Astec Industries Q3 2007 Earnings Call Transcript

Astec Industries Inc. (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

Presentation

Operator

Greetings, ladies and gentlemen, and welcome to the Astec Industries' Third Quarter 2007 Results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

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

Steve Anderson

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

Also on today's call are Dr. J. Don Brock, our Chairman and Chief Executive Officer, 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 operations in business environment. In the way disclosures, I will note that our discussion this morning may contain forward-looking statements that relate to the future performance of the company, and these statements are intended to qualify for the Safe Harbor liability established by the Private Securities Litigation Reform Act.

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

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

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

McKamy Hall

Thanks, Steve. We appreciate you joining us this morning. We are pleased to report to you on a good third quarter. Overall sales growth is 20.2% and 34.5% the growth in international sales.

We generated a 16% of improvement in net income, compared to the 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 increase of 20.2%. International sales were $74.5 million for an increase to 34.5%. The large increases came in Australia, Africa, West Indies, Canada, Middle East, South America and Asia.

Domestic sales were $131.7 million versus $116.1 million, or a 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 was 39.7%, Asphalt 25.1%, Mobile 16.2%, Underground 13.7%. The sale by segments and other information relating to the segment 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. First time manufacturing cost for new equipment and new models was the primary reason for the reduced margin, and it's not a situation that we expect to repeat in the upcoming quarter.

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

The income from operations was up 5.1%, the income by segment 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 the backlog is at $239.9 million versus prior year of a $131.2 million for an increase of $108.7 million or 82.9%. And that’s broken down for you by segment attached to your press release.

The balance sheet is very strong. Our days outstanding are 37.4 versus 36.9, so basically no change, and the inventory is 3.5 turns, both current 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 will be attached to the 10-Q filling. This concludes my formal remarks; I'll certainly be glad to answer any questions, you may have later in the call. We do appreciate your interest in Astec, as we strive to improve profitability and return for the shareholders.

Steve Anderson

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

Don Brock

Thank you, Steve. As McKamy mentioned our revenues were up 20.3%, and our income was up 15.2%. Our gross margin slipped a little for the quarter from 23.9 to 23.5. This was caused by a number of new products that we introduced which is typical, our first introduction of products or at either no margin or very little margin.

One of our big expenses was the introduction of the Green system at Astec, or the asphalt plants where we have been able to lower the mixing temperature, eliminating the smoke and the smell of the asphalt. This reduces the fuel consumption and ups the amount of the recycle. And since the introduction 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 low or no margins or a loss. We also had introduced a model of larger track-mounted crushers for the aggregate industry, which was little or no margin.

We had an introduction of new wheel machines at the underground operation. Our oil drilling rigs, we also introduced two new models are Roadtec machines, two models of small drills, two models of small trenchers.

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

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

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

For the nine months, our revenues were up a $100 million, up 18.2%; our income was up 35%, and our gross margin year-to-date is up from 24.4% 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 delays in very year-end shipments, but we certainly expect fourth quarter to be substantially better than fourth quarter of last year.

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

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

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

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

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

We see some softening in the East and Midwest part of the country, but this is more than offset by the improvements in the infrastructure spending in the West, and particularly in the international market, which is very strong and gives us confidence that we will have to continue to grow our business in 2008. At this time we'll be glad to answer any questions you would have.

Question-and-Answer Session

Operator

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

Arnie Ursaner - CJS Securities

Hi, good morning.

Don Brock

Good morning Arnie.

Arnie Ursaner - CJS Securities

First question I have is you obviously have a number of unusual expense items on the SG&A line. Can you perhaps help all of us by quantifying the couple of the key ones that you highlighted; that impacted results?

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 our senior officers. Our Board started this year’s ago where we put in Astec's stock in there. It's a non-cash expense, but it affected us nearly $2 million this 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 in as earnings. As it goes up it takes away from our earnings. And again it's one of 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 just the 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 - CJS Securities

Okay. Can you also quantify? You mentioned, obviously you lost some money I guess on initial shipments of your Double Barrel. Can you quantify 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 the Double Barrel, and we've sold over 50 of these systems. We probably got 20 of them shipped now, and all of them have been at a loss. Mainly the main expense of 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-mounted crushers hit us, a number of them. There's probably a total of $4.5 million for the quarter that was hit by all of these new products and margin.

Arnie Ursaner - CJS Securities

Okay that’s very helpful. You’re backlog in asphalt is obviously stretching quite a bit; you mentioned some manufacturing issues or capacity 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 a little bit with it, a lot of west coast orders that we have for out there are kind of unpredictable and (with ship). And we constantly are rearranging the production of those plants, because if the permit seemed to get delayed, we have a couple of orders that stretch out nearly a year right now, that's anticipated shipping as early as March of’07 that haven’t shipped yet.

And yes, they have to select the plant, they chose the manufacturer 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 when they'll take it. We have some ways of, some of those we can escalate prices on and some of them we can’t.

Arnie Ursaner - CJS Securities

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

McKamy Hall

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

Arnie Ursaner - CJS Securities

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

McKamy Hall

I think that’s still our goal.

Arnie Ursaner - CJS Securities

That goal is different than being comfortable though?

Don Brock

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

Arnie Ursaner - CJS Securities

Okay, thank you very much.

Don Brock

Okay.

Operator

Our next question is from Jack Kasprzak from BB&T Capital 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 to sales 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 East and the Midwest, there was some softness there. 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 stock piles shutting down earlier this year. We see more in the Midwest and Illinois some of those areas, Wisconsin and some of those is slowing down quite a bit.

As I travel around to visit on our quarterly reviews, I guess the consensus is, the Southeast is okay, from Texas on west is pretty darn good. Even though home building is down in Arizona and 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 New England, all through the Midwest seems to be the 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 a continued ramp there in projects and interest among customers?

Don Brock

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

Jack Kasprzak - BB&T Capital Markets

Okay. And you mentioned shallow surface drilling that you see. 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 you can elaborate on that? I mean how new, I guess that's a relatively new opportunity, how big of a market do you see for that?

Don Brock

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

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

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

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

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

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

Again, we go much faster. Well we got a little, probably a little better sensor technology in the drill stem of exactly where you are. So we 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 the plant, and we’re kind of being a little more cautious till we get a whole bunch of orders before we do that.

McKamy Hall

Eleven customers there last time.

Don Brock

Yeah we had eleven customers in to see the first vertical rig.

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 the drill rig opportunity of one customer and kind of eleven more prospects at this point.

Don Brock

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

He's been a little reluctant to let him by, go in and look at it. So, we made an agreement on the last rigs that we can go take customers in 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 of clarifications on numbers that we've already heard. On the parts comparison McKamy, 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 compensation expense?

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 Peterson contributed about 3.8% of that, versus $127 last year. So on existing companies it 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 what exactly is going on in the Asphalt Group? It's pretty remarkable that your revenue run rate went from around $65 million, $66 million a quarter, and I understand 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 to understand how the quarter could have been so disappointing? And one other thing that sort of obviously suggests itself is that, you have some revenue ready 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 the past 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 to shift. 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 had a number of them there. We are bumping capacity in the asphalt side of it right now, both at Astec and at Heatec.

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

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

Robert McCarthy - Robert W. Baird

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

Don Brock

In the whole company I have looked that we were probably $12 million to $13 million shorter that was on the bubble. How much of that was in asphalt, 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 plans that 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 looking that up, can I infer from this that, you will break the traditional, whether you should break the traditional seasonal pattern in this segment in the fourth quarter.

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

Don Brock

If we can get it shipped in December, if people would take it, I mean if people will take it, our fourth quarter could be equal to the third 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 they say they are going to take, and I have asked thereby to be conservative because it’s very important what we tell you on the fourth quarter. But we, or it could be very close to the, what we’ve got in the yard, but that end of month is being 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 actually the 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's scattered 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’t even put on the list, it's on the bubble because again the customer delayed them 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 fifty asphalt, 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 of yardstick 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 change in the way we are doing it Rich will sell milling machines, it will sell crushers, it will sell screening units, and it will sell more of our Double Barrels.

It’s a long range affect, but all of these that are sold today. Should say all of them, but most of them are retrofits. Practically every 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. You guys 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 had between 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 brand new mix; so, exciting process.

Rich Wesolowski - Sidoti & Company

Was Peterson profitable the quarter?

Don Brock

They were about breakeven, just about breakeven. And this is their 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 the fourth 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 your new work versus what you were seeing a year ago?

Don Brock

We have been - we continue to see price increases. While the dollar 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 Canadian operation. 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 the year that we’ve got or hopefully, we have initiatives to continue to work on the improved number. Right now we’re starting to increase prices, but that won’t come into effect till probably the first quarter. So that’s why the fourth quarter is kind of a wild card on the margins, but I think we’ll end up the year close to where we are now.

Rich Wesolowski - Sidoti & Company

Okay, on the asphalt capacity issue that we’ve been speaking about. You mentioned in the prior call extending the work shift. Has that already been executed and are you at all considering bricks and mortar investment?

Don Brock

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

Rich Wesolowski - Sidoti & Company

Okay, and finally, your general economic comments, kind of fly 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 that makes the business or is it something else?

Don Brock

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

And our new products offer some differentiation. So, I guess we are cautiously optimistic that we’ll continue to grow, not probably at the pace that we have in the last. As I have said all along, there's usually a flatter 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 gone to the trouble to calculate, and I probably should have pointed it out, our international sales year-to-date are 29.9% of our sales, and the backlog is very strong, and it'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 time related to the California permitting 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’ve obtained 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 targets for having an international presence? I know you already spoke that Q4 is supposed 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 will exceed 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 is international, somewhere between 35% -40%.

Rob Young - WM. Smith & Co

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

Don Brock

The application is right now on the path, now, because obviously it's within and so it's just a matter of that. It's an exciting process. 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 weeks ago, and we shouldn't be talking about putting water in. A guy came up to me and said we were calling that hydrogen oxide and it's still the water. That's our 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 a few countries that you mentioned last quarter that has excellent growth opportunities, are there any others that are developing relationships with other than those?

Don Brock

I know we're scattering our equipment all over the world, I guess. We've seen a lot of growth in the asphalt side of it. Of course, Australia is being good. Canada is 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 Australia and one going to Singapore, a number of different locations. South America is very strong right now for us, on smaller plants, Middle East obliviously, is a strong market.

Rob Young - WM. Smith & Co.

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

Don Brock

We see prices, at least, it's obvious that the companies the last two or three weeks. The general tendency is they are seeing a considerable moderation 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 little slowdown 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 Capital Management]. Please state your question.

David Mills - JBN Capital Management

Yes. As far as the shipments of products that have either no gross margin or very low gross margins, is that as a percentage of your revenue stream, is that more or less peaked out this quarter or do we have more to look forward to?

Don Brock

David it's typically when we are building new model or a new version of a machine, we may end up from 0% to 10% gross margin on. But then it generally takes four to five machines of those particular machines before we get it up to our normal level. A part of it is just product development. We can'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 of them trying to hit this quarter, which was unusual. But to answer your question, generally, I had to build four or five of them, and in most cases that's about where we are as, so we can see as much of effect in the fourth quarter as we did in the third.

McKamy Hall

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

David Mills - JBN Capital Management

Well I am not criticizing you, I'm just trying to get a feel as for the gross margin progress over the next four or five quarters? Do you see 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's not as much of effect as you would see in this quarter. It seems like just bunch of them here at the same time, but I see it will last next year than it is this year.

David Mills - JBN Capital Management

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

Don Brock

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

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

David Mills - JBN Capital Management

Okay.

Don Brock

And that's the main difference.

David Mills - JBN Capital Management

Thank you very much.

Don Brock

Yes sir.

Operator

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

Robert McCarthy - Robert W. Baird

Sorry, McKamy, I didn’t get the nine months stock plan compensation 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 stock went 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 year assumes what tax rate?

McKamy Hall

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

Robert McCarthy - Robert W. Baird

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

Don Brock

That's a good question. Typically, about a third of what we had, I guess Rob. I mean we’re constantly putting new things out, and that's the 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, we expected better margins, but you always have some of that. But looking at the list that I read to you, there is not too many of that. The Green System is pretty well, what we are selling for now, we’ll be making money on. About all of these, we should be profitable on, but I also know we’ve got a pretty stream by other stuff coming in and it's not near or like this. But typically, a third of what we saw in this quarter.

Robert McCarthy - Robert W. Baird

Okay, and last one. You mentioned engine - delays getting engines? 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 think the whole world is waiting on those engines.

Robert McCarthy - Robert W. Baird

This affected which? Was it the Heatec or an aggregate problem?

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 a bunch 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 the fourth quarter?

McKamy Hall

I guess we already answered to that.

Don Brock

They got enough casting to furnish us, but they say their castings I can’t predict whether they are good or not. So we never had a supplier that really won’t tell you. If they do what they say, yeah, that'll be okay, 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 - AB Analytical Services

Hi, yes. I am relatively good new to your company and your industry, so pardon me if my question is a little off base that. I understand you 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 weakens further here, how do you guys go about expanding business with respect to your exposures to those market?

Don Brock

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

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

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

Alan Brochstein - AB Analytical Services

Okay. So as far as any sort of reaps that you are getting or any thing evidenced from your customers or are they taking their (inaudible) or what have you or is it not really an issue at this point for them in terms of starting to get headaches?

Don Brock

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

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

Alan Brochstein - AB Analytical Services

Okay. Thank you very much.

Don Brock

Thank you.

Operator

Our next question is from Jack Kasprzak from BB&T Capital Markets.

Jack Kasprzak - BB&T Capital Markets

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

Don Brock

That was purchase components Jack, on average of our purchased 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 you referenced some may be slower operations, specific to aggregates in the New England area and may be some other Midwest areas.

But when you look at the bigger aggregates companies, is there any commentary you can give us about what you are seeing there, in terms of their behavior. There have been some CapEx plans announced, seems relatively healthy, 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 their volume seems to be down. In the Southeast the volume is down, but they certainly pushed their prices up and I think their profitability is good, and they’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], please state 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 – THM Holdings

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

Don Brock

Right

Shaun Deli – THM Holdings

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

Don Brock

Right

Shaun Deli – THM Holdings

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

Don Brock

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

Shaun Deli – THM Holdings

Right.

Don Brock

That’s what makes it difficult.

Shaun Deli – THM Holdings

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

Don Brock

Basically the Board's kind of know if something whether they are going to do it, they are available within 8 hours to vote on it. But if our stock plummeted or something and we had the cash available, that would be our intent 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 some opportunities and acquisitions. It would probably ahead of that.

Shaun Deli – THM Holdings

Okay. Okay thanks very much.

Steve Anderson

Thank you

Don Brock

Thank you

Operator

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

Robert McCarthy - Robert W. Baird

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

Don Brock

No. We got couplets going on well, but we would, it could happen, 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. I would like to turn the floor back over to management for closing comments.

Steve Anderson

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

A replay of the conference call will be available through October 29, 2007, and an archived webcast will be available for 90 days. The transcript will be available under the Investor Relations Section of the Astec Industries' website, within the next seven days. All of that information is contained in our news release that was sent out earlier today.

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

Operator

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

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Comments

[Damyata:]

This transcript is inaccurate in a few places and the errors are critical.

The paragraph recorded above as:

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

is actually

I guess, WHY we got such a strong backlog, there's still a little bit of puzzle there. We are surprised that at the backlog that we got quite frankly, and they continue to keep coming. The prospects are very good for the asphalt, but we ARE hitting a whole lot stronger, proportional amount of international business.

Also, above it is written that:

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

But what was really said was:

So you have a higher warranty expense when you have it, which flows into your gross margin. So, we just had an inordinate number of them KIND OF hit this quarter, which was unusual. But to answer your question, generally, AFTER we built four or five of them, and in most cases that's about where we are, so we WON'T see as much of effect in the fourth quarter as we did in the third.

2007 Oct 23 02:51 AM