Astec Industries Inc (ASTE) 2012 Q3 法說會逐字稿

Greetings and welcome to the Astec Industries' third-quarter 2012 earnings 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, LaTonya. Good morning and welcome to the Astec Industries conference call for the third quarter ended September 30, 2012. As LaTonya mentioned, my name is Steve Anderson and I'm the Vice President of Administration, Secretary and Director of Investor Relations for the Company. Also on today's call are Dr. J. Don Brock, our Chairman and Chief Executive Officer; Norm Smith, President and Chief Operating Officer; and David Silvious, our Chief Financial Officer.

In just a moment I will turn the call over to David to summarize our financial results and then to Don to review our business activity during the third quarter.

Before we begin I will 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.

Factors that could influence our results are highlighted in today's financial news release and others are contained in our annual report and our filings with the SEC. As usual, we ask you to familiarize yourself with those factors. So at this point I will turn the call over to David to summarize our financial results for the third quarter.

All right, thanks, Steve and I want to thank each and every one of you for joining us on the call this morning. Net sales for the quarter were $227 million versus $214.6 million in the third quarter of last year, that's an increase of 5.8% or $12.4 million. Our international sales were $87.6 million in the third quarter of 2012 versus $87.3 million in third quarter of 2011 and it's essentially flat.

The increases in dollars for international sales occurred primarily in Europe, Canada and Australia and those increases were offset by some decreases in the Middle East and India and in Asia. International sales were 38.6% of the third quarter 2012 sales versus 40.7% for the third quarter of last year.

Domestic sales for the third quarter of 2012 were $139.5 million versus $127.3 million in the third quarter of 2011, a 9.6% increase or $12.2 million. Domestic sales were $61.4 million -- I'm sorry, 61.4% of the third quarter of 2012 sales versus 59.3% of the third quarter of 2011 sales.

Part sales for Q3 of 2012 were $58.3 million compared to $58.8 million for the third quarter of 2011, and only a slight decline there. Part sales were 25.7% of Q3 2012 sales versus 27.4% in Q3 of 2011. The revenues by segment are -- for the quarter and year to date are attached to your press release in the segment analysis. On a year-to-date basis sales were $747.6 million this year compared to $692.6 million last year, 7.9% increase or $55 million.

International sales on a year-to-date basis were $285.2 million compared to $278.3 million last year, that's an increase of 2.5% or $6.9 million. Those international sales increased primarily in Australia, in the post-Soviet states, in Brazil, in Russia, Central America and Mexico and those increases were offset by decreases in the other South American countries other than Brazil, in the Middle East, Canada and India. International sales were 38.2% of net sales in 2012 compared to 40.2% for the year to date period in 2011.

Domestic sales on a year-to-date basis were $462.4 million in 2011 -- in 2012 versus 2011 of $414.2 million, that's an increase of $48.2 million or an 11.6 percentage increase in year-to-date domestic sales. Year to date domestic sales are 61.8% of total sales this year compared to 59.8% of total sales in 2011.

On a year-to-date basis part sales are $199.9 million compared to $174.6 million on a year-to-date basis in 2011, that's an increase of 14.5% or $25.3 million. Part sales for the year to date period were 26.7% of total sales compared to 25.2% of total sales for the year to date period in 2011.

Gross profit for the quarter was $49.4 million in Q3 compared to Q3 of 2011 at $46.4 million, that's an increase of $3 million even or a 6.5% increase. Gross profit percentage was 21.8% for Q3 of 2012 compared to 21.6% in Q3 of 2011, a 20 basis point increase.

The gross profit was impacted during 2012 by an increase in under absorption of manufacturing overhead, that was about $3.4 million and that was primarily experienced in the Asphalt Group -- the Mobile Asphalt Paving Group. And of course we had GEFCO this year and we did not have GEFCO last year, so the under absorption there is an increase in this year. The gross profit by segment for Q3 and the year to date periods are attached to your press release as well.

Consolidated gross profit was $166.3 million compared to $163.1 million in the prior year, a 2% increase or $3.2 million. The percentage on a year-to-date basis of gross profit was 22.2% compared to 23.5% the prior year, that's a 130 basis point decrease. Under absorbed overhead for the year to date period increased by $9 million, that was driven primarily by the Asphalt Group, the Mobile Asphalt Paving Group and the addition of GEFCO in the current year that was not there in the prior year.

Our manpower is just over 4,000 employees, last year at this time we were about 3,600 employees, about a 12.7% increase in headcount.

SGA and engineering for the quarter, SGA&E was $40 million or 17.6% of sales compared to $37.4 million or 17.4% of sales in the prior year -- for the Q3 of 2011. The increase of $2.6 million in dollar terms and an increase of 20 basis points as a percentage of sales, primarily those increases were driven by payroll related costs as well as an increase in health insurance costs.

For the year SGA&E is $122.3 million or 16.4% of sales compared to the year to date period in 2011, $115.6 million or 16.7% of sales, that's a $6.7 million increase and a slight decline in the percentage. Those costs are driven by -- increases in the current year were driven by health insurance, personnel and related costs.

And you will recall that last year we had ConExpo and we do not have that this year and also the RSUs, the spot price drives RSUs, it's a formula driven calculation and because the stock price increased last year we took a hit in last year's quarter that we did not take this year.

Operating income increased from $9 million in Q3 of 2011 to $9.4 million in Q3 of 2012, that's a $400,000 increase or 4.4%. On a year-to-date basis operating income was $45.3 million this year compared to 44 -- I'm sorry -- $44.1 million this year compared to $45.3 million last year, that's a decrease, actually, of $1.2 million or 2.6% decrease. Income by segment is attached to your press release in the segment analysis.

On down the P&L we are looking at other income. Other income for the year went up slightly, it was [$856,000] in Q3 of 2012 versus Q3 of 2011 where it was $264,000. The primary source of that is license fees and royalty income on our products as well as investment income by our captive insurance company. On a year-to-date basis other income is $2.3 million compared to $1 million in the year to date period for 2011.

Pre-tax income for the quarter is $10.1 million versus $9.3 million for the same quarter in 2011, that's an increase of 9%. On a year-to-date basis it's $46.1 million this year versus $46.2 million in 2011, essentially flat.

The effective tax rate for the quarter is about 32% compared to 16.2% in 2011 -- Q3 of 2011. The tax rate increased or is different from the same quarter last year, primarily due to the research and development credit. It was passed in Q4 of 2010, retrospectively for all of 2010 and prospectively for all of 2011. It has not been passed for 2012 yet. So we have no R&D credit baked into the rate. For the year the tax rate is 35.9% versus 30.6% in 2011 and again the R&D tax credit has an impact on the year-to-date rate as well.

Net income for the quarter was $6.9 million versus $7.7 million in Q3 of 2011, that's a 10.4% decrease. Earnings per share for the quarter was $0.30 for the -- versus $0.34 for Q3 of 2011, that a decrease of 11.8%. ON a year-to-date basis net income was $29.5 million compared to $32 million for the nine months ended September 30, 2011. That's a decrease of $2.5 million or 7.8%.

EPS for the year to date period this year is at $1.28 compared to $1.39 last year, that is a 7.9% decrease.

Our backlog at September 30 of this year is $240.5 million compared to $232.1 million at September 30 of last year, that's an $8.4 million increase or 3.6%. Just recall that that September 30 backlog has been adjusted to include those acquisitions that occurred, primarily GEFCO, that occurred in Q4 of 2011. So it is an apples-to-apples disclosure.

The international backlog at September 30 of 2012 is $124.4 million compared to $124.2 million the same time last year, it's a slight increase. And the domestic backlog at 9-30 of 2012 was $116.1 million compared to $107.9 million last year, that's an increase of $8.2 million or 7.6%. Of course backlog by segment is also attached to your press release in the segment analysis.

On the balance sheet, the balance sheet remains very strong. We have receivables of $109.3 million at September 30 compared to $101.2 million at September 30 prior year, that's an $8.1 million increase. Of that increase GEFCO represents about $3.4 million because they were not included at 9-30 of 2011.

Days outstanding is hanging in there at 43.3 (technical difficulty) days this year versus 43.4 days (technical difficulty) last year. Inventory is at $341 million for September 30 of 2012 compared to $290.5 million for September 30 of 2011, that is a $50.5 million increase or 17.4%. Of that $50.5 million increase GEFCO is about $29.3 million of that.

Our terms are two and a half days this year and two and a half days last year, so they remain the same. In that inventory raw materials are the primary driver of the increase followed by work in process, finished goods was actually down slightly.

We have nothing owed on our $100 million credit facility. We have $35.6 million in cash and cash equivalents at 9-30, we have borrowing availability of $85.4 million due to outstanding letters of credit.

Capital expenditures on a year-to-date basis are $17.3 million, for the quarter they were $5.9 million. We believe CapEx will end up at approximately $28 million for 2012.

Depreciation for the quarter is $5.3 million and on a year-to-date basis it's about $16 million. We believe the year will wind up somewhere in the $22.4 million range on depreciation.

That concludes my remarks and I will be around at the end of the call for any questions. Thank you.

Thank you, David. Don Brock is now going to provide some comments regarding the third quarter of this year's operation. Don.

Thank you, Steve. As David said, our revenues for the quarter were $227 million versus $214 million or up 5.8%. Our customers were hurt by lack of work and work with little or no margins. The late passage of the Highway Bill after numerous extensions somewhat stopped DOTs from letting jobs until late in the season. Continued uncertainty over regulations, taxes and the election has delayed many buying decisions.

Our pre-tax earnings were $10,140,000 versus $9,256,000 or up 8.6%, but our after-tax earnings were down 10.4%, as David said. The difference being the tax rate of last year bidding at 16% versus 32% this year. The difference was caused by the R&D credit that existed in 2011 which we took a substantial amount of that in the third quarter versus no R&D credit in 2012.

For the first nine months our revenues were $692,000 -- excuse me $692 million versus $747 million or up 7.9%. Pre-tax earnings were flat at $46 million. After tax earnings were down from $31.9 million to $29.4 million or 7.8%, again due to the difference in the tax rate.

Our backlogs at the end of the quarter stood at $240 million and most of the difference in these versus last year of $232 million, a big part of our decrease for the quarter was in the asphalt and mobile group. Last year we -- historically asphalt and mobile has been about 50% of our business, they were about 40% in the third quarter.

Looking at the fourth quarter we expect fourth-quarter revenues to be slightly higher than the third quarter but expect margins to remain flat. We plan to continue to grow both in the energy and mining business as well as try to sustain the -- our position in infrastructure. We are moving the small asphalt plant line that we have at CEI to our Dillman facility to consolidate the asphalt plant business and to free CEI to grow in the energy business.

We are now in the production of the wood pellet plants that we have spent a lot of R&D in developing in the last couple years. We are producing hot water heaters for fracking at Heatec and at CEI. We continue to modernize the GEFCO plant and have added to its product line with geothermal drills and we'll be adding to its oil drilling line business with rigs transferred from American Augers.

We are beginning to consolidate or beginning construction of a manufacturing plant in Brazil, adding to our Telsmith plant in Wisconsin and our Osborn plant in South Africa to add capacity to build crushers and screens -- or more crushers and screens for the mining industry.

As can be seen from our numbers, the asphalt and mobile business have been hurt by the lack of customer demand in the US and a slowdown in the global economy. We do not expect this to improve significantly in 2013, although we have seen a pick up in the asphalt plant business both internationally and domestically in the last few weeks, but still seem to be struggling in the mobile side of the business.

We hope to return our margins to a more normal level due to the less new models of equipment, the Tier 4 implementation -- as we implemented Tier 4 our margins really went down significantly. We are recovering those margins on the mobile equipment and we will be spending less in 2013 on R&D.

We expect to end the year slightly -- with revenue slightly above $1 billion in volume and expect 2013 to grow slightly. Our emphasis will be on improving margins in 2013. We will continue to actively seek acquisitions that will enhance the three markets that we serve. With that I will stop and be glad to answer any questions for either me or Norm if you like.

(Operator Instructions). Rob McCarthy, Robert W. Baird.

This is Mig Dobre in for Rob McCarthy. Good morning, gentlemen. And, Don, it is really good to hear you on the call today. My first question I guess is really on North America structure and trends. And I remember you mentioning in the past that the passage of a highway bill was an important financial catalyst.

And even though we haven't seen increased funding, the fact that we had a two-year bill could potentially result in an uptick in demand. It seems to me from what you just mentioned though that perhaps this is expected to be less of a catalyst in 2013. Can you sort of provide some color around that?

Yes, actually, Mig, we were -- I guess we were surprised, we had a terrible July and August. And I think the bill was so late in passing that the highway departments just did not go ahead and let much work -- some of the highway departments did not have matching funds. And the bill is a flat bill, it is not an increase, it is flat. And it's a two year bill basically.

So it will help -- it will actually provide a couple of years going forward here and maybe we will get a decent bill after they get some of this financial problem straightened out. But we did not see any uptick -- I think part of that is related to the fact that generally in passing of a highway bill, they can get some quick asphalt jobs out in a hurry of milling and then lay and overlaying.

But we have had so darn many extensions they pretty well used up what they had -- they've been doing that for about two years because they were getting 90 day extensions and none of them gave them time to plan big jobs. And so as a result when the bill passed we just didn't see the uptick that we normally see.

Now a little bit to my surprise -- Ben Brock is also sitting here on the call and he looks after the Asphalt Group. We have seen a pretty good pick up in the last three weeks in backlog. And I guess it's kind of to all of our surprise as some of it is domestic, some of it is international.

But Roadtec in the mobile side, both Carlson and Roadtec -- they have struggled both with volume and with margins. And it has been extremely competitive during this quarter. The biggest thing I guess I am cautious about for next year is just who is going to be elected, what are they going to do about the deficit and there are so many uncertainties out there that our customers are just reluctant to spend the money.

I think in the Asphalt Group they have got enough products to back fill. While we think asphalt is probably going to be about like it has been this year, maybe a little better, but we are starting to build the wood pellet plants, we are starting to build concrete plants. And so we've got some new products that are back filling. But if we were just to look at asphalt, which is what the mobile side is, it's not a good outlook.

So, just to clarify this, as we are thinking out say a couple of years, in order to see sustained growth in asphalt you are saying that we would need more highway funding than we currently have?

That's correct. And it is flat. And I don't -- you know, if the economy picks up then the states' tax revenues will pick up and things will get better. If Romney is elected and we drill more for oil we are going to lower the prices probably of oil and there's going to be more gasoline consumed and that would help tax revenues. So a lot of it is dependent on who is elected and what they do about taxes and regulations.

But from our visibility right now -- I hate to say it, but all I see is the increase is due to inflation or price increases and that is about it. But volume wise we just see a flat year next year.

Great. Then sort of switching from this to mining, maybe you can share with us some of the things that you are hearing from mining customers. I know around the world mining CapEx seems to be coming down and a lot of the OEMs in that space have really sort of changed their production outlook.

From everything that I am hearing from you, you are looking at continued growing there. And I am trying to figure out is this primarily gaining some share and entering some new markets? Or are you seeing something slightly different?

Our growth primarily will be in market share and we have not done very much in Australia in mining and we are -- some of our SG&A -- most of the SG&A increases that David mentioned has been the addition of GEFCO, but we have expanded our sales force in the mining. So our growth there will be in new products for mining and growth in market share.

In Brazil that has done nothing at this point to help our revenues, but should kick in in the second half of next year. The mining industry (technical difficulty) we had a president's meeting a couple weeks ago and the mining industry generally (technical difficulty) is flat to maybe going to be down as you look at it. But we have such a small market share we think we can grow without the industry growing a heck of a lot.

And this is my last question here. How difficult or easy do you think it is to gain market share in an environment where CapEx might be coming down and arguably seeking competition will be -- for the dollars that are still spent will be increasing?

Generally what we are seeing from a lot of the mining equipment people, they really have only one or -- sometimes only one other choice besides us and sometimes two. But generally in the size machines only one other competitor and they seem to be anxious and willing to have another source.

So we see it as a very good opportunity. We are coming out with a new line of cone crushers that -- we've got some real significant advantages both in energy consumption and the ability to repair them. Typically I see able to gain market share just due to the fact that they wear these things out and they got to replace them. There is a certain amount of just maintenance CapEx that the mining people are going to be spending and we would be participating more in than in expansions.

The thing that -- the other area that has been surprising to me is a lot of our smaller track mounted machines we have sold to a lot of the mining industry where they will have leases on property that they have to crush -- go in and mine a certain amount every year. And they have -- we have sold quite a few fleets of just track mounted small crushers that I would have never thought would have sold in the mining industry. But that has been a pretty good business for us.

Thank you.

Rich Wesolowski, Sidoti & Company.

On the June quarter call it was cited that the Company was under absorbed by $700,000, and this quarter it was $[3.4] million. Is that to be expected seasonally or was that strictly reflected in the change in the equipment demand?

It is basically -- it is both, the fourth quarters generally are our biggest slowdown. But we've -- the third quarter it really slowed -- it surprised us, frankly. July and August was just not good months. And particularly in the mobile side of it. We just seen a significant slowdown in that area.

It has been extremely competitive. One of our competitors out of Europe was able to -- on papers and milling machines they were able to stockpile Tier 3 engines and we were not as an American manufacturer, another one of our great EPA decisions. But they stockpiled and they are bringing a lot of Tier 3 engines in at a significantly cheaper price, which played havoc with the margins.

Our other US competitor that's painted yellow, they kind of set a program up to match them. And so it has been tough on our margins. And that should clear up in 2013, they've got to use those things up. But not only did we see a downturn, we have just seen extremely competitive pricing.

The part sales fell slightly, but this year you had GEFCO in there and last year you did not and they added to the part sales. So would you assess the progress you are making with the parts only sales force?

You know, in the asphalt plant side of it I think it is basically been flat but there are so many -- there's a lot of plants that are just not running. A lot of our competitors -- the largest outfit in the business, they have about 20% of their plants basically mothballed right now. The largest player in the business I should say.

And most of our customers are telling us that they are running, the volumes they're running are significantly lower than in the past, which reflects on the parts business. I think we are not losing any share there. We have grown our sales force in the aggregate side of it.

And to be -- again, to be very frank with you the aggregate side is doing a lot better than we expected. And they have done fairly well this year domestically. Some of that is growth in the parts business in the aggregate. But we are still on track to continue to grow that side, but the overall volume of business has just been down. And so the plants haven't been running and wearing out parts.

Understood. And then last one, on average are prices for your purchase components still rising?

We are not seeing too much of that. I would say on price increases on components, Ben, do you want to comment on that? I mean, what would you say average 3%?

3% to 4%.

Yes, 3% to 4%. Steel is kind of flat but -- and price increases will probably be in the 3% to 4% this year too.

For your product?

We are not seeing the inflation we saw a couple years ago.

I appreciate your time, thanks.

Jason Ursaner, CJS Securities.

Good to have you on the call. You mentioned the under absorption increase. Just given the drop-off in revenue, gross margin actually looked like it held in all right. Can you talk about utilization rates during the quarter and will there be anything else in that gross margin number that might have skewed it more expense engineering work, any of that which would be the reason you would expect it to stay flat in Q4 despite higher revenue? And I think you are going to be taking the first revenue recognition on that big Army contract.

I think, Jason, what we have seen is most of the new products, the Tier four and the other new models we have come out with and just new products we've had very low margins in that -- in those products. But they are recovering quite nicely. I guess I'm trying to be a little cautious on it.

The pricing competition is probably the biggest issue as we try to maintain volume, it is very competitive. But our focus frankly fourth quarter next year is to return our margins to more normal levels. Everybody is refocusing on that.

We have been -- it's hard in a down market to do that, but I think we are seeing our man hours go down on these new models and we are not seeing a lot of help from the pricing of components. But we are certainly seeing our man hours come back to where they should be on new models. But I guess frankly I am just trying to be cautious because we hadn't done a very good job of predicting the last year.

But -- I mean it just sounds like you are going to hopefully get some better flow through once the learning curve moves slower on the new products?

That's correct.

And on asphalt, just the funding environment aside, where do you think the need for equipment is right now relative to some historical period in terms of pent up demand? If we have the money what is the need for the equipment that's kind of been compounding in the market for the past few years?

Jason, there's a lot of old equipment out there. Secondly, to compete and to really both compete with new work on concrete and to compete with your competitors there is still a lot of old plants that won't run high recycled. And we have -- we've developed machines now that will do 60% recycle, operate with very low stack temperatures and are very efficient machines.

And people will -- I think people will have to replace over a period of time to stay competitive. But as it is right now, I mean they need some visibility, we -- ARTBA had an awards dinner for me -- the innovation award this year and we had 150 customers from all over the US come into the ARTBA meeting in Memphis and it was -- I've never seen as many negative people about the market as we have seen this year.

Now that -- in talking to these customers we are seeing a little change in attitude and a little bit of work picking up. It is kind of as if the darn states were not ready to let work and they're beginning to let it right now. And I think -- I may be a little pessimistic on the fourth quarter of next year, but, as I said, I hadn't done a very good job of predicting the last year. So I am trying to be realistic as possible.

Understood. And just comparing it to the fourth quarter of last year, I think that there had been a big order in asphalt to Azerbaijan. I think I remember you commenting at the time that it came on real late in the quarter. So is that quarter been in backlog if we were looking at that year-over-year backlog comparison for the segment?

Ben, do you want to --?

That order would have been in September because it came in late September last year so it would have been in third quarter.

Right. The order received -- the shipment was in the fourth.

Yes.

Yes.

Okay. I appreciate that. Thanks a lot, guys.

Ted Grace, Susquehanna.

How you doing, good to hear your voice.

Good, thank you. I was just hoping you could come back -- you mentioned that July and August were slower than expected, there was no real comment in September, then you commented on the last few weeks in October. But could you maybe give us a flavor for what September felt like and how that trajectory has kind of maintained itself in the last few weeks?

September was pretty -- was a decent month. Of course I sometimes tell our presidents that we are going to have eight quarters instead of four because everybody works hard to ship the last month of the quarter. But September was a very decent month, but with the other two were extremely slow. So we had a lot of catching up.

The other thing we've seen this year, Ted, that is a little frustrating, even though the sales that we've got, a lot of them are not in any hurry to get them. So we've had a lot of -- and we wore that out. But we had a lot of stuff in September that could have actually gone and we were right on the bubble at the end of the month. But we always seem to have that.

I would say that we probably had more than normal. We've got two or three plants in Australia that have been delayed that the orders are still here and we built them, but they delayed us for some reason on shipment. And it seems to be the same way on our crushing equipment that is going international, either waiting on LCs or something. But we had an unusual amount in September.

I hesitate to make that kind of an excuse because we always have some. But it seems like this year every month and every quarter we have slippage because of waiting on customers where that is not -- historically hasn't always been the case.

Would you say the slippage, just order of magnitude, was maybe two times what you would normally expect or less than two times?

Yes, I would say it's about two times what you would normally expect. That again is not that they are not going to take it, they just -- due to the fact that if they bought and they don't have the -- they are not in a big hurry to put it in they just take their time on getting it.

That's helpful. And then on the October trends, I know you mentioned (technical difficulty) things have picked up the last few weeks. Has it been broad-based or just one or two segments and maybe some of flavor there would be helpful.

I would say on asphalt it has been more domestic than international, is that a good -- yes, Ben is shaking his head yes. The other side of that is we have seen a domestic slowdown on the crushing side, not as much in the international. But the -- mainly domestic though, to answer your question.

Okay. And then in light of the revenue commentary on 2013, could you maybe give us a little hand-holding how to at least directionally think about margins or at lease kind of the puts and takes? I mean maybe your thoughts on price costs next year, mix and kind of like there might be some restructuring with that business moving from asphalt. But any color there would also be helpful as we just think about that dynamic.

You know we would like to see a 100 basis points to 200 basis points improvement in our gross margins. It remains I guess -- I want to be cautious and not pessimistic, but without -- the easiest way to have a real improvement in margins is to see an improvement in revenues. And rising water covers a lot of stumps.

With a flat market if revenues remain flat it's going to be a challenge to get much more than 100 basis points just in internal improvement. But that is about the only comments I would make on that.

So we shouldn't -- there is no kind of specific mix we should think about that could skew one business to grow at a faster rate than the other and influence from a bottoms-up perspective your gross margin?

You know, we've got the potential of probably doing from $80 million to $100 million in pellet plants next year. But these things are worse than asphalt plants in that they get delayed, delayed -- right now the big wait on the pellet plants, we have a couple of major orders that we've got except they are waiting to make sure that UK passes that tax credit on for utilities that burn wood. It's a significant tax credit for the utilities which affects the price of the pallets.

And there is a number of our customers getting -- have contracts that are just waiting to be signed, waiting on the Parliament to go with the final passage of that. With that we have factored zero volume of the pellet plants in for next year. But it could be -- that is probably the biggest upside that we probably potentially got.

Got it. And then the last thing I was hoping to ask it on inventory at two levels. One, David, I know you mentioned on the numbers, but if I did my math right, DSIs were up to 183 days at their highest point since the third quarter of 2009.

I know you mentioned that raw materials was the biggest driver of that. But was that function of just not being able to hold back suppliers and how should we think about that dynamic in fourth-quarter? And then any commentary on channel inventory for the Company would also be helpful.

Well, David, do you want to comment?

Well, no, I was just going to say that you are right on your analysis. With finished goods down slightly we've got a lot of stuff in process and with -- the backlog is holding in there. So I don't see any problem in the inventory, I guess is what I am saying.

Yes, and frankly we have been doing -- we have instructed our people if they can do opportunistic buying of steel and some other items with the fact that we are sitting on cash, we have not been very disciplined on trying to just watch the inventory that close.

And in an extremely competitive market toe finished building and having the finished goods puts you at an advantage, if they want it they want it tomorrow. So we have not been really very -- we have not pushed them to control their inventory better, which it is basically trying to help revenues and trying to do opportunistic buying.

Okay. And then in the businesses where you do typically have inventory in the channel, no concerns on that?

No.

Okay.

Very little -- we have very little unsold inventory.

Okay, that's helpful. Best of luck this quarter.

Rich Wesolowski, Sidoti & Company.

Thanks, and I apologize if you answered it already. But did you say what GEFCO adds to the 3Q sales and maybe earnings?

Yes, we can give you that.

I have that right here, GEFCO for the quarter added about $12.5 million in sales.

And I think very little in profit.

They had very little profit for the quarter, that's correct. They actually had a slight loss, very, very small.

Rich, we are spending probably a significant amount of our capital out there to revital -- basically just to rearrange that plant, put new machine tools in it and we have done it probably looking back faster than we should.

We kind of screwed up our manufacturing for a period of time here and -- but we are totally -- they were outsourcing all of their machine, a big part of their machining, all of their material prep, we are putting in machines to do that and with programming of those we are trying to change our shoes while we run the 100 yard dash, that played havoc with their earnings for the quarter to be truthful.

How quickly will that be resolved?

We will have it resolved by the first quarter of next year. It's a good company and good people, it's a matter of they just -- the previous owners had not spent any capital in years and years and some of their machines they were the '60s version. And we realize that and we will continue to upgrade all of that. But I think they are going to be a good company for us.

Okay, thank you again.

Jack Kasprzak, BB&T.

You talked a lot about the environment for highway construction and late passage of the highway bill and look at what that has done to state DOTs. But there is also talk about different things that are out there that maybe can drive -- different programs that can drive some highway spending like the TIFIA program and toll roads and different bonding initiatives.

I am just wondering what are your thoughts there where if anything your customers are saying about those types of nontraditional programs if that is what you want to call them to help the business.

You know, I guess in general I don't see our customers too excited about toll roads, you're going to pay for it one way or the other. Our senator here from Tennessee, the word is he's going to introduce a pretty substantial bill after the election of trying to control the budget and -- control the deficit.

But his -- you know, I think if we end up with that Simpson-Bowles approach, which I think is somewhat like that, it is a deal between [Colker and Kerry] is the word that we get. But it is something like the Simpson-Bowles, it was very positive on infrastructure.

And we are going to have to address -- I mean, all you got to do is drive on a highway and we've got so dog gone many trucks on there now we've got to do something about dedicated truck lanes. And I think the next administration will be addressing something like that.

These other programs to try to raise the revenue, they are going to just have to take a hard bite and do it, in my opinion, with gas tax to begin with or vehicle miles traveled. That would be the better. Right now the more natural gas the more electric cars of they get a free ride. And as more trucks go natural gas they are getting a free ride.

So we've got to change the revenue stream. And I don't personally see it being a big, big boost of just going to toll roads and some of these others. Everybody that (multiple speakers) drives on it ought to pay their fair share.

Right. So I guess this goes to your comment about your sales outlook and the environment. I mean those are uncertain long-term issues, maybe it happens in the next administration, maybe not. But it is probably nothing that -- that colors your view on 2013 to be sure I guess.

That's correct. And that is I guess why I don't like to be negative, but it -- just from what we see they've got enough problem with the deficit and with the -- well if they don't do anything and we go over this fiscal cliff it's going to be exciting, obviously.

Nobody wants to take that ride.

Nobody wants to take that ride. So if they don't do something there it's going to be tough. But all of this stuff, Jack, as you well know, puts the uncertainty factor in effect -- when you don't know, you don't buy. And that's -- we have been managed over the last couple of years, the younger guys have done a great job with international and we have grown that.

And we still see the Australian, Canadian and South American market as growing a lot in infrastructure. We don't see Europe doing anything, but we see an improvement in Russia. But there are certain of the international markets that are still doing okay.

Right.

And we've got a balance both of them. Eventually, I mean all of this is built into one hellacious pent up demand, in my opinion. There is going to be a good highway program here at some point, because there's got to be or we are not going to be moving any goods and services.

I heard a speaker recently said we are growing a city of Chicago's size every year in population. And we've got to get food and services into them and that is all going to be coming mostly by truck. And if we don't do something we are just going to be gridlocked.

Certainly been under investing for a long time. Well that's it for me. Thanks for your comments, Don, as always.

Nick Coppola, Thompson Research Group.

Good morning, and Don, I'm glad you're on the call.

Thank you.

Just talking about the international business -- or the mix of international business, and it's something you may want us to look at a longer time line, but looking at the last two or three quarters, international backlog in Q1 and Q2 declined year over year and (technical difficulty) it's up kind of less than domestic backlog I guess.

So it looks like there has been a little pullback in the mix there. How do we reconcile that versus your strategy to have an increase in international exposure? And what potentially were some of the regions where you may have seen a little bit of a pullback?

I think the main pullback that we have had, Nick, has been in Europe. We just went from what we had in Europe to next to nothing. Europe has been the main down spot. Australia is actually a little better than it has been for us, Canada is probably pretty well flat, I would say Central America has been down a little bit, Mexico has been up.

And so we really -- and the other thing that -- we will start to get more business in Brazil as we build the crushing equipment in Brazil. So I guess we don't see Central South America -- well, we see Mexico coming back fairly strong frankly. It's been (technical difficulty) dormant for a number of years. But it seems to be becoming a better market and they seem to be getting their act together.

Colombia is still okay, doing quite well. And some of those Central American countries are doing a lot on infrastructure. So it is a different mix of where it is, but all of the downturn is in Europe that we see, at least for us.

That makes sense. And then going back to last quarter, I guess we talked about the drag from new product introductions on margins kind of tapering off this quarter. Did we see that occur? Was there drag on margins from new product introductions and then is that mostly over at this point?

Yes it -- I think we probably recovered half of what we need to and we will probably recover the rest in the fourth quarter. But new products like the heaters for fracking and all of that, they are getting their margins back up, we have improved our margins on the pavers and shuttle buggies and the mills, not that we were up to where we want to be, but we have improved them quite a bit over where they were.

So, yes -- and that is my comment really going into 2013. I think we will continue to improve those margins. The first of any new model, people just have to get used to it. I talked to some of the guys in the plant on these Army plants that we are building here and one asked why is the man hour so outrageous on that? And he said we were scared to death we were going to make a mistake. We just weren't familiar with it.

And that is -- until they get to building the new models you run into that. So we are making progress on that and we are not introducing as many new models. We had a tremendous rush of R&D for the last two or three years.

Okay that's it for me, thank you.

Rob McCarthy, Robert W. Baird.

Yes, just a quick follow-up on Aggregate and Mining. I was wondering can you provide us with a little bit of color as to what the split is in there between mining and everything else revenue wise? And then I know that a lot of these international sales in mining, you guys to denominate them in US dollars.

So I would imagine that with the recent strength in the USD that has been a slight competitive disadvantage that you might have had. Maybe you can talk a little bit about that and perhaps touch a little bit on pricing as well if you don't mind.

Yes, probably the mining is approximately for the aggregate side I would say it is in the 25% to 30% range today. South Africa, our South African operations about 95% mining. The currency has affected both our profitability and our revenue number particularly from South Africa, the rand a year ago was, if I recall, about 6.5 rands to the dollar were about 8.5 now, maybe closer to 9. Our managers down there say we could see as high as 11 rands per dollar.

So that has hurt us likewise in Brazil, that currency is -- against the dollar has changed about 25%. Australia and Canada has been pretty flat as far as theirs. But it -- the Rand and the Brazilian real I guess have been the two that have been the biggest swing for us.

And pricing for mining specifically?

I would say that we -- we stay pretty competitive on that. I don't -- the big thing on mining that you want to get to, you don't make a lot of money on the machines but they burn up a lot of parts. So that's very helpful.

All right, thank you.

Cris Blackman, Empirical Capital.

And Don, it is great to hear you.

Thank you.

You're welcome. I know and appreciate all the transparency, pretty much everything that has been on my mind has been answered. But I guess just one final question, and I know it is something that you all have really never done in the past but maybe have been thinking about lately, stock repurchase, considering the stocks were down again today, it's $28 down about almost 5% and getting close to that book value -- intangible book value. Is this -- can you share with us maybe if there has been any rethinking of that strategy?

Our Board has discussed a lot on stock repurchase and dividends and what to do. We struggle with what the heck they are going to do with tax laws, which is the -- your three choices is acquisitions, is it to grow the Company, which we still use that as our major strategy, but we are looking at the other two and it's going to depend on what they do on the tax laws. But we had a long discussion yesterday. So I can't say much more than that.

Okay. Well I am glad it is in discussion and on the table.

Okay.

Thank you.

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

Thank you, LaTonya. We appreciate everyone's participation on our third-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 November 9, 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. All of that information is contained in the news release that was sent out earlier today. This will conclude our call. Thank you, have a good weekend.

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