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Astec Industries Inc. (NASDAQ:ASTE)

Q3 2007 Earnings Call

October 22, 2007 10:00 am ET

Executives

Steve Anderson - Director IR

Don Brock - Chairman, CEO

McKamy Hall - VP, CFO

Analysts

Arnie Ursaner - CJS Securities

Jack Kasprzak - BB&T Capital Markets

Robert McCarthy - Robert W. Baird

Rich Wesolowski - Sidoti & Company

Rob Young - WM. Smith & Co

David Mills - JBN Capital Management

Alan Brochstein - AB Analytical Services

Shaun Deli – THM Holdings

Operator

Greetings, ladies and gentlemen, and welcome to the AstecIndustries' Third Quarter 2007 Results. At this time, all participants are in alisten-only mode. A brief question-and-answer session will follow the formalpresentation. (Operator Instructions). As a reminder, this conference is beingrecorded.

It is now my pleasure to introduce your host, Mr. SteveAnderson, Director of Investor Relations for third quarter 2007 results. Thankyou, Mr. Anderson, you may begin.

Steve Anderson

Thank you, Lathania. Good morning of welcome to the AstecIndustries' conference call for the third quarter of 2007. As Lathaniamentioned, my name is Steve Anderson, and I'm the Corporate Secretary andDirector of Investor Relations for the Company.

Also on today's call are Dr. J. Don Brock, our Chairman andChief Executive Officer, and McKamy Hall, Vice President and Chief FinancialOfficer.

In just a moment, I will turn the call over to McKamy tosummarize our financial results, and then to Don to discuss our operations inbusiness environment. In the way disclosures, I will note that our discussionthis morning may contain forward-looking statements that relate to the futureperformance of the company, and these statements are intended to qualify forthe Safe Harbor liability established by thePrivate Securities Litigation Reform Act.

Any such statements are not guarantees of futureperformance, and are subject to certain risks, uncertainties, assumptions, andother factors, some of which are beyond the company's control.

Some of those factors that could influence our results arehighlighted in today's financial news release; and others are contained in ourAnnual Report and our quarterly and annual filings with the SEC. As usual, weurge you to familiarize yourself with those factors.

At this point, I will turn the call over to McKamy Hall tosummarize the financial results. McKamy?

McKamy Hall

Thanks, Steve. We appreciate you joining us this morning. Weare pleased to report to you on a good third quarter. Overall sales growth is20.2% and 34.5% the growth in international sales.

We generated a 16% of improvement in net income, compared tothe third quarter of 2006. We look forward to the fourth quarter of 2007,beginning with a backlog of $239.9 million.

For the quarter, our sales were $206.2 million for an increaseof 20.2%. International sales were $74.5 million for an increase to 34.5%. Thelarge increases came in Australia,Africa, West Indies, Canada,Middle East, South America and Asia.

Domestic sales were $131.7 million versus $116.1 million, ora 13.4% increase. Our parts sales were at $49.2 million versus $40.2 million,or a 22.4% increase.

In terms of the pie where the sales came from; Aggregate was39.7%, Asphalt 25.1%, Mobile 16.2%,Underground 13.7%. The sale by segments and other information relating to thesegment as well as the backlog is attached to your press release.

The consolidated gross profit was up $7.6 million or 18.5%.The gross profit percentage decreased slightly for the third quarter. Firsttime manufacturing cost for new equipment and new models was the primary reasonfor the reduced margin, and it's not a situation that we expect to repeat inthe upcoming quarter.

The two primary factors in the increase in SG&A werenumber one, the cost of the Supplemental Executive Retirement Plan as a resultof the large increase in the value of our stock, and also the addition of theacquisition of Peterson.

The income from operations was up 5.1%, the income bysegment is attached to your press release also, and all segments had increases.The net income is $11.6 million versus $10 million. Our earnings per share was$0.51 versus prior year of $0.46 or a 10.9% increase in the earnings per share.

As I mentioned earlier, the backlog is attached and thebacklog is at $239.9 million versus prior year of a $131.2 million for anincrease of $108.7 million or 82.9%. And that’s broken down for you by segmentattached to your press release.

The balance sheet is very strong. Our days outstanding are37.4 versus 36.9, so basically no change, and the inventory is 3.5 turns, bothcurrent year and prior year.

Year-to-date capital expenditures are $30.6 million,year-to-date depreciation and amortization is $10.8 million. The cash flow willbe attached to the 10-Q filling. This concludes my formal remarks; I'llcertainly be glad to answer any questions, you may have later in the call. Wedo appreciate your interest in Astec, as we strive to improve profitability andreturn for the shareholders.

Steve Anderson

Okay, thank you McKamy. Dr. Don Brock will now discussAstec’s business operations for the third quarter of 2007. Don?

Don Brock

Thank you, Steve. As McKamy mentioned our revenues were up20.3%, and our income was up 15.2%. Our gross margin slipped a little for thequarter from 23.9 to 23.5. This was caused by a number of new products that weintroduced which is typical, our first introduction of products or at either nomargin or very little margin.

One of our big expenses was the introduction of the Greensystem at Astec, or the asphalt plants where we have been able to lower themixing temperature, eliminating the smoke and the smell of the asphalt. Thisreduces the fuel consumption and ups the amount of the recycle. And since theintroduction in the middle of June, we have sold over 50 of these systems.

But at this point those that we've put out, we at very lowor no margins or a loss. We also had introduced a model of larger track-mountedcrushers for the aggregate industry, which was little or no margin.

We had an introduction of new wheel machines at theunderground operation. Our oil drilling rigs, we also introduced two new modelsare Roadtec machines, two models of small drills, two models of smalltrenchers.

And as I travel or visit companies, we had an inordinatekind of change in the product mix, selling more over our lower margin productsand [lesser] the higher margins. We don't see that, as McKamy said, as lastingfrom quarter-to-quarter.

We also had an abnormal number of shipments that weredelayed, caused particularly the international shipments, by lacks of receivingthe final letters of credit.

We had some delays in the manufacturing due to componentproblems of getting engines in on certain models of our machines, and we had adelay caused by permitting on a number of the asphalt plants or delays on thewest coast. The good news is our backlog was up 83% to $240 million, and we seethe fourth quarter being better than normal.

For the nine months, our revenues were up a $100 million, up18.2%; our income was up 35%, and our gross margin year-to-date is up from24.4% to 25.0%.

Looking forward to the fourth quarter, we find it difficult,I'll say as usual to predict the fourth quarter due to the holidays and delaysin very year-end shipments, but we certainly expect fourth quarter to besubstantially better than fourth quarter of last year.

As we try to look forward and try to keep everything inperspective, we've decided to start giving annual guidance on the company, andwe expect this year to end with earnings of somewhere in the $2.40 to $2.50 ashare range. This is versus a $1.81 for last year, up approximately 33%.

Our industry is weathering high oil prices much better thanit has done in the past. We believe this is due to the higher amounts ofrecycle that is being used, and today there seems to be a disconnect betweenthe prices of oil and the prices of asphalt in most areas of the country.

Our Green initiative which will allow our customers as Imentioned early, to reduce fuel cost, be easier to permit because of theelimination of smoke and smell, and particularly to increase recycle. And inthat sense we can reduce the carbon footprint caused by the asphalt plant. Webelieve this will bode well as we go forward in the future, and the acceptancein the market is no less than a Green tsunami.

We have now sold five oil drilling rigs, and believe ourtechnology could revolutionize the shallow surface drilling in this area. Alarge number of our products today are going to the energy industry with ourdrills, our heaters, wood chippers, trenchers, and a number of other products,and we believe this offsets slow-downs that may occur in the infrastructureside of it.

Our international business is as strong as it's ever been,particularly hit by the weak dollar and our increase in our sales forces in theinternational side of it.

In summary we believe we had a good quarter although theearnings were a little disappointing, as compared to our previous increases inearnings. We expect to end with a good year. Our backlog is excellent; however,we are running into capacity problems in certain products particularly asphaltplants.

We see some softening in the East and Midwestpart of the country, but this is more than offset by the improvements in theinfrastructure spending in the West, and particularly in the internationalmarket, which is very strong and gives us confidence that we will have tocontinue to grow our business in 2008. At this time we'll be glad to answer anyquestions you would have.

Question-and-AnswerSession

Operator

Thank you. Ladies and gentleman, we will now be conducting aquestion-and-answer session. (Operator Instructions). Our first question isfrom Arnie Ursaner from CJS Securities. Please state your question.

Arnie Ursaner - CJSSecurities

Hi, good morning.

Don Brock

Good morning Arnie.

Arnie Ursaner - CJSSecurities

First question I have is you obviously have a number ofunusual expense items on the SG&A line. Can you perhaps help all of us byquantifying the couple of the key ones that you highlighted; that impactedresults?

Don Brock

I think, really the one thing that's frustrating this Arnie,is the Supplementary Retirement, and that's plenty and we have for all of oursenior officers. Our Board started this year’s ago where we put in Astec'sstock in there. It's a non-cash expense, but it affected us nearly $2 millionthis quarter, because of the increase in the price of our stocks.

So it’s a non-cash deal. So stock goes back down,unfortunately it's just the opposite, if stock goes down, it will come back inas earnings. As it goes up it takes away from our earnings. And again it's oneof these FASB regulations that we don’t quite understand.

Other items, I guess McKamy, you got.

McKamy Hall

The main thing other than that or the main quantity was justthe acquisition of Peterson, and their normal SG&A for the month.

Don Brock

That's where Peterson came in for the first time Arnie.

Arnie Ursaner - CJSSecurities

Okay. Can you also quantify? You mentioned, obviously youlost some money I guess on initial shipments of your Double Barrel. Can youquantify what the financial impact on gross margin might have been from there?

Don Brock

It was not, it was actually the attachment that goes on theDouble Barrel, and we've sold over 50 of these systems. We probably got 20 ofthem shipped now, and all of them have been at a loss. Mainly the main expenseof that, the expense of getting it in place and the R&D related to it.

We will make money on our future systems, but it was in the$1 million range for this quarter. Larger trenchers hit us; the track-mountedcrushers hit us, a number of them. There's probably a total of $4.5 million forthe quarter that was hit by all of these new products and margin.

Arnie Ursaner - CJSSecurities

Okay that’s very helpful. You’re backlog in asphalt isobviously stretching quite a bit; you mentioned some manufacturing issues orcapacity issues. How far out does that backlog go at this point?

Don Brock

We are out into May of next year. One of the frustrations alittle bit with it, a lot of west coast orders that we have for out there arekind of unpredictable and (with ship). And we constantly are rearranging theproduction of those plants, because if the permit seemed to get delayed, wehave a couple of orders that stretch out nearly a year right now, that'santicipated shipping as early as March of’07 that haven’t shipped yet.

And yes, they have to select the plant, they chose themanufacturer and then they have to go through all of the permitting processes,and it's just very difficult for the customer to predict to exactly whenthey'll take it. We have some ways of, some of those we can escalate prices onand some of them we can’t.

Arnie Ursaner - CJSSecurities

Final question for McKamy, if I can, you’ve previouslyspoken of about 1% of revenue that you are targeting for SG&A, and you’rewell above that range this quarter. Are you still comfortable with the rangeyou’ve had previously?

McKamy Hall

That’s an annual range Arnie. And typically, the thirdquarter is one of our slower quarters, and typically it does as a percentage ofsales hit a higher level there.

Arnie Ursaner - CJSSecurities

But you are still comfortable with the annual [digit] youhad on this?

McKamy Hall

I think that’s still our goal.

Arnie Ursaner - CJSSecurities

That goal is different than being comfortable though?

Don Brock

Well, typically, our range is in and around 14% in SG&Aas a percent of sales, and we believe we'll stay in that range.

Arnie Ursaner - CJSSecurities

Okay, thank you very much.

Don Brock

Okay.

Operator

Our next question is from Jack Kasprzak from BB&TCapital Markets. Please state your question.

Jack Kasprzak -BB&T Capital Markets

Thanks. Good morning everyone.

Don Brock

Hi, Good morning Jack.

Jack Kasprzak -BB&T Capital Markets

The Peterson acquisition, can you tell us, what it added tosales in the quarter?

Don Brock

Just a minute.

McKamy Hall

I believe it's $11 million.

Don Brock

$11 million I think what it amounted to.

Jack Kasprzak -BB&T Capital Markets

Okay. And Don, you mentioned in your comments, that the Eastand the Midwest, there was some softnessthere. Where is that? Is that across the board or is it more in non-res or …

Don Brock

Well, what we see Jack probably, particularly in New England, we see some of the quarries with big stockpiles shutting down earlier this year. We see more in the Midwest and Illinois some of those areas, Wisconsin and some of those is slowing downquite a bit.

As I travel around to visit on our quarterly reviews, Iguess the consensus is, the Southeast is okay, from Texas on west is pretty darn good. Eventhough home building is down in Arizonaand some of those, seems like the highway work is somewhat picked up.Commercial work is still good in about all of the areas. But seems like the NewEngland, all through the Midwest seems to bethe slowest, are the ones that are slowing down a little more

Jack Kasprzak -BB&T Capital Markets

Primarily in quarry?

Don Brock

Yeah, primarily in crushing and even in asphalt also.

Jack Kasprzak -BB&T Capital Markets

Okay. And then on the strong side, you mentioned that West,and of particular interest, I think is California.You’ve seen with the bonding money, I guess in place now, are you seeing acontinued ramp there in projects and interest among customers?

Don Brock

Yes. We got California, Arizona, Nevada.In Las Vegas, the building side of it iscertainly home building that's been hit hard in Las Vegas, but still there is a lot ofcommercial work in that area. Western Canadais very strong and then international are very strong, Jack. That’s the areaswe just see it kind of like away, going westward.

Jack Kasprzak -BB&T Capital Markets

Okay. And you mentioned shallow surface drilling that yousee. You have some products that could put revolutionize drilling in this area,I think this is what you said, if not please correct me. But I wonder if youcan elaborate on that? I mean how new, I guess that's a relatively newopportunity, how big of a market do you see for that?

Don Brock

If I ever listen to the customer who bought first five, hesays we better gear up for about $500 million in that area, but we hadn't quiteknocked the walls down yet. What he tells me, and I guess, and we've talked toa number of customers in that area.

But typically, if you go down to 5,000 feet on a regular oildrilling rig, you are depending on the weight of the steel of your drillingsteel to push your cutter down.

We have the ability with our rigs to push and pull. Theywere horizontal rigs that we've turned up vertically. And he says at 5,000 feetwere equal. He says at 3,000 we're better, at 1,000 feet there's nobody even inthe market.

If you read about oil, there's probably 43% of it, that’sless than 3,000 feet, and we passed by huge amount of it. He drills wells inIndiana, drilled one, went down 379 feet. His conventional rig if he could havedone it, he said he would have gone at about 10 feet a minute; he was going ata 100 feet a minute.

I actually got down to 379 feet he turned, it wenthorizontally 4,800 feet. And then he pulled back out and he made a wagon-wheelpattern, and he said, you know, generally with all you go into pay zones orvertical. Vertical rig personally got some oil wells up and/or some interest inoil wells in West Virginia,and they get about three tier zones and 6,500 feet. He got a 108 pay zones. Andso there is quite a bit of the excitement that there is a lot of shallow oil inthis country that we pass by and this is a great opportunity.

The other thing on our rigs is that, HDD or horizontaldirectional drilling is relatively new market, less than 15 years oldtechnologies new. What we do is very automated or you automatically lower thedrill, stand them in to position. You have automatic wrenches that decouple andcouple the drill stem in place.

Again, we go much faster. Well we got a little, probably alittle better sensor technology in the drill stem of exactly where you are. Sowe could get extremely excited about it, I'm trying to be cautious on it.

Our guys at American Augers want to triple the size of theplant, and we’re kind of being a little more cautious till we get a whole bunchof orders before we do that.

McKamy Hall

Eleven customers there last time.

Don Brock

Yeah we had eleven customers in to see the first verticalrig.

Jack Kasprzak -BB&T Capital Markets

Okay, I think that it for me, for now. Thank you.

Don Brock

Thank you, Jack.

Operator

Our next question is from Robert McCarthy from Robert W.Baird. Please state your question.

Robert McCarthy -Robert W. Baird

Good morning gentlemen.

Don Brock

Hey Rob.

McKamy Hall

Good morning Rob.

Robert McCarthy -Robert W. Baird

I wanted to make sure I got that last point correct on thedrill rig opportunity of one customer and kind of eleven more prospects at thispoint.

Don Brock

Yeah the first customers bought five. He bought the firstrig which was a slant rig, it go up to 70 degree -- round at about 70 degreesRob. The second one was a vertical rig and he has bought three more of thevertical rigs. We had eleven different customers.

He's been a little reluctant to let him by, go in and lookat it. So, we made an agreement on the last rigs that we can go take customersin to see, see what he is doing, which I don't blame him.

Robert McCarthy -Robert W. Baird

Yeah. Alright, thank you. I wanted to get a couple ofclarifications on numbers that we've already heard. On the parts comparisonMcKamy, did Peterson contribute something for that?

McKamy Hall

I am sure. Let me help to get the number for you, but it's a…

Robert McCarthy -Robert W. Baird

Also going to ask about year-to-date stock compensationexpense?

McKamy Hall

Year-to-date Supplemental Executive Retirement Plan?

Robert McCarthy -Robert W. Baird

Yeah.

McKamy Hall

We'll get, give us just --.

Don Brock

Rob on the parts we are a $137 million and Petersoncontributed about 3.8% of that, versus $127 last year. So on existing companiesit would be about a $133 versus a $127.

Robert McCarthy -Robert W. Baird

Alright, thank you.

Robert McCarthy -Robert W. Baird

I guess my biggest question is or at least to me it is whatexactly is going on in the Asphalt Group? It's pretty remarkable that yourrevenue run rate went from around $65 million, $66 million a quarter, and Iunderstand the seasonality of the business.

But, you of course have been hiring people, adding hours,and I believe or basically sold out well into next spring. But I'm trying tounderstand how the quarter could have been so disappointing? And one otherthing that sort of obviously suggests itself is that, you have some revenueready to go late in the quarter and for delays, the one reason it didn’t go.

Now you have talked about some of the causes and have in thepast of course as well. But, I am wondering, did you have additional business?You had several plans that have been delayed and waiting for an opportunity toshift. Did you have any more new issues like that in the quarter?

Don Brock

Bob, I would say - thanks for your question. Yes we have hada number of them there. We are bumping capacity in the asphalt side of it rightnow, both at Astec and at Heatec.

Heatec has been hurt, since they've hurt, been half thewhole lot by oil and gas. A lot of their heaters are going to that. But Astecis strictly asphalt plants, numbers of international plants. Most of the delayson asphalt plants are permitting delays, though the letter of credit delays ismore in the crushing side of it.

I guess, while we got such a strong backlog, there's still alittle bit of puzzle there. We are surprised that at the backlog that we gotquite frankly, and they continue to keep coming. The prospects are very goodfor the asphalt, but we aren’t hitting a whole lot stronger, proportionalamount of international business.

Robert McCarthy -Robert W. Baird

If you've been able to ship what you think you should haveshipped in the quarter. What kind of hit did you take on the top line in theAsphalt Group?

Don Brock

In the whole company I have looked that we were probably $12million to $13 million shorter that was on the bubble. How much of that was inasphalt, I guess a third of it or something. Would you McKamy?

McKamy Hall

I am looking right now.

Don Brock

McKamy is looking right now. So we’ve had a couple of plansthat have been sitting here for just about nearly all year.

Robert McCarthy -Robert W. Baird

Yeah. We’ve talked about that of course. While he’s lookingthat up, can I infer from this that, you will break the traditional, whetheryou should break the traditional seasonal pattern in this segment in the fourthquarter.

I mean even in years when businesses is really soft, youalmost always ship a little more in the September quarter and then the Decemberquarter, if nothing else, because of the holidays. But do you have enoughaccumulated product out in the yard that you probably go up in the fourthquarter?

Don Brock

If we can get it shipped in December, if people would takeit, I mean if people will take it, our fourth quarter could be equal to thethird quarter. But what makes us a tad reluctant and little more cautious is,you've got so many darn holidays and people tend to stop in December.

But if we can get them shipped, and if people take what theysay they are going to take, and I have asked thereby to be conservative becauseit’s very important what we tell you on the fourth quarter. But we, or it couldbe very close to the, what we’ve got in the yard, but that end of month isbeing in December, it’s kind of hard to predict.

Robert McCarthy -Robert W. Baird

I understand, okay. McKamy you've come up with the numbers?

McKamy Hall

All this list and I have rounded off some here. But actuallythe aggregate is more like $8.6 million of the $12.

Robert McCarthy -Robert W. Baird

Wow.

McKamy Hall

And the heater side is about $2.5 million. So then it'sscattered beyond that. But that gives you about $11.1 million of the $12.

Don Brock

In the asphalt side there was plans, but they just didn’teven put on the list, it's on the bubble because again the customer delayedthem a month ahead of time.

Robert McCarthy -Robert W. Baird

Yeah, okay. Right, I will let somebody else to go, thanks.

Don Brock

Hey, thank you Rob.

Operator

Our next question is from Rich Wesolowski from Sidoti &Company. Please state your question.

Rich Wesolowski -Sidoti & Company

Thanks, good morning.

Don Brock

Good morning Rich.

Rich Wesolowski -Sidoti & Company

Don, you mentioned you shipped only twenty of the fiftyasphalt, green asphalt amendments that you sold.

Don Brock

We got orders were about fifty-five of them right now.

Rich Wesolowski -Sidoti & Company

Okay. Well the question is can you give us some kind ofyardstick about how the new products that you've already sold, but not shipped,will rollout and the affect on margins in the coming quarters?

Don Brock

This makes thirty. I mean we are talking of $50,000 to$70,000 addition, so it's not a big item. What it will do though is, the changein the way we are doing it Rich will sell milling machines, it will sellcrushers, it will sell screening units, and it will sell more of our DoubleBarrels.

It’s a long range affect, but all of these that are soldtoday. Should say all of them, but most of them are retrofits. Practicallyevery new plant we are selling, they are selling with this attachment on.

So a lot of it's been retrofits, a lot of it has been --we've had seven different demonstration projects where the customers voted. Youguys may be come over and help us, we are going help all our customers.

In the last week we had one in South Carolina, they hadbetween 80 and a 100 people in there from all over that area, and produced 50%of recycle, 270 degrees with no smoke, no smell, and it look just like brandnew mix; so, exciting process.

Rich Wesolowski -Sidoti & Company

Was Peterson profitable the quarter?

Don Brock

They were about breakeven, just about breakeven. And this istheir normal down quarter. You know as we told you, I think when we bought it,they are in a low air, but right now we expect it to start to improve in thefourth quarter.

Rich Wesolowski -Sidoti & Company

Can you discuss general margin expectations for that?

Don Brock

No, not at this point.

Rich Wesolowski -Sidoti & Company

Alright, how about a comment on the expected margins in yournew work versus what you were seeing a year ago?

Don Brock

We have been - we continue to see price increases. While thedollar has been very helpful in sales, it's been costly and imported component,and it’s also been costly a little bit, particularly with our Canadianoperation. They've been hit with about a $0.5 million in exchange rates.

But we expect to either hold the margins for the rest of theyear that we’ve got or hopefully, we have initiatives to continue to work onthe improved number. Right now we’re starting to increase prices, but thatwon’t come into effect till probably the first quarter. So that’s why thefourth quarter is kind of a wild card on the margins, but I think we’ll end upthe year close to where we are now.

Rich Wesolowski -Sidoti & Company

Okay, on the asphalt capacity issue that we’ve been speakingabout. You mentioned in the prior call extending the work shift. Has thatalready been executed and are you at all considering bricks and mortarinvestment?

Don Brock

We are not planned on anymore bricks and mortar, we areadding machinery to it and we're the growing the night shifts and they aredoing it as rapidly as they can to bring people in and train them, and thattakes some time. But yes, going to your question, we’re preceding on the samepath we were.

Rich Wesolowski -Sidoti & Company

Okay, and finally, your general economic comments, kind offly in the faces, some of the other industrials that we’ve heard recently,especially Caterpillar on Friday. Is it the focus of your end markets thatmakes the business or is it something else?

Don Brock

Our end markets are different from Caterpillars'. We are notaffected as much by home building. Our customers obviously do sales some oftheir products in the home building, but we are not affected as much by that asthey are. We probably touch the energy business more than we used to, and we'vegot a strong market shares in each of the areas we’ve got.

And our new products offer some differentiation. So, I guesswe are cautiously optimistic that we’ll continue to grow, not probably at thepace that we have in the last. As I have said all along, there's usually aflatter down year. We won’t see next year yet been down.

Rich Wesolowski -Sidoti & Company

Great, thanks a lot.

McKamy Hall

One comment I might just throw in Rich. If you haven’t goneto the trouble to calculate, and I probably should have pointed it out, our internationalsales year-to-date are 29.9% of our sales, and the backlog is very strong, andit's going to be very strong for the fourth quarter.

Operator

Our next question is from Rob Young from WM. Smith & Co.Please state your question

Rob Young - WM. Smith& Co

Thanks. Good morning.

Don Brock

Yes, good morning, Rob.

McKamy Hall

Good morning Rob.

Rob Young - WM. Smith& Co

Last quarter it was mentioned that there are some lag timerelated to the Californiapermitting process, can you update us on that?

Don Brock

Continues to be. We have shipped some plants in to California, but we still have some delay, and we’veobtained some additional orders since then, but it’s just a long process for California particularly.They require so many different types of permits and you can eventually get on,but it is hard to predict exactly the shipped dates.

Rob Young - WM. Smith& Co

Okay. And then, what are your long and short term targetsfor having an international presence? I know you already spoke that Q4 issupposed to increase, but what is your kind of long term gestation for that?

Don Brock

We'd like to see it in the 35% range. Fourth quarter willexceed that, but year-to-date certainly won't. We'll probably be north of 30%year-to-date. But we believe, where we can get, over 35% of our business isinternational, somewhere between 35% -40%.

Rob Young - WM. Smith& Co

Okay, great. And then how is the patent process proceedingwith the Double Barrel Green System?

Don Brock

The application is right now on the path, now, becauseobviously it's within and so it's just a matter of that. It's an excitingprocess. I've got to leave here in a little bit go to Texas and give a talk on it. I gave one in Hawaii about two weeksago, and we shouldn't be talking about putting water in. A guy came up to meand said we were calling that hydrogen oxide and it's still the water. That'sour new term for what we put in to the asphalt.

Rob Young - WM. Smith& Co

Alright, okay, and then just one last quick one. There are afew countries that you mentioned last quarter that has excellent growthopportunities, are there any others that are developing relationships withother than those?

Don Brock

I know we're scattering our equipment all over the world, Iguess. We've seen a lot of growth in the asphalt side of it. Of course, Australia isbeing good. Canadais obviously close neighbor and a very strong market for us.

We've put some of soil remediation plants in England.We got one going to Australiaand one going to Singapore,a number of different locations. South America is very strong right now for us,on smaller plants, Middle East obliviously, isa strong market.

Rob Young - WM. Smith& Co.

Okay. And I apologize I just have a one more. With thebacklog contracts, how much flexibility is there as far as looking at increasedcommodity prices, and how has that affected?

Don Brock

We see prices, at least, it's obvious that the companies thelast two or three weeks. The general tendency is they are seeing a considerablemoderation in price increases, as you know more in the 3% range in most cases.

Rob Young - WM. Smith& Co.

Okay.

Don Brock

We’re getting some savings things, but we’re seeing a littleslowdown in price increases.

Rob Young - WM. Smith& Co

Okay.

Don Brock

Okay.

Rob Young - WM. Smith& Co

Alright, well I appreciate it. Thank you.

Don Brock

Thank you.

Operator

Our next question is from [David Mills] from [JBN CapitalManagement]. Please state your question.

David Mills - JBNCapital Management

Yes. As far as the shipments of products that have either nogross margin or very low gross margins, is that as a percentage of your revenuestream, is that more or less peaked out this quarter or do we have more to lookforward to?

Don Brock

David it's typically when we are building new model or a newversion of a machine, we may end up from 0% to 10% gross margin on. But then itgenerally takes four to five machines of those particular machines before weget it up to our normal level. A part of it is just product development. Wecan't build many of these machines and put them on the backyard and run them.

So you have a higher warranty expense when you have it,which flows into your gross margin. So, we just had an inordinate number ofthem trying to hit this quarter, which was unusual. But to answer yourquestion, generally, I had to build four or five of them, and in most casesthat's about where we are as, so we can see as much of effect in the fourthquarter as we did in the third.

McKamy Hall

I think David, too, you need to always keep in mind it's aninvestment in the future. And --

David Mills - JBNCapital Management

Well I am not criticizing you, I'm just trying to get a feelas for the gross margin progress over the next four or five quarters? Do yousee first half of '08 being better in terms of this or about the same?

Don Brock

We continue to push product development, and normally it'snot as much of effect as you would see in this quarter. It seems like justbunch of them here at the same time, but I see it will last next year than itis this year.

David Mills - JBNCapital Management

Okay. And the other question I had is as you talked about adisconnect between the oil and asphalt prices, do you have a sense of whythat's happening and whether are you expected to continue?

Don Brock

I think the main reason it's happening is though the priceof heavy crude as related to light crude is always from $10 to $20 a barrelless, but there seems to be an inordinate amount of heavy crude coming into thecountry. And as they produced the heavy crude, they got a choice of makingasphalt or if they have cookers to coke it.

The predominant number of refineries don't have the abilityto coke it, and those that don't, they have to get rid of that asphalt, or theycan't keep the refinery running. So, as a result, they'll dump it on themarket, at somewhat depress price as compared to what you would expect it tobe.

David Mills - JBNCapital Management

Okay.

Don Brock

And that's the main difference.

David Mills - JBNCapital Management

Thank you very much.

Don Brock

Yes sir.

Operator

Our next question is a follow-up question from Robert McCarthy fromRobert W. Baird. Please state your question.

Robert McCarthy -Robert W. Baird

Sorry, McKamy, I didn’t get the nine months stock plancompensation number from you?

McKamy Hall

It's $3.1 million increase.

Robert McCarthy -Robert W. Baird

$3.1 million this year greater than last year?

McKamy Hall

Correct.

Robert McCarthy -Robert W. Baird

Of which almost $2 million was in the quarter?

McKamy Hall

$2.5 million I believe. It went from - I think the stockwent from 42 to 57 on the calculation of the averages.

Robert McCarthy -Robert W. Baird

I see, alright. And then your forecast for the full yearassumes what tax rate?

McKamy Hall

Basically, thirty-six Rob. 35.26 is the effective rateyear-to-date.

Robert McCarthy -Robert W. Baird

Thirty-six for the year, okay. And as a follow-up to thedialogue you just had Don, about on concentration on the new product expensesetcetera. What would you suggest is a more normal quarterly level of impactfrom these kinds of expenses?

Don Brock

That's a good question. Typically, about a third of what wehad, I guess Rob. I mean we’re constantly putting new things out, and that'sthe only way we can…

Robert McCarthy -Robert W. Baird

At when exactly?

Don Brock

But this time and to be true for reason we didn’t expect, weexpected better margins, but you always have some of that. But looking at thelist that I read to you, there is not too many of that. The Green System ispretty well, what we are selling for now, we’ll be making money on. About allof these, we should be profitable on, but I also know we’ve got a pretty streamby other stuff coming in and it's not near or like this. But typically, a thirdof what we saw in this quarter.

Robert McCarthy -Robert W. Baird

Okay, and last one. You mentioned engine - delays gettingengines? Are you comfortable saying from more year?

Don Brock

From Germany,from outfits that, of course name starts with a D. I will tell you no more.

McKamy Hall

Yeah, and auto diesel's long dead.

Don Brock

Talk to [Bill Gales] or talk to some of the others, I thinkthe whole world is waiting on those engines.

Robert McCarthy -Robert W. Baird

This affected which? Was it the Heatec or an aggregateproblem?

Don Brock

It was an underground.

Robert McCarthy -Robert W. Baird

Underground problem.

Don Brock

Yeah, a couple of models with smaller trenches, we got abunch of orders for. We just can't (inaudible) waiting in on engines.

Robert McCarthy -Robert W. Baird

Okay, alright. And you expect to see that clear in thefourth quarter?

McKamy Hall

I guess we already answered to that.

Don Brock

They got enough casting to furnish us, but they say theircastings I can’t predict whether they are good or not. So we never had asupplier that really won’t tell you. If they do what they say, yeah, that'll beokay, but we don’t know.

Robert McCarthy -Robert W. Baird

Yeah, I understand. Okay, thanks a lot guys.

Don Brock

Okay.

Operator

Our next question from [Allan Broxstien] from AB Analytical Services,please state your question.

Alan Brochstein - ABAnalytical Services

Hi, yes. I am relatively good new to your company and yourindustry, so pardon me if my question is a little off base that. I understandyou guys have a hard time telling exactly which markets you are selling into,in terms of the commercial market which I know you have the small exposure to,and also stating [local] versus federal.

But how do you see, if this economy remains weak or weakensfurther here, how do you guys go about expanding business with respect to yourexposures to those market?

Don Brock

Our markets do not go direct to the end market. We sell theequipment that produces the asphalt mix and it goes to interstate highways,state highways and residential pavements and parking lots and a variedvarieties. So, we have to watch our customers, because when they have aheadache we have a heart attack generally. But typically, of our customersbusiness, 60% of it is public works related; 40% is either commercial or privatetype of business. And that’s in the Asphalt side of it. The aggregate is aboutparallel to that.

The underground business is more driven by our small utilityline, goes into more in the home building, the directional drilling, and itgoes into more existing market. So we have a wide variety of different productsgoing to a lot of different markets.

We also see fifty different states in different countriesthat when one's is up the other ones are down. So we have to kind of weigh whatthey are. And in the UStoday, I would say probably high for the US, the States are down and highprobably when they are up.

Alan Brochstein - AB Analytical Services

Okay. Soas far as any sort of reaps that you are getting or any thing evidenced fromyour customers or are they taking their (inaudible) or what have you or is itnot really an issue at this point for them in terms of starting to getheadaches?

Don Brock

The thing I have seen this year, I guess in the Midwest and in the East that their markets are down buttheir profits are not hurt as bad because this is in the asphalt business. Theyanticipated major price increases in asphalt that didn’t occur.

Even though all is going up, it's one of disconnects I wastalking about, and most of them kind of smile and they made decent profits eventhough their volume was down. So it's difficult for us to, all we can do isread on average and without international business we would probably looking atpiling all a little bit. But, with international business being the strong andthe dollar being as weak, we feel reasonably good.

Alan Brochstein - AB Analytical Services

Okay. Thankyou very much.

Don Brock

Thank you.

Operator

Our next question is from Jack Kasprzak from BB&TCapital Markets.

Jack Kasprzak -BB&T Capital Markets

Thanks, one follow-up. Don, you referred earlier to a slowerrate of increase of 3% on something and I missed what you were referring tothere?

Don Brock

That was purchase components Jack, on average of ourpurchased items that we buy.

Jack Kasprzak -BB&T Capital Markets

Okay.

Don Brock

Right.

Jack Kasprzak -BB&T Capital Markets

And also to just, you mentioned some aggregates youreferenced some may be slower operations, specific to aggregates in the NewEngland area and may be some other Midwestareas.

But when you look at the bigger aggregates companies, isthere any commentary you can give us about what you are seeing there, in termsof their behavior. There have been some CapEx plans announced, seems relativelyhealthy, but has there been any change that you can discern recently?

Don Brock

We haven’t seen any change in there Jack, they seem to,they've been able to get good price increases. And as you well know when theirvolume seems to be down. In the Southeast the volume is down, but theycertainly pushed their prices up and I think their profitability is good, andthey’re continuing to spend money.

Jack Kasprzak -BB&T Capital Markets

Okay. Great, thanks a lot.

Don Brock

Thank you.

Operator

Our next is from [Shaun Deli from THM Holdings], pleasestate your question.

Shaun Deli – THM Holdings

Good morning, could you repeat your annual guidance?

Don Brock

Our annual for this is in the 240 to 250 range.

Shaun Deli – THMHoldings

Alright, So I know you hadn’t given any prior guidance tothis but the consensus was 267?

Don Brock

Right

Shaun Deli – THMHoldings

And you are missing this quarter by $0.15, let's call it?

Don Brock

Right

Shaun Deli – THMHoldings

So, you’re not really seeing in much, you don’t anticipatethe fourth quarter to see the problems you saw in the third quarter. Is thatcorrect?

Don Brock

No sir, we don’t. Basically we could deal on the high end ofthat, if we get to December. Shipments are strong in December and probably inthe low end they are not.

Shaun Deli – THMHoldings

Right.

Don Brock

That’s what makes it difficult.

Shaun Deli – THMHoldings

And where are you in terms of, did the Board authorized forpurchase earlier in the year or?

Don Brock

Basically the Board's kind of know if something whether theyare going to do it, they are available within 8 hours to vote on it. But if ourstock plummeted or something and we had the cash available, that would be ourintent to buyback.

Shaun Deli – THM Holdings

And you consider 17% will plummet or?

Don Brock

Well, at the range we are right now we feel like we get someopportunities and acquisitions. It would probably ahead of that.

Shaun Deli – THMHoldings

Okay. Okay thanks very much.

Steve Anderson

Thank you

Don Brock

Thank you

Operator

We have a follow-up question from Robert McCarthy fromRobert W. Baird. Please state your question

Robert McCarthy -Robert W. Baird

I guess this is just a refinement of or a refined follow-upto what we just heard. I was going to ask you to update on what was going on inthe acquisition front Don. Would you rule something out for the balance of theyear?

Don Brock

No. We got couplets going on well, but we would, it couldhappen, otherwise those are relatively small.

Robert McCarthy -Robert W. Baird

We’ll keep an eye on. Thanks.

Don Brock

Okay. Thank you

Operator

Gentlemen, there are no further questions at this time. Iwould like to turn the floor back over to management for closing comments.

Steve Anderson

Okay. Thank you Lathania. We appreciate your participationon our third quarter conferences call, and thank you for your interest inAstec. As our new release indicates, today's conferences call has been recoded.

A replay of the conference call will be available throughOctober 29, 2007, and an archived webcast will be available for 90 days. Thetranscript will be available under the Investor Relations Section of the AstecIndustries' website, within the next seven days. All of that information iscontained in our news release that was sent out earlier today.

Since there are no further questions, this will conclude ourcall. Thank you very much.

Operator

Ladies and gentlemen, this does conclude today'steleconference. You may disconnect your lines at this time. Thank you for yourparticipation.

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Source: Astec Industries Q3 2007 Earnings Call Transcript

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