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Astec Industries (NASDAQ:ASTE)

Q1 2008 Earnings Call

April 22, 2008 10:00 am

Executives

Steve Anderson – Director of Investor Relations

Dr. J. Don Brock – Chairman & Chief Executive Officer

McKamy Hall – Vice President & Chief Financial Officer

Analysts

Arnold Ursaner – CJF Securities

Michael Cox – Piper Jaffrey

Rich Wislowsky – Zadonian Company

Jack Caspaza – BB&T

Neil Miller – Fidelity Investments

Chris Weltzer – Robert W. Baird

Alan Brockside – A.D. Analytical Services

Garo Norian – Blackrock, Inc.

Greetings, ladies and gentlemen, and welcome to the Astec Industries First Quarter 2008 Results Conference Call. (Operator Instructions) It is now my pleasure to introduce your host, Mr. Steve Anderson, Director of Investor Relations for Astec Industries. Thank you, Mr. Anderson, you may begin.

Steve Anderson

Thank you, Doug. Good morning, and welcome to the Astec Industries conference call for the first quarter of 2008. As Doug said, my name is Steve Anderson and I am the Corporate Secretary and Director of Investor Relations for the Company.

Also on today’s call are Dr. J. Don Brock, our Chairman and Chief Executive Officer, and McKamy Hall, Vice President and Chief Financial Officer. In just a moment I will turn the call over to McKamy to summarize our financial results and then to Don to discuss our business operations and market conditions.

In the way of disclosures, I will note that our discussion this morning may contain forward-looking statements that relate to the future performance of the company. These statements are intended to qualify for the safe harbor liability established by the Private Securities Litigation Reform Act.

Any such statements are not guarantees of future performance and are subject to certain risks, uncertainties, assumptions and other factors, some of which are beyond the company’s control. Some of those factors that could influence our results are highlighted in today’s financial news release, and others are contained in our annual report and our quarterly and annual filings with the SEC. As usual, we urge you to familiarize yourself with those factors.

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

McKamy Hall

Thanks, Steve. We appreciate each of you joining us this morning. It is certainly a beautiful day in the Southeast, and we are certainly pleased to report to you on the most profitable first quarter in the company’s history. The company generated a 14.4% improvement in net income, and we are looking forward to ’08, starting out with a backlog of 263 million dollars for the quarter.

For the quarter, our net sales were 263.1 million, and that is an increase of 22% over last year. International sales were 92.5 million, being an 88.4% increase over last year. Those increases occurred in Canada, Asia, South America, Central America, Australia. The domestic sales were up two and a half percent over the quarter for last year.

Parts sales were up 22.3% at a level of 52.6 million. And we did have parts sales increases in all segments of the business. We also had sales increases, as you can see from the attached information, information attached by segment, to your press release.

On the gross profit, the gross profit was at 66.2 million, an increase of 11.8 million or 21.7%. The gross profit percentage for the quarter remained flat at 25.2%. Again, that information is attached, by segment, to the press release.

On the SG&A, our SG&A was at 14.7%. This SG&A increase included an increase of $3.5 million for ConExpo expenses and the other primary increase in the SG&A was in the form of salaries, commissions and benefits. Income from operations was at 27.4 million, that is an increase of 3.6 million or 15.1%. The effective tax rate was up just slightly, 36.63 versus 36.26.

Our net income per share was at 78 cents versus 69 cents, for an increase of 13% in earnings per share. The net income was up 17 and a half million versus 15.3 million or 14.4%.

The backlog is at 263 million as we mentioned in the beginning, and that backlog is down 1.2% compared to the prior year. But we have to keep in mind that it is down after having achieved the 22% increase in sales, and certainly we have spent money on capital expenditures and have improved our throughput to process orders during this last 15 months.

On the balance sheet, our balance sheet continues to be very strong. We have corporate cash available of 31.3 million. We have receivables at 39.8 days versus 36 days a year ago. Inventories at 3.4 turns versus 3.5 turns a year ago.

While we owe nothing on our credit facility, we are utilizing our facility for 7 million dollars of letters of credit, leaving a borrowing availability of 93 million. Capital expenditures are at 7 million thus far through the first quarter out of a scheduled 31.9 million.

Our depreciation and amortization is at 4.1 million out of a projection of 18.2 million. Our cash flow will be attached to the 10-Q when it is filed.

That concludes my prepared remarks, and I will certainly be available to answer any questions you have later in the call. We do appreciate your interest in Astec as we strive to improve profitability and return for the shareholders. Don?

Dr. J. Don Brock

Good morning. As McKamy said, we had a good quarter. We were very pleased with it. The revenues increased from 215 to 263, a 22% increase. Our income was up from 15.3 to 17.5 or 14%, and earnings per share were up from 69 to 78 or a 13% increase.

The ConExpo expense: we generally have taken that, in the past, over an 8 month period. We took it all in this quarter based on what are some of the new rules in accounting that required that. If we had have taken that over the two year period that we have in the past we would have probably had – our earnings per share would have been about eight to nine cents higher than they are showing. ConExpo was extremely good this year, but it was expensive, as McKamy said, in the 3.5 to 3.6 million range.

Our backlog for the quarter is flat; basically, down about 1%. Frankly, this is a little more comfortable level that will allow us to make deliveries bit. We are still a little bit high in some of our segments, stretching the deliveries out a little bit longer than we would like.

International sales, as McKamy had said, is up about 88%. 35% of the revenues for the quarter were in the international and 65% domestic. Domestic sales were up only 2%, but we continue to grow our international sales and that continues to – we look for that to continue to increase over the next three quarters. We were real pleased that parts sales were up 23%, and this is an area that we focus on and continues to grow.

Our gross margins were flat at 25.2%. We see this as probably one of our biggest challenges, with the continuing inflationary pressures that we have in commodity prices of maintaining this gross margin or our gross margin for the year. We think that is going to be one of our biggest challenges.

Looking forward in the second quarter and the rest of the year, while ConExpo was very expensive, it was the best one that we have ever had. Historically we have never obtained many orders there but we received approximately 40 million dollars in orders at that ConExpo throughout all of the companies, so that was very – ended up being a very good show.

Our April order intake, as a result of ConExpo, was very strong, both domestically and internationally. And this has been helped a lot by our new products, the green systems on the asphalt plants, the need to increase recycling both in asphalt and in aggregates, and particularly in the new oil drilling rigs that we are building at American Augers.

Looking forward, we are confident that we can meet our growth projections of 15% this year. We are still comfortable with our annual guidance in the 280 to 295 range, but our challenges are going to be managing the rapid increases in steel prices.

We are very comfortable with second quarter. It is a little bit hard to see out beyond the second quarter. We are doing everything we can to offset increases by efforts of our focus groups and our improved manufacturing operations, but as I said, the visibility is a little hard when you get out beyond three to four months.

We continue to work on a couple of acquisitions that hopefully will close in the third quarter. The growth in the energy market looks very good to us. We are doubling the size of the American Augers facility to build drill rigs, to have a dedicated factory just for that.

In summary, we had a good first quarter; second quarter looks good to us. We continue to diversify into other markets that are counter-cyclic to the infrastructure market, and that will level our volumes and earnings. We will also continue to increase our sales coverage geographically around the world to apply our products throughout the world. With that, we will stop and answer any questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Arnie Ursaner of CJF Securities.

Arnold Ursaner – CJF Securities

Hi, good morning.

Dr. J. Don Brock

Hi Arnie.

McKamy Hall

Hey, Arnie.

Arnold Ursaner – CJF Securities

A little more on the SG&A related to ConExpo. In your last conference call we asked about it and you spoke about it and you mentioned normally you recognize half in the year of the show, half in the following year. And at that time I think you indicated it would add an incremental 700,000 to cost, most of it in Q1. I am trying to reconcile a $3.5 million number with that. Is it fair to say you had assumed 3.5 million generally over the two years, and if we kind if “x” this out, should we assume we will have a million eight less next year? As an estimate?

Dr. J. Don Brock

Well, Arnie, we will basically have, if you take the 3.6 million, divide by eight quarters, that is what we would have normally had. So there is seven-eighths of it that we took, basically, up front, here. You will not have any – next year will not have any – it is over. Basically, we have written it – it has all been written off. Historically, though, we were writing it off over that period, over eight quarters.

Arnold Ursaner – CJF Securities

And you had given guidance before about SG&A as a percent of revenue. What should we be thinking about both this year and for next year, to try to build this – you know, to –

McKamy Hall

That is just a one time hit, Arnie, that we took to the best of our ability, all of it in this first quarter. So if you want to take 3. 6 or 7 million out of that number, and look at it as Don said, for the first quarter, then that’s what it would be without. And there will be none for another three years.

Arnold Ursaner – CJF Securities

The next question I have is, can you comment on the impact the currency had on your results? How much did it benefit revenue, and any comments you have on how it may have impacted earnings?

Dr. J. Don Brock

It had a very negative effect related to BTI. I do not have the numbers in front of us, but the exchange rate has certainly hurt them considerably, which is our Canadian subsidiary. But frankly, with the weak dollar, it certainly – it drives international sales, or has been one of the drivers of it. So I do not know that we can qualify that, Arnie, other than the fact that we are up 10%. You know, we are up from 25% international sales to 35%, and part of that is from – part of that is the dollar, and part of it is, it is more effort to sell internationally.

Arnold Ursaner – CJF Securities

I have a question if I can relate to the steel. Obviously it is a concern. You have had supply locked in through June at fixed prices. Did you think of that while you were going well beyond June? What steps, if any, are you taking when you either bid on work or, do you have specific escalators to reflect higher steel? Or if in fact you have booked business at a certain price and steel gets way out of whack, do you have to absorb the margin? And can you walk us through that process?

Dr. J. Don Brock

I would say in general if we have booked it, we are going to get hit with – on further out, Arnie. With some of it, we do have some major jobs that we are basically negotiating now with a steel price increase. There is some of them that would be hanging out there, though. It is primarily on asphalt plants.

What we are doing is buying all the steel we can get our hands on at the prices we have got locked in, right now, which we can cover a couple of months on out beyond. But that is about as far as we can go. The real question is, is it going to stay up?

Well, you can get every answer you want, you know, and there is a fine line between being brilliant and being stupid on our buying right now. I guess we were – a number of people in the business seemed to think that it was probably going to start to level back down or drop back in July. Now we are hearing as far out as the fourth quarter, so it’s kind of a wild card that we don’t know.

But we are trying to buy ahead, to answer your question, we are trying to get escalators and in some cases we do have escalators, but not in every case.

McKamy Hall

And Arnie, I would just add to that, and Don can expand on it, but we are, in all of our subs, we are looking at what are typical products, our representative products, in those subs and we are doing what-if rollups of the cost to keep our people apprised of what they need to do either in terms of reducing cost or increasing prices or a combination of the two to maintain or improve our margins.

Dr. J. Don Brock

We are raising prices at this point, but you know, how much we can raise them is still out – questionable. I mean, some of the companies have raised them 4 to 5%, some of them as high as 7 or 8%, and this is a mid-year price increase, what it amounts to. So, I would say on an average I would say we have raised them 4 to 5%, mid year, here, where we normally do not do that until September.

Arnold Ursaner – CJF Securities

Thank you very much.

Operator

Our next question comes from the line of Michael Cox, with Piper Jaffrey.

Michael Cox – Piper Jaffrey

Good morning, and congratulations on the quarter.

Dr. J. Don Brock

Thank you, Mike.

Michael Cox – Piper Jaffrey

Okay, my first question is, I wonder if you would comment on your ability to add sales resources or new distributors to capitalize on the increased manufacturing capabilities that you described, and should we expect the backlog to remain at this relatively similar level throughout the balance of the year?

Dr. J. Don Brock

I think to answer your question; it normally drops off a little bit in the summer time. But yeah, I personally do not want to see it grow much from there, because you start getting out where you’re missing orders because you can not deliver them. And it has been at a – it has been at an uncomfortably high level. We have added enough capacity in many cases for the first time we can probably deliver track mounts pretty quick, track mounted crush asphalt plants a big backlog on those. A lot of international business coming in there. Oil drills and rigs we can not deliver those as fast as we need to. So we got capacity problems probably in about four of the companies. Some of the others we added onto. For example, Rotec and Colbert pioneer were two big additions that we did about 18 months ago. That is really paying off and helping us keep the backlog at a reasonable level.

Michael Cox – Piper Jaffrey

Okay great, that is helpful. On the international side are there specific geographic regions that you are seeing the strongest growth or any deviations or unusual trends?

Dr. J. Don Brock

I would not say there is much deviation. It is pretty much spread all over. Australia, Russia, Middle East, number of units going to Europe. It is pretty well spread out. The international pipeline business, of course the trenchers kind of follow where there goes. The big drills kind of follow that. A lot to the Middle East, a lot to Russia. Some into Turkey. Wherever your big pipeline projects are going that is where they follow. But Canada -- Western Canada, well over Canada is very strong force. So it is not a whole lot different mix than it was last year to answer your question.

Michael Cox – Piper Jaffrey

Okay, that is great. My last question is on the domestic business. Did they carve out the Peterson business? It looks like domestic was down 7 or 8%. I am curious to how that stacked up relative to your expectations. What do you expect to as you look to the balance of the year? Do you expect that decline to get worse?

Dr. J. Don Brock

First on the Peterson business, we basically it wasn’t – it is totally added. We took what their backlog was before we bought them. So it is still in there. But Aggregate they are down probably from 120 million to 100 million in backlog. Mobile which is Rotec and Carlson, backlog you might as well throw that one out. It is not very meaningful. Their backlog was 13 million and they did 17 million last month. So, and probably do that again this month. So you end up – backlog is not very meaningful in that group. The other – the other groups basically are all up. The Aggregate mining basically is down you know 17%. The good part of that is just increased capacity. We have increased capacity in those clients. And domestically – frankly domestically we have seen a slow down. In all of the volume that our customers have in the asphalt side we not had necessarily seen a slow down in buying. I think a lot of that is driven by the increase – needing the increase the amount of recycle. To stay competitive and to warm asphalts or green systems we are up to close between 80 and 100 of those out now. Either ordered or out. So that certainly helped the asphalt business.

Michael Cox – Piper Jaffrey

Okay, I apologize. I was actually referring to book revenue as opposed to the backlogged domestically. I would be curious as to look and see what the demand environment on the domestic side.

Dr. J. Don Brock

Yes, I am sorry. I probably didn’t answer the right question. Okay.

Michael Cox – Piper Jaffrey

Could you comment though on the demands? In care of the environment you see domestically.

Dr. J. Don Brock

On the demands or going forward? Or are you talking about the quarter?

Michael Cox – Piper Jaffrey

Going forward.

Dr. J. Don Brock

Okay. Michael I – on asphalt I guess it is a surprise to me. I mean with the price of oil where it is it is obviously mean they can buy less tons. There is still disconnect in asphalt prices and oil prices. But we seen a big increase in asphalt prices. But the stats are very much more willingly to more recycle. We see the amount of recycling increasing. We see another major trend that I have not seen in my career. Is historically the cities the counties the private works follow whatever states specifications are. The states are pretty conservative. A lot of the engineers in the states.

With this new warm asphalt, higher recycle we are seeing them disconnecting. The cities are saying the heck with what the states want to do; we need to stretch our dollars. So, we see the contractors gearing up to do more of that. With the leads credit that they get buy running higher recycle, the developers are saying the heck with the states [inaudible 05:00] put us down a good mix. So we are seeing – we are seeing a growth in that market not being held back by the states specifications. I mean they seem to be more aggressive on the private, city, and the county side. Overall though there is obviously a slow down n the U.S. economy. That is occurring, but we have not seen a slow down in the buying at that point. Which is a little bit surprising.

Michael Cox – Piper Jaffrey

Okay, great. Thank you very much.

Operator

Our next question comes from Rich Wislowsky with Zadonian Company. Please go ahead with your question.

Rich Wislowsky – Zadonian Company

Good morning. Don you mentioned some of the orders in April. How much of the 40 million that you cited within $260 million backlog?

Dr. J. Don Brock

I would say there's probably a third of it.

Rich Wislowsky – Zadonian Company

Okay.

Dr. J. Don Brock

The rest of it is what I call firm verbals. They did not have the paper work in.

Rich Wislowsky – Zadonian Company

Right, that is what you were referring to in April?

Dr. J. Don Brock

Yes, that and we have a lot of orders -- verbal orders for drill rigs that is not in there either.

Rich Wislowsky – Zadonian Company

Okay

Dr. J. Don Brock

Substantial number.

Rich Wislowsky – Zadonian Company

Can you provide what kind of details on the additions you are making to your sales force, especially internationally? How big is now versus a year ago. And what stage are you in this plan. What regions are you targeting etcetera?

Dr. J. Don Brock

Probably the biggest push we’ve had in the asphalt side of it. We have a new vice-president of sales for the asphalt group internationally. And he is adding people around the world. Pretty well – we have added people in the Middle East. We have added people in the Asia-Pacific. We had people there, but we are adding more to those forces in the different areas. Europe adding dealers basically these guys work with and you are adding dealers in these different areas. Peterson, obviously we are trying to grow their international business and they are doing quite well with their wood chippers internationally. The Aggregate mining side of it has really grown tremendously in the last four years in that area. We have not had as many recent additions in that area. We have kind of ramped up in that area. But mainly in the asphalt and in the green side of it.

Rich Wislowsky – Zadonian Company

Does the fact that you have a lot of new faces in the sales force make it more difficult to make the price increase to stick?

Dr. J. Don Brock

I think that comes back to us stop management of managing that. We certainly –we got to put them out there and try to dig our heels in early. But, so far we have not had to much push back. If I go up as much as steel has gone up, I worry about that. So, we are putting every effort we can to take other cost out to continue to work on our cost areas. So I – don’t see us being able to raise our prices as much as the steel of what being going up. So we got to get it somewhere else to maintain our margins. At this point I think we can, but the jury is still out on that.

Rich Wislowsky – Zadonian Company

Okay. And finally just in line of question. The $32 million Capex (ph) budget that does not include anything for the American [inaudible] extension right?

Dr. J. Don Brock

It included probably about 4 million. We are probably going to spend 10. So our board has given up approval to up that to do what we need to do up there.

Rich Wislowsky – Zadonian Company

Okay. Thank you very much.

Dr. J. Don Brock

Thank you.

Operator

Our next question comes from the line of Jack Caspazac with BB&T capital markets. Go ahead with your question.

Jack Caspaza – BB&T

Good morning Don, how are you?

Dr. J. Don Brock

Good. How are you today?

Jack Caspaza – BB&T

Congratulations on the quarter. And wanted to ask in the segment break down there is an all others category which says 2008 revenue was 2623, and it was I guess 0 last year. Can you – have you maintained I guess that is a question for.

Steve Anderson

That is Peterson.

Dr. J. Don Brock

That is Peterson. And Peterson we only had a half of year.

Jack Caspaza – BB&T

Yes, okay.

Dr. J. Don Brock

And that is for the first quarter basically. We didn’t own them the first quarter. Right, last year.

Jack Caspaza – BB&T

And then the profit part of that exhibit where the all others category has a loss of 12725. Is there a corporate number that is embedded in their specifically.

Dr. J. Don Brock

Yes, that is basically McKamy department.

McKamy Hall

He is ribbing me now. That also includes all your federal taxes Jack.

Jack Caspaza – BB&T

Okay, great. I just wasnted to know what I was comparing there.

Dr. J. Don Brock

It' not indicative of Peterson. It is primarily incorporate and federal taxes. If we get another acquisition in that area – in that are we will separate that as a green group.

Jack Caspaza – BB&T

Okay. And I guess you have made some comments already Don about you know the U.S. and the economy how your orders are looking there. You know I guess I wanted to maybe ask in a different way. But the state budget situation is generally I think it is better to say deteriorating. Some of you may disagree with that, and you know the last time we had this sort of situation like this '02, '03, you know it was a little dicer time. You know could you just maybe talk about you know today versus five or six years ago when we had the last sort of state budget crisis.

Dr. J. Don Brock

Jack I guess the thing is that it is quite frankly surprises me is I think we probably got a more sophisticated clientele 6 to 10 years ago. I am surprised that the number of customers that continue to buy equipment at. I have listened to CNBC and I would want to go and get back in bed and pull the cover over my head and cry. And then you get – you go down to the show and everybody is walking in and they want to buy something. I want to say, "Aren't you listening to television". I think what I see more of our customer base, which we have a large stable customer base. And the asphalt is they are raising their prices right with liquid asphalt and while the states can buy less and the states are spending less our customers are still making money. And you show them a reduction in cost and they will jump all over it. And they are still buying. We got them you know ordering out into the fourth quarter right now. And just want to go ahead and get their orders in and get – and that is one thing that bugs us a little bit with the steel prices. To make sure we are covering everything. Not knowing how this stuff is going to keep changing. But we don’t – I guess due to us the green systems it lowers their cost, coal burners lower their cost. But mainly, increase the amount of recycle lowers their cost. And we had one of the major players brought 10 of his people in last Thursday. We had to warm mix them over. We paved their church parking lot. And had about 60 customers in. Man they do not seem to be slowing down at all, although the market is slowing a little bit. But they have money and they are willing to spend money to reduce cost.

Steve Anderson

They had a good year last year.

Dr. J. Don Brock

They had a good year last year. I guess that – so it is a little bit of a disconnect Jack that is surprising to me.

Jack Caspaza – BB&T

Okay. That is very helpful. Also, I wanted to ask whether it is possible to guesstimate what the company's capacity is today. I know that going back in time we used to throw around different numbers for what you thought your peak capacity was. Is there any color you can give us on that?

Dr. J. Don Brock

Jack I would say we are running close to 90% right now. And there is some of them that could do a little more. There is a couple of the three of the companies that could do more. But, I was in South Africa week before last and they are wide open. I mean their problem is stretched out deliveries. And all of the asphalt companies, the three in that group and the two in the mobile group are wide open. I mean we are running at peak capacity. We can build up some more second shift. But we are still running close. American Alders is totally above capacity. But that is why we are doubling the price for the size of that plan.

Jack Caspaza – BB&T

Right.

Dr. J. Don Brock

So we are running up around you know it depends on how you figure it. If we could get more employees on the second shifts and the third shifts we can increase a little bit. But we are getting up pretty close on capacity.

Jack Caspaza – BB&T

Okay, great. Thanks very much.

Operator

Our next question comes from the line of Neil Miller with Fidelity Investments. Please go ahead with your question.

Neil Miller – Fidelity Investments

Hi all.

Dr. J. Don Brock

Good morning.

Neil Miller – Fidelity Investments

Don, question on American Alger what geology matches up with this sort of drilling. Is it oil shell or what areas of the country is it suitable for application?

Dr. J. Don Brock

Neill I think it can go all over. But the hot area is that Marcellus shell that goes from Indiana from up to New York. Big gas deposit, the Barrett shell in Texas you know is suppose to be 17 trillion cubic feet. And they are estimating that the – I have heard from 53 trillion to 320 trillion. It is pretty well shallow gas up in that area. So there is a huge amount of drilling starting to go on in Pennsylvania, Ohio in that area. Which is right where our plan is. Right in the middle of it. The last rig that we shipped last week went to Oklahoma though. Some of them are going to Texas. Thing I think I see for shallow drilling you could go down 300 feet and then turn horizontally for a mile. And from the same hole with a wagon wheel pattern you can – could cover a 2 mile area. So we see that as probably being a great machine to be more acceptable environmentally. Instead one guy in Oklahoma told us that you would have to drill 50 feet wells to cover that same area, you know. Or punch 50 holes in the ground and you guys are just punching one. You are not having to move the rig 50 times. So we see it has applicable all over. The new rig will go to 15,000 feet in depth. Or she can go horizontally for a mile if you need to.

Neil Miller – Fidelity Investments

I was at an energy conference and certainly Shell and the United States is certainly on top of the mines that is good to hear. Question on your leadership and the asphalt and kind of the green component. Any comment here on the competitive backdrop, is that change? As I recall you had a significant leadership.

Dr. J. Don Brock

Yes, we have sold between 80 and 100 in our other two competitors. One of them had not sold any yet. And the other one just sold one. So we are kind of little bit 100 to 1 out in front I guess. Frankly we have even debated in helping our competitors. Because we think it is the right thing for the country and the right thing for the industry. You know I don’t want them to screw it up. But we are doing – we are doing is working right. My only concern is they kind of do a half way job. And it not – you know not get the performance we need to get. But right now we are kind of way out in front on that. But it has taken off like a green Tsunami. We have – the other interesting thing is dragging the asphalt plans along with it. I got customers flying in here right now to see it. And they – it is exciting development. You don’t have to have – you can eliminate one roll. It compacts easier. You eliminate all the smoke and the smell. You can run higher recycle without changing the grade of liquid. And you will reduce your drying cost from 14 to 20%. So it has some good legs to it.

Neil Miller – Fidelity Investments

Question on the balance between domestic and international sales. You said in this quarter I think it was 35% international. Would you expect that given the domestic backdrop in reference? You said you can overcome some of these municipal budget struggles or state struggles. But I am just kind of wondering whether you would expect the international component to scoot up to your end.

Dr. J. Don Brock

Yes, I expect the back end in a year to be more up in the 40-45% range. But I kind of expect the end of year on balance near about 40%.

Neil Miller – Fidelity Investments

Interesting, thanks so much.

Dr. J. Don Brock

Thank you.

Operator

Our next question comes from the line of Chris Weltzer with Robert W. Baird. Please go ahead with your question.

Chris Weltzer – Robert W. Baird

Good morning guys.

Dr. J. Don Brock

Hi Chris.

Chris Weltzer – Robert W. Baird

I have been wondering if you have seen any of your steel suppliers tacking on surcharges to your existing steel contracts.

Dr. J. Don Brock

No we have not got there yet. But the next round where we have that in it. You know I guess what I am saying; right now we are covered up in through May to June. But, and that varies with each company. And in the South here where we use a lot of steel. We are kind of locked in there. But the scrap surcharge will probably be one thing we will not be able to get around in the next round.

Chris Weltzer – Robert W. Baird

Now we can get sort of a pretty good view on stock prices. But what sort of increases are you seeing on the ground?

Dr. J. Don Brock

Well what we are seeing is – what they are talking about is gong be probably up about 60% from January. We probably seen today – while we have not seen it come through to us exactly yet. But, if you were on the ground at spot level now, I talked to a guy last night a company we are looking to acquire and he was 45% a 45 cents a pound in October and he paid 68 cents yesterday. That is because he is not protected. So you are seeing from 30 to 40 to 50% on the ground. Question is when is it going to back off, or is it. And that is the steel distribution centers are very reluctant to load up, because a lot of them think it will backup. And we – it is hard to read. If you get a good reading on it, we would appreciate your input.

Chris Weltzer – Robert W. Baird

Certainly. I know you talked in the past the federal pricing opportunity internationally given the weaker dollar. Just wanted to know if gross margins internationally might be better internationally than here in the states. Does that difference carry through the operating margin line or the extra sales support you have added sort of neutralize that benefit?

Dr. J. Don Brock

No, it would carry through the operating line. And if you -- if you really look at our numbers if you could really dig down into them. Which we do not give you that kind of detail; I think that by the end of year. You would see our average margins are going to be up by the international. But the domestic margins probably going to be down. The international be up. But on – that is one of the whole things I hope that we can achieve is just to maintain margins.

Chris Weltzer – Robert W. Baird

Just remind us, the current expo expenses are those in the all other line? Or all those spread throughout the segment?

Dr. J. Don Brock

They are spread through out the segment.

Chris Weltzer – Robert W. Baird

Is it fair to assume they are spread roughly you know proportionately to revenue?

Dr. J. Don Brock

Pretty well. Not totally but that is a good assumption. That is close enough. I mean when you look at Aztec, Inc. they took two eight to one eight scale models of two asphalt plants and their space does not equal some of the bigger equipment spaces. I mean Aztec and Rotec were probably equal in their space allocation. But it pretty close. Other than Aztec, Inc. that would be the only be disproportionate.

Chris Weltzer – Robert W. Baird

Okay and just a couple of quick questions on Peterson. One if you could help us out with what sort of operating income contribution there was from Peterson in the quarter. And I

was just wondering what Peterson domestic international led by then.

Dr. J. Don Brock

The revenue is – it is 14 million domestic 16 million international.

Chris Weltzer – Robert W. Baird

That is helpful. And the operating income contribution?

Dr. J. Don Brock

We have not broken that out Chris. That is in that all other.

Chris Weltzer – Robert W. Baird

Right. Would it be fair to say that the Peterson operating margin was probably a little bit below consolidated?

Dr. J. Don Brock

If you read – basically look at the all other. McKamy do not bring in any revenue, and he do not bring any gross profit. So there you are.

Chris Weltzer – Robert W. Baird

Okay.

Operator

Our next question comes from the line of Alan Brockside with A.D. Analytical Services. Please go ahead with your question.

Alan Brockside – A.D. Analytical Services

Hi, thank you for taking my call. I had a couple of questions on the balance sheet. The first on the inventory it sounds like – the explanation is probably the Peterson acquisition as well as stock pile and steel. Can you just elaborate a little bit on the inventory buildup you guys have.

Dr. J. Don Brock

Basically to be frank we needed to increase in some areas to be able to make deliveries on all of that. Some of this is delayed shipments on asphalts plants. And some of the other, they have not gotten their permits. That part of it, that will come on down during the second quarter. This is kind of our peak inventory and our peak time of the year. Steel is a part of it. We are trying to stock as much steel as we can, as we can buy right now. But, mainly I guess there is some asphalt plants, there is some crushing equipment for international orders that we are waiting on letters of credit. We are waiting on permits and something like that. And that probably the biggest drive.

Steve Anderson

Yes, one thing that happened to us last year. In the asphalt mobile paving operations we just did not have the stock available that we would like to have available. And so we have put an extra effort into this year making sure that we had adequate stock there for the real surge that we have in the first and second quarter. We go direct market to the market there as opposed to going to two dealers. The competition has stopped sitting at dealers. We need – we needed last year more stock here available to ship immediately for demand. So we have boosted that number considerably and the asphalt mobile paving as well not to miss orders.

Alan Brockside – A.D. Analytical Services

Okay, and then also on the balance sheet receivables. I am imagining that is due to your increased internationally sales. Can you walk me through receivable growth as well.

Steve Anderson

Well if you look at the days that I mentioned. Your days are at 39.8 versus 36, so you know other than the increase in volume we do not feel like there is any noticeable increase in any area. And as far as international goes, often international is better than the domestic because we do deal in primarily letters of credit or cash in advance. So often the international has a more favorable aspect to it, not a negative aspect.

Dr. J. Don Brock

The other thing – I do not know if most companies have this same problem. But we ship and then order inordinate amount the last quarter. It seem like everybody gets all geared up for that time. And the receivables equal about one month shipment.

Alan Brockside – A.D. Analytical Services

So you all had really good sales this quarter. Better than expected. So that boost even more. And then on the income statement – I appreciate your concern about margins near term. You mentioned some of the potential issues, but if you look out longer your gross margins are about as high as they have been and your operating margins as well. [Inaudible 28:10] that you can take over time or will leverage – can you leverage higher sales levels. And what should we think longer term about your operating margins?

Dr. J. Don Brock

We are up at a margin level. Of course of the story now is historically, I mean you look at where we are they tend to deteriorate towards the end of the year. And I think you got to look at us on an annual basis a little better. We put in enormous amount of effort to improve our products and improve the margins on the products over the last four years. In the face of tremendous rise of steel – steel went up 225% in '04 and is jumping again. And frankly, we have run out a whole lot of savings and it is not as easy to get back in '04. We went to coral steel versus plate and we did a lot of things. So we are continuing to work on those. But I do not continue to see long range us getting a huge benefit – a huge increasement in gross margins. Obviously if some of the new products we have got have got a little bit at gross margins you know should have better margins. And some of the real hot products and they do as we get more of a better product mix. We may see some improvement. But it is difficult to push it up much more than what it is right now.

Alan Brockside – A.D. Analytical Services

Okay. And then this last one I want to ask the CEO this question. But I have a feeling Dr. Brock you know the answer. You said something that caught my attention; I think it is the industry of eight you said you took some prototypes with you. I guess my question is are you guys using any of the virtual prototyping any simulation as opposed to actual physical prototype construction?

Steve Anderson

We have very sophisticated computer systems in all our engineering that really cut down a lot of your mistakes that you normally make in prototyping. But one of the humbling things about the business we are in is that is that God gave us a lot of different Aggregates. A lot of different materials that we have to process. And until you get about 10 of the machines out, and about all of the conditions you do not know all of the weak points that is going to show up. As hard as we try we go through a lot of debugging of them is what I call it. But I think we make great leaps. We have simulations where we can simulate rocks dropping in a drum, dryer of different sizes everything like that. It sure does pull your boundaries in of what you can do and what you can not do. I trust that answers your questions.

Alan Brockside – A.D. Analytical Services

Yes, thank you very much. Thank you guys.

Dr. J. Don Brock

Thank you.

Operator

Our next question comes form the line of Garo Norian with Blackrock, Inc. Please go ahead with your question.

Garo Norian – Blackrock, Inc.

There is one thing I wanted to clarify for myself. The expense, was that by choice or is that required by Gap.

Steve Anderson

That has been a -- that is the current interpretation that our auditors have of how that should be handled. And that has changed over time. And that is where we are today. Like many other things the interpretations continue to change but that is where we are today.

Garo Norian – Blackrock, Inc.

Okay. Then on the steel – I mean if you guys fully decide to pass through what you expect the price increase to be. What do you think would be the negative repercussions? Is it customers going to competitors who are willing to take lower margins. Or do you think it is people throwing their hands up and saying, "We can not afford it."

Dr. J. Don Brock

I think it would be later if you go too far. Our competitors are probably sophisticated too. And they are going to be going up similarly. I mean they got too. And you know we have not seen that much push back yet. But we have – if this sticks at this higher level, we've got to got up more and that is always in the – that is a biggest concern is will we get a huge push back. And we have not seen that yet but we have not gone up as high as we need to go either.

Steve Anderson

Don may want to address this more adequately more than I can. But all that I can read in here and see that is going on is this is not a U.S. problem. This is a world wide problem and it is not just impacting the United States and I think that most people are becoming readily aware that it is a world wide problem.

Dr. J. Don Brock

I talked to one customer this morning and he builds bridges too. And he is totally aware of the steel increases and – and as McCainey said they are paying the same price in South Africa as we are here. And when I was down there week before last it is a world wide commodity price now. And there is not opportunities to bring in foreign steel at any cheaper prices, so.

Steve Anderson

And then virtually none is being brought in.

Dr. J. Don Brock

Yes.

Garo Norian – Blackrock, Inc.

No, I agree. When you have guys like caterpillar and huge iron guys, you know raising prices it gives you guys a little more cover.

Steve Anderson

You are correct in your assumption that our biggest concern is when does a customer push back. And that is – that I wish I knew the answer to. But we have not seen it at this point. But we are not through raising prices either.

Garo Norian – Blackrock, Inc.

Yes. But it is not yet. The last question I have is on the Alger's extension. When do you expect to get that done? And what does it mean exactly for capacity and revenue potential once it is done.

Dr. J. Don Brock

Well they are about do 80 – 85 million right now. And this will double our capacity.

And to answer your question, I hope to be done by the end of the year. We are just now breaking the ground.

Garo Norian – Blackrock, Inc.

Okay, and that is where you kind of have this verbal kind of orders but not the hard ones?

Dr. J. Don Brock

You got those firm verbals in everything in all of them. We got a bunch of them in oil drilling rigs. Some of them – most of them were hard orders they just were not booked in March, at the end of March. We don’t put it in the backlogs until we have a signed contract. And some of these are customers you know what they have told you yeah go ahead with it but you have not got the paper work so you can not count it. So there – you know I have not seen any of the verbals back off. I will put it that way.

Garo Norian – Blackrock, Inc.

Got you. Alright, thank you.

Dr. J. Don Brock

Thank you.

Operator

Gentlemen there are no further questions in the queue at this time. Would you like to make some closing comments?

Steve Anderson

Yes, thank you Doug. We appreciate everyone's participation in our first quarter conference call. And thank you for your interest in Aztec. As our news release indicates today's conference call has been recorded. A replay of our conference call will be available through April 29, 2008. And an archived webcast will be available for 90 days. We will have the transcript on our website in the investor relations section within the next seven days and all that information is contained in the news release that was sent out earlier today. We appreciate your attendance on our call. Thank you.

Operator

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

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