Astec Industries Inc (ASTE) 2012 Q2 法說會逐字稿

Greetings and welcome to the Astec Industries second-quarter 2012 earnings call. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Steve Anderson with Astec Industries. Thank you, Mr. Anderson. You may now begin.

Thank you, Christian. Good morning and welcome to the Astec Industries conference call for the second quarter of 2012. As Christian mentioned, my name is Steve Anderson, and I'm the Vice President of Administration and Director of Investor Relations for the Company.

Also on today's call are Norman Smith, Corporate Vice President, and David Silvious, Chief Financial Officer. We also have with us today Tom Campbell, Vice President of the Mobile Asphalt Paving Group and Underground Groups; Rick Patek, Vice President of the Aggregate and Mining Group; and Ben Brock, President of Astec Inc. These gentlemen will be available during the question-and-answer portion of our call.

Before we begin, I would like to let you know that Don Brock, our Chairman and CEO, continues to work on a reduced basis as he undergoes treatment for mesothelioma, and many of you have communicated your sentiments and best wishes. Don and his family and we here at the Company are all very appreciative for that.

In just a moment, I'm going to turn the call over to David Silvious to summarize our financial results and then to Norm Smith to discuss our business operations.

Before we do that, I will note that in the way of disclosures 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 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 will turn the call over to you, David, to summarize our financial results.

All right. Thanks, Steve, and good morning to everyone.

Sales for the quarter were $253.9 million in 2012 compared to $247.8 million in 2011. It is an increase of about 2.5%. International sales were $92.4 million in the second quarter of 2012 compared to $108.3 million in the second quarter of 2011. That is a decrease of 14.7%. International sales were about 36% of the second-quarter revenues in 2012 compared to 44% of the second-quarter revenues in 2011. The decrease in international sales quarter versus quarter occurred mainly in Canada and the non-Brazil South American countries in the Middle East, in Mexico and in Australia.

Domestic sales for the second quarter of 2012 were $161.5 million compared to $139.5 million in the second quarter of 2011. That is an increase of 15.8%. Domestic sales were 64% of the Q2 2012 sales compared to 56% in Q2 of 2011.

Parts sales for the second quarter of 2012 were $65.6 million, and that compares to $58.5 million for the second quarter of 2011. That is a 12.1% increase or $7.1 million increase. Parts sales were 25.8% of the quarterly sales in 2012 compared to 23.6% of the quarterly sales in 2011.

Speaking of parts sales, the Underground Group actually had the largest dollar increase, primarily due to GEFCO, the addition of GEFCO in late 2011. So they are not in the second-quarter 2011 numbers but in the second-quarter 2012 numbers, followed by the Aggregate and Mining Group, which had a parts sales increase, the Mobile Asphalt Paving Group and the other group as well. The Asphalt Group was the only group that had a slight decrease in their parts sales.

On a year-to-date basis, the sales were $520.5 million compared to $477.9 million in the prior first half of 2011. That is an increase of 8.9% or $42.6 million. International sales in the current year in the first half were $197.6 million compared to $190.9 million in the first half of 2011. That is a 3.5% increase. The increases in dollars for international sales occurred primarily in Australia, in Brazil, in the post-Soviet states, Russia and also in China. These were offset by decreases in Canada and the other South American countries outside of Brazil.

International sales were 38% of net sales on a year-to-date basis in 2012 compared to 40% of year-to-date sales in 2011.

Domestic sales in 2012 for the first half were $322.9 million compared to $286.9 million in the first half of 2011. That is a $36 million increase or 12.5%. In 2012 the first-half domestic sales were 62% of total sales compared to 60% for the first half of 2011.

Parts sales on a year-to-date basis in 2012 were $141.6 million compared to $115.8 million for the first half of 2011. That is an increase of 22.3% or $25.8 million. Parts sales for the year-to-date were 27% of the total sales in 2012 compared to 24% of total sales in 2011.

Moving down to the gross profit line, gross profit for the quarter was $56.2 million compared to $62 million for the second quarter of 2011. It is a decrease of about $5.8 million or 9.4%. The gross profit percentage decreased 290 basis points for the quarter to 22.1% from the 25% that we had in the second quarter of 2011.

One of the drivers of that was the absorption variance, the underutilization, if you will. We actually were overabsorbed by about $2.8 million in the second quarter of 2011, and we are now slightly underabsorbed by about $700,000 in the second quarter of 2012 for a total of about $3.5 million swing.

On a year-to-date basis, the gross profit is $116.9 million compared to $116.7 million in the prior year -- first half of the prior year. That is basically flat. The gross profit percentage for the first half of 2012 is 22.5% compared to 24.4% in the first half of 2011, about 190 basis point decrease. Again, our underutilization or underabsorption of overhead increased year over year, half over half by about $5.6 million. We were overabsorbed last year and again underabsorbed this year.

Our manpower actually went up 528 people, about 15% June 30 versus June 30 headcount. Part of that is GEFCO acquisition and other acquisitions that occurred in Germany and also in the startup of Brazil that is occurring. Those are very minor compared to the acquisition of GEFCO.

On the SGA&E line for the quarter, SGA&E is $40.4 million or 15.9% of sales compared to the second quarter of 2011 where it was $38.8 million or 15.7% of sales, about a $1.6 million increase in strictly dollar terms and an increase of about 20 basis points as a percentage of sales. Impacting that certainly was the acquisition of GEFCO. That was about a $2 million of the increase for the quarter. And in the prior year, driving up the prior year, we had CONEXPO for about $1 million in the second quarter of 2011. Other increases in SG&A for the second quarter of 2012 were payroll and related costs, some insurance costs related to benefits, and the actual stock-related costs went down about $600,000 and served in the restricted shares.

For the year, SGA&E was $82.3 million the first half and 15.8% of sales compared to $78.3 million for the first half of 2011 or 16.4% of sales, a $4 million increase. The impact in the first half of 2012, again, were insurance, health insurance and other payroll and benefit-related costs, and travel was also an increase in the first half versus first half. And GEFCO and the other acquisitions accounted for about $4.7 million of the increase.

Operating income decreased in the second quarter of 2012 from $21 million in the second quarter of 2011 to $15.9 million in the second quarter of 2012. It is about a $5.1 million decrease or 24.3% decrease. On a year-to-date basis, operating income was down $1.6 million or 4.4% from $36.2 million in the first half of 2011 to $34.6 million in the first half of 2012.

Income by segment, revenues by segment, all of that is attached to your press release and a supplementary schedule there for you to review.

Other income was $627,000 in the second quarter of 2012 compared to $366,000 in the second quarter of 2011 and $1.5 million in the first half of 2012 compared to $800,000 in the first half of 2011. Primarily that is driven by license fee income and investment income by captive insurance companies.

The tax rate, again, is an interesting topic. For the quarter, it is 36.6% in 2012 versus the rate in 2011 of 33.8%. Again, it has to do with the R&D tax credit, which was passed in late 2010, prospectively for 2011, but has not yet been passed for 2012. Congress historically has passed that late in the year, so we would expect that the tax rate to return to a more normalized rate around the 34%, 35% level. The tax rate for the year was at 37% versus 34.3%. Again, the R&D credit has a big impact on that year-to-date tax rate.

Net income attributable to controlling interest for the year or for the quarter, second quarter of 2012, was $10.4 million compared to the second quarter of 2011 of $14.1 million. That is a 26% decrease. Earnings per share for the quarter were $0.45 compared to $0.61 last year. That is another 26% decrease. On a year-to-date basis, we had earnings of $22.6 million compared to $24.2 million on a year-to-date basis in 2011. That is about a 6.6% decrease in the earnings.

And earnings per share at $0.98 for the first half of 2012 compared to $1.06 for the first half of 2011, that is a 7.5% decrease.

Our backlog at June 30, 2012, is $258.3 million compared to $224.9 million at June 30, 2011, a $33.4 million increase or about 15% increase. The 2011 backlog number has been adjusted for the acquisitions that occurred late in 2011, primarily GEFCO.

The international backlog in June 30, 2012, was $109.6 million. That compares to $121.9 million at June 30 of 2011. That is a decrease of $12.3 million or 10.1%. The domestic backlog at June 30, 2012, was $103 million (technical difficulty)-- I'm sorry, was $148.7 million compared to $103 million (technical difficulty)-- at June 30 of 2011. That is an increase of $45.7 million or a 44% increase.

Backlog by segment is attached along with the other segment information to your press release.

On the balance sheet, our balance sheet remains very strong. Our receivables are about $120 million at June 30, 2012. That compares to $103.8 million at June 30 of 2011, a $16.2 million increase. Of that increase, acquisitions accounted for about $5 million from June to June.

Days outstanding actually increased from 38 to 42.5 from June 30 of 2011 to June 30 of 2012. We don't see any problem in the receivables. We have made a conscious effort to use our balance sheet for select customers to have some extended terms or to facilitate their purchase of some equipment.

The inventory is $322.1 million at June 30 of 2012 compared to $281.2 million at June 30 of 2011. That is a $40.9 million increase. GEFCO and Germany and Brazil combined account for about $29 million of that $40.9 million increase.

We are at 2.5 turns this year compared to 2.5 turns last year. That remains relatively flat. We had nothing owed on our $100 million credit facility. We have about $36 million, $35.9 million in cash and cash equivalents. We have outstanding LCs of about $12.9 million. We had borrowing availability against that $100 million credit line of $87.1 million.

Capital expenditures for the second quarter are about $6 million. On a year-to-date basis for the first half, capital expenditures are about $11.4 million. We budgeted about $37 million for capital expenditures, and we believe that given the investments that we had going on in Brazil and in Oklahoma at the GEFCO facility, in addition to simply maintenance CapEx, that we will probably come close to hitting, is going to hit that capital expenditures budget for 2012.

Depreciation for the second quarter was about $5.8 million. On a year-to-date basis, that is $11.7 million. We're budgeted -- we are forecasting to run about $22 million in depreciation, and we are right on target to do that.

Well, that concludes my prepared remarks on the financial details. I will turn it back over to Steve, and we appreciate your interest.

Thank you, David. Norm Smith is now going to discuss Astec's business operations for the second quarter and provide some insights for outlook going forward. Norm?

Good morning. To just give you a brief overview and a few comments on the second quarter and the second half, just to repeat, David said second-quarter revenues were $253.9 million, up from $247.8 million, about a 2.5% increase. Three of our segments were up and two were down. The aggregate and mining segment sales in Q2 increased by [9.6] year over year. Domestic sales in the segment increased 42% year over year and 3.5% over the quarter, number one. International sales were down 12.1% year over year, but increased 4.3% over Q1.

Talking about the underground segment, sales increased 50.9%, year over year about $11.7 million. Domestic sales increased 131%, and international sales were off 45%. $10 million of the sales increase in the Underground Group was from GEFCO. The segment that we report as other segment, the sales there increased by 19.1% year over year. Domestic and international sales in that group increased 23.6% and 16.1%. The increases were from equipment sales, primarily with parts being level. Australia sales, Astec Australia is in the other group; Australia sales improved 123% year over year. Our Australian grew sales for 10 of the companies, so that was across-the-board sales for them.

The Asphalt Group segment revenues decreased by 12.8% year over year. Equipment sales were down 14.7%, about $8 million. Parts sales were down 4.4% year over year. The Mobile Asphalt segment revenues decreased by 15.5% year over year. Machines sales were off $9.2 million or 21% compared to Q2 2011. The comparison quarter in Q2 2011 was a very good quarter. The mobile equipment sales for Q2, even though it was down at $34.4 million, was comparable to an average of the four previous quarters, which would have been $34.8 million. The Asphalt Group and Mobile Group margins were hurt by the $8 million to $9 million decrease in volume, the loss in volume there.

The delay in the Highway Bill passage and the weakness in the economy both had an impact on domestic sales.

A few comments about earnings. Earnings were $10.4 million versus $14.1 million year over year, a 26% decrease. Three of the five segments, however, did improve. The Asphalt Group in the mobile group profits decreased 57% and 52% respectively. Factors that affected those earnings in the Asphalt Group, the pellet plant development, the development of a special plant for the Army, the design of the highly portable plant for international customers. A number one plant has been built, shipped with low margin, number two is sold as better expected margins, of course, the number two. Also, the design and development of the water heaters for fracing, we have had a number of those shipped already and have a substantial number in the backlog. Of course, we expect improved margins on those in the backlog.

In the Mobile Asphalt Group, the Tier 4 development costs and the pricing pressure in the market were the two factors that primarily affected earnings. Parts sales for the first six months consolidated over all segments was up 22%. This is an indicator of our customers' repairing existing equipment versus investing in major capital expenditures.

The outlook for Q3, the Asphalt Group and the Mobile Asphalt Group expect the passage of the two-year Highway Bill to be very positive for their markets. The state highway department now will have time and dependable funding to design larger and more projects. The third-quarter backlog in the Asphalt Group is about equally split between international and domestic customers. Also, it is about equal between the smaller regional owners and the large multinational companies.

Canada and Australia continue to be good areas for the Asphalt Group. We have an order for our first pellet plant, and the plant will consist of a prototype plant plus additional new equipment. The plant is a 10 ton per hour plant. We also have a letter of intent and an engineering design contract for our second plant, which will be a 45 ton in our plant. We expect both plants to be operational in early 2013.

We see our Aggregate and Mining Group's performance to remain good through the third and fourth quarters. The areas of our country with oil and gas business have been good areas for the Ag and Mining Group due to the need for aggregates for their infrastructure. Also, our dealers have had good demand for their rental equipment, especially in those areas.

In general, the third and fourth quarter, we just don't have very good visibility. Of course, the Highway Bill is positive. The election, of course, will create an uncertainty or does create some uncertainty for our customers. But with housing starts improving in some areas, we could get some help across all of our groups when that housing starts.

Going forward we remain focused on three key areas -- the continuing of our R&D efforts to develop new products, our strategies to increase our mining and energy markets, and our continued emphasis on international sales and marketing.

Just a comment, in 16 days on August 9, 2012, Astec Industries will celebrate its 40th year anniversary. As Steve mentioned, just a reminder, we have Tom Campbell, Group VP who is over Roadtec; Carlson, which is the Mobile Asphalt Equipment Group; American Augers; Astec Underground, GEFCO; and Astec Mobile Machinery, which is our German company, also reports to Tom and the Underground Group. Rick Patek, the Group VP over Telsmith, Osborn, VCI and is responsible for our new company in Brazil, which are all part of the Aggregate and Mining Group. Ben Brock is President of Astec Inc. It is the largest division of Astec Industries. Now Joe Vig, is the other Group VP, is not in attendance today. He is over ACI, KPI, Mobile Screens and Peterson, and we will handle questions from those companies for Joe.

We appreciate your interest in Astec, and we are ready for your questions.

(Operator Instructions). Rich Wesolowski, Sidoti & Co.

Thanks. Good morning. Did I hear correctly that GEFCO added $10 million in total sales? If that is right, how much of that was in parts?

GEFCO added $10 million in total sales for the quarter and GEFCO parts were -- let me flip to that page for you -- GEFCO parts for the quarter were about half of that.

Okay. How much revenue did you have from the Toro products, and were those at a loss or somewhere around breakeven?

Toro products? We don't have revenue from Toro products. We sold that last year.

Right. Basically we expect that in an OEM agreement that they cover our costs. We run that at a breakeven.

And there was no revenue in the quarter from that?

Just labor costs is all it is.

Great. Did you have more or less dilution of the margin from new products relative to the March quarter here in June?

(technical difficulty)-- I believe we had more dilution in this quarter than we did in March.

And what would be the reason for that? I was under the assumption that, as you shift the second, third and every successive version of these new products, that you would cover more overhead, and you would have less rework or redesign, etc.

Yes. During the second quarter, we shipped a couple of number ones, and all of the -- a number of the fracing units and a six size shipped during the quarter, and all of those were broken into low margin.

Also, the development out of the pellet plant continued, and then the development of the Army plant primarily were all in the second quarter. I would say we have not -- we did not have any cost relative to Army plants during the first quarter.

Would you suspect that the dilution in the September quarter and onward would be less than June? Is this a low point for this phenomenon?

I think it is. I think going forward we have got several number ones, as Tom mentioned, the double pumper fracing trailer pumps went out. That was a number one as well at a lower margin than what we expect. So late in the third quarter of 2012, there will be less pollution from the new products. Although we have continued to develop new products (multiple speakers). So it is kind of an evolution.

Okay. Thank you. I'm sure Don is listening to the call or he will be. I will say that our thoughts will be with you, Don, with your family, and with the whole Astec team in the months and the years ahead. Best of luck. Thank you.

Rob McCarthy, Robert W. Baird.

This is Mig Dobre sitting in for Rob McCarthy. Good morning, gentlemen. We also echo the wishes for Don and for all of you. Best of luck going forward.

My first question is really on trying to get a little more clarity about how you are viewing revenue growth for the year. There was previous guidance of about 15%, and I do realize that it is probably off the table now. I am wondering, though, can you give us a sense far your updated expectations for growth either for the second half or for the year as a whole?

Yes, in the press release, Don commented that he did not expect the impact of the Highway Bill to quite get us back up to that 15% expectation. So I think your question is very valid in that 15% is probably not what we are going to achieve. Although we do expect the Highway Bill to at least give our customers confidence and some state DOTs the confidence to go ahead and let some -- do some lettings and take some of the variability out of the market out there. The election still is a big issue for the economy. So I think your assumption is correct that it is off the table.

But you would not have some sort of guidance for us as to your new expectation -- where your new expectation would be? Is it fair to assume that could be a sequential uptick from the second quarter, or is this a new run-rate that we have to factor in?

The problem with the third and fourth quarter is the seasonality of it. We expect the Highway Bill to have an impact, but we also understand there is seasonality out there. Again, we have got exposure to the Southern Hemisphere with Australia, with South Africa. They are going into their summertime as we go into our winter. Obviously the Highway Bill does not impact them. The US dollar is probably -- and global uncertainty is more of an impact. But we think that somewhere in the 9% or 10% range is probably more fair at this point.

Do you want to comment about --

Ben is going to make a comment about the Asphalt side.

On the Asphalt side, one of the things about the Highway Bill is most of the state lettings tend to be before April. They would let them over the winter, and so we're past that point. So while the highway funding is there, a lot of our contractors are working on the jobs they have, and they are preparing for the lettings that are coming.

So for the Asphalt side, we would see right now the third being maybe a little bit better than the second and maybe the fourth being slightly better. Because we see the work coming, we get past the election, and at the association meetings, people are generally pretty pleased to have at least a two-year build to depend on.

It is not necessarily a lot of money. It is fairly level on the money side for highways. It is about $40 billion in year one, a little more in year two, and they were not overly excited, other than the fact that we will finally have something. You could feel a little bit of a sense of relief of dependable funds.

So just to understand your comment, you are saying that the fourth quarter in Asphalt should be better than the third?

It should be yes, a little bit better.

Okay. And my last question here is really on margin and EPS growth given the previous question about dilution from new products, but also realizing that we are talking about slightly lower revenue growth and additional costs related to your Brazilian plant. Is it still fair to assume that we could have year-over-year EPS growth for fiscal 2012?

I think that is a fair comment. This second quarter we mentioned the headcount. The headcount is still very high. We are still incurring a tremendous amount of costs. We are a high fixed cost operation, and that is just the nature of our manufacturing. But, with the lower potential for revenues, lower expectations as Don discussed in the press release, we have got to take measures to cut costs and to get our margin back to a level that is acceptable to us.

Certainly we want to be poised to take advantage if something takes off.

Thank you for taking the questions.

Jason Ursaner, CJS Securities.

Good morning. In the Asphalt segment, in total how much did the short-term continuing resolution impact sales? (technical difficulty)-- and what do you think was actually delayed for (technical difficulty)-- versus eliminated?

I would say that the delays had a lot of effect on our customers ordering. What you see is our parts are off a little bit. We saw a lot of component sales. So, in our major sales, we saw a lot of customers fixing up plants rather than going all new. I think generally there is a lot of pent-up demand because of this. We had, I think, it was nine extensions before we got to a two-year bill. And it did definitely got into some of our customers' minds, and depending on the pockets of where it is getting bad, I had dinner with a customer that had several plants that he had to that are mothballed. And so it will take some time for that to come back, and I think -- like I think Norm mentioned the housing starts. Our customers are seeing that. So we're starting to see a little bit of health on the private side, not as much as we would like, but I would say -- I would not necessarily put a percentage on how many deals did not happen, but I would say that there were deals that absolutely did not happen because of the extensions.

But there was no specific project that you built a plant and expected to shift (multiple speakers) for the next quarter?

No, there was not anything like that.

Okay. And just generally in that segment, what type of incremental margin would you expect to see on shipments at around a $60 million run-rate of sales? You mentioned some underabsorption there. I am just trying to get a sense for what a $1.00 might mean relative to the 20% or so gross margin on the consolidated.

Yes, I think with the underabsorption and they can make the moves that they want to make in holding down the costs, I think you are going to see in equipment, if we are talking about equipment only, parts sales hung in there, but if we're talking about equipment only, we are talking probably incrementally in the high 20s to low 30s.

Okay. In the US Army contract, you had expected the first plant to be delivered this quarter. I think I heard Norm say it went out. What was the actual contribution to revenue and margin from that first plant?

It did ship, but we have not actually counted the revenue as yet. That will not be known until late fourth quarter or -- I believe, Jason, that is -- we have been -- they go through a testing before they accept the plant, and it is in Aberdeen now being tested, and they anticipate the testing to be over in the fourth quarter, and that is when we can take it.

Got it. So there was no impact to revenue?

No.

And then in the Ag and Mining segment, Norm mentioned a pretty healthy domestic outlook with the energy markets, but globally there are pretty mixed expectations for mining CapEx going forward. A lot of big companies talking about phasing investment and returning cash rather than investing. Should we be expecting this segment to be peaking out in the near term with the commodity cycle or some of the investments you have made in the sales team, maybe you can grow through it?

Good question. I would say I think you will see the growth there slow down. We are hopeful that things remain relatively stable, which we still see that in the environment that we are in. But certainly people are talking about maybe delaying projects until they have a little bit more visibility in the marketplace in terms of mining. We have very good backlogs, so we are very comfortable with third and fourth quarter. We have started to book orders into 2013, which is a positive sign. But like you, we pick up the newspapers and talk to customers, and there is some apprehension going on there.

Okay. Just the last question and I will jump back in queue. It is a follow-up on bridges in the Underground segment, I'm just trying to figure out, he asked about the Toro contract manufacturing. I'm just trying to get how much of gross margin for the overall segment is being held back by that? Whatever revenue you are getting, sort of getting at costs would be masking the rest of the segment? So do you have a number on at least what the revenue from the contract manufacturing point of view was?

No, I don't have that broken out. Basically we are manufacturing for Toro, and they are paying for our labor and that is pretty much it. It is just a breakeven. We do get the absorption in the manufacturing expenses for the hours worked, but that is pretty much the only gain we get.

Okay. All right. Well, I appreciate it. I will jump back in the queue. David, I look forward to seeing you guys at our conference. Thanks.

Nick Coppola, Thompson Research Group.

Hey, guys. Looking at year-over-year declines in both the Asphalt and Mobile Paving revenue, I'm wondering if you could add any color there? What I'm thinking about, does the lack of a Highway Bill hurt more in this quarter than it has in prior quarters? Was there really anything else going on there that is kind of affecting demand?

I think the other thing that affected us a little bit is the dollar is moving a little bit stronger, and we are seeing a little bit of that on the international side as far as the volume goes. It is not -- it is probably affecting more our quotes right now than it has in the past, but it is not as robust -- if that is the right word -- right now for us.

I think that customers have learned to operate. They have learned to operate under a new norm, whatever that norm is that. But when there is uncertainty introduced, then it puts things on hold. And I think the fact that people -- that the extensions were fine and our customers learn to operate under the extensions. But when folks started talking about a Highway Bill, then it was -- that introduced uncertainty actually. Are we going to get one? How much is it going to be? And then the psychology of the market changed a little bit and people held back.

All right. And then have you seen any change in kind of total sales across segments to your different end markets? Has energy and mining done any better than the infrastructure piece? I wonder if you can call out any kind of strength or moderation.

I can tell you in mining actually it is making up a bigger chunk of our sales, especially when we related to international construction aggregates versus international mining. So it is starting to -- at one point it was probably 30%. Now it is probably closer to 50% of those sales.

In our Heatec division, which is part of the Asphalt Group, they have a good bit of business in the energy sector, which we mentioned the fracing heaters, and they sell also to natural gas processing plants. That business for them has been good and continues to be good.

Okay. Thanks for your help.

Rich Wesolowski, Sidoti & Co.

Thank you. You caught me off-guard. I did not expect to come back so soon. I would like to summarize the Army Corp. contract. It was some $89 million, 24 plants, and the last that I had written there was about $20 million in backlog for seven plants. Has anything else been put in backlog?

This is Ben. There have not been any more orders, so the backlog is still the same that you are remembering.

Okay. So of the seven plants, you have shipped one of them but (multiple speakers) no revenue yet?

That is correct, one shipped, no revenue. The second plant is on our pad waiting inspection. So they will both be about the same time for recognition. Because once the first plant is tested, then they can accept the other one here on-site.

Okay. So, of course, all the costs related to those have been recognized in the first quarter and more here in June?

No, not until we recognize the revenue. We would have some engineering costs in there developing the product.

But not the direct costs for the units, which you will incur when the Army Corp. accepts the awards?

That is right (technical difficulty)-- that is right.

At what stage are you in terms of reconfiguring GEFCO's manufacturing operations? I recall having conversations that there was some savings to be reaped there, and is there any way to put some numbers around what you can reap from there?

This is Tom. We are in the early stages of laying the plant out and moving things around, buying equipment, setting up sales, initiating lean into the entire process. And we are probably, if you looked at a percentage of where we are going to be and where we are, we are between 10% and 15% of where we have got to be. So I don't know if that is the answer you are looking for, but it is early stages.

And over what sort of timeframe would you hope to catch up with the remainder?

I would say hopefully my timeframe may be a different than the rest of those guys, but I'm hoping in 12 to 15 months, we are pretty much done with it.

Would you discuss the revenue recognition and the potential profitability of both the first pellet plant order, the smaller one, and secondly, when you would get the official order for the second larger plant, which sounds like you are already have an engineering design award for?

I will address the revenue recognition, and then Ben can discuss the order itself. But these are new products. These are number one and number two, and obviously one is built, and it has been proven out in the yard as an R&D project. We have got to get it in location and get it set up and make it perform, which it will, and we have proven that. So once we do that, revenue is -- revenue recognition is not a problem.

The second one obviously, the larger one that we discussed, has to be built. It is a little bit different, so the revenue recognition on that one may be delayed until we can get it into the field and watch it perform and see that it meets specifications.

That would be sometime as of today's schedule in the first half of 2015?

That is what we are shooting for. Yes, sir.

Okay. And then the last one, an earlier caller had discussed the outlook for the rest of the year for the seasonality. The heart of my question is, should we expect the same sort of seasonality from these reduced June numbers as we would normally see for a typical Asphalt year? And I would say 2010/2011 are more typical, or would the seasonality in revenue and in earnings be muted by the fact that June was below expectations?

I think the seasonality will be muted just a little bit. I think, as Ben discussed Asphalt, he feels like Asphalt is going to be a little better performer in the second half. I think we have got some of the pain behind us on the mobile side and going forward there. Underground is picking up, as you have seen in the numbers. Aggregate and Mining has a lot of exposure internationally, and certainly that could be positive, especially in the Southern Hemisphere in the second half. So I think we have got some things pointing in the right direction. I think the global risk of a global slowdown is really the uncertainty that is hanging out there.

I think last fourth quarter our Australian (technical difficulty)-- in the fourth quarter, and David has alluded to that our -- their seasons run opposite to ours since they are south of the equation. So that could help mute it as well.

Right. Okay. I'm sorry. One more, if I could. Looking a little further out, right now over the last three or four quarters the Company's margins have been hampered. You had put through some pricing. You had the new products that you would expect to get incrementally less dilution from over time. You have the parts sales that are doing fairly well. I mean is it unreasonable to assume that -- again, I know a lot depends on volume -- but if the Company does grow 5%, 10% in 2013, you would expect to see an especially good incremental margin given those opportunities. Is that management's belief?

It would certainly be a positive impact that we would expect to occur.

Okay. Thank you, again.

There are no further questions at this time. I would like to turn the floor back over to you, Mr. Anderson, for any closing comments you may have.

All right. Thank you, Christian. We appreciate everyone's participation on our second-quarter call. Thank you for your interest in Astec.

As our news release indicates, today's conference call has been recorded. A replay of the conference call will be available through August 7, 2012, 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. Again, all of that information is contained in your news release for your reference.

This will conclude our call. Thank you and have a good week.

Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time, and we thank you all for your participation. Good day.