS Securities
Hi, good morning.
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
Hi Arnie.
McKamy Hall – Astec Industries Inc ‑ Vice President and Chief Financial
Officer
Hey, Arnie
Arnie Ursaner – CJS Securities
A little more on the
SG&A related to ConExpo. In your last conference call we asked about it
and you spoke about it and you mentioned normally you recognize half in the
year of the show, half in the following year. And at that time I think you
indicated it would add an incremental $700,000 to cost, most of it in Q1. I am
trying to reconcile a $3.5 million number with that. Is it fair to say you had
assumed $3.5 million generally over the two years, and if we kind of “x” this
out, should we assume we will have a million eight less next year, as an
estimate?
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
Well, Arnie, basically,
if you take the $3.6 million, divide by eight quarters that is what we would
have normally had. So there is seven-eighths of it we took upfront here. You
will not have any next year. We have written it...it has all been written
off. Historically, though, we were writing it off over that period, over eight
quarters.
Arnie Ursaner – CJS Securities
And you had given
guidance before about SG&A as a percent of revenue. What should we be
thinking about both this year and for next year, to try to build this...you
know, to…
McKamy Hall – Astec Industries Inc ‑ Vice President and Chief Financial
Officer
That is just a one-time
hit Arnie, that we took to the best of our ability, all of it in this first
quarter. So if you want to take $3.6 or $7 million out of that number, and
look at it as Don said, for the first quarter, then that’s what it would be
without. And there will be none for another three years.
Arnie Ursaner – CJS Securities
The next question I have is, can you
comment on the impact the currency had on your results? How much did it benefit
revenue, and any comments you have on how it may have impacted earnings
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
It had a very negative
effect related to BTI. I do not have the numbers in front of us, but the
exchange rate has certainly hurt them considerably, which is our Canadian
subsidiary. But frankly, with the weak dollar, it drives international sales,
or has been one of the drivers of it. So I do not know that we can qualify
that Arnie, other than the fact that we are up 10%. You know, we are up from
25% international sales to 35%, part of that is the dollar, and part of it is
more effort to sell internationally
Arnie Ursaner – CJS Securities
I have a question if I
can relate to the steel. Obviously it is a concern. You have had supply
locked in through June at fixed prices. Did you think of that while you were
going well beyond June? What steps, if any, are you taking when you either bid
on work or, do you have specific escalators to reflect higher steel? Or if in
fact you have booked business at a certain price and steel gets way out of
whack, do you have to absorb the margin? And can you walk us through that
process?
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
I would say in general if we have
booked it, we are going to get hit with...on further out, Arnie. With some of
it, we do have some major jobs that we are basically negotiating now with a
steel price increase. There are some of them that would be hanging out there,
though. It is primarily on asphalt plants.
What we are doing is buying all the
steel we can get our hands on at the prices we have got locked in, right now,
which we can cover a couple of months on out beyond. But that is about as far
as we can go. The real question is, is it going to stay up?
Well, you can get every answer you
want, you know, and there is a fine line between being brilliant and being
stupid on our buying right now. A number of people in the business seemed to
think that it was probably going to start to level back down or drop back in
July. Now we are hearing as far out as the fourth quarter, so it’s kind of a
wild card that we don’t know.
But we are trying to buy ahead, to
answer your question, we are trying to get escalators and in some cases we do
have escalators, but not in every case.
McKamy Hall – Astec Industries Inc ‑ Vice President and Chief Financial
Officer
And Arnie, I would just add to that,
and Don can expand on it, but we are, in all of our subs, looking at what are
typical products, our representative products, in those subs and we are doing
what-if rollups of the cost to keep our people apprised of what they need to do
either in terms of reducing cost or increasing prices or a combination of the
two to maintain or improve our margins.
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
We are raising prices at
this point, but you know, how much we can raise them is still questionable. I
mean, some of the companies have raised them 4 to 5%, some of them as high as 7
or 8%, and this is a mid-year price increase is what it amounts to. So, I
would say on an average we have raised them 4 to 5%, mid year, where we
normally do not do that until September.
Arnie Ursaner – CJS Securities
Thank you very much
Operator
Our next question comes
from the line of Michael Cox, with Piper Jaffray.
Michael Cox - Piper Jaffray
Good morning, and
congratulations on the quarter.
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
Thank you, Mike.
Michael Cox - Piper Jaffray
Okay, my first question
is, I wonder if you would comment on your ability to add sales resources or new
distributors to capitalize on the increased manufacturing capabilities that you
described, and should we expect the backlog to remain at this relatively
similar level throughout the balance of the year?
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
I think to answer your
question; it normally drops off a little bit in the summer time. But yeah, I
personally do not want to see it grow much from there, because you start
getting out where you’re missing orders because you can not deliver them. And it
has been at an uncomfortably high level. We have added enough capacity in many
cases. For the first time, we can probably deliver track mounts pretty quick,
track mounted crush asphalt plants, a big backlog on those. A lot of
international business coming in there. On oil drills and rigs, we can not
deliver those as fast as we need to. So we have capacity problems probably in
about four of the companies. Some of the others we have added onto. For
example, Roadtec and Kolberg-Pioneer were two big additions that we did about
18 months ago. That is really paying off and helping us keep the backlog at a
reasonable level.
Michael Cox - Piper Jaffray
Okay great, that is
helpful. On the international side, are there specific geographic regions that
you are seeing the strongest growth or any deviations or unusual trends?
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
I would not say there is
much deviation. It is pretty much spread all over. Australia, Russia, Middle East, number of units going to Europe. It is pretty well spread out. The
international pipeline business, of course the trenchers kind of follow where
those go. The big drills kind of follow that. A lot to the Middle East, a lot
to Russia, and some into Turkey. Wherever your big pipeline projects are going,
that is where they follow. But Canada...Western Canada, well all over Canada is a very strong force. So it is not a whole lot different mix than it was last
year to answer your question.
Michael Cox - Piper Jaffray
Okay, that is great. My
last question is on the domestic business. Did they carve out the Peterson
business? It looks like domestic was down 7 or 8%. I am curious how that
stacked up relative to your expectations. What do you expect as you look to
the balance of the year? Do you expect that decline to get worse?
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
First on the Peterson
business, it is totally added. We took what their backlog was before we bought
them. So it is still in there. But Aggregate is down probably from $120
million to $100 million in backlog. Mobile, which is Roadtec and Carlson,
backlog, you might as well throw that one out. It is not very meaningful.
Their backlog was $13 million and they did $17 million last month. So, they
will probably do that again this month. So you end up...backlog is not very
meaningful in that group. The other groups basically are all up. The
Aggregate mining basically is down you know 17%. The good part of that is just
increased capacity. We have increased capacity in those plants. And
domestically...frankly domestically we have seen a slow down. In all of the
volume that our customers have in the asphalt side we have not necessarily seen
a slow down in buying. I think a lot of that is driven by the
increase...needing the increase the amount of recycle. To stay competitive and
to warm asphalts or green systems we are up close to between 80 and 100 of
those out now. Either ordered or out. So that certainly helped the asphalt
business.
Michael Cox - Piper Jaffray
Okay, I apologize. I
was actually referring to book revenue as opposed to the backlog domestically.
I would just be curious as to your look at the demand environment on the
domestic side.
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
I am sorry. I probably
didn’t answer the right question. Okay.
Michael Cox - Piper Jaffray
Could you comment though
on the demands, environment you see domestically?
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
On the demands or going
forward? Or are you talking about the quarter?
Michael Cox - Piper Jaffray
Going forward.
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
Okay. Michael...on asphalt, I guess it is a surprise to
me. I mean with the price of oil where it is, it obviously means they can buy
less tons. There is still a disconnect in asphalt prices and oil prices. But
we have seen a big increase in asphalt prices. But the states are very much
more, willing to do more recycle. We see the amount of recycle increasing. We
see another major trend that I have not seen in my career. Historically, the
cities, the counties, the private works, follow whatever states specifications
are, states are pretty conservative, a lot of the engineers in the states.
With
this new warm asphalt, higher recycle we are seeing them disconnecting.
The cities are saying the heck with what the states want to
do; we need to stretch our dollars. So, we see the contractors gearing up to
do more of that. With the leeds credit that they get by running higher
recycle, developers are saying the heck with the states, they put us down a
good mix. So we are seeing a growth in that market not being held back by
state’s specifications. I mean they seem to be more aggressive on the private,
city, and the county side. Overall though, there is obviously a slowdown in
the U.S. economy that is occurring, but we have not seen a slowdown in the
buying at that point, which is a little bit surprising.
Michael Cox - Piper Jaffray
Okay, great. Thank you
very much.
Operator
Our next question comes
from Rich Wesolowski with Sidoti Company. Please go ahead with your question.
Rich Wesolowski - Sidoti Company
Good morning. Don you
mentioned some of the orders in April. How much of the $40 million that you
cited within $260 million backlog?
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
I would say there's
probably a third of it.
Rich Wesolowski - Sidoti Company
Okay.
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
The rest of it is what I
call firm verbals. They did not have the paperwork in.
Rich Wesolowski - Sidoti Company
Right, that is what you
were referring to in April?
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
Yes, that and we have a
lot of orders...verbal orders for drill rigs that is not in there either.
Rich Wesolowski - Sidoti Company
Okay.
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
Substantial number.
Rich Wesolowski - Sidoti Company
Can you provide what
kind of details on the additions you are making to your sales force, especially
internationally? How big is it now versus a year ago. And what stage are you
in, in this plan. What regions are you targeting etcetera?
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
Probably the biggest
push we’ve had in the asphalt side of it. We have a new vice-president of
sales for the asphalt group internationally and he is adding people around the
world. We have added people in the Middle East. We have added people in the
Asia-Pacific. We had people there, but we are adding more to those forces in
the different areas. In Europe we are adding dealers basically these guys work
with and we are adding dealers in these different areas. Peterson, obviously
we are trying to grow their international business and they are doing quite
well with their wood chippers internationally. The Aggregate and mining side of
it has really grown tremendously in the last four years in that area. We have
not had as many recent additions in that area. We have kind of ramped up in
that area. But mainly in the asphalt and in the green side of it.
Rich Wesolowski - Sidoti Company
Does the fact that you
have a lot of new faces in the sales force make it more difficult to make the
price increase to stick?
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
I think that comes back
to us stop management of managing that. We certainly have to put them out
there and try to dig our heels in early. But, so far we have not had to much
push back. If I go up as much as steel has gone up, I worry about that. So,
we are putting every effort we can to take other cost out to continue to work
on our cost areas. So I...don’t see us being able to raise our prices as much
as the steel of what being going up. So we have to get it somewhere else to
maintain our margins. At this point I think we can, but the jury is still out
on that.
Rich Wesolowski - Sidoti Company
Okay. And finally just
in line of question. The $32 million CapEx budget that does not include
anything for the American Augers extension right.
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
It included probably
about $4 million. We are probably going to spend $10 million. So our board
has given us approval to up that to do what we need to do up there.
Rich Wesolowski - Sidoti Company
Okay. Thank you very
much.
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
Thank you.
Operator
Our next question comes
from the line of Jack Kasprzac with BB&T Capital Markets. Go ahead with
your question.
Jack Kasprzac - BB&T Capital Markets
Good morning Don, how
are you?
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
Good. How are you
today?
Jack Kasprzac - BB&T Capital Markets
Congratulations on the
quarter. I wanted to ask, in the segment break down there is an all others
category which says 2008 revenue was $20.6 million, and it was I guess 0 last
year. Can you...have you maintained I guess that is a question for.
Stephen Anderson – Astec Industries Inc – Director of Investor Relations
That is Peterson.
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
That is Peterson. And
Peterson we only had a half of year.
Jack Kasprzac - BB&T Capital Markets
Yes, okay.
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
And that is for the
first quarter basically. We didn’t own them the first quarter last year.
Jack Kasprzac - BB&T Capital Markets
And then the profit part of that
exhibit where the all others category has a loss of $12,725 million. Is there
a corporate number that is embedded in there specifically.
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
Yes, that is basically McKamy’s department.
McKamy Hall – Astec Industries Inc ‑ Vice President and Chief Financial
Officer
He is ribbing me now. That also
includes all your federal taxes, Jack.
Jack Kasprzac - BB&T Capital Markets
Okay, great. I just wanted to know
what I was comparing there.
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
It' not indicative of Peterson. It
is primarily in corporate and federal taxes. If we get another acquisition in
that area, we will separate that as a Green Group.
Jack Kasprzac - BB&T Capital Markets
Okay. And I guess you have made
some comments already Don about you know the U.S. and the economy how your
orders are looking there. You know I guess I wanted to maybe ask in a
different way. But the state budget situation is generally I think it is
better to say deteriorating. Some of you may disagree with that, and you know
the last time we had this sort of situation like this '02, '03, you know it was
a little dicer time. You know could you just maybe talk about you know today
versus five or six years ago when we had the last sort of state budget crisis?
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
Jack I guess the thing that quite
frankly surprises me is, I think we probably have a more sophisticated
clientele 6 to 10 years ago. I am surprised that the number of customers that
continue to buy equipment. I have listened to CNBC and I would want to go and
get back in bed and pull the cover over my head and cry. And then you go down
to the show and everybody is walking in and they want to buy something. I want
to say, "Aren't you listening to television". I see more of our
customer base, which we have a large stable customer base, and the asphalt is
they are raising their prices right with liquid asphalt and while the states
can buy less and the states are spending less, our customers are still making
money. If you show them a reduction in cost they will jump all over it and
they are still buying. We have them ordering out into the fourth quarter right
now. They just want to go ahead and get their orders in and that is one thing
that bugs us a little bit with the steel prices. To make sure we are covering
everything. Not knowing how this stuff is going to keep changing. But we
don’t...I guess. Due to the green systems it lowers their cost and coal burners
lower their cost. But mainly, increasing the amount of recycle lowers their
cost. We had one of the major players brought 10 of his people in last
Thursday. We paved their church parking lot and had about 60 customers in.
Man they do not seem to be slowing down at all, although the market is slowing
a little bit. But they have money and they are willing to spend money to
reduce cost.
Stephen Anderson – Astec Industries Inc – Director of Investor Relations
They had a good year last year.
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
They had a good year last year. I
guess that...so it is a little bit of a disconnect Jack that is surprising to
me.
Jack Kasprzac - BB&T Capital Markets
Okay. That is very helpful. Also,
I wanted to ask whether it is possible to guesstimate what the company's
capacity is today. I know that going back in time we used to throw around
different numbers for what you thought your peak capacity was. Is there any
color you can give us on that?
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
Jack I would say we are running
close to 90% right now. There are some of them that could do a little more.
There are a couple of the three of the companies that could do more. I was in South Africa week before last and they are wide open. Their problem is stretched out
deliveries. And all of the asphalt companies, the three in that group and the
two in the mobile group are wide open. We are running at peak capacity. We
can build up some more second shift. But we are still running close. American
Augers is totally above capacity. But that is why we are doubling the price
for the size of that plant.
Jack Kasprzac - BB&T Capital Markets
Right.
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
So we are running up around you know
it depends on how you figure it. If we could get more employees on the second
shifts and the third shifts we can increase a little bit. But we are getting
up pretty close on capacity.
Jack Kasprzac - BB&T Capital Markets
Okay, great. Thanks
very much.
Operator
Our next question comes
from the line of Neal Miller with Fidelity Investments. Please go ahead with
your question.
Neal Miller - Fidelity Investments
Hi all.
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
Good morning.
Neal Miller - Fidelity Investments
Don, question on American Augers,
what geology matches up with this sort of drilling. Is it oil shale or what
areas of the country is it suitable for application?
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
Neal I think it can go all over.
But the hot area is that Marsel that goes from Indiana up to New York. Big gas
deposit, the Barrett shell in Texas you know is suppose to be 17 trillion cubic
feet. And they are estimating that the...I have heard from 53 trillion to 320
trillion. It is pretty well shallow gas up in that area. So there is a huge
amount of drilling starting to go on in Pennsylvania and Ohio in that area, which
is right where our plan is, right in the middle of it. The last rig that we
shipped last week went to Oklahoma though. Some of them are going to Texas. The thing I think I see for shallow drilling is, you could go down 300 feet and
then turn horizontally for a mile. And from the same hole with a wagon wheel
pattern you ...could cover a 2 mile area. So we see that as probably being a
great machine to be more acceptable environmentally. Instead one guy in Oklahoma told us that you would have to drill 50 foot wells to cover that same area, you
know. Or punch 50 holes in the ground and you guys are just punching one. You
are not having to move the rig 50 times. So we see it has applicable all over.
The new rig will go to 13,000 feet in depth. Or she can go horizontally for a
mile if you need to.
Neal Miller - Fidelity Investments
I was at an energy conference and
certainly Shell and the United States is certainly on top of the mines and that
is good to hear. Question on your leadership and the asphalt and kind of the
green component. Any comment here on the competitive backdrop, is that
changing? As I recall you had a significant leadership.
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
Yes, we have sold between 80 and 100
to our other two competitors. One of them had not sold any yet. And the other
one just sold one. So we are kind of a little bit 100 to 1 out in front I
guess. Frankly we have even debated in helping our competitors because we
think it is the right thing for the country and the right thing for the
industry. You know I don’t want them to screw it up. But what we are
doing...we are doing right. My only concern is they kind of do a half way
job. And it not getting the performance we need to get. But right now we are
way out in front on that. But it has taken off like a green Tsunami. We
have...the other interesting thing is dragging the asphalt plants along with
it. I have customers flying in here right now to see it. And they say it is
exciting development. You can eliminate one roll. It compacts easier. You
eliminate all the smoke and the smell. You can run higher recycle without
changing the grade of liquid. And you will reduce your drying cost from 14 to
20%. So it has some good legs to it.
Neal Miller - Fidelity Investments
Question on the balance between
domestic and international sales. You said in this quarter I think it was 35%
international. Would you expect that given the domestic backdrop in reference?
You said you can overcome some of these municipal budget struggles or state
struggles. But I am just kind of wondering whether you would expect the
international component to scoot up to your end.
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
Yes, I expect the back end in a year
to be more up in the 40-45% range. But I kind of expect the end of year on
balance near about 40%.
Neal Miller - Fidelity Investments
Interesting, thanks so much.
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
Thank you.
Operator
Our next question comes
from the line of Chris Weltzer with Robert W. Baird. Please go ahead with
your question
Chris Weltzer - Robert W. Baird
Good morning guys.
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
Hi Chris.
Chris Weltzer - Robert W. Baird
I have been wondering if you have seen
any of your steel suppliers tacking on surcharges to your existing steel
contracts.
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
No we have not got there yet. But
the next round we have that in it. You know I guess what I am saying; right
now we are covered up through May to June. But, that varies with each
company. And in the South here where we use a lot of steel, we are kind of
locked in there. But the scrap surcharge will probably be one thing we will
not be able to get around in the next round.
Chris Weltzer - Robert W. Baird
Now we can get sort of a pretty good
view on stock prices. But what sort of increases are you seeing on the ground?
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
Well what we are seeing is...what
they are talking about is gong to be probably up about 60% from January. We
probably saw today...while we have not seen it come through to us exactly yet.
But, if you were on the ground at spot level now, I talked to a guy last night
at a company we are looking to acquire, and he was 45% a 45 cents a pound in
October and he paid 68 cents yesterday. That is because he is not protected.
So you are seeing from 30 to 40 to 50% on the ground. Question is, when is it
going to back off, or is it. And that is, the steel distribution centers are
very reluctant to load up, because a lot of them think it will backup. And it
is hard to read. If you get a good reading on it, we would appreciate your
input.
Chris Weltzer - Robert W. Baird
Certainly. I know you talked in the
past about the federal pricing opportunity internationally given the weaker
dollar. Just wanted to know if gross margins internationally might be better
internationally than here in the states. Does that difference carry through
the operating margin line or the extra sales support you have added sort of
neutralize that benefit?
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
No, it would carry through the
operating line. And if you really look at our numbers and you could really dig
down into them, which we do not give you that kind of detail; I think that by
the end of year, you would see our average margins are going to be up by the
international, but the domestic margins are probably going to be down and the
international will be up. But, that is one of the whole things I hope that we
can achieve just to maintain margins.
Chris Weltzer - Robert W. Baird
Just remind us, the current expo
expenses are those in the all other line? Or are all those spread throughout
the segment?
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
They are spread throughout the
segment.
Chris Weltzer - Robert W. Baird
Is it fair to assume they are spread
roughly, you know, proportionately to revenue?
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
Pretty well. Not totally, but that
is a good assumption. That is close enough. I mean when you look at Astec,
Inc., they took two eight to one eight scale models of two asphalt plants and
their space does not equal some of the bigger equipment spaces. I mean Astec
and Roadtec were probably equal in their space allocation. But it’s pretty
close other than Astec, Inc., that would be the only disproportionate.
Chris Weltzer - Robert W. Baird
Okay and just a couple of quick
questions on Peterson. One if you could help us out with what sort of
operating income contribution there was from Peterson in the quarter. And I
was just wondering what Peterson’s domestic, international led by then.
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
The revenue is...it is 14 million
domestic, 6 million international.
Chris Weltzer - Robert W. Baird
That is helpful. And the operating
income contribution?
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
We have not broken that out Chris.
That is in that all other.
Chris Weltzer - Robert W. Baird
Right. Would it be fair to say that
the Peterson operating margin was probably a little bit below consolidated?
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
If you read...basically look at the
all other. McKamy did not bring in any revenue, and he did not bring any gross
profit. So there you are.
Chris Weltzer - Robert W. Baird
Okay.
Operator
Our next question comes
from the line of Alan Brochman with A.D. Analytical Services. Please go ahead
with your question.
Alan Brochman - A.D. Analytical Services
Hi, thank you for taking my call. I
had a couple of questions on the balance sheet. The first on the inventory. It
sounds like the explanation is probably the Peterson acquisition as well as
stock pile and steel. Can you just elaborate a little bit on the inventory
buildup you guys have?
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
Basically to be frank, we needed to
increase in some areas to be able to make deliveries on all of that. Some of
this is delayed shipments on asphalts plants. And some of the other, they have
not gotten their permits. That part of it, will come on down during the second
quarter. This is kind of our peak inventory and our peak time of the year.
Steel is a part of it. We are trying to stock as much steel as we can, as much
as we can buy right now. But, mainly I guess there are some asphalt plants,
there is some crushing equipment for international orders that we are waiting
on letters of credit. We are waiting on permits and something like that. And
that is probably the biggest drive.
McKamy Hall– Astec Industries Inc – Vice President and Chief Financial
Officer
Yes, one thing that happened to us
last year. In the asphalt mobile paving operations we just did not have the stock
available that we would like to have available. We have put an extra effort
into this year making sure that we had adequate stock there for the real surge
that we have in the first and second quarter. We go direct market to the
market there as opposed to going to two dealers. The competition has stopped
sitting at dealers. We needed last year more stock here available to ship
immediately for demand. So we have boosted that number considerably and the
asphalt mobile paving as well not to miss orders.
Alan Brochman - A.D. Analytical Services
Okay, and then also on the balance
sheet receivables. I am imagining that is due to your increased international
sales. Can you walk me through receivable growth as well.
McKamy Hall – Astec Industries Inc – Vice President and Chief Financial
Officer
Well if you look at the days that I
mentioned. Your days are at 39.8 versus 36, so you know other than the
increase in volume we do not feel like there is any noticeable increase in any
area. And as far as international goes, often international is better than the
domestic because we do deal in primarily letters of credit or cash in advance.
So often the international has a more favorable aspect to it, not a negative
aspect.
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
The other thing...I do not know if
most companies have this same problem. But we ship and then order inordinate
amounts the last quarter. It seem like everybody gets all geared up by that
time. And the receivables equal about one month’s shipment.
Alan Brochman - A.D. Analytical Services
So you all had really good sales
this quarter, better than expected, so that would boost it even more. And then
on the income statement...I appreciate your concern about margins near term.
You mentioned some of the potential issues, but if you look out longer your
gross margins are about as high as they have been and your operating margins as
well. Are these steps that you can take over time or will leverage...can you
leverage higher sales levels. And what should we think longer term about your
operating margins?
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
We are up at a margin level. Of
course the story now is historically, I mean you look at where we are and they
tend to deteriorate towards the end of the year. And I think you have to look
at us on an annual basis a little better. We put in enormous amount of effort
to improve our products and improve the margins on the products over the last
four years. In the face of tremendous rise of steel...steel went up 225% in
'04 and is jumping again. And frankly, we have run out a whole lot of savings
and it is not as easy to get back as in '04. We went to coil steel versus plate
and we did a lot of things, so we are continuing to work on those. But I do
not continue to see long range, us getting a huge benefit...a huge increase in
gross margins. Obviously if some of the new products we have got have a little
bit at gross margins we should have better margins. And some of the real hot
products and they do as we get more of a better product mix. We may see some
improvement. But it is difficult to push it up much more than what it is right
now.
Alan Brochman - A.D. Analytical Services
Okay. And then this last one I want
to ask the CEO this question. But I have a feeling Dr. Brock you know the
answer. You said something that caught my attention; I think it is the
industry of late, you said you took some prototypes with you. I guess my question
is, are you guys using any of the virtual prototyping, any simulation as
opposed to actual physical prototype construction?
Dr. J. Don Brock – Astec Industries Inc – Chairman and Chief Executive Officer
We have very sophisticated computer
systems in all our engineering that really cut down a lot of mistakes that you
normally make in prototyping. But one of the humbling things about the
business we are in is that is that God gave us a lot of different Aggregates.
A lot of different materials that we have to process. And until you get about
10 of the machines out, and about all of the conditions you do not know all of
the weak points that is going to show up. As hard as we try, we go through a
lot of debugging of them. But I think we make great leaps. We have
simulations where we can simulate rocks dropping in a drum, dryer of different
sizes everything like that. It sure does pull your boundaries in of what you
can do and what you cannot do. I trust that answers your questions.
Alan Brochman - A.D. Analytical Services
Yes, thank you very much. Thank you
guys.
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
Thank you.
Operator
Our next question comes
form the line of Garo Norian with Blackrock, Inc. Please go ahead with your
question.
Garo Norian - Blackrock, Inc
There is one thing I wanted to
clarify for myself. The expense, was that by choice or is that required by
GAAP.
McKamy Hall – Astec Industries Inc – Vice President and Chief Financial
Officer
That has been a...that is the
current interpretation that our auditors have of how that should be handled.
And that has changed over time. And that is where we are today. Like many
other things the interpretations continue to change but that is where we are today.
Garo Norian - Blackrock, Inc
Okay. Then on the steel...I mean if
you guys fully decide to pass through what you expect the price increase to be,
what do you think would be the negative repercussions? Is it customers going to
competitors who are willing to take lower margins, or do you think it is people
throwing their hands up and saying, "We can not afford it."
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
I think it would be later if you go
too far. Our competitors are probably sophisticated too. And they are going
to be going up similarly. I mean they have to. And you know we have not seen
that much push back yet. But we have...if this sticks at this higher level,
we've got to go up more and that is always the biggest concern is will we get a
huge push back. And we have not seen that yet but we have not gone up as high
as we need to go either.
McKamy Hall – Astec Industries Inc – Vice President and Chief Financial
Officer
Don may want to address this more
adequately more than I can. But all that I can read in here and see that is
going on is this is not a U.S. problem. This is a worldwide problem and it is
not just impacting the United States and I think that most people are becoming
readily aware that it is a worldwide problem.
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
I talked to one customer this
morning and he builds bridges too. And he is totally aware of the steel
increases and as McKamy said, they are paying the same price in South Africa as we are here. And when I was down there week before last it is a world wide
commodity price now. And there is not opportunities to bring in foreign steel
at any cheaper prices, so.
McKamy Hall – Astec Industries Inc – Vice President and Chief Financial
Officer
And then virtually none is being
brought in.
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
Yes.
Garo Norian - Blackrock, Inc
No, I agree. When you have guys
like Caterpillar and huge iron guys, you know raising prices gives you guys a
little more cover.
Dr. J. Don Brock – Astec Industries Inc – Chairman and Chief Executive Officer
You are correct in your assumption
that our biggest concern is when does a customer push back. And that, I wish I
knew the answer to. But we have not seen it at this point. But we are not
through raising prices either.
Garo Norian - Blackrock, Inc
Yes. But it is not yet. The last
question I have is on the Augers extension. When do you expect to get that
done? And what does it mean exactly for capacity and revenue potential once it
is done.
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer Well they are about 80...85 million
right now. And this will double our capacity.
And to answer your question, I hope
to be done by the end of the year. We are just now breaking the ground.
Garo Norian - Blackrock, Inc
Okay, and that is where you kind of
have this verbal kind of orders but not the hard ones?
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
You got those firm verbals in
everything in all of them. We got a bunch of them in oil drilling rigs. Some
of them...most of them were hard orders they just were not booked in March, at
the end of March. We don’t put it in the backlogs until we have a signed
contract. And some of these are customers you know what they have told you,
yeah go ahead with it, but you have not got the paper work so you cannot count
it. So there...you know I have not seen any of the verbals back off. I will
put it that way.
Garo Norian - Blackrock, Inc
Got you. All right, thank you.
Dr. J. Don Brock – Astec Industries Inc ‑ Chairman and Chief Executive Officer
Thank you.
Operator
Gentlemen there are no further
questions in the queue at this time. Would you like to make some closing
comments?
Stephen Anderson – Astec Industries Inc – Director of Investor Relations
Yes, thank you Doug. We appreciate
everyone's participation in our first 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 our conference call will be available
through April 29, 2008. And an archived webcast will be available for 90
days. We will have the transcript on our website in the investor relations
section within the next seven days and all that information is contained in the
news release that was sent out earlier today. We appreciate your attendance on
our call. Thank you.
Operator
Ladies
and gentlemen this does conclude today's teleconference. Thank you for your
participation. You may disconnect your lines at this time.
