Astec Industries Inc (ASTE) 2012 Q1 法說會逐字稿

Greetings, and welcome to the Astec Industries first quarter 2012 earnings 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, Mr. Steve Anderson. Thank you, Mr. Anderson, you may begin.

Thank you, Louis. Good morning and welcome to the Astec Industries conference call for the first quarter ended March 31, 2012. As Louis mentioned, my name is Steve Anderson, I am the Vice President of Administration and Director of Investor Relations for the Company. Also on today's call are Dr. J. Don Brock, our Chairman and Chief Executive Officer, and David Silvious, our Chief Financial Officer. In just a moment, I'll turn the call over to David to summarize our financial results and then to Don to review our business activity during the first quarter.

Before we begin, I'll remind you that our discussion this morning may contain forward-looking statements that relate to the future performance of the Company and these statements are intended to qualify for the Safe Harbor liability established by the Private Securities Litigation Reform Act. Any such statements are not guarantees of future performance and are subject to certain risks, uncertainties, and assumptions.

At this point, I'll turn things over to David to summarize the financial results for the first quarter of 2012. David?

All right. Thanks, Steve, and good morning to everyone. We appreciate you being with us this morning. I'll run through the financials quickly here.

Net sales for the quarter, $266.6 million in 2012 versus $230.2 million in 2011. That's a 16% increase, or $36.4 million increase.

International sales were $105.2 million of that in 2012, compared to $82.7 million in 2011. That's a 27% increase, $22.5 million increase, and that represented 40% of the Q1 2012 sales. In 2011, international sales were 36% of Q1 2011 sales. The increase in those international sales for Q1 of 2012 versus Q1 of 2011 occurred primarily in Australia, in Brazil, in the post-Soviet states in Russia, in Asia, in the Middle East, and in Mexico.

Domestic sales for the first quarter of 2012 were $161.4 million. That compares to $147.5 million in the first quarter of 2011, or a 9% increase, $13.9 million increase. Domestic sales then represented 60% of the Q1 2012 sales versus 64% in Q1 of 2011.

Part sales for the first quarter of 2012 were $76 million, and that compares to $57.3 million for the first quarter of 2011. It's a 33% increase in part sales, or $18.7 million. Part sales were 29% of the quarterly sales in 2012, compared to 25% in 2011.

The segment revenues are attached to your press release. I won't read those to you here. They're given to you in detail there for the first quarter of 2011 and 2012.

The gross profit for the quarter was $60.6 million, compared to of the prior year $54.7 million, that's an increase of $5.9 million, or an 11% increase in dollars. The gross profit percentage on a consolidated basis decrease for 110 basis points for the quarter from 23.8% last year to 22.7% this year. Gross margin by segment is also attached to your press release and we won't cover those in my comments.

SGA&E for the quarter was $41.9 million, compared to $39.5 million in Q1 of 2011. It was 15.7% of sales this year versus 17.2% of sales year. That's an increase of $2.4 million, but a decrease of 150 basis when it comes to as a percent of sales. The primary areas where there were decreases was ConExpo. You remember that in 2011, we had ConExpo, which is every three years. We had increases this year in health insurance and some payroll related and travel expenses in SGA&E.

Operating income increased from $15.2 million in Q1 of 2011 to $18.8 million in Q1 of 2012. That's an increase of $3.6 million, or a 24% increase in operating income. Income by segment is also included in the press release.

The tax rate was 37.3% on an effective basis for the quarter. That compares to 34.8% in the prior year, and that increase is primarily due to the R&D tax credit being in effect for 2011 but not in effect for 2012 yet. We are hopeful that Congress will pass that R&D tax credit during 2012 and it will be retroactively effective back to January 1, 2012. But being that they have not passed that R&D tax credit yet, we certainly cannot consider that when calculating the effective rate on our earnings, so the rate is 37.3%.

Net income attributable to controlling interest is $12.2 million in the first quarter of 2012, compared to $10.1 million for the first quarter of 2011. That is a 21% increase in earnings there, or $10.1 million. Earnings per share per fully diluted share for the quarter is $0.53, that compares to $0.44 per diluted share in Q1 of 2011. That's a 20% increase in our earnings for the quarter.

The backlog at March 31, 2012, is $285.6 million, compared to $264.7 million at the same time last year. That's a $20.9 million increase, or 8% increase in the total backlog. And that backlog for 2011 was adjusted to reflect those acquisitions that occurred, primarily Gefco that occurred late in 2011.

The international backlog at March 31, 2012 was $122.8 million, compared to $139.9 million last year for a decrease of $17.1 million, or a 12% decrease in the international backlog. However, the domestic backlog increased from $124.8 million at March 31, 2011 to $162.8 million at March 31, 2012. That's a $38 million increase, or a 30% increase in the domestic backlog. The backlog by segment is also attached to your press release.

If we look at the balance sheet, our balance sheet remains very strong. Our receivables are $113.6 million this year at March 31, compared to $100.2 million last year. That's a $13.4 million increase. And the days outstanding actually reduced by one day from 39.1 last year to 38.1 this year.

Our inventory is up to $313.4 million this year versus $272.7 million last year at March 31. That's a $40.7 million increase. That increase is partially due to the acquisition of Gefco, which makes up about $22.6 million of that inventory increase. Inventories turning in 2012 at 2.6 turns versus 2.5 turns last year, so the turns have slightly improved.

We owe nothing on our $100 million credit facility. We have $41.6 million in case and cash equivalents on the balance sheet right now. Letters of credit outstanding are $13.5 million against that credit facility, so our borrowing availability is $86.5 million under that facility.

We did renew that facility. Many of you may know that it was going to expire in April, and we did renew that $100 million credit facility with Wells Fargo and you may have seen the 8-K filed on that. It was a five-year deal on substantially the same terms as our previous five-year credit agreement with Wells Fargo.

Capital expenditures for the quarter were $5.4 million. We're budgeted to spend about $37.5 million for 2012. Depreciation for the first quarter was $5.4 million and we have budgeted about $22.5 million depreciation for the year 2012.

Well, that concludes my prepared remarks on the financial details and certainly will be available to answer any questions you may have later in the call.

Okay. Thank you, David. Don Brock is now going to provide some comments regarding our first quarter of this year's operations. Don?

Thank you, Steve.

As David has said, our revenues were up from $267 million versus $230 million last year, or an increase of 16%.

Our pre-tax profit was $19.5 million versus $15.5 million, or a 26% increase, while after-tax was $12.2 million versus $10 million, or a 21% increase. The difference, as David said, was due to the different in a tax rate of 34.8% versus 37.3% due to the expiration of the R&D tax credit. This effected our earnings per share about $0.02. Our EPS was $0.53 versus $0.44 for an increase of 20.8%.

We continue to struggle with our equipment margins during the quarter. In the mobile equipment, the change from Tier 3 to Tier 4 required major redesigns in each equipment model that build. We not only experienced higher engine costs in doing this, but saw man hours increase due to the first of these new models being built.

We were also hurt by our foreign competitors are also able to bring in Tier 3 engines due to models being built where they were able to stockpile engines in advance. US manufacturers were not allowed to stockpile at the end of 2010. This has led us to a very tough pricing competition, particularly in the paver side of the market.

We've also experienced higher costs on our other new and first (inaudible) products that we're building. We have a number of these due to our aggressive product development program over the last two years. However, these products will be what will grow our Company in the future, and it seems to be a price that we have to pay on all new products.

Although our margins improved 150 basis points from the low of Q4 of last year, we remained 110 basis points below Q1 of 2011. This difference equates to about $0.08 a share.

On the real positive side, we saw our part sales continue to grow, as David mentioned. We had a 33% increase from $57 million to $76 million. Basically, most of our gross profit was totally due to growth in parts. We're pleased to see the efforts that we've put forth in the last couple of year of growing our parts business. Increasing our parts sales have begin to pay off.

However, it should be pointed out with a weak market, you expect your parts, particularly here in the United States, we see people buying more parts doing repairs in lieu of buying new equipment. We expect to see our margins gradually recover during the year, as we've mentioned in the past, but we think this will be a slow recovery as we gradually build more of the machines and work our man hours and our costs down.

Looking forward to the second quarter and the rest of the year, I guess, first, if we look at the equipment for the infrastructure, we remain without a highway bill with a (inaudible) extension in place. Volume for our customers remain weak. Highway lettings are off 14% year-over-year. We do not believe that we will see a highway bill. Personally, I don't believe that we'll see it before 2013 due to the election.

With this backdrop, we expect domestic sales to remain weak and very competitive. International sales continue to grow but not as a rapid a pace as we've seen in the last two years. However, with all of these negatives, let's say that we believe that we will be able to backfill this weakness with equipment from the energy and mining sector.

We continue to grow our drill businesses. We are building water heaters that are used for fracking, pump trailers for well service and fracking, larger chippers and flails that are used for producing wood chips. Our new concrete plant is beginning to sail. Surface miners and wood pellet plants are also being developed and we are beginning to receive our first orders. This wide variety of products creates many opportunities for us, but it also creates many challenges.

As the US economy improves and the volume of our core products return to normal, our growth will be driven by these present low-margin products that we're birthing today. At the end of the quarter, our backlog was $285 million versus $264 million from last year, or up 8%. Domestically, we believe that the uncertainty of no highway bill, the delay in the Keystone Pipeline, the environmental resistance to fracking will prevail throughout this year, keeping our customers cautious and somewhat paralyzed, buying only what they have to buy.

The expiration of the 100% depreciation credit has also slowed the buying of our strong private customers who generally buy even or buy on a more consistent basis regardless of the economy. However, with all of this said, we continue to believe that we will continue to grow our business at approximately 15% per year.

Typically, at this rate of growth, you will see improvements in incremental margins, however, based on the number of new products, the competitiveness of the market, we think our profits will grow along with our revenues and, basically, we will not see incremental improvements as we have in the past.

Our balance sheet remains strong and we continue to look at bolt-on acquisitions that will be accretive and synergistic.

I'll be glad to answer any questions that you would have at this point.

We will now be conducting a question-and-answer session. (Operator Instructions). Our first question comes from Jack Kasprzack of BB&T. Please proceed with your question.

Good morning, Jack.

Good morning, Don, good morning, everyone. First question is with regard to Q1 asphalt sales. Asphalt group sales were down and mobile sales were down in the quarter, so is that just due to the lack of a highway bill and the uncertainty you underscored, Don, or is there anything else going on?

No, I think that's pretty well it. Jack, there's a lot of the states just stopped the lettings because we fooled around till the last week of March before they extended the bill, and as a result a lot of lettings were just stopped and continued what we are selling domestically on asphalt plants, they've all got wheels on them, the people generally are low on volume of work and if there are large jobs, they're more prone to move, so we're selling a number of portable plants.

We have an order for seven plants from the US Army. The first one we built was not profitable; the others will gradually be, so another one of the new products. They have a few special things that they require on it that required reengineering. In the paper side of it, we have been by the fact that one of our competitors stockpiled a large number of Tier 3 engines and he's now bringing them into the states and are very aggressive on pricing, and that's, certainly, for us to meet that pricing has hurt our margins on top of the fact that we're having to put the Tier 4 in ours and our margins have gone down on that.

I'd say we have seen that in crew, but I don't see a lot of revenue pick up in both of these areas other than from the international until we get some stability or some certainty about what kind of highway bill we're going to have.

Are you feeling less optimistic about the domestic sales opportunities you have right now than you were three or six months ago?

I guess it's pretty frustrating to answer your question on what they might do with the highway bill . On the positive side, I do see commercial work slowly coming back, not greatly. Homebuilding, as you know, was up slightly, a long ways from where it needs to be, but we're seeing a gradual return to the commercial work, which helps our customers. But the highway work, it remains slow and I'd have to say I'm still negative of getting anything done before -- we've got to have more revenues and the Republicans don't want to do anything to raise it and the Democrats definition of infrastructure is a lot different from roads and bridges. So it's not a very positive thing.

There's a number of people in the industry with the opinion that maybe with this conference, that they will convene and we might end up with a three-year highway bill. And even though it would be probably a flat bill, they'll still have to come up with some funding. That wouldn't be all bad, at least it let's a little bit of certainty into the market. But right now, people are just somewhat paralyzed by the unknown of what's going to happen related to it.

And where do you thinking you guys are in the transition from the Tier 3 to Tier 4 engines in terms of your retooling of your equipment?

Well, our biggest are there was at Roadtec, and I'd say they are 80% through with all that. We have all of the new models designed there. There are some of our other businesses, the Peterson, the chipper business, is just getting started in it. They are larger engines and they have more time on that. But I would say on a whole of our mobile equipment, we're probably 70% there.

Okay. Well, that does it for me. Thank you very much .

Thank you .

Our next question comes from Robert McCarthy of Robert W. Baird. Please proceed with your questions.

Good morning, Rob.

Good morning, Don. That's Baird, of course. As you would expect from me, I've got some number oriented questions . First, I want to make sure that I understand the backlog adjustments that we're making. We've added about $20 million to last year's backlog for comparability purposes. That's Gefco I gather.

That is correct.

That's correct.

And then the thing that sort of surprises me, just a question of ignorance, it looks like about two-third or three-quarters of that backlog was international.

Yeah, Gefco, before we bought them last year, had about $19 million backlog at the end of the first quarter and $10 million of it was a larger order to Egypt that our Corps of Engineers paid for. So it was an unusual size order for that company and that doesn't exist this year, so that was kind of an anomaly. That order shipped before we bought the company.

So their business today is -- I mean, is it mostly domestic, which is what I had assumed?

No, I would say, again, it's about half international. The good part of it, they had a very good first quarter. And I might say I'm very pleased with the people there and with that acquisition. They're very excited about us upgrading their plant and putting more equipment in. But one of the things, they had been very cautious and held back for a number of years and we have doubled a number of people they've got out in the parts area, so their parts business is about 42%, 43% of their business.

They've got such a string of products out in the field, and we're growing that business. Their new equipment, we're redesigning some of it and growing it. It was exciting; I was out there last week and we started the focus groups about three months ago and I've never seen a group so excited about how much savings that they can take out of what they're doing. So we're very pleased with that. I think it's going to be a great company for us.

Can you tell us what Gefco contributed in revenue in the quarter?

It was around the $14 million, $15 million range.

Okay. And last question. More broadly, looking at the international and domestic order comparisons, deriving that from backlog, it looked like your international order activity was roughly flat year-on-year, Don. Was there a surprise to you, is there an element from last year's number that made it a more difficult comp or can you just talk about what you're seeing there?

You know, it's a mix, Rob, between the companies. Canada and Australia continues to be good for asphalt. The thing that's been a little surprising is we've done our quarterly reviews, and the domestic business in the aggregate side of the business for the first time in about three years has began to pick up a little bit, which was a little bit surprising to me, while on the domestic side of the asphalt business, it's a struggle. But the mix between international and domestic has switched over and it's about half and half now on the aggregate side where (inaudible) there was about 70% international last year. So we are seeing an improvement.

I might add part of that on our track-mounted machines, there's a lot of those going out to dealers who are renting them. The rental business is just a part of the uncertainty and people are doing a lot more renting than they are buying. And the machinery that we have in that area is doing better because of that.

Okay. Thank you. I'll get back in the queue.

Okay.

Our next question comes from Rich Wesolowski of Sidoti & Company. Please proceed with your question.

Thank you. Good morning.

Good morning, Rich.

Don, over the last couple of calls, you voiced optimism that the Company can reap operating leverage on the 15% sales growth both in the gross margin and in the SG&A, and today, it seemed to reverse and pulling for earnings expanding in line with sales. Can you discuss what changed there?

It's mainly in the mobile side due to the redesign of the equipment for the Tier 4 and the cost of the engines in the Tier 4 and the new products. What we are selling to backfill our brand new products and, without any question, the margins on those have been disappointingly low.

It's like one of our president's said, he said, "I'm embarrassed that we lost money on this first sale," but he said, "we're going to up the price and we're going to cut our costs and we'll get the margin back in shape," and that's just we are going through that process. Our margins on our equipment was down about 2% year-over-year, but what saved us is the parts business.

Right .

And the growth of that. But we're disappointed that the margins -- that we're not getting incremental benefit. I believe we will. It may take another quarter or two to do that. We can't, and I don't know where anybody can, but we can't design a brand new product or a new model and not have to do some rework and not have to have some warranty, not to have excess man hours on it. It just seems to happen and I know from over the years, we've seen our man hour cost go to 40% of what the first unit was, so this is not unusual what we're seeing here today.

Am I correct that assuming that the bulk of the 1Q sales were for products that did not have the late 2011 price increase but that the great majority of the sales in Q2 and beyond would benefit from the price increase?

Yeah, that's correct.

Okay. And then lastly, even without Gefco's contribution, your parts business was about $70 million and you've never cracked $60 million in the past. What was the big change from 1Q versus 2011?

I think there are two things. One, we are being very aggressive about selling our parts. As I mentioned in other calls, we continue to add PSRs, or parts service representatives, out in the field. And the people who buy the parts are not the people that buy the new equipment.

I'm a little embarrassed that we haven't recognized that in the past more. We've been more order-takers on parts and now we're aggressively trying to sell them. We're reverse engineering some of our competitors' parts and some of our competitors that have gone out of business. But I think the second thing that's probably equally as important is that in the uncertainly of the economy, there are two major things happening.

People are, at least on asphalt plants, they're buying used asphalt plants versus new if they can find them. And number two, and particular in the mobile stuff, they'll rent before they buy . It's really just a process, in my opinion, Rich, of delaying a decision. It's not that they don't need it, but with the uncertainty and not being able to have much visibility out there out, they will pay a higher price to rent.

Great. I appreciate it. Best of luck.

Thank you.

Our next question comes for Nick Coppola of Thompson Research Group. Please proceed with your question.

Hey, good morning.

Good morning, Nick.

If you were to look across segments and divide it into infrastructure, mining and energy, what was the performance like in each of those buckets? I guess any quantitative or qualitative conjecture would be appreciated.

If I understand your question, I guess if we look at the asphalt side of the business, it is still a very strong infrastructure. Probably 75% of what they do is infrastructure, maybe 80%. The one company there that has done very well in diversifying more in energy the Heatec operation (inaudible). Their business is going to heaters for processing natural gas, for fracking, for hot water, so they've done a very good job.

Astec still sells some soil remediation plants. Astec has invest a lot of money in this wood pellet plant, and it could be a substantial part of its business in the future. We have two plants that we, as I've said earlier, that we think we'll sell this year. The larger of the two -- I had an email from our customer yesterday and it said that they hope to sign the contract on the [Oftec] agreement by the end of this month or by the end of May, I should say, and would be proceeding with the plant. That will be a part of that business.

In the aggregate side of it, the predominant amount of their business is going to infrastructure and mining with probably 30% of it now going to mining. In the underground side, it's predominantly going to energy or drilling. Our drill rigs are going quite well and the directional drills or pre-well, a large part of it is being sold internationally, but, again, that's for pipelines and things like that. The mobile side of the business is predominantly infrastructure and really is not diversified a lot out of that.

All right, that's helpful . I guess talking about the wood pellet plants, I think the last time that we spoke, I guess there was still some I guess technological or there's functionality issues being ironed out. Where are you on that?

We have continued to struggle with the pellet press. The first plant we sold will be using ring dyes, the more conventional type units that we will purchase. That amounts to about 10% of the cost of the total plant. The drying and burning up of the VOCs and the torifying of the wood has worked very successful through the tube-type dryer. We've tested and all our tests have come out very well, and we're pretty excited. We've got a great product there.

Torification is still kind of a new process that will be a while probably before the utilities buy into it. The economics of it at this point don't work as well as just the regular wood pellets, and many of the European utilities are set up just to handle the wood pellets. But we think we're ahead of the game on that and we think that we've got the ability. The tests we run, most pellet plants that run southern pine without an afterburner or RTO on the plant, you can't run over about 120,000 tons a year. With the system we have, we can run up over 600,000, 700,000 tons a year without an afterburner, so we've got some real advantages. We're pretty excited that we're getting close to having all the bugs out of it.

Okay. That's great. Thanks. And then one last question. I think I missed this, but with the 15%, 20% increase in revenue, how much of that was acquired revenue?

Basically, we're making a comparison of year-over-year, basically. Their backlog and everything has got it included, but we're making -- that's -- of the revenue, it's about $15 million, but as a comparison of year-over-year, we had Gefco's last year's in there. But we had it in our backlog --

In the backlog but not in the revenue, yeah, so it's about $15 million.

About $15 million in the revenues, but it is in their backlog as comparison.

Got you, got you. Okay. Thank you.

Our next question comes from Jason Ursaner from CJS Securities. Please proceed with your question.

Good morning.

Good morning, Jason.

Quick follow-up on Jack's original question about the contract with the US Army. What was the revenue content that's actually shipped through the quarter on that first one, and what do you have in backlog now from that?

Basically, the total contract is $89 million to $90 million. We have only put in backlog about $21 million of it. We have firm orders for seven plants. Actually, we did not actually ship the first plant. We will be shipping it in the second quarter. We had a lot of expenses related to it.

Okay . And you won't have ConExpo this year, and I know last year, you had a very strong showing there at the end of March. In terms of the top line impact of that, I think most of the shipments went out in Q2, but were the orders already in backlog by the time Q1 ended last year?

No, I think we sold everything that was out at ConExpo. But, no, I would say probably most of the benefit of that stretches out over nine months. You asked a question that is hard for us to analyze. I struggle with whether we get the benefit of that as our salespeople think we do.

We had just finished a show last week at Intermat in France, and again, you don't spend there what you do at ConExpo, but we were successful in picking up some orders there. But I think to answer your question, most of that showed up in the second quarter if it shipped out of what was at the show and then other orders would have been in the second or the third quarter of last year.

But those wouldn't have been in backlog; it sort of was an immediate order from the show?

Some of those were in backlog. I would say half of what went to the show, we already had sold, Jason.

Okay . In terms of hitting the annual revenue growth target, I see the acquisition growth is in hand, but listening to your commentary and I guess the backlog figures, I'm a little confused where the volume growth is going to come from. You're still showing growth, but the quarterly comparisons are getting a little tougher from here on out. So if you could just give any more color on that?

Well, it -- we, I guess, we see the 15% growth as still being very achievable. It will probably in the second half switch more to being international. I am, I guess, domestically on infrastructure, I think you'll see a continued slight improvement in residential and commercial type building, just a slow improvement. I think highway work is going to be flat and, as I said earlier, is already down like 14%.

We're getting a lot of our growth or will get more of it out of the energy business. We have a number of orders for pump trailers for oil service and fracking. We have about 30 something orders for hot water heaters for fracking. We've got a year's backlog for thermal oil heaters going on gas platforms. We have -- the pellet plants, we hope will start to fill in the fourth quarter . So we've got a variety of diversified products that should continue to backfill, and that's what we're banking on.

Okay, great. I appreciate the color.

Our next question comes from the line of Ted Grace of Susquehanna. Please proceed with your question.

Hey, guys. How are you doing?

All right, Ted.

So the first thing I was hoping to come at is the orders by end market. And so if you could just dissect, you know, we look at the year-over-year change in your orders, not backlog but orders, how much of that came from infrastructure versus energy versus mining?

From my best guesstimate of it, Ted, would be probably 20% mining, 15% to 20% in energy, and about 60%, 65% infrastructure.

Okay, so that's orders not revenue?

That's correct .

Okay. And just for clarifications sake, I know you gave kind of an apples-to-apples comparison on the backlog, but could you give us the orders from the first quarter adjusted for Gefco and whatever other adjustments you think are appropriate?

I'm not sure I understand what your question is there. I mean, Gefco is about $15 million in revenues and their backlog is comparable to that. They've got about a month -- about a quarter's backlog. In the way the accounting is, David and I knock heads sometimes over this, but he wins. He's bigger than I am.

In presenting our backlog, we have to compare what backlog that Gefco had last year, and they had like $19 million last year versus about -- I believe it's $15 million this year in backlog.

That's about right.

They had that one large order, and even though we didn't own them and even though we did an asset purchase, we had to make that comparison. So it was an asset purchase towards revenues, we had their revenues without a comparison to last year.

Okay. So maybe said otherwise, if I just look at your quarters on an apples-to-apples basis dollar wise, they're up what, $30 million year-over-year?

That's pretty close, yes.

And what you're saying is two-thirds of that came from infrastructure despite the headwinds and only 20% was mining, only 20% was energy?

That's right.

Okay, that's what I was trying to get at. And in terms of the April lettings on the highway side, any sense for how that's going? Have you seen an uptick or an improvement given that you did get a CR?

We did see, I know in Georgia, for example, they canceled all the lettings in March until June, but they reinstated them and they had letting in April and in May, likewise in Mississippi, likewise in most states. So what all of this has done, though, it's tended to delay the start of the construction season for the contractors due to good weather. They used up their backlog and, as a result, they're just -- they're getting somewhat of a late start, and then you still continue with uncertainty of what's going to go on after June.

In one respect, it's like we've had for the last two and a half years, the type of work they can let is primarily is asphalt job. The bigger job, they're not going to -- they require a year or so of design, so you're not going to see any of that done until you get a multiple year highway bill. There is an opportunity in this conference committee that we might see maybe a compromise of a three-year bill. There's been some discussion of that at about flat funding, as I said earlier. And I would think that's probably got a 50-50 chance of getting done. With that, it would probably change the backend of our year a little bit.

Okay. But if you look at the highway lettings, they were down five months before March, so they've been down six months in a row in seven out of eight by an average of 25%. Do you think that's going to reverse itself in the, call it, the spring season?

It will a little bit, but it won't makeup the 25%.

Okay . And then the last thing, I was just hoping to get a little more color on Brazil in the quarter, kind of where the strength was and how you're thinking about Brazil for the rest of the year.

We're in -- we've been slowed by -- David, you've been down there. We've been slowed by just the legalities of it. The plant's beginning to be started.

Yeah, there's a lot of bureaucracy that you have to weigh through in Brazil to do just about anything. But we are making progress, the plant is -- we have blueprints and such and we're beginning to -- getting ready to break ground and we still project that by the end of the year of 2012, probably the first quarter of 2013, we'll begin production in Brazil. Again, there's a lot of weigh through, but we've got a lot of the administration and back office operation underway, so it's looking pretty good.

I guess, more specifically, I was trying to get a sense for sales, not operations. So when David went through international sales, Brazil is the second listed region, and so I didn't know if we should infer that it was (inaudible) by Australia then Brazil then CIS or -- I'm just trying to get a little better flavor for how your business did in the first quarter this year.

Yeah, those are sales out of the US into Brazil, and we believe that certainly Brazil will move up the ladder once we start selling in Brazil. I mean, there are a lot of incentives for people to buy from Brazilian manufacturers.

The main reason we're going to Brazil is we've got -- the duties of taking products in there is extremely high. It's not to build there and export out of there. It's to build there and sell in Brazil to be competitive with our competitors that are there.

Got it. Okay. Good luck, guys.

Thank you.

Our next question comes from the line of Walt Liptak from Barrington Research. Please proceed with your question.

Hey, Walt.

Hi, thanks. Good morning, guys. I wanted to ask another one on this Tier 3, Tier 4 transition. You mentioned foreign competitors that are allowed to bring in Tier 3 engines. Are those transition engines and when does that come to the end because that might alleviate some of the margin pressure?

Walt, I think -- we don't know how many they stockpiled, but we were unable legally to stockpile engines, Tier 3. We do have a flex program where, depending on the amount of number of engines that you build, you get a percentage of that as a transition period. The foreign competitors were able to stockpile as many as they wanted to. And they have, in addition to that, they have the flex program available after that. So it's kind of typical bureaucratic -- it really puts the American manufacturer at a major disadvantage and it's kind of frustrating for us. But I think they'll blow through that this year.

Okay.

The other thing that will help us, too, and we're already seeing it, our margins are coming back up on the new models as we get the jigs and fixtures and the things for those, so I think we will probably be ahead of them and also in the warranty problems that you have with new machines, we'll certainly be ahead of them on that. But right now, they've probably got a nine-month advantage on us.

Okay . And the margin pressure that you saw on asphalt, was that because of that sole Army related plant?

Yeah, the first one or two of those are not going to have much in them. The biggest thing that we're seeing on that is just a lack of good violence volume -- we're selling a lot of components, we're selling a lot of parts in the asphalt side. And our quarterly review with the Astec subsidiary, our sales manager said that there had been in the least 12 months 14 of what I would call our double barrels, our relocatable type plants, 14 of those out on the market about six of them have been sold.

And the problem with that is that it just takes away new business. We sell parts to the people that buy the plants, but it takes away our -- the new side of the business. So what they are buying, they're either fixing up what they've got or buying a portable because they're moving out of the area they normally work or they've got the ability to do -- to go look for a used one.

Okay. And let me just switch gears but still talking about margins. The price costs or what the commodities costs have been moderating, maybe some contracting. Wouldn't that help your second quarter and your back half of the year if some of your material prices come in?

Yes, that would be a real help. We've seen steel moderate a little bit, but it's still probably 25% above where it was a couple of years ago. It went up maybe 40% and then back down, but it hadn't moderated like it did in 2009. It's still probably 20% or better above what it was at the beginning of last year.

Okay, but at this point, you're not seeing the relief come through from raw materials?

Not a lot. We've seen the rate of increase moderating, but not necessarily falling back on them.

Okay. And then the last one I want to ask is the businesses that continue to do well, the backlogs and (inaudible) group and aggregate mining, and you talked about how the commodities areas are still going to be good. But we've seen commodities prices come in, what point should we worry a little bit about too much capacity being out there for commodities process and if the prices are coming down or are you just not seeing a robust market?

We're not seeing the market as being real robust at this point.

Okay, but your backlogs continue to grow.

I guess our expectations, and if I sound disappointed -- my disappointment with the growth in the revenues I think we'll have that. My disappointment is that we didn't do better on our margin. I expectations was a little too high, but that's been disappointing. I think it's an opportunity there for us to improve and I think we will do that.

Okay. Thanks very much.

Our next question comes from the line of Todd Vencil of Sterne Agee. Please proceed with your question.

Thanks a lot. Good morning, guys.

Good morning.

Most of my questions have been knocked out, but I'd like to drill down on a couple of things. One is, Don, when you talk about margins sort of recovering slowly and you're not really looking for incremental improvements from volume, but you are looking to a recovery from some of the things that hit you during the first quarter. So are we thinking about kind of recovery up to this 24% gross margin level that you saw in 2007 and 2008? Is that kind of the level you're thinking about?

That's where I'd like to see us get to, but it will be probably 12 months before we get back to that. I think we'll just see a gradual improvement.

Okay and then you mentioned the domestic -- that you were not looking for a lot of domestic growth, certainly on the asphalt mobile side given what's going on here with the highway bill or lack thereof. What is the -- for those two business, asphalt and mobile asphalt paving, what is the domestic international split?

They are generally in a 25% to 30% international.

Okay, that's what I've got. Thanks a lot.

Good. Thank you.

Our next question comes from Robert McCarthy of Robert W. Baird. Please proceed with your question.

Thanks for taking another question or a couple. David, just to be perfectly clear on tax rate expectations, we should just use 37% for the balance of the year best guess right now?

That's best guess if Congress will pass the R&D tax credit. It should revert to our historical norms, which is about 35%.

You hate to count on Congress to do much of anything these days.

Right.

The corporate expense, unallocated corporate expense, if you net out things like interest expenses and taxes, etc., that number was down something like 50% year-on-year, it got cut in half. Was there something unusual that contributed a positive offset in there?

No, there was nothing unusual.

So expense levels last year then were elevated.

Yes.

They were slightly elevated last year.

I think last year, we had all that ConExpo in there, Rob.

Okay .

We see our SG&A in engineering as being pretty well flat the rest of the year, and as a percentage of total revenue, we see it getting more back in line where it should be.

And the only other question I had was in the asphalt group, typically, Don, you'd see a measurable revenue decline from in the second quarter from the first quarter. Is that what you also expect to see this year?

No. Normally, the decline, Rob, would be in the third or fourth quarter. The second generally is equal to the first or always has been, and sometimes second has historically been our best quarter for the whole company, and it's generally Astec pretty well parallels that.

I don't mean to be argumentative, Don, but the last three years, second quarter asphalt group revenue has declined by at least $5 million from the prior quarter.

Well, we don't expect that this year.

Okay. That's clear enough. Thank you, Don.

All right.

Our next question comes from Rich Wesolowski of Sidoti & Company. Please proceed with your question.

Hi. Thank you for circling back. Don, did you mention that you had a firm order for a $40 million (inaudible) or group of plants?

I had a second word, a "firm verbal".

Firm verbal, okay. That's the one I missed.

We have had a number of meetings with this particular customer whose been very -- they run two pellet plants in Georgia, they're building a third large one. We have agreed on the numbers, we've agreed on everything except they are in Europe, as we speak. Hopefully, we'll get a contract signed for all other Oftec by the end of May.

The one thing that has everything a little bit in limbo over there is the British government has got a very aggressive program to give tax credits for burning biomass type fuels and replacing their coal fire tire plants with it, and that law is supposed to take effect I think the first of May, and they hope to have their contract in place. So our order is contingent on that contract getting in place.

Would you mind discussing the order outlook for that product line beyond this one prospect?

We have a very good prospect for this prototype plant that we've got. And, frankly, we've got prospects for probably three or four more of the big plants. We want to digest this big one and get it running and make sure that we have no other problems with it, but I would say that we should start to see more substantial orders in 2013 for the plants. But we're not ready to take multiple orders until we get this first one in and operating.

Right. And lastly, would you remind us of the range of sizes of the pellet plants and the price tags that can go on those?

Typically, the lines that we're building, we're building a modular type plant and they will operate at 15 tons per hour, guaranteed production, and we hope they'll do 20 tons an hour is our expectation. That's very dependent on how wet the wood is. But the one in Georgia we're talking about will have three lines, three identical lines, so it will do 45 tons to 60 tons an hour. And those things, each line is about -- the first line with the auxiliary equipment goes with it is probably a $16 million plant and the other lines will be like $15 million -- excuse me, $13 million a piece.

Great. I appreciate it.

Our next question comes from Jason Ursaner of CJS Securities. Please proceed with your question.

Thanks for taking the follow-up, Don.

Yes, sir.

What was the revenue on the small trencher business you sold to Toro, and is that still going to be a drag on that segment earnings until you finish out sort of the contract manufacturing agreement or will you be able to list it as a discontinued op?

We will not list it as a discontinued op. It will -- the revenues were around $17 million to $18 million a year, and that includes the parts related to it. There was about $4 million to $5 million of that being parts. We will continue to manufacture for them until the fourth quarter. It will be -- I'd like to say it will be a break even, but it may be a slight loss till the fourth quarter. It is just consuming man hours in that plant as we reload it with these other products.

Okay. So if I think about the Gefco contribution, it's probably, on a gross margin percentage, it's a bit higher than that consolidated?

Yes . Now, the underground is still a drag on us there. We expect that to improve considerably as these fracking trailers go out. We have orders for those and we have started to get orders for the larger trenchers again, which is a pleasant surprise.

Okay, great. Appreciate it. Thanks.

Our next question comes from the line of Larry DeMaria of William Blair. Please proceed with your question.

Hi, good morning.

Good morning, Larry.

Most things have obviously been answered, but two quick questions. If you get the two orders for the wood pellet plants, when would you anticipate shipping, would that be third or fourth quarter?

We would anticipate the first line of the big plant going in the fourth quarter and the other two lines going in the first quarter of next year. The small prototype plant we have here, probably in the fourth quarter.

Thank you. And then with regards to Intermat, any more color you can give us in terms of how order shaped up and are they staying in western Europe or are they mostly going to eastern Europe or elsewhere? Just your overall sense you got from Intermat would be helpful.

The prospects kind of jump all over the place, but we sold one plant that is going to France. The other one's -- the other prospects are kind of scattered all over, but I would say more eastern Europe than anywhere else. I was quickly looking on my Blackberry, my son sent me a list of all the different ones that or from the different areas and there are some that are in the Middle East, some Africa, mainly I would say eastern Europe is where they're --

Okay, that's helpful. So do you guys feel better or worst about coming out Intermat than you did going in, I guess, given what's going on in the world?

I guess I've always been the negative one on Intermat. The times I've been, there wasn't much. But he was saying leads out of France, Italy, Belgium, Kazakhstan, Czechoslovakia, Qatar, South Africa, Finland, Angola, Ireland, and Poland.

That covers a lot.

Yeah, it covers a lot.

Okay, thank.

Yes, sir.

There are no questions at this time. I'd like to hand the floor back over to management for closing comments.

All right. Thank you, Louis. We appreciate your participation on this first 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 May 8, 2012, and our 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. And, again, all of that information is contained in the news release today. This concludes the call. Thank you and have a good week.

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