Astec Industries Inc (ASTE) 2011 Q2 法說會逐字稿

Greetings and welcome to the Astec Industries second-quarter 2011 results conference call. 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, Corporate Secretary and Director of Investor Relations for Astec Industries. Thank you, Mister Anderson. You may begin.

Thank you, Christine. Good morning and welcome to the Astec Industries conference call for the second quarter of 2011. Also on today's call are Doctor J. Don Brock, our Chairman, Chief Executive Officer and McKamy Hall, Vice President and Chief Financial Officer, and David Silvious, Corporate Controller.

In just a moment I'll 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 that these statements are intended to qualify for the Safe Harbor liability established by the Private Securities Litigation Reform Act. Any such guarantees are not subject to certain -- or, sorry, 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.

At this point I'll turn things over to McKamy to summarize our financial results.

Thanks, Steve. We appreciate each of you joining us this morning. For the quarter, we had sales of $247.8 million versus $209.2 million in 2010 for an increase of 18.5% or $38.6 million. All segments had increased sales compared to the second quarter for our year.

Our international sales were $108.3 million versus $80 million second-quarter 2010 for an increase of 35.4% or $28.3 million. International sales were 43.7% of the second quarter total sales in 2011 compared to 38.2% of total sales in the second quarter of 2010. The increase of international sales for the second quarter 2011 compared to the second quarter of 2010 occurred mainly in South America, Canada, Australia, and Africa. International sales increased in all segments except for the Asphalt Group. International sales are increasing faster than domestic sales for the quarter and year to date in 2011.

Domestic sales for Q2 2011 increased by $10.3 million or 8% to $139.5 million of total sales. Domestic sales increased in the Mobile Asphalt Paving Group, Asphalt Group, and Aggregate and Mining Group. Part sales for Q2 2011 were $58.5 million versus Q2 2010 of $50.2 million for our 16.5% increase or $8.3 million. Parts were 23.[6]% of the quarterly sales in 2011 versus 24.0% in 2010.

Aggregate and Mining Group had the largest parts dollar increase versus the second quarter of the prior year followed by the Mobile Asphalt Paving Group. The segment revenues for the second quarter of 2011 are attached to the press release and as a percent of sales for the quarter, Aggregate and Mining Group composed 34.9%, the Asphalt Group was 27.5%, Mobile Asphalt Paving 1.6%, Underground Group 9.4%, and the Other Group 6.6%. Total sales increased for each segment.

On the year-to-date net sales we are $477.9 million versus $402.7 million for the prior year for an increase of 18.7% or $75.2 million. International sales compared to the prior year were at $191 million versus $144 million for an increase of 32.6% or $47 million. The increases in dollars for international sales occurred mainly in South America, Canada, Australia, and Europe. International sales were 40% of the net sales in 2011 compared to 35.8% for year-to-date 2010.

Domestic sales year to date were $286.9 million versus $258.7 million for 2010, an increase of $28.2 million or 10.9%. Year-to-date domestic sales composed 60% of 2011 total sales versus 64.3% of total sales for 2010. Our part sales year to date are $115.8 million versus $100.5 million for an increase of 15.2% or $15.3 million. Part sales for year-to-date 2011 were 24.2% of total sales versus 25% of sales in 2010.

On a segment basis, the Aggregate Mining provided 34.6% of the sales, Asphalt Group 29.7% of sales, Mobile Asphalt Paving Group 21.6% of sales, Underground 7.3% and Other 6.8%. The consolidated gross profit for the quarter was at $62 million versus $46.7 million. an increase of $15.3 million or 32.8%. The gross profit percentage for the quarter increased to 25% for 2011 from 22.3% in 2010. The utilization of capacity improved in the second quarter. Our direct labor hours applied increased 27.1% for the second quarter compared to the prior year's second quarter.

In the segments, the gross profit was 29.2% for Mobile Asphalt Paving, 25.9% for Aggregate and Mining, 24.6% for Asphalt Group, Other Group at 19.8% and underground at 17%. For the quarter and summary, part sales increased, equipment sales increased, and plant utilization improved.

On the consolidated gross profit for year to date, we are at $116.7 million versus $92.8 million for 2010. That is a 25.8% increase or $23.9 million. Our gross profit percentage year to date is at 24.4% versus 23%, an increase of 140 basis points. Our plant utilization again improved significantly. The direct labor hours increased 22.9% from the prior year.

The gross profit percentage for each segment for year-to-date, Mobile Asphalt Paving was at 28.1%, the Asphalt Group at 25.3%, Aggregate and Mining at 24.9%, the Other Group at 19.8% and Underground at 11.7%.

In the SG&A, we were at $38.8 million or 15.7% of sales versus $30.8 million or 14.7% of sales. Our payroll and related commissions, R&D, [SRP], RSU were all up only the payroll and the related increase exceeded $1 million and the health insurance decreased just a little bit less than $1 million; and all others items that I mentioned including legal and professional and insurance general liability were all up slightly less than $1 million.

On the SG&A year to date, we were at $78.3 million or 16.4% of sales versus $63.5 million or 15.8% of the sales. Again, we had increases over several areas. The largest area was payroll and related. The largest decrease was health insurance; and then we had several other items that were $1 million or less. Legal and Professional was actually a little over $1 million. Research and Development a little over $1 million. Insurance, General Liability -- a little under $1 million. So it was sort of widespread in those areas.

On your P&L this time, you have an item under SG&A and E spelled out as an impairment charge. The Company recognized the $2.2 million asset impairment charge on a corporate aircraft held for sale for the quarter. On the income from operations, we increased from $15.9 million in 2010 to $21 million in 2011 for an increase of $5.1 million or 32.1%.

Year-to-date 2011 income from operations is at $36.2 million versus $29.3 million for an increase of $6.9 million or 23.5%. Your pre-Fed tax increase by segment is attached to your press release for your convenience and I won't read those to you.

The effective tax rate for the quarter was at 33.8% for 2011 versus 34.8% 2010. The Q2 2011 rate was reduced by the R&D credit as compared to the Q2 2010 tax rate. The R&D credit had expired in Q2 of 2010. However in December 2010 Congress renewed the R&D credit retroactively for 2010 and prospectively for 2011. Therefore the Q2 2011 provision included the R&D credit whereas the Q2 2010 did not include the R&D credit.

The tax rate for 2011 for the year is at 34.3% versus 35.3%. The 2011 rate is a mixture of increasing state taxes offset by the additional estimated R&D credits and the increased estimated domestic production activity deductions. The domestic production activity deductions increased because of both increased profitability and increased manufacturing volume. The net income attributable to growing interest for 2011 is at $14.1 million compared to $10.3 million for an increase of $3.8 million or 36.9%. The earnings per share for the quarter net income per diluted share is at $0.61 versus $0.45 per share in Q2 2010 for an increase of 35.6%. The year-to-date net income is at 24.2% versus year-to-date 2010 of 19.1% for an increase of 5.1 or 26.7% in net income attributable to [controlling] interest.

Diluted earnings per share year-to-date are at $1.06 versus year-to-date diluted of $0.84 for the prior year for a 26.2% increase. Our backlog is also included in our press release for your convenience. At June 30, the backlog was at $217.1 million versus June 30 $139.7 million for an increase of $77.4 million or 55.4%.

Our international backlog at June 30, 2011 was $121.9 million compared to $81.7 million at June 30, 2010 for an increase of $40.2 million or 49.2%. International backlog is 56.1% of our total backlog at June 30.

June 30, 2011 domestic backlog increased from $58 million for 6/20/2010 to $95.2 million for an increase of $37.2 million or 64.1%. Backlog by segment is provided at the bottom of the press release, and I will not read those to you.

The balance sheet is very strong. It continues to be very strong and provides a good base for us to seek acquisitions. Our days outstanding are at 38.3 days versus 36.9 days. Our inventory has increased to $281 million from $224 million for June 30. We are at 2.5 turns versus 2.3 turns. Our raw materials are up $32.1 million. Our work in process is up $19.5 million. Our finished goods are up $10.1 million and used and rental equipment is actually down $1 million.

So a lot of these inventory increases certainly are in relation to the increased backlog that we have. There is nothing owed on the $100 million credit facility we have at 6/30/2011. We have $73.5 million in cash and cash equivalents. Our letters of credit are $10 million. Our availability on the loan is $90 million. Our capital expenditures at Q2 are $13.7 million. Our capital expenditures year to date are $18.7 million and we are budgeted for $29.4 million for the year. Our depreciation for the quarter was $4.7 million, year to date is $9.2 million and is budgeted at $18.8 million for the year. Our cash flow will be attached to the 10-Q which is scheduled for filing on August 9.

This is certainly a good report for Q2 and a strong backlog. If you've read the press release this morning, I'd just like to make a few additional comments to my standard comments.

I certainly have been blessed to be part of the Astec family for the past 24 years. In particular I have enjoyed my time as CFO. There's certainly never been a dull moment. We have had our successes, challenges, and difficulties. I had enjoyed acquiring various businesses and helping them grow, at the same time growing Astec's business.

As I step down as CFO, I am proud of our corporate accounting staff. David Silvious has worked with me closely for the last 12 years. I am confident that David will make an excellent CFO and provide outstanding leadership.

Fortunately my time with the Astec family is not over. I will be focused on acquisitions and business development, but of course will be accessible to others if needed.

I have enjoyed meeting many of you and spent time with you that are on the call today and have enjoyed meetings, calls, conferences. I look forward to hearing from some of your organizations that will have opportunities for us to consider.

Now I'll turn the call over to David. Thank you, David, for all the hard work, support, and friendship over the years. Congratulations on your new role. You've earned it.

Well, thanks, McKamy. I would certainly like to thank Don for giving me the opportunity to serve as CFO of the Company and I would really like to thank McKamy for giving me the opportunity to work at Astec 12 years ago. McKamy has been a great teacher and a great mentor and I look forward to working with him in his new role as Vice President of Business Development. We will work closely together to affect a smooth transition and ensure that we continue to provide sound financial leadership for the Company.

Thank you, David and McKamy, for your comments and at this point will turn the call over to Don Brock who will discuss Astec's business operations for the second quarter of 2011. Don?

Thank you, Steve, McKamy, and David. We are pleased with our second-quarter results. Revenues, as McKamy said, were up from $209 million to $246 million or 18.5%. Our net earnings increased from $10.3 million to $14.1 million or was up 37%.

With the uncertainty created by the bickering and lack of direction from our President and Congress, our customers in the US are remain cautious and reluctant to buy new equipment. This leads to more pressure to rent equipment versus buy.

It also leads to them repairing older equipment, writing it longer than before replacing it. This, however, has helped our parts business as you can see, and it grew during the quarter 16.5% and year to date 15.3%. I believe we are seeing a slow growth in the US economy. Home building is up slightly in June. Our customers have rightsized their companies and are profitable, but at a much lower level than in 2007 and 2008.

We see them, however, continuing to defer spending until they see a more clear direction on the Highway Bill, on the deficit, and on an energy bill. Fortunately we continue to backfield the domestic weakness by stronger international sales.

International sales reached 44% of our revenues in the second quarter and 40% year to date. Our backlog quarter to quarter was 56% international and our total backlog was up 55%. Our initiatives to expand our international sales force in each group to grow the application of our crushing equipment in the mining industry and to expand our range of products in the energy business has allowed us to grow during this time.

During the quarter, we looked at a number of opportunities both to acquire and to better align our businesses. We expect to consummate some of these acquisitions early in the third and fourth quarter. Looking forward to the 3rd quarter, over the past year we have expended considerable money, effort, and time in developing new products to grow our business in energy, mining, and infrastructure. We are beginning to receive orders for this new equipment and expect it to produce revenues over the next six months.

Peterson developed a new line of drum shippers that are performing very well and that are selling, producing wood to energy products. Larger models are being developed and orders have been received for them. Roadtec developed a new line of power brooms and a new -- an addition to their stabilizer line and these products are beginning to sell and to grow.

Heatec continues to grow in the oil and gas industry and recently introduced large hot water heaters used in fracing and have received the first orders for these units. We have the pellet -- prototype wood pellet plant being in an initial start-up in the next 10 days and is being checked out on our yard at Astec at this time. Our vertical oil drilling rigs are beginning to -- which we've sold over the last couple of years -- are beginning to sell again after an 18 months' downturn.

The new concrete plant line that we developed, the first plant has been sold and is running very well and performing very well. We have a number of other products that are in the pipeline.

With the help of the weak dollar, we expect international sales to continue to grow and become a larger part of our business. We believe that the most likely scenario on the Highway Bill will be a two-year bill that will extend beyond 2012. The results of such a bill would be somewhat more of the same, good mobile sales, probably weak plan and pressure sales and that segment of the industry. With the 100% depreciation, tier 4 engine implementation, and the same direction on the Highway Bill, we expect sales in the US to be okay, but not necessarily great for the rest of 2011 and 2012. However we see international as continuing to grow.

Looking specifically at the third quarter, we expect revenues and profits to be better than our first quarter, but probably not as strong as our second quarter. With that I will stop and be glad to answer any questions.

Christine, can you poll for questions now, please?

Thank you. (Operator Instructions). Jack Kasprzak with BB&T.

Good morning, everyone. First, let me wish McKamy good luck in his new role. Certainly have enjoyed working with him over the years. So thanks for all your help, McKamy.

Thank you.

I wanted to ask about the margin, which -- gross margin which was up nicely first and second quarter last year and you guys mentioned plant utilization improving. Are there any other factors we should consider when thinking about the improvement in the gross margin in the second quarter?

Jack, I don't think so. Rising water covers a lot of stumps. We've -- probably, we've reduced some manufacturing overhead during this downturn and now that man-hours are coming back to the plant, it certainly helps.

Probably haven't seen in some of the businesses, we really just are beginning to see the American augurs and that side of the business coming back. Their third and fourth quarter will be very good and they really had a very weak --. As you can tell from the numbers -- the first quarter for both of those companies is weak. Second quarter was a lot better and third and fourth will be our -- will continue to improve.

But the other plants, a number of them, we are working on more hours. We have got a lot more capacity, but I think that's a major contributor, I would say, to it.

Okay. The charge, the asset impairment charge, is there a tax effect that you guys can give us related to that charge?

There will be a tax effect.

Jack, it won't -- until we sell it, it won't have an effect. Now I apologize, I didn't bring a calculation with me or remember what it is, what the effect will be -- but that won't happen until the sale.

I guess, Jack to get specific comment, over the life of, I think, over the years since we started in business, we have owned about 15 airplanes and this is a Falcon 100 that we have had to write down. We are selling it and the depreciation schedule that we had was not sufficient. We have seen planes drop in price the last -- in this downturn to half what they used to sell for and so that is the asset impairment on that particular item.

I guess I could ask it differently. If that asset impairment charge had not happened in the quarter, would your reported tax expense been any different?

Only minutely different. It would only change by a fraction of a percent, yes.

We would have been about $0.66 a share without it.

Got it. And then, domestic backlog was up nicely year over year and your comments about the Highway Bill, notwithstanding, can you talk about I guess what's been good as far as driving that domestic backlog?

You know, we see it in, pretty well spread over all of the groups of the Company. Probably the best improvement in backlog would be in the -- with American augurs. However it is a lot international.

We are, I guess it is coming off of a weak quarter year to year was probably the best thing I can say. We see, I talked to a lot of our customers and they are all doing pretty well. They are all surprised that they are doing well. There's just so doggone negatism.

What we see on the asphalt side of it is these extensions don't allow the states to do a lot of long-term planning. So they are doing a lot of paving and the two-year bill will be more of the same, it is what I was commenting. And as a result, they order -- everything they order is in a panic. There is not any long-range planning on it.

But I would say it is just a combination across -- as I said, I see a slight improvement in the overall economy. There's probably more improvement than there is added -- in actuality than there is added to right now.

Okay.

Jack, maybe to be a little more helpful and Don might want to comment further on this, but the asphalt backlog's up about 53% and the aggregate back -- and I'm talking about domestically to your question, the aggregate is actually up 187%.

It has been more in the aggregate side which both asphalt and aggregate was real weak a year ago.

Yes. Okay. That's --.

I would say, Jack, it's not up as much as it -- overall, I guess, for the revenues and everything the business is better, the economy is better, but it is not up as much as the backlog shows on a year-to-year comparison.

Got it. That does it for me. Thank you, guys.

Robert McCarthy with Robert W. Baird.

Good morning. I would like to also offer my congratulations to McKamy and David and best wishes to both of you.

Don, you talked with a greater level of certainty than we've heard from you in some time about potential acquisition activity, actually saying that you are going to close what sounds like more than one transaction. Can you give us any kind of visibility as to size?

Well, that's (laughter). Wait a couple of weeks, Rob. (laughter). They are not real big, but they are good companies and they will add to our -- one is small, one is medium-sized, I'll put it that way.

Just to try to figure out how big the breadbox is, is that medium-sized under $50 million in revenue, for example?

Probably between $50 million and $100 million. Somewhere like that. In revenues, now, in revenues.

Okay. Understood. Yes. And is that the -- is the larger one the one that is closer to happening?

Yes.

Okay. So we will look for that.

Yes.

If I understood you correctly, you said that you expect that Underground would also be above breakeven in the third and fourth quarters. Did I get that right?

Well, the underground on the --. We are strong looking at what we do with the small trenchers and will probably have something done there in the third quarter. And there will be a hit on selling that, if -- assuming that goes through and other than that, operation and though it could be -- it's got a possibility of being profitable in the fourth quarter operationally.

Very good. And I appreciate all the detail from McKamy on all of the various contributors to the SG&A, or operating expense number for the quarter, but in a, maybe a little bigger picture sense, can you just address --? I mean, last quarter we had very strong growth in SG&A line in part because of expenses associated with Con Expo.

That's of course not a factor in the second quarter, yet year-on-year growth still pretty strong and of course faster than revenue growth. An element of the site I know is catching up on compensation. Is there something else that we need to be aware of here. Are we going to --? Are we going to see this trend of faster expense growth and revenue growth end before the end of the year?

I think you'll see it get more line in the third and fourth quarter. You certainly can't take the second quarter and annualize it. The other thing I would have to say, though, we have not cut back on domestic sales expense while, truthfully, with so much more of our business we have increased international sales expense and not cut back domestic and with the mix being more and more international, you could probably if we were in a financial state where we were really under pressure, we would probably cut back domestic sales, but we see that as we see that hopefully returning within the next year to 18 months and we've got a good cadre of salesmen and we are not going to do that.

But the con -- we've got more salesmen right now per revenue dollars than we have had in the past, due to the fact that we've not reduced domestically and we've added international.

So, now a limit of this is the necessity to invest in people to secure later revenue growth, right?

That's correct. The other thing we are doing is we are growing our parts sales where we are putting more parts salesmen in the field and now in the Aggregate side. We have done that in the Asphalt side and we are adding some expenses there that we'll have growth in that area, but it's showing up at expense right now without developing revenues, before it develops revenues.

Thank you.

Tom Hayes. Piper Jaffray.

Good morning. I guess shifting gears all that, I was just wondering if you could share what you are seeing in terms of input cost on maybe steel, copper, and components?

We saw a pretty good increase during this -- as we talked about in the past, during the first two quarters, we have seen it moderate a little bit. It has moderated at a higher level. Up until this point, we have -- up until mid-June we were pretty well protected with some longer term contracts. The level right now is probably 20% or 25% higher than it was at the beginning of the year. We are seeing some spot buying that is going back at a lower level. It seems to be the steel companies push it up the first two quarters of the year and then seem to back off a little bit and that is what we have seen this year.

Other increases on components, we have seen probably an average of 4% to 7% increases. We have raised our prices and I would have to say that we are, marginwise, we are probably a little behind the price increases; and that is why I'm a little -- was a little cautious on the third and fourth quarter. They are not going to be as good as the second, but they ought to be more like the first quarter.

Okay. And then you commented that your view is probably this gridlock Congress, we've got something along the lines of a two-year bill. Will that be significant enough to get the states kind of getting some projects off the [trotting] board and getting your customers writing those purchase orders again?

I'm afraid I can't say that's going to give a lot of optimism. Some of the big projects of bridges and interchanges and new roads and things like that, two-year bill doesn't give them enough visibility to do something on that. It, however, if they do it as they are talking at a level slightly above this year, it will be very beneficial to the asphalt business. And I would say our customers in the asphalt and the aggregate related to the asphalt will do very well in the next couple of years.

I talked to one Saturday, he called me and he was he said they were having the best year they had had in a long time. But he said I don't know what to do for major expenditures looking two and three years out. So it doesn't create any long-term visibility for the customer. So I think they will just continue to operate in a reactionary mode more than a strategic planning method.

And so, they will buy what they have to buy, but they are not going to be looking down the road to the future.

Okay then just lastly, more on a strategic front, especially with McKamy's new role on M&A. How do you prioritize yields? Is it more of a looking for a geographic distribution in market access or access to new products?

I think we are really more accessed to products that would be synergistic with some of the things we have. We see a lot of growth in the energy side of it. We intend to get more in the fracing side of the business equipment for that, for the oil service type of equipment. We will be switching underground more to that type of equipment.

We look at expanding in the oil drilling equipment business and some other, you know, in that type of field. We also if you look at the wood pallet plant we built, we pulled components out of seven of our companies and if we can see some acquisition that we would be able to utilize their products in total systems jobs, that would be attractive to us.

Great. Thank you.

Rich Wesolowski with Sidoti & Company.

Thanks. Good morning. First off, McKamy echoing others, congratulations on your move. Thanks for all the help and all the work on the stock over the last couple of years.

Thank you.

First question, Don, do you have a sense that the second-quarter orders maybe even benefited from customers frontrunning price increases or was this a normal seasonal order flow?

It was a normal seasonal order thing. I don't -- I think they see in this environment we are in that they could be this down. So, they are not going to worry about the price increases. We have got to sneak them in. But I haven't seen that. I think -- and again, international, there's not much, there's not as much pressure internationally with the weak dollar on prices as there is domestically.

What percentage of your business revenue is going into mining now and what was that a year ago?

It's -- one of the struggles we've had is trying to determine what it is because we are pulling it out of every different company, but my guess today is we are about 20% and we probably were between 10% and 15% a year ago. Maybe more like 10% a year ago.

Specifically on the Aggregate side, have you seen changeable business coming from the new mining sales team or is it really just demand that's driving higher sales and perhaps the benefit, people you added would come later.

Most of our increase in aggregate side is from the mining. Our South African company, Osborn, is 95% of their equipment is going to mining. I would say probably 70% of Telsmith's equipment is going that way. 60% to 70%. And a huge amount of Telsmith is going internationally now. It's distributed between mining and infrastructure. But we are seeing -- we're very pleased with the progress we made in the mining side.

Okay. Similar question for oil and gas. I know it is an estimate, but how much today and how much a year ago?

My guess is today it's again probably in the 15% range and it was probably 7% a year ago. The -- like Heatec's business, they've got nearly a year backlog, but their big heaters are now 60% of their business. About every bit of that is going to oil and gas. The wood products or energy, all of the products at American Augurs are going to energy. Some of it is going for pipelines and some of it is going for oil drilling and it -- we really have struggled that we probably need to get the business into three groups but the equipment is coming out of every company.

And that is what is -- it's not split in any one company. It's every company is probably supplying either energy mining or infrastructure and, but that's my about best guesses.

Okay. Can you detail what your aim is for the new facility in Germany? Would it be production or distribution, what have you?

It's primarily distribution and it will be production of high-density screeds that go on the back of the Roadtec pavers. Now that will be about the only product that they do build. The Company builds some compaction equipment and we will probably be building more of that over here, but it is primarily distribution.

And lastly if you would give an update on the partnerships that you struck earlier in India and in China. From what I can tell, the one in India is a little bit further along, but just perhaps what stage you're at, when you expect first orders, etc.?

We have gotten the first orders out of India for a couple of plants and those are being built here. They plan to have an open house in early November that my son is pressuring me to go to in India.

In China, it has been a little slower and all more disappointing. But I would say the Indian market and the Indian licensee is, their main problem has been getting their new plant built. I think they will do quite well.

You can't offer any even multiyear goals as to what that could add?

Not at this point. I guess I would hope that in both cases, we could ship maybe 40% of the product out of here, but licensing agreements bring in just straight revenues that but -- I mean they don't bring in big revenues. They bring -- and what they bring in goes to the bottom line. But I'm a little reluctant to do that at this point.

Appreciate it. Thank you.

Jason Ursaner with CJS Securities.

Good morning. Can you talk a little more specifically about revenue trends in the Asphalt segment? And it is up year-to-year, but sort of on a relatively low base and is it the big trend here, just what you've talked about with demand from mobile plants instead of that more traditional stationary plant? Or is it actually unit volume being affected?

Yes, what we basically are seeing is not many --. I wouldn't say none, but there's not many stationary type plants going in. The market under these economic conditions, if there is a big paving project, you are going to see a lot of bidders on it and many of them are not the local guys. So at this point, probably 75% of what we are building on asphalt plants have got wheels on them. And they tend to -- they basically tend to buy more portables in a down market than they do in an upmarket. But I would say right now, 75% of what we are building has got wheels.

So if you look back at prior years, is it lower sales on similar volume or would it be actually a lower volume?

Typically a portable plant sells for less money than a big stationary so it would be -- to get the same volume you would have to have more plants. I think that's the question you're asking.

And in the Mobile segment, you are continuing to show pretty strong results. If I was trying to understand what's driving this business now, is there still a decent amount of the arrow-related pave jobs there? Is there some domestic orders from I guess the end of last year before the tier 4 switchover? Is it to accelerate depreciation or the international markets?

It's a combination of all those. There is still the tier 4 thing is still going on. We had, you have about 3 -- depending on the size of your company, you have so many flex engines that you can sell that are tier 3s. We are on that program and that will basically be ending this year and so some of it is being driven, by still being able to get tier 3 engines.

The tier 4s have been slow coming out. Cat in particular, which we use a lot of their engines, we have struggled with getting those different size was running and debugged and we -- I won't say any more in it. But we get a little frustrated with them.

The other thing, though, I guess with the work that's coming out, a lot of it is night paving. A lot of it is overlay. Most of the asphalt contractors are doing primarily public works and they do need good equipment that is reliable. So they will upgrade that fleet when they would not upgrade necessarily the plant side of the business.

I think also, we are probably gaining a little market share in that business from the numbers show we are. So we're pleased, very pleased with how they are doing.

And then just last question for me. I just want to make sure I'm clear what you are saying on gross margin expectations. Would you expect to see a contraction from this Q2 level or do you think there are some levers within some of the various divisions where you could all set some of the normal seasonality [and the CO] inventory?

Frankly, we were pleased and surprised that it got back up to 25% this quick. I expected it to -- I guess my expectations were not quite that good and I guess all I am saying with the inflation that we've seen on component costs, with the fact that probably third and fourth quarter are a little lower in volume, I would expect the gross margins to drop back a little bit.

Okay. Thanks for taking my question.

David Wells with Thompson Research Group.

Good morning. First off, just looking at the strength and aggregate backlogs with the domestic piece being up almost 200%. Can you give us a little more color on what is driving that and is that basically equipment that has been run to fail that they are being -- that your customers are being forced to buy? Or even kind of maybe some of the different characteristics from a mix perspective? Is it more stationary versus mobile? Any thoughts around that would be great.

There's a substantial amount of it that is mobile and track-mounted equipment. The smaller equipment where it may not be your conventional customers or that would be buying it. The larger aggregate producers we don't see them expanding a lot. In fact their volumes are down.

So it's going, it's going number one probably to the nonclassical arrogant producers. Number two, it is going, a lot of it is going international and some of it is even going into domestic mining. Some of it is going to plants that are open for scrubber stone and things like that that are non-infrastructure-related. So it's a mix.

Helpful. And then, just one clarification given the growth of international sales right now. If you look at your cash balances on the balance sheet, how much of that is cash is in the US and how much is now internationally domiciled?

There's probably about $12 million that is international. That's up about --.

It's not up substantially.

It's not up substantially.

That's helpful. And then we heard one equipment manufacturer last week discuss access to capital issues with some of their international customers. Just curious if you are seeing some of that where you are maybe seeing some folks on the fence for orders just as they try to find financing, given the debt turmoil at the sovereign level that we're seeing?

It has not been that -- I wouldn't say that's affected us that much. Most of the contractors we are dealing with, a lot of them are internationally are pretty sizable companies and we haven't really seen that. And a lot of the projects they are buying equipment for are very large projects and well-funded. Have not seen that issue.

That takes care of it for me. Thanks.

Ted Grace with Susquehanna.

Thanks. First, I was hoping to circle back on, and I apologize if I missed it, but in regards to the Highway Bill, two-year bill seems to be your base case now on. I didn't hear any commentary on your thoughts on size. Could you give us some of your thinking on that angle?

I guess the Senate bill is probably up 10% over the present level of spending where the House bill would be down like 30% over the present level of spending, and it would be down for six years. Senate bill in my opinion may end up being flat or it may be up a little bit.

If it's flat at this level, it is not the end of the world. And I guess that's -- there's a whole lot of flapping that goes on in the House, but it usually is the Senate that prevails and I guess that's why I think the two-year bill is the most likely. And I think, while a lot of people in the industry depend on which side of the industry you are on, if you are in the grading or crane business or something like that, you probably had rather see a six-year bill. If you're on the asphalt you had rather see the short-term bill. So it varies with what kind of equipment you are selling.

Sure. And I mean given that much, we respect your view, I think about most if not all others on that Highway Bill, just curious what your thoughts on how they would bridge the deficit gap because even that Senate version is at least $12 billion underfunded. So any thoughts on how they'd actually make a flat bill since the money is not there?

I can't answer that one. They seem to have ways of doing that and in this present environment that we are in, that sounds that -- I agree with you. Sounds less likely. I guess, they are going to be faced with doing something here and it is a matter of where they get that from.

The six-year bill if we took transit out of it and took all of the pork barrel projects out of it, the funding that we've got if it was a pure trust fund bill, pure highway spending, could be -- wouldn't be that bad if it would be a pure bill. But there's just a lot of things in the air right now; it is hard to say. Where that would come from I can't answer the question.

That's all right. I agree with you on the concerns.

Sure.

On orders in backlog, could you just comment, were there any cancellations of note in any of the segments in the quarter? Or slippage on the (technical difficulties)?

No. We generally don't have that problem. We did have probably quite a few delayed shipments that were for one reason or another making a ship, or the international shipments always seem to be on the bubble. Depending on how the LC is written you have to get it on board the boat or the boat is late, but I would say a little more -- and I hate to even bring that up because we always have from 12 -- $10 million to $12 million or something like that that is right on the bubble. But I would say this year it was more like $18 million to $20 million that was on the bubble.

So, that backlog number may have been a little overinflated given the inability to convert those and to recognize revenue?

I wouldn't say that. I mean it is up quite a bit, but we continue to get orders to backfield. So I think that that backlog number is pretty steady.

You do? Okay. And then on up order number, just I was hoping to get some commentary on, I think, the Asphalt Group and the AMG group are book to bill, in both cases, was meaningfully below 1. I think in Asphalt it was 0.6, book to bill. Global Asphalt was 0.8.

Could you give us some help on how to think about those businesses in the back half of this year from an order perspective?

Well, this, the second quarter is always our strongest quarter. Historically if you look at the business, 40% of it usually is in the back half and 60% in the front half from a domestic standpoint. International tends to skew that quite a bit, depending on where the international is coming from. If it is south of the equator their work season is opposite to ours.

So we -- I guess, we expect -- you know we're not -- the third quarter is not going to be down a heckuva lot from the second towards revenues. So I don't -- I think it's just -- it's pretty usual if you look historically on the backlog always drops at the end of the second quarter.

So, just for clarity's sake, the fact that Asphalt Group orders were down 32% year over year and down 46% sequentially and then Mobile Asphalt was down 2% year over year and down 20% sequentially, there is nothing to bear from an end market perspective?

No. (Multiple Speakers) take many orders on the asphalt plant that skew that quite a bit.

Okay. That's helpful. And any help you can provide us on the impact of tier 4 prebuy? Either in the second quarter or year-to-date and how we might calibrate our expectations around that?

The only thing I would say that last year when they finally, we had two drivers at the end of last year and that was one that finally they came to, in December, a decision on the tax increases or tax cuts, however you want to look at it. That made a major change in attitude in the industry.

Tier 4, due to the fact of the flex engines being available, I think that tier 4 could hurt us a little bit this fourth quarter. Would they help the first quarter and hurt the first quarter? I thought that a year ago and it didn't happen. So I guess a lot of other drivers affected as much as anything, but I would have to say that we think probably there is some pent-up buying of tier 3 equipment versus tier 4, at this point.

And far as the mobile side, that could have a slight negative effect on it in the first and second quarter of next year.

Okay, that's helpful. And then the last question for me, just thinking through pricing and margins for your OE business versus your aftermarkets business. One of your prior comments was it's pricing has been very difficult. My interpretation is that's much more so on the OE side.

But could you just give us some flavor for how to think about pricing on OE versus aftermarket and then how the margin performance was OE in the quarter versus MR -- you know, aftermarket in the quarter?

I would say the margins have been reasonably steady on the new equipment, on parts. Again, margins on parts are considerably better than they are on new equipment. Our emphasis is as a company, to grow more, grow our parts businesses more. To actually go after -- a lot of our competitors have reduced their ability to supply parts are actually gone out of business. So we are going after that business and that is why we are putting parts salesmen out there so that the more we can -- parts is about 24% of our business in first half and the more we can grow that, the better it is on our overall margin.

But my guess is, it is easier to capture pricing on the parts side than it is OE. Is that still the case?

Yes, in general it depends on if they are, basically, if they are unique parts to our equipment. Now we sell a lot of replacement drums for asphalt plants that there's plenty of competitors on. So in general, your answer is correct, but it's not in every case.

Okay, but the bottom line would be margins for OE versus aftermarket were both pretty steady year over year?

That's correct.

Okay. Great. Best of luck this quarter. Thank you very much.

Eric Glover with Canaccord.

I just wanted to ask you about your SGA&E expenses for the back half of the year. Should we assume they are going to be in sort of this $38 million range?

I think that's a little strong. We expect them to be down slightly. At least, our forecasts show that. And we, again we had Con Expo, we had the write-off of that -- the write-down of that airplane. There was, there's probably $8 million in the first half that wouldn't be reoccurring.

Thanks. And on the Underground Group, there was a pretty strong performance there. Is that going to be a sustainable level of revenue or is that mainly sort of a seasonal factor and some pick-up in the market?

In their case the best part of theirs is going to be in the back half instead of the front half.

Can you talk about the drivers that you are seeing in that market that are helping you?

There's a lot of gas and oil drilling going on in the country and there's a lot of -- again internationally there's a lot of pipeline construction for big drills and so there's just -- the energy business is good. I guess that's the main driver. It's --.

Alright. I'm going to go back to one of your earlier comments on backlog in Asphalt and Mobile Asphalt paving, so, fairly significant on a sequential basis. And you seem to imply that that was fairly normal for the June quarter. Is that one on a correct assumption?

That's correct.

Thank you.

Morris Ajzenman with Griffin.

Questions have been well picked over so I'm going to pass. My congratulations to McKamy and all and we will pick this up next quarter. Thank you.

Walt Liptak with Barrington Research.

The questions have pretty good, but I'm going to take a shot at capacity. So the healthy trends in aggregate mining, you know, what kind of capacity are you running there? Do you need to add capacity? Are you -- if the order trends continue to build backlog, can you ship more like in the third and fourth quarters than you did in the second?

In the aggregate side of the business, our capacity problems still is probably in the machining area, bricks and mortar is not a problem and, generally, fabrication is not a big problem. It is primarily machining capacity and we are trying to -- we are taking care of that, or we're -- that's places that we're adding.

That's probably the biggest thing, but we've got some of them that are we have a couple of the companies that are really load-in, and we've got some that we've got capacity problems in certain areas and in not other areas I guess is what I'm saying. We could build a lot more portable plants, a lot more track-mounted plants. We probably start to run into a little problem on unit machines. We furnish unit machines to many of our competitors that generally don't talk about but that does load up your machining capacity and some of that.

With the nice backlog could you get third quarter to be sequentially up from the second? Do you have enough capacity for that?

Yes, I think there could -- I wouldn't say a lot, but it could be up on those, in those areas.

Okay. And the gross margin in that segment, is that something that might buck the trend of a down gross margin in the third?

yes. My cautiousness on the gross margins is primarily in component pricing increasing that we have tended to hold back, but and we've tended to offset by better utilization of our plants. But I guess, hopefully, it will be better, but I just want to be a little cautious. That's all I'm saying.

Okay, I got it. Thank you.

Robert McCarthy of Robert W. Baird.

Don, I don't think I heard you address specifically what's going on with your backlog of orders for drill rigs.

We had about an 18-month period there that we didn't sell anything and we have sold three or four of those rigs which are pretty sizable rigs. We've also sold some of the large directional drills and that is why I'm a little more upbeat on American augurs. They are doing better and then there are some other things that synergistically is going to help that company that we will be doing.

So I feel pretty good, Rob, that the one negative thing on the drill rigs is the fact that the darn things are with the horizontal rigs they are getting so much more for oil -- per well out now. One of our rigs is one of our customers went down 2,000 feet earlier this year and then went horizontally 12,000. And he said he could've gone 15,000. So the amount of fracing that they are doing on these wells is like 30 to 40 times what it was on a vertical well. So, they are getting so much more out of the personal wells. So, they are not going to need as many drill rigs, but they need a lot of fracing equipment.

Okay and in these -- the drills you have sold are still in backlog or have you shipped some of those already?

They are still in backlog right now. I think we have one going to New Zealand that didn't make the quarter end, but it will be in July.

And then, I had a small detail question for McKamy, I guess. The write-down in the quarter, we calculated to have a value of about $0.06 assuming a roughly 35% tax rate. But I think I heard earlier a comment that the tax impact was less than that, which would suggest an even greater than $0.06 impact. But you specifically identified $0.66 or $0.05 as a likely earnings number without that. So there's something that I'm not getting right. Can you help me?

I think the tax rate actually changed very minutely, but as far as the impact on the quarter for a per-share rate, it is right at $0.06. It was just the tax rate that was not impacted.

The tax rate is not going to be impacted until we actually make the disposition.

We have probably been $0.66, $0.67, I guess somewhere in that range.

All right. Just wanted to double check. Thank you.

Eric Prouty with Canaccord.

Thank you very much and just so I can throw a little more detail on the gross margin if we go back over the year's past cycles, etc., you are starting to get now back up to what has historically been a very high gross margin level. Is there something going on with -- because I know that you keep talking about your utilization rates are getting better, but certainly aren't at full utilization rates.

Is there a product mix shift that is changing the profitability? Has it just been some belt lightening over the years? One, what is driving that margin and two, as we list up into a more normalized cycle here is the economy improves, what are you viewing as a more normalized midcycle gross margin as compared to previous cycles?

Eric, I think we could conceivably see 26% gross margin. As I said earlier, you -- I was little shocked that our gross margin was that much. We were overabsorbed in some of our plants and we did some a number of things to downsize. We've, we hadn't -- depreciation or capital expenditure over the last couple of years has been much less and so I guess, mainly, the improvement was in the utilization of the plant.

If we could average out all the companies and get them running full bore, we've probably got the capacity to do $1.4 billion right now. So you could have some very pretty gross margins if we had them all balanced out and were running wide open. But we got a few capacity problems in two or three areas, but generally we have got underutilization. And I'm trying to be a little cautious on don't get too excited about it. This isn't the greatest economy yet that we've seen.

Okay but I guess to follow up, you still, again, given utilizations to driver, do you still feel like there's more forward upside to the gross margin as your revenue scales. You have not maxed out what that gross margin that you continue to improve as revenue levels improve?

Yes, I think it does. The cautiousness I have on that is that inflation in 2008 was unbelievable and we were running wide open, and for the size plants that we had at that time and we offset it and then in 2009 inflation prices dropped way back on components and we were underutilized. There is a lot of inflation out there right now. And whether or not it backs off or it continues to rise is my cautiousness.

I think if we could get price stability, if prices didn't go up and we keep growing, I mean, we can grow our revenues, it will obviously look better. But you have got -- it's coming at you from both sides. One of them is the inflation and the other is the utilization.

Great. That's fair enough. Thank you very much.

Rich Wesolowski with Sidoti & Company.

My last question was actually just asked. Appreciate it.

Mister Anderson, there are no further questions in the queue at this time. I would now like to turn the floor back over to you for closing comments.

All right. Thank you, Christine. We appreciate everyone's participation on our second-quarter conference call and thank you for your interest in Astec. As our news release indicates, today's call has been recorded. A replay of the conference call will be available through August 6, 2011, 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.

So thank you. Have a good week.

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