Astec Industries Inc (ASTE) 2010 Q2 法說會逐字稿

Greetings and welcome to the Astec Industries' second-quarter 2010 earnings release. 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, Steve Anderson, Director of Investor Relations for Astec Industries. Thank you, Mr. Anderson, you may begin.

Thank you, LaTonya. Good morning and welcome to the Astec Industries conference call for the second quarter of 2010. As LaTonya mentioned, 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 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 this morning, I will note that our discussion 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. As usual, we urge you to familiarize yourself with those factors. So at this point, I will turn the call over to McKamy to summarize financial results.

Thanks, Steve. We appreciate each of you joining us this morning. Net sales for the second quarter were $209.2 million in 2010 versus $188.8 million in 2009 for an increase of 10.8%. International sales were $80 million for second quarter of 2010 versus $59.6 million for 2009 for an increase of 34.2%. International sales were 38.2% of the second-quarter total sales versus 31.6% of the total sales for 2009. The increase of sales for the second quarter 2010 compared to second quarter 2009 occurred mainly in Canada, Australia, South America, West Indies and Europe.

Domestic sales for 2010 were flat at $129.2 million for the second quarter with the prior year. Part sales for 2010 second quarter were $50.2 million compared to $44.4 million, a 13.1% increase. The part sales were 24% of our quarterly sales in 2010 versus 23.5% in 2009. Aggregate and mining had the largest increase, followed by the underground group, asphalt group and the other group.

Segments by net sales or this piece of the pie that is composed by each segment, aggregate and mining is 32%. That is -- those sales increased 20.8%. Asphalt group was 31.2% of the pie, a decrease of 6.1%. The mobile asphalt paving group was 22.6% of the pie, an increase of 28.1%; other, 7.7%, an increase of 63.3%; underground group 6.5%, a decrease of 20.5%. Those sales by segment are attached to the press release or made part of the press release for your convenience.

Net sales year-to-date for the year-to-date is $402.7 million versus $394.1 million for an increase of 2.2%. International sales were $144 million for an increase of 8.3%. Increases in international sales again occurred mainly in Canada, South America, Central America and Africa on a year-to-date basis. The international sales on a year-to-date basis were 35.8% of net sales compared to 33.7% for 2009. In the segments aggregate and mining, mobile asphalt paving group and the asphalt group all increased.

Domestic sales year-to-date were at $258.7 million versus $261.1 million for a decrease of $2.4 million, or 9/10 of 1% in sales dollars. The remainder of the stimulus package not spent in 2009 is providing some support for 2010 revenues and Don is going to comment further on the drivers of the business in just a second.

Part sales year-to-date were $100.5 million for an increase of $11.7 million. The part sales were 25% of our total sales versus 22.8% in 2009. Sales by segment, asphalt group is at 33.6% of the sales year-to-date. Aggregate mining is at 31.3% of the sales year-to-date. Mobile asphalt paving is a t22.2% of the sales year-to-date and certainly the mobile asphalt paving group is a strong benefactor of the stimulus package. The other group is at 7.3% and the underground group is 5.6%.

On the consolidated gross profit for the quarter, we were at $46.7 million versus $42.9 million or an increase of $3.8 million, or 8.9%. The gross profit percentage actually decreased 40 basis points for the quarter from 22.7 to 22.3.

The segment rankings by gross profit percentage, mobile asphalt paving group was at 25.9%; asphalt group at 22.9%; aggregate and mining group at 22.7%; other at 21.3%; and underground at 6.4%.

In summary, the part sales and equipment increased, manufacturing overhead was relatively flat with margins decreasing slightly. Our consolidated gross profit year-to-date was at $92.8 million versus $86.6 million, or a 7.2% increase. The gross profit percentage year-to-date was 23% versus 22% or an increase of 100 basis points.

Our manpower decreased 161, or 4.8%. Our direct labor hours decreased 7.1% and our unabsorbed overhead decreased 20.6%, which is reflective of management's efforts to control costs. The ranking of the gross profit by gross profit percentage year-to-date, asphalt group 26%; mobile asphalt paving 25.5%; aggregate and mining 22.5%; other at 20.4%; and underground at 2.3%.

Our SG&A and engineering for the quarter was at 14.7% of sales versus 16.7% in the prior year. One unusual item that we did have in the second quarter is the Bauma Equipment Show in Germany, which is every three years and for the second quarter that was $534,000, that was within the SG&A. On a year-to-date basis, the SG&A was at 15.8% versus prior year of 16% and the year-to-date expenses for Bauma contained in that number is $984,000.

Income from operations second quarter was $15.9 million versus $11.3 million for an increase of $4.6 million. On a year-to-date basis, income from operations increased to $29.3 million from $23.6 million or an increase of $5.7 million. The pre-federal tax income by segment is attached to your press release and I won't read that to you.

The effective tax rate remained flat. Our net income for the quarter was at $10.3 million versus $7.7 million. Earnings per share increased to $0.45 from $0.34 for a 32.4% increase. On a year-to-date basis, the earnings increased to $0.84 from $0.67, or a 25.4% increase.

Our backlog, which is at the bottom of the second page of our press release, is at $139.7 million versus $133.6 million compared to the prior year June 30. That is a $6.1 million increase or 4.6%. The international backlog portion of that backlog was at $81.7 million compared to $71.4 million at June 30 for a 14.4% increase. The domestic backlog was at $62.1 million versus $58 million for a 6.6% decrease.

The backlog, as I stated, is at the bottom of the press release and for those of you that like to look from quarter to quarter, the June backlog is at $139.7 million compared to the March backlog of $134.8 million for a 3.6% increase.

We are certainly very pleased with our balance sheet. We are in a very strong position. Our days outstanding are at 36.9 days, down from 42.3 days last year. Our inventory has decreased $42.5 million. Our turns are flat with last year at 2.3. All classes of inventory have decreased compared to the prior year. We owe nothing on our $100 million credit facility. We have $82 million in cash and equivalents, have $8.2 million in letters of credit, which reduces our borrowing availability to $91.8 million.

Our capital expenditures were $2 million for the quarter, $3.8 million for the year. Our depreciation was $4.4 million for the quarter and $9.1 million year-to-date. Our cash flow will be attached to the 10-Q filing. This concludes my prepared remarks on the financials and we will be available to answer any questions you have later in the call. We do appreciate your interest in Astec.

Thank you, McKamy. Dr. Don Brock will now discuss Astec's business operations for the second quarter of 2010.

Our second-quarter revenues, as McKamy has said, increased 11% from $188 million to $209 million. Our profits were $10.3 million versus $7.7 million for a 34% increase and the earnings per share were $0.45 versus $0.34 for a 32% increase.

For the six months, first six months of the year, we were at $402 million versus $394 million and our earnings were at $19.1 million versus $15.1 million for a 26% increase for the first six months.

As McKamy said, our backlog was up slightly about 5%. Domestic revenues were basically flat. Our international revenues for the quarter were up 34% and repair parts were up 13%.

Through our reductions in receivables, our inventory less CapEx, we generated about $41 million in cash during the first half of the year, ending the quarter about $82 million in cash. Our SG&A was closer to our target of 14% at 14.8%, but we still are experiencing very high increases in healthcare costs. And we had a $1 million expense related to Bauma during the first half of the year.

We continued to see weakness in the underground and the wood business during the quarter, but we have seen slight improvements or pick-up in recent weeks in these businesses. Looking forward to the third quarter, volume continues to be our biggest challenge. Our domestic customers continue to be reluctant to spend due to the uncertain outlook in the country. The new highway bill does not seem to have many champions in Washington. We don't see any optimism improving in our domestic sales as we look forward to the second half.

Our third quarter will depend on the strength of the international infrastructure business and sales of our equipment to other industries. We continue to improve our international sales coverage for infrastructure equipment and we are building our presence in our sales forces in the mining industry.

We also introduced equipment, a number of new pieces of equipment for the energy business. As with the infrastructure, however, a lot of the success in the energy business is going to depend on whichever direction that Washington takes in their new energy bill and their energy policy.

The weak market domestically has led to very competitive pricing. We believe during this period, however, that we have increased our marketshare. We see continuing pricing pressures from our suppliers, but overall, we are not seeing a tremendous amount of increases. A lot of talk, but it hasn't happened up until this point. Steel increased briefly, but then it seems to be dropping back.

We continue to push our development of new products in the wood pellet presses, the entire pellet plants, concrete products and a number of other new products in our other businesses. In the asphalt group, we continue to have success in selling the warm mix packages and equipment to increase the amount of recycle.

In our companies that utilize diesel engines, our engineering staffs are exerting a lot of effort to introduce the new designs with the Tier 4 engines to be in compliance by January of 2011.

We continue to explore various bolt-on acquisitions that would add on to or enhance our existing companies. However, we have not been very successful due to the uncertainty in the market. People, just if they have cash, they are not ready to sell, if they are pretty strong. If they are weak generally, they are so weak that they haven't been very interesting on our part.

In general, our companies have seen slight improvements in the market over 2009 and we believe this will continue on a comparative basis during the second half. But it is still weak as compared to 2008.

In conclusion, we expect the third quarter to be weaker than our first two quarters. The depth of the weakness will depend on the continuation in part sales, the strength of the international business and the success of the introduction of new and existing products to other industries.

We continue to see slight improvement, as I said earlier, as compared to 2009, but we do not believe that we will see much strength in the market going forward for the next 18 to 24 months before we see a recovery take place. That concludes my remarks and we would be glad to answer any questions.

(Operator Instructions). Arnold Ursaner, CJS Securities.

Good morning, Don. It's actually Jason Ursaner calling in for Arnie. Just looking at the SG&A first, the $30.8 million, if I exclude Bauma for the quarter and I exclude the quarterly number for Q1, it looks like there is still about a $2 million sequential decrease. So I am just wondering what drove this and is it sustainable?

I don't know anything specifically.

I think the stock price did cause some decreases in our SRP expense and in our stock option expense and we had a slight reduction in the R&D area. We have increases in commissions and profit sharing and some other areas.

There is generally, Jason, about a -- can be as much as $1 million to $1.5 million swing due to this darn way we have to treat that supplementary retirement plan, that SRP has got Astec stock. If the price goes up, we have got an expense. If it goes down, we have got a gain, which is kind of crazy and think it is to do with the stock at the end of both of those quarters that affected that.

Does that generally get offset with the interest and other income lines?

No.

And then just for an apples-to-apples, for last year, there was some CONEXPO. Was there a breakdown for how that would fit the first half?

It would be very insignificant last year. Several years ago, we started -- well, I guess the CONEXPO would have been '08. Basically that expense has to be taken, Jason, now in the year in which it occurs. So if there is any CONEXPO expense last year, it was relatively minor and would probably be expenses not recoverable toward the upcoming show next year.

Okay. And then just in the aggregate and mining segment, revenue was obviously up 21%; gross margin was still down. Is this the pricing or some of the wood pellet equipment in there that maybe has lower margins?

It is actually -- the wood pellet is that group and that could be a little bit of it. We sold three of those presses and they are a new product and got obviously some problems with them on any new product that we have. That is one thing. And I guess the other thing is it's just very, very competitive. Most of our gain in that business is international and it is a very tough market right now.

Okay. And then just in asphalt, there was a pretty minor sales decline, 10%, but the margin really got hit, 360 basis points. Is that just the pricing or is utilization really --

It is a little of both.

Okay. I will jump back in the queue. Thanks.

Rich Wesolowski, Sidoti & Co.

Thanks, good morning. Just following up on that last question, in previous conversations, we have spoken about tough pricing for the aggregate's production machinery, the paving and the milling, but not as much for the asphalt plants. Has that changed?

Yes, it is a tough market on everything right now. We have got -- obviously, we have got strong marketshare and we have got some real advantages, but I guess every deal right now is very competitive. I would have to say that in about all of the businesses.

Okay. Is the margin you are getting on the part sales any different from what you have quoted historically?

No, that is pretty well the same.

Okay. And within the segments, the change in the sales from international/domestic was obviously very different. Was there a big spread in the geography of your sales as you look at it from the product groups? For instance, is there one segment that has an atypically high or low share of sales coming from international markets?

I would say that what we are seeing, if I am following your question there, Rich, that the underground business is very high international; practically nothing domestic. The aggregate side of it is predominant -- probably 60% international and asphalt, during the last half, will be very strong internationally. So it is -- the international is going to save us in the last half.

On the domestic market, our customers are just buying what they have to. They are scared to death of what is going on in Washington and a lot of them have got the cash to do it; they are just very reluctant to spend.

Right. That was what I was going after. Thank you. And lastly, the quotation activity for your horizontal rigs, does that match the pick-up in drilling that has been reported over the last year?

We are seeing a lot of -- I would say in the directional drills and in the vertical drilling rigs, there has been a lot of improvement in the quotations that we are putting out and [the interest]. If they'd just start pulling the trigger, it'd help. Our sales in the third quarter have certainly improved in the underground, particularly on the drill rigs, but still are quite weak.

We think with all that has gone in the Gulf, it is going to lead to more domestic on-land drilling, which would be an advantage to us and to our products and frankly, the aggregate business has been helped a lot by the natural gas drilling up in the Marcellus Shale and in Louisiana and all of those because the pads that they build for the drill rigs use a lot of rock. So in those markets, we have seen it help the aggregate business also.

Okay, thank you.

Chris Weltzer, Robert W. Baird.

Good morning, guys. Let me maybe come after this asphalt group question a different way. Was there anything -- would you consider the 2Q to be sort of the new run rate and the 1Q was maybe unusually strong, maybe you had some price cost benefits from lower-priced steel or should I be taking the average of the two? I am just trying to get an idea of how the third quarter plays out because that is usually a lower revenue quarter sequentially.

I would say second quarter is going to be more typical. The other thing, the international sales are generally smaller plants and so there is not as much revenue and the margins vary a little bit. We have in the asphalt side -- I would say that probably 60% of our business in the asphalt group is going to be international during the third quarter. Some of those margins are probably going to be -- it is probably going to be like the second quarter.

From a margin perspective as opposed to a --

Yes.

Still lower sequentially on a revenue perspective though?

That's correct.

Okay. And then did I understand your comments about the second half of '10 correctly that you expect revenue to be up year-over-year? Slightly?

Year-over-year I expect it to be -- it will obviously be down as compared to the first half.

Right.

That's correct.

Okay. And then can you just talk a little bit in more detail I guess about how you are handling the Tier 4 interim rollout? Are all products, all new products getting rolled out at the same time? Will they be staggered? Will there be any noticeable impact on 4Q or 1Q production rates? Any issues getting a hold of prototype engines, that sort of thing?

Chris, they range all the way up to 750 horsepower and that is the ones that have to come out. And they basically are practically going to come out at the same time because the engines haven't been available or we are just now beginning to get the engines for the prototypes. So it is going to be an exciting second half. We have the ability with the flex program to build up to about 300 machines over the next year, so with this flex program that are in Tier 3.

Secondly, all of our -- most of our international sales, practically all of it will still be the Tier 3 engines. We have got to build basically models with the two different tiers because the other countries, most of them do not have the ultra low sulfur fuel and that is what is needed.

So we do think that to come back to the end of your question there, I think the particularly Roadtec and the companies that build mobile equipment will probably get some help in the fourth quarter, third and fourth quarter of people buying ahead of the Tier 4s coming into affect. They worry about when you have an engine change and the Tier 4 is probably going backwards as we normally do as EPA normally does, Tier 3s are good engines, but Tier 4, man, they are going to run hotter, they are going to burn more fuel. Yes, they are going to have lower emissions, but at the same time, we are going to be burning more fuel with them because they run so much hotter. So I think we are already getting orders for the fourth quarter at Roadtec before they get the Tier 3 engines ahead of time.

Thank you. That is very helpful. Can you remind me roughly what an average price increase you might see with a new engine might be?

We are seeing as much as 50% increase in the engine itself. Probably on the machine over a period of a year or so, we are probably going to see prices go up 10% to 12% on the equipment because of the engine change. It -- physical size is about 50% to -- depend on the engine -- from 50% to 100% larger with your aftercool and everything. You have got -- there is two Tier 4s that you should keep in mind. There is an interim Tier 4, which you have got a couple of years. We are trying to go on completely to the complete Tier 4. And when you go the Tier 4, you are going to have to add a urea injection tank to add urea. You use about one gallon of urea per 100 gallons of diesel fuel.

Okay, that's very helpful. And then would R&D engineering costs then start to come down in 2011 as you have completed the rollout of these machines?

Yes, I would expect so, yes.

Okay, thank you, guys.

Walt Liptak, Barrington Research.

Hi, good morning, guys. Let me start with a follow-on to the last one. I wasn't sure if I caught this or not, but R&D expenses, are they going up in the back half of the year for the Tier 4 or are you going to be able to maintain around $30 million of SG&A and engineering expense?

I expect it to stay about the same. I mean we have had high R&D for the last couple of years. I think the question was did we expect it to go back down some in 2011 and that was when I said yes I expect it to be -- to back off a little bit going forward.

Okay, alright. The part sales seem to be going well and I guess I have been attributing that to stimulus spending and better part sales for some of the mobile asphalt and other products, but how would you characterize stimulus spending? Are you getting an impact from it?

I would say definitely in the asphalt side, we have seen it. It has been a little surprising to me that a number of states, a la Georgia and Florida, are really just now beginning to spend fairly strong on the stimulus. A lot of the states jumped on it and spent all of theirs up pretty quick.

I was under the opinion -- there was $27 billion. I was under the opinion -- last year, we spent about $7 billion. I thought we would probably spend most of the rest of it this year. It looked like there is probably not going to be over $14 billion or $15 billion spent this year and probably the rest of it is going to fall into next year.

From what we are seeing on highway spending federally, the federal number is $41 billion for 2010. The Appropriations Committee out of the House has raised that to $45 billion for next year. You add the stimulus on top of it, the federal money is probably going to be $55 billion for this year and could be as high as $52 billion for next year, which is down 5% to 10%, but not as much as everybody had expected because of the tail-out -- because of the increase that they are going to have in the regular highway spending even without the authorization bill.

Okay. Well, given the stimulus spending that is going through, you sounded fairly pessimistic about your customers' outlook and spending on capital equipment. Are you seeing your customers get more cautious as time goes on? And with the outlook that you just laid out, do you expect that to continue?

Well, the two problems we have is, number one, they tend to buy things like pavers and milling machines and the mobile equipment as they need it. That is one thing. So that business has been pretty darn good. The asphalt plants, the bigger ticket items, they want to see kind of a five or six-year plan for federal highway spending to give them a lot of optimism. And the fact that commercial building and residential remains weak and that we don't have a highway bill makes them reluctant to make big ticket expenditures. They will buy components that will increase the amount of recycle, that will reduce their cost, things like that, but we just see a lot of them sitting on the sidelines waiting to see what the government is going to do.

And a lot of cash sitting on the sidelines.

And they have got a lot of cash. Generally, just a heck of a reluctance to spend. So that is -- my pessimism is I still talk from 5 to 10 customers a day and while they are still spending on small things, they are reluctant to pull the trigger on big expenditures until they get the highway bill.

I think two things could change the attitude in this country right now if we kick about half of the congressmen and senators out and we saw a change up there, that would help the attitude a lot and then the second more important would be a new highway bill that just gives us some confidence that there's going to be a continuation.

Maybe we can kick more than half of them out.

Yes, I would agree.

Maybe we could talk about the highway bill. The timing I think you were thinking was after the election something could happen. Has that pushed out into 2011 now?

I guess the way I read it now is yes. I guess from what we see, there is such a movement of a lot of people getting defeated, I think -- the problem we are having is seeing much attention to it. They have got their focus on these other things. Right now, I guess the next on the agenda is the energy bill and highways doesn't seem to be -- there is a major movement in our industry of calling the senators and congressmen, trying to get their attention, but we don't seem to be able to get their attention on infrastructure spending.

Okay, thanks for your comments.

Tom Hayes, Piper Jaffray.

Good morning, Don. Just to kind of follow up on the reauthorization of the highway bill. If you go back to the previous bill that expired when it was introduced, do you expect much of a lag between the initiation of a bill and then the order pattern from your customers?

No, not really, Tom. I guess from what we have seen in the past, and I think this is an unusual time, this has been a longer downturn than you normally see and there -- as McKamy added a while ago, we see more customers that are really in pretty darn good shape that have a lot of cash, that they just -- they -- well, a little bit of optimism would make them turn that loose and put it to work. And I think that's -- there is getting to be a lot of pent-up demand if we could just get some optimism to -- and we are not a whole lot different on our end too.

Six years ago, they took 22 months to pass the bill and I think the attitude is probably more negative now than it was then.

Okay. And then just a follow-up, and you guys on your inventory level, it was a meaningfully year-over-year as well a sequential drop. Is that just a temporary decline or just kind of a more stringent management of your inventories based on the outlook?

We went into this downturn running wide open and it was probably the most sudden -- the quickest drop-off that I have seen in my career. And I think as a result, it is kind of the train running wide open and we made the conscientious decision, rather than lay off as many people as we probably could have, to go ahead and convert our raw materials into finished goods. And as a result, we had a pretty good buildup in inventory, Tom, that we have just been able to work back down to normal.

And we still like -- still got more than we need in a couple of the companies, but in general -- if we can get it worked down in a couple more where we reduce our underabsorption, we will be able to continue to have decent earnings with those -- or get those businesses back to decent earnings.

And then just related to that, I think you made some comments in your prepared remarks regarding steel prices. They have kind of bounced around a little bit. Just your thoughts on kind of how steel prices may be impacted 2Q and kind of some of your thoughts for the second half of the year?

We are pretty well locked into steel prices out through the end of the year and I don't see much effect, but they were pushing, I guess back in April and May, March, April and May, that we were going to see pretty good increases by the end of the year and I think they have backed off on that. The demand is just not there and we have kind of seen them go up a little bit and then they just stabilize and flatten. So I see them staying about where they are now the rest of the year.

I would say this on steel and on other components. I think there is an inflationary gorilla behind the curtain here. When volume picks up, you're going to see inflation like we hadn't seen in a while because there has been a reduction in the capacity in most of these industries and they don't have the competition they once had and when the opportunity comes to raise them, you are going to see them take off.

Great. Thank you.

Morris Ajzenman, Griffin Securities.

Hey, guys, how are you doing? Not to beat a dead horse, but this highway bill -- I mean obviously last year we knew -- on the front burner was healthcare reform and I guess now I guess the issue you touched on now energy. Assuming this gets put to bed sometime this year, I mean is there any likelihood -- I mean, again, it's like trying to make a wager here, but in the early part of 2011, are there any other issues that might grab the front burner away from the focus on the highway bill or is this just -- the legislators just don't want to be attached to anything with a tax increase. I mean can this go much further out or there is only so far in your best estimate that it can go (inaudible)?

I really thought that probably in the lame-duck that you would [pay] something. The problem with it is the mere fact that they are going to have to increase the gas tax in order to have a bill that is meaningful and nobody wants to touch that. And that is the whole issue. It is a little bit ridiculous when you look at it. A dime increase in the gas tax would amount to the average person about $73 a year, which is not much and they are increasing taxes on everything else, but there seems to be something magic about that.

I think from what we see, the general public would be all for raising it if they had any confidence that they could, in the politicians, that they would spend it for highway work and for upgrading our roads. But they don't have a lot of confidence. We get lied to all the time with what they are going to spend the money for. So that is the real struggle and I just -- there is such a division up there now and I got you thing that -- and a spin on everything that is going on, I just don't see anybody touching that thing until probably after the next Congress comes in.

Timewise, to come back to what you had said, when the energy bill gets through in some form or fashion, probably the next on the agenda should be the highway bill. And it is rather insignificant in comparison. It is a pay for itself as it goes whereas many of these others are not. So it is -- it should not be an issue, but I am afraid due to having to increase the gas tax, that is the problem.

Fair enough. Let's move on. A couple of quick questions. On your inventories, sequentially it was down approximately $22 million. You have done a good job with it, $224 million. I mean are we at a level now where we don't expect to see more declines in inventories? How does that play out in the next few quarters?

I think you're probably going to see it stay pretty flat. We, as I said, we have got two or three businesses that probably we will see a continuing reduction, but we are pretty close to flat I think where we need to be with it. I would like to hold it -- see our volume jump back up 20% or 25%. We need to be at four turns a year and we are certainly not there in all the businesses.

Okay, so basically your indication there is you can actually get an increase in revenues and still keep this flat by (inaudible) turns?

That is correct. That is correct.

Last question here, (inaudible) very quickly, $41 million in cash generated in the first half. What is from operations? That has been working capital, CapEx. I mean what was the cash generated in the first half?

Basically inventory reduction. We didn't spend as much on CapEx as we had in depreciation and we had a drop in receivables.

So that $41 million includes all of that?

Yes.

Okay. And can we be close to annualizing that for the full year or is that being way too (inaudible)?

No, we won't -- again, if our inventory stays flat, so to speak and our receivables probably are in pretty decent shape where they are, we will continue to probably not spend on CapEx. We are like all our customers. So we will see some additional cash generation, but nothing like that.

Got you. Fair enough. Thank you.

David Wells, Thompson Research.

Good morning, everyone. First off, given your expectations for international markets being stronger in the second half of the year, primarily in the asphalt business, what sort of visibility do you have on that? And I guess domestically, we started to here that even over the last 30 to 45 days, just given the amount of -- the overwhelming amount of negativity in the media currently about the state of the broader economy, folks are pulling back the reins on spending. Are you seeing some of that out of your international customers or are you actually -- are you near contracts or contracts in hand that gives you confidence about that outlook?

I guess we have got a lot more optimism internationally, David, than we do domestically. There is two things I would say on the domestic. Number one, this is the time of year when all our customers are working and they don't really do their buying until the fourth quarter and the first quarter is when most of the buying goes on.

South of the equator, it is just the opposite. We have got a lot of Australian customers in here for a seminar as we speak and this is their winter over there and this is when they are buying in that part of the world. South of the equator in South America is where they are buying and South Africa similar to that.

But we see more privatized work going on, a lot of infrastructure projects that are design build private participation in South America, likewise in Australia and some of the other countries. The countries that have oil and have minerals are still doing okay.

The other thing I guess I see is that we -- most of these countries are coming out of their recession or their downturn much quicker than we did because they did not have the securitization, the adjustable rate mortgages, the cheap interest rates. So they didn't have the hit in the financial markets that we have had.

Given the expectations that you broke out earlier to a prior question about possibly being around $52 billion in the federal program in 2011, given the fact that I guess some of the increases that you have seen in your mobile business has been maybe some pent-up demand for equipment, I mean do you feel like the corporation overall could see top-line growth in 2011 given a more conservative federal program as that stimulus dollar winds out?

I don't really see a lot of top-line growth for next year. I would hope we would come out of it, but I think it is going to be another 18 to 24 months before we really -- you are going to have to get some residential and commercial building starting to return to really help our customers. I do think the highway bill would give us some optimism, our customers optimism and we could see some top-line growth, but really the basic volume of business is still going to be struggling until you see a return of the general economy getting better and along with the highway spending.

Maybe last question, at this point, you continue to underspend your depreciation from a CapEx perspective. You have got a nice cash balance on the balance sheet and availability on your credit facility. What is your kind of approach to that cash balance right now? Do you foresee the potentiality to either pay a dividend of some sort or the acquisitions? How are you thinking about that looking out the next couple of years if you continue to be modestly cash flow positive from an operating perspective?

Our first choice we've discussed with our Board should we start with dividends or a stock buyback. And their direction has been first to try to really play out the acquisitions and see if we can continue to grow the Company.

Unfortunately, I have looked at a number of acquisitions and I find two different things. Some of them that are good companies that their performance is down like ours is and as a result, they don't want to sell until they get their performance back up. The others are those that are in trouble and some of those are not worth trying to turn around. They have been neglected for a long time. Then there are some that are fairly decent out there and we are trying to -- we spend quite a bit of our time looking at what is available and what makes sense to us. So our first effort would be in acquisitions.

The second one would be to look at dividends and I guess our really reluctance there is what the devil is it going to do on the tax on dividends and what effect that has. And that remains to be seen what Washington does in the next five months.

Very helpful. Thanks for your time.

Eric Glover, Canaccord.

Hi, good morning, guys. Just a quick question here. Going back to the part sales for a second, you talked about customers repairing equipment rather than replacing it for sometime now. I am just wondering at what point do these same customers sort of throw in the towel so to speak and decide that they have to replace their equipment?

I wish I knew the answer to that one. They can put it off for a good while. The thing we have managed on our parts is we have increased, in at least in Astec and in the asphalt group and in the mobile group, we have really put an effort to put a bunch of -- to go after the parts business. We have got parts salesmen in the field and we are starting to do that in some of the aggregate groups now. And I guess we have decided we are going to grow our parts business even in a flat market and the margins are good in that and it just makes a lot of sense. We are going after, in most cases, also going after our competition's parts.

Some of these competitors have somewhat gone away, but -- and there are some of them still there that we are going after. The rebuilds, we are trying to go after rebuilds where we rebuild the equipment for the customer. That is a backhanded way of getting the parts business and so we think that they will continue to rebuild versus buy as long as there is this uncertainty over the economy.

Once that happens, I think you will see them start to -- I think there is going to be a -- two good things could happen. We get a new highway bill and we get another Congress where you see a change in direction there would change the attitudes immensely.

Okay, is there a target level of revenue as a percentage that parts would be that you're looking for?

I would love to see the parts get up to around 30% of our business. Conceivably, my dream has always been to make enough margin on the parts to cover all your SG&A. Now we are not there, but if you could do that, you can be pretty mean in the equipment business.

We are at 25%.

Yes, we are about 25% right now.

Okay, great. Thank you.

Larry De Maria, Sterne Agee.

Hi, good morning. Thank you. Just curious if you guys could talk a little bit about your manufacturing footprint because [visited] to Brazil and met with your distributors down there, MDE, which obviously is a very good operation and should help you guys probably immensely. But as you think about going forward, given the currency volatility and where the demand is coming from outside of the US naturally, how are you guys thinking about adding capacity for manufacturing elsewhere and over time, should Brazil be one area where you would be doing that? Any color on that would be helpful. Thanks.

Brazil has got -- is an unusual country. Brazil and China somewhat are both very protectionist. Our equipment coming out of the United States can be very competitive in Brazil if it wasn't for the fact that, by the time you go through all the tariffs, you can multiply the US price by 1.57. And we are probably 20% less than the Brazilian price, but by the time you get all their tariffs on it, you are 30% higher.

So your choice is to build down there and we are looking at some opportunities down there that would allow us to maybe buy something like a foundry or some -- a company like that where we could export out of Brazil products that we are buying here in the states or that we are buying internationally such as castings and then add to that facility where we could assemble and import some of our critical components in there and build the rest there. So we are looking there. We are looking somewhat in China for one of the companies, but China seems to be beginning to experience higher costs and we have looked in Korea.

A number of the foreign countries we are looking at, but again the dollar is still very competitive and we can build here cheaper than we can in Australia for example and cheaper than we can in a number of the countries.

Thank you very much.

[Chris Blackman], Empirical Capital.

Yes, thank you and I appreciate the depth and breadth of your answers to the questions. Just wanted to look longer term. You have talked in the past I think late last year or maybe earlier this year about positioning the Company as far as your product mix in 2013 with energy representing perhaps as much as 40% and mining 20% of your total business. Would you elaborate perhaps on your current sentiments on that product mix 2013 achieving those targets?

Yes, I guess, Chris, what we see in the mining first we are building a pretty good mining salesforce and it is mainly a reapplication of existing products. The crushers that we build for aggregate, the minerals in the mining business is just another form of aggregate, but it is an industry that we haven't in the past really focused on. So it is a reapplication of existing products.

In the energy side of it, the oil drilling side, we think we still have a very unique oil drilling rig. We have got the capacity to build them. The drill rigs operating in the US are twice what they were a year ago and we believe now we are beginning to see a demand for new rigs and it has been -- from the downturn last year, it got so deep real quick, everything on new rigs just stopped. We are beginning to see that to pick back up.

So we continue to look at building a better oil drilling rig than is normally out there. Our Heatec operation in the processing side hot oil heaters to go on gas plants and tar sand-type operations, we have a six-month backlog on those heaters and we will be adding to that facility within the next six months to increase our capacity there at Heatec. So we see a real opportunity to continue to grow in that area.

In the distribution side of it, the more gas that we drill in this country, there is still a lot of areas that don't have gas lines and so we feel like the trenchers and the directional drills will be helped from that. The geothermal rigs for conservation, we have got our first ones out. Still a slow market, but we feel like we have got a unique product there.

In the wood pellets and the solar panels, we are still just in our infancy there, but we really feel like from what we see this wood pellet business is really going to continue to grow. That is kind of weighting on what happens on that energy bill. If it passes requiring up to 20% renewable, you are going to see a tremendous amount of wood pellet plants go in. In Europe, they are talking about going from 10 million tons a year to 80 million tons a year.

What we've put together on this pellet plan is pretty unique. The ability to dry it using hot oil to dry will be much safer. The pellet press we have got will make a pellet out of more of a power, which is more adaptable to a power plant. So we have got some really unique items on this plant that should allow us to dominate the market in that. Also the ability to build it modular and one company to build it all will be very helpful.

So still feel confident that that mix is probably in line with what your expectations are?

That is correct. I may have overanswered your question.

I appreciate that. And how many sales people have you added so far?

Probably in the last six months, we have probably added between 10 and 15.

Excellent. All right. Thank you very much.

Chris Ursaner, CJS Securities.

It's Jason Ursaner. A quick follow-up. You talked a lot about the parts business, but the used market -- Ritchie Brothers Auction indicated it is pretty soft. Can you talk a little bit about what you are seeing and is that what is driving some of the pricing pressure or is it competitors with new equipment?

It is more competitors with new equipment. The used market, what you would see from Ritchie would be more -- I would say the markets for excavators would be terrible right now. I mean a friend of mine runs a Komatsu operation here in town and I mean they went down in '09 like 80%. So there is -- the used market for excavators is whatever you wanted to pay.

Used market on asphalt plants, for example, there is not that many good ones out there believe it or not. Just the inventory of those, we seem to be able to sell them as we trade for them. So it kind of varies with what the product is. I would say on pavers, milling machines, we sell direct, we sell our used equipment direct and again, our inventory has not grown in that area.

I think it is more has been in anything related to grading or new construction in residential or commercial, that part of it has been terrible from a standpoint and there is an abundance of used equipment.

Okay. And then just on the highway bill, you talked a lot about customer reluctance and pent-up demand. Do you think it's even if you get a highway bill renewed at the same rate or is it really customers waiting to -- thinking that it is going to get renewed at a much higher rate? And if it doesn't get renewed at a higher rate, is it really waiting on a private recovery?

If it was renewed at the same rate, they would have a little bit -- at least it would say that there is some stability to it, but obviously if it is renewed at a higher rate, it is going to give more enthusiasm to move forward. But in the last -- in my lifetime, we talk about doubling every one of them and we end up generally increasing them over the life of a five or six-year build probably 50%. And I suspect that is what will end up again happening here.

Okay, thanks a lot for taking the follow-ups.

There are no further questions in queue at this time. I would like to turn the floor back over to Mr. Anderson for closing comments.

Thank you, LaTonya. We appreciate your participation on our second-quarter conference call and thank you for your interest in Astec. As our news release indicates, today's conference call has been recorded. A replay of the conference call will be available through August 3, 2010 and an archived webcast will be available for 90 days. A transcript will be available under the Investor Relations section of the Astec Industries website within the next seven days. All of that information is contained in the news release that was sent out earlier today. Again, we thank you for your interest in Astec. Have a good day.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.