Astec Industries Inc (ASTE) 2013 Q1 法說會逐字稿

Greetings, and welcome to the Astec Industries first quarter 2013 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 Latanya. Good morning and welcome to the Astec Industries conference call for the first quarter ended March 31, 2013. My name is Steve Anderson, and I am the Vice President of Administration and Director of Investor Relations for the Company. Also on today's call are Dr. Don Brock, our Chairman and Chief Executive Officer, Norm Smith, our President and Chief Operating Officer, David Silvious, our Chief Financial Officer, and Ben Brock, our Corporate Vice President over the Asphalt Group, and also President of Astec, Inc., our largest subsidiary company.

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 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 that these statements are intended to qualify under the Safe Harbor liabilities established by the Private Securities Litigation Reform Act. Any such statements are not guarantees of future performance, and are subject to certain risks and uncertainties, and assumptions. Factors that could influence our results are highlighted in today's financial news release, others are contained in our Annual Report and our filings with the SEC. At this point, I will turn the call over to David to summarize our financial results for the first quarter. David?

Thank you Steve, and good morning to everyone. Thank you for joining us this morning. Let me preface my comments this time by saying that you may recall that we sold American Augers in late 2012 during the fourth quarter, and therefore they are shown as a discontinued operation in the financial statements that were sent out, and so my comments will address the line items as they are presented in these financial statements, with American Augers removed out of each of the line items.

Sales for the quarter were $247.8 million versus $252 million in first quarter of 2012, that is a decrease of about 1.7%, or $4.2 million. International sales for the quarter were $85.9 million, compared to $96.9 million last year, that is a decrease of 11.4%, or $11 million. Decrease for dollars for international sales were primarily in Australia and Brazil, in the post-Soviet states, and these decreases were offset by increases in Europe, in Africa, and in Russia during the quarter. International sales were 34.7% of revenues in the first quarter of 2013, compared to 38.5% of revenue in the first quarter of 2012. Quarter-to-date international sales decreased in each of the segments, expect for the Aggregate and Mining group. Domestic sales for the first quarter of 2013 were $161.9 million, compared to $155.1 million in the first quarter of 2012, that is a 4.4% increase, or $6.8 million. Domestic sales were 65.3% of first quarter revenues this year, compared to 61.5% of first quarter revenues last year.

Parts sales for the first quarter of 2013 were $68 million, compared to $72.8 million for the first quarter of 2012, that is a $4.8 million or 6.6% decrease. Parts sales were 27.5% of revenue for the first quarter of 2013, compared to 28.9% for the first quarter of 2012. Segment revenues for the first quarter of 2013 are attached to the press release as supplemental information. Also included with that segment, of supplemental information is the quarterly detail on the sales and earnings of American Augers for 2011 and 2012. Some folks have asked for that, so we wanted to get that to you, so you could use that information.

Gross profit for the quarter was $58.6 million compared to $58.6 million last year, it was relatively flat there on the gross profit dollar line. However, the gross profit percentage actually went up 30 basis points to 26.3% from 23.3% last year. SGA&E for the quarter was $40.4 million, which represented 16.3% of sales, compared to $40.1 million, or 15.9% of sales, that is about a $300,000 increase in dollar terms, and a 40 basis point increase as a percent of sales. The increases were primarily concentrated in the payroll and benefits line items. Operating income for the first quarter of 2013 was $18.2 million, compared to $18.5 million for the first quarter of 2012, that is a about $300,000 increase or 1.6%. Income by segment is attached to your press release.

Income from continuing operations before income taxes was $18.9 million, compared to $19.3 million in the first quarter of 2012, that is a decrease of 2.1%, or about $400,000. The effective tax rate was interesting this quarter, as we had previously discussed in other conference calls, the first quarter of 2013 tax rate was lower than the 2012 tax rate simply due to, primarily due to the R&D tax credit. You may recall, Congress did not enact the 2012 R&D credit legislation until early in January of 2013, therefore, the 2012 credit for the full year was included as a discrete item in our first quarter of 2013 tax rate. In addition, the portion that was allocable to the first quarter of 2013 for our projected 2013 credit was also taken into consideration in the first quarter tax provision.

Net income from continuing operations for the first quarter was $13.3 million, compared to $12 million last year, that is a 10.8% increase, or $1.3 million, and diluted earnings per share for net income from continuing operations was $0.57, compared to $0.52 last year, that is a 9.6% increase. Net income attributable to controlling interest, that is the minority interest that we have at Osborn and Brazil removed from that number, gives you $13.2 million this year compared to $12.2 million last year, that is an 8.2% increase, or $1 million. EPS for the quarter on that line item was $0.57 compared to $0.53 in the prior year, that is a 7.5% increase.

Our backlog at March 31 of 2013 is $276.5 million compared to $276.2 million March 31 of the prior year, basically flat. The international backlog this year was $109.2 million compared to $116.5 million at March 31 of last year, that is a $7.3 million decrease, or 6.3% decrease. Domestic backlog this year is $167.3 million compared to $159.7 million last year, that is an increase of $7.6 million, or 4.8%. Backlog by segment is attached to the press release.

Balance sheet remains very strong. Our Receivables are at $104.6 million at March 31 of this year, compared to $113.6 million last year. Now that number does include American Augers. They were not removed. The accounting does not require you to remove them from the balance sheet from the discontinued presentation, but I have those numbers for you, so you can compare those with Augers in there, it was a $9 million decrease. Augers was $2 million of Receivables in the prior year, so it is really a $7 million decrease on Receivables. Days Outstanding are 37.1 this year compared to 38.1, so that has improved one day over March 31 of last year. Our inventory as presented is $322 million from this year compared to $313.4 million last year, an $8.6 million, or 2.7% increase. The actual increase without Augers in the prior year is $38.9 million, and that removes Augers from the prior year. Our turns are at 2.4 turns this year, compared to 2.6 turns in the prior year. We have got nothing owed on our $100 million credit facility.

We have about $73.2 million in cash and cash equivalents on the balance sheet. Our letters of credit outstanding are at $10.3 million, resulting in borrowing available of about $89.7 million. Capital expenditures for the quarter were $9.4 million. We are projecting somewhere in the tune of $40 million for the year, maybe slightly above $40 million for 2013. Our depreciation was $5.4 million for the quarter, and we are projecting around $22 million for 2013 for depreciation. That concludes my prepared remarks on the financials, and I will be around to answer questions at the end of the call.

Thank you, David. Don is going to provide some comments regarding the first quarter, and will also offer some thoughts going forward, and then Ben Brock and Norm Smith attended the Bauma Trade Show in Munich last week, and they will share some observations about that show. Don?

Thank you, Steve. During the quarter we continued to see flat revenues as David had mentioned. Our domestic customers tend to remain cautious. Their attitude this year was weakened by a very wet winter, particularly in the Southern states, and kind of resulting a late start up of paving projects. Many of them that I have talked to said our backlogs are good, not because of the volume of work, but because of being unable to do work. Ben talked to a customer this morning in Virginia and said it was about 30 degrees up there today, so things are still slow starting, but this has accumulated a big backlog for them, due to the fact of not doing the work.

International sales continue to be slow due to the fiscal problems in many countries. Fortunately, we have been able to backfill with products going to other industries. As of April 1st, the UK did approve the rock credit for utilities that would burn wood pellets and change from coal fired plants to wood plants. We see this as a real opportunity for other growth in the wood pellet plant business, and we see this product as filling the gap in our volume in the next few years as infrastructure continues to be somewhat slow. In selling American Augers and selling the utility to Toro when selling the Trend core line to Charles Machine Company, we had certain supply contracts that we had to fill, at basically just cost, and we are completing these contracts at year-end and during the first quarter.

We have tried to backfill and are backfilling these lines in the Loudon plant, with the pump trailer lines and the vertical oil drilling rigs that we have maintained from Astec Underground and from American Augers. We have grown our sales force in this area, and are obtaining orders for both dump trailers and vertical rigs, and the market is interesting. We are doing better in vertical rigs in international, and the pump trailers more domestically used on the service side of the business.

While our revenues are flat, our margins are improving. Our earnings increased as David said from $12 million to $13.2 million, and our EPS went from $0.52 to $0.57 per share. While the earnings increase was benefited from the R&D tax credit carried over from 2012, we benefited from 30 basis points improvements in margins from Q1 to Q1, and 260 basis points from Q1 to Q4. Our major focus in 2013 has been on margin improvement, and even if our revenues remain flat, we think we have opportunities to start returning our margins to more normal levels.

We enter the second quarter with a backlog of $276 million which is flat from last year. We expect the second quarter to be similar to the first quarter. The visibility is difficult to see beyond one quarter. We do see improvements in home building and commercial business, although somewhat slow. Infrastructure improvement related to oil and gas exploration and transportation of these products is improving, which should help the energy drilling and exploration to start growing again. We expect highway spending to remain flat but not down.

We continue to receive new orders and additions to existing orders for wood pellet plants. Due to the size of these orders, our quarters are going to be lumpy. Also on the first plan, our auditors have indicated that we will be unable to recognize revenues until the production guarantees of this facility are met. We expect to have this plant running by the end of the first quarter, and probably the end of the fourth quarter before we recognize the revenues. We continue to grow or have a strong balance sheet with no debt.

We continue to grow cash and for this reason, our Board of Directors has chosen to begin a quarter per share dividend, or $0.40 per year dividend as a cash return to our stockholders. This will not affect our flexibility in making opportunities with acquisitions as they become available. We are excited about the new products we have developed over the last three years. We have invested a lot in R&D, and our ability to diversify with these products in the energy and mining industry will broaden our base in the infrastructure market.

As the infrastructure markets improve, we will be well-positioned to grow and take advantage of opportunities as they occur. Although energy markets in mining continue to grow and mining is slow, we see this as temporary, and we expect to see the needs for our equipment in these markets to continue to increase. One of the biggest things was as mentioned earlier, we are drilling more oil than we can get moved to where it needs to be moved, and that situation has certainly helped adding more railroads and more roads, and particularly in those areas. We see with the need of minerals and the number of population growth in the world, that could be a temporary lull, but mining to come back on a steady basis, as well as energy. With that, we will be glad to answer any questions. This completes my remarks.

Thank you. (Operator Instructions). Our first question comes from Morris Ajzenman with Griffin Securities. Please proceed with your question.

Good morning, guys.

Good morning.

On the wood pelletization plants with the Parliament approval, on the previous call you indicated one utility that you had already sold one line to if approved, and now has approved. Has potential orders for an additional $31 million. Can you comment on that, or just comment on how all of this plays out now that Parliament has approved the tax credit?

Ben, do you want to answer that one?

Well, the customer is working on the finalization of their supply contract for more pellets, and they anticipate giving us the go ahead on an additional two lines by the middle of May at the latest, it could be sooner than that. We feel very certain that will happen, that it will be an add-on to their one-line plant.

And any thoughts or discussions now that the tax credit has been approved about additional orders elsewhere, conversations you have had without being specific?

Yes. Yes, we have in the last two weeks, we have had multiple contacts from customers, some are based in Europe looking to put in plants in the United States. Some are local to US to just supply the pellets to Europe. They are in the size of the plant that we are supplying to Georgia, they would be two-line plants, either 40 or 60 ton power plants, primarily in the Carolinas.

It is an interesting industry. They need a supply contract to sell the pellets, which that now is becoming available very quickly. There is, make sure you have enough fiber to feed the plants, but the big gap seems to be in construction financing of these plants, that they are big, and permanent financing doesn't seem to be a problem, but if all of them that are talking came through, you can't build enough of them, but the real dilemma is getting construction financing that finance companies seem to be a little reluctant to come up with the cash to do that. I think that will get fixed as more of these plants are successfully running,and we feel like this first one we are building will be the only one offer in a package plant that they can look at and see and say, yes, this is the real thing.

Thank you. One other question unrelated, and I will get back in queue. As you get into mining in the quarter, basically flat, down very modestly, give us a sense of what percent of revenue is for mining, then separate that, just give us a flavor of how aggregate did in the quarter year-over-year?

I would say the nature of the second question, first. The aggregate in the United States, there has been such a delay in doing upgrades, that seems to be better domestically than it is internationally. In the mining side internationally, there has been a lot of, we have seen a slowdown in new projects, but there are a lot of them that are well on the way that they are finishing and they are continuing to do. The one good part about the product we build, they basically are making a little rock or little minerals out of big minerals and they wear them out, so it is a pretty good, it is something that is a sustainable business even when the market is not that great. Mining is only about one-third of that segment now, and we think it will continue to grow. We also, the big capital expenditure this year is on that plant in Brazil. The Brazilians want about a 50% to 60% content coming out of Brazil, and we think that will certainly help as we get that online towards the end of the year to grow more on the mining side.

Thank you.

Our next question comes from Jack Kasprzak with BB&T Capital Markets. Please proceed with your question.

Thanks. Good morning everyone.

Good morning.

First question is, the margin improvement overall David mentioned for gross margin, it looks like it really came from the Asphalt Group. I was wondering if you could talk about the margin improvement there on only modestly higher sales, then staying on the subject of margins, in mobile gross margin was down? Are you still being affected by the engine changeover there? Is there a lingering effect or is there something else going on?

I think first on the asphalt side, we have not seen commodity prices hit us as hard as it had been. Steel seems to be fairly flat, and in fact, some cases dropping down a little bit, and frankly, on the asphalt side of it, Ben, you could comment if you want to, but we put a lot of effort into trying to improve our lean operations. We have done better. I accused the guys running these operations at Astec, Heatec, and Roadtec that they have done good over the years and probably hadn't made as many improvements.

They really focused on that, and in both companies we are seeing real improvements in our manufacturing. Roadtec is still lingering a little bit on the tier four. We are getting all of those products out. We have introduced a line of four models of stabilizers that are beginning to sell quite well, and frankly, if you look at both of the companies, Jack, parts helped us a bunch on margins, and the equipment margins have improved enough, and most of the improvements have been in the equipment margins. You want to add anything to that, Ben?

Yes, I would agree with what you are saying. I think the other thing that helped us is our product mix was right. We did a lot of new products last year through this plant, and having a core product in the first quarter definitely helped us. The self-sufficient bays really did work, too, that is part of the lean, but certainly not having as many new products in the shop did help.

Got it.

Some of the international, the products going internationally needs to be, it sounds pretty simple, but they need the asphalt plant to be a smaller, width, narrower width plant, where they can move it without permits, and we came out a new model of that. That has sold very well in Australia. The first ones had no margins in them, and we are seeing that getting corrected.

I was going to ask about your comments, Don, on housing and commercial, we all look at the same statistics on housing starts and see the improvement. It has been a long time since maybe you guys have felt a demand pull from the private sector. Are we really, do you think at the point where there is some sustainable demand in terms of for your equipment for projects like housing developments and commercial developments?

We are seeing kind of a different thing. If you look at that industry, if you go back into 2007 in that area, about one-third of the people got married, which is 1.5 million weddings a year. A third of them went into apartments, a third of them went into 1,500 square foot houses, and a third of them went into 2,200, or 2,300 square feet, and as you know, the big houses are the ones that are caught to heck. What we see from contractors that do site development work is that a lot of the big homebuilders bought up a lot of that land, and has shrunk the size of the houses that they are building into the $150,000 to $180,000 homes are the ones that are selling, and the apartments are selling and as a result, gosh, it is been a four, five year recession or depression, but they have used up more of the prepared subdivisions, as you would call them, than they would have normally done in what I would call a classic market. We are seeing, or our customers are telling us they are starting to see more residential developments coming back. We are still at 900,000 starts, and that is a long way from 1.5 million, but the homes that are being built are those mid-sized ones as you know. I think that is the difference we are seeing there.

Right. Makes sense. Okay. That is it for me. Thanks guys, appreciate it.

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

Thanks. Good morning.

Good morning.

1Q is typically a strong booking quarter for the Company. Would you mind discussing how 2013 March quarter awards set you up, relative to your annual revenue budgets for the year?

We have seen, you can be optimistic on a daily or weekly basis, but we have seen somewhat of a slowdown in March in the asphalt side of it, in the aggregate side, we have seen it pick up fairly well. In fact, they are pretty pleased on the aggregate, not as much international as domestic, and there are a lot of projects out there that, particularly international projects on the aggregate side that are fairly substantial that we are working. On the asphalt side, we are seeing a lot of prospects for third and fourth quarter orders, and it seems to be a lot of our customers are looking at finally replacing facilities, but most of them are looking at ordering in the third, and replacing in the fourth, so we did see a lull here right at the end of the quarter. Fortunately, the backlog is okay at this point.

Right. Regarding the international mining area. I am wondering if your confidence in your own sales is reflective of a broad market outlook that would be somewhat at odds with some of the other suppliers, or rather a confidence that you will be able to establish a position there with the new products even in a difficult market?

There has really been one, and maybe two suppliers primarily to the mining industry around the world, the big one being Metso, and then Sandvik is also in it now, but F.L. Smith is in it somewhat, but not directly as much competing with us. There seems to be a real want for a strong second or third supplier, and we have been both surprised and pleased at the willingness to buy our products. There is somewhat in many parts of many mine companies a little unhappiness with the existing suppliers, so we feel that we have got good opportunities there. Larger projects, we historically have not been in on as many of those, but we are in on a number of them now, and it would seem to be being accepted in those.

Okay. Lastly, we spoke a little bit about the wood pellet plants. I am wondering what are the other new products that you have introduced over the last 18 to 24 months that would you expect to move the needle in 2013 sales? Thanks a lot.

I think it did obviously do the size of the wood pellet plants where you are looking at $40 million to $50 million plants moves the needle pretty good. It does make things lumpy. The other products like the stabilizers at Roadtec, the new models at Roadtec, we have a number of larger, bigger crushers coming out of Telsmith. The one place we are still losing money, but we are beginning to see at least we have got profitable products at the Loudon facility with these pump trailers.

They have been very, very well accepted in the market as being the state-of-the-art. They are much smoother, much quieter, much, you can run them up to 15,000 PSI with no vibration, and the others generally vibrate out of the trailer, so we have applied some of our technology to those industries that they haven't seen before. The vertical oil drilling rigs, we are still very excited that we have one $15 million order going to Kazakhstan for a complete rig. Normally we are just selling the drilling rigs. Now we are selling and beginning to build everything surrounding the drill rigs, all of the auxiliary equipment, and those are, could be sizeable projects, and they still offer a tremendous advantage, particularly as natural gas comes back, we see a lot more opportunity in the shallow gas and oil markets for those.

I appreciate all of the help, and best of luck for the rest of the year.

Thank you.

Thank you.

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

Good morning. This is Michael Laskin, I am calling in for Jason. In the Asphalt segment, did the Army accept delivery of their orders, and was that revenue recognized?

No, they haven't accepted. They are still, it feels like every call we get to talk about Aberdeen, Maryland, and the proving ground, but it is just a slow go there. It is going well, but it is just slow.

Do you have any idea when that revenue might be recognized, or is it still--?

It will either be late this quarter or the first of the third quarter.

Got it. Understood. And have you seen any of the pricing issues related to your European competitors stockpiling the Tier 3 [engines] to resolve itself?

They still seem to have a bunch of them left.

So do you have any idea when you can expect them to run out?

We have seen a little stabilizing in the market there. They are not quite as competitive as they were. I would say the competition is not as severe in the mobile side as it was last year. Our margins are improving in our equipment and we have done two things. We have reduced our manufacturing costs, or are reducing it, and the prices are sticking a little better. While we are still seeing them bring in Tier 3s, we expect that to run out this year.

Okay. Thank you very much.

Our next question comes from Nick Coppola with Thomson Reuters.

Thompson Research Group. On the public infrastructure side, I heard in your comments, you talked about the lack of a strong highway Bill. I remember in previous quarters you talked about how Bill was passed too late in the letting season for it to have a real positive impact. Now that we are getting into the spring of 2013, are you going to start seeing a real positive impact in DOT's having greater visibility, even at flat funding?

I guess what I am seeing in talking to our customers is that there was a knee jerk in highway lettings this spring because of the sequester question, and the extension of the authorization Bill. That has pretty well gone away and there are some pretty good lettings going on right now in most states.

We are also seeing some states like Virginia, Indiana, and a lot of them divert some of the money that they had diverted out of the highway funds back into the highway funds. They were giving the Highway Patrol was being paid in Indiana, for example, by the road fund, they have now put that back to the General fund, tags and things like that they are putting back into the Road fund. I guess one of the interesting things in Business Week this week, the election in Los Angeles, the hot button out there is fixing potholes, and both mayors are trying to say they are going do a better job of fixing the roads than the other one is, they have even got them out there with shovels doing some of the patching of the potholes themselves. It is very exciting to finally see that some of the politicians recognize that the infrastructure is coming apart. We see more improvement at the state level, and of course the federal level is flat. The sequester didn't affect the highway trust fund that much. It affected only the amount that was being put in from the General fund, so it was about $500 million of the $40 billion.

Interesting. Thank you. And then what kind of impact are you expecting from TIFIA?

The TIFIA program has got a good multiplier affect, so it is beginning to create some additional funds that just weren't there before. As you know, the fund can be used to help contractors achieve investment grade rating, so it makes financing easier. So a lot of obligations have been incurred right now, in the works just now beginning to go to the job site. Not a big impact so far, but it is a positive that hasn't been there in the past.

Okay, that is it for me. Thank you.

(Operator Instructions). Our next question comes from Tim Robinson with Susquehanna.

Good morning guys, thanks for taking may call. I just wanted to touch base on your comments about expecting margin improvement, even if sales are flat. I was just wondering if you were to rank the primary drivers that would result in the margin improvement, is it better absorption, is it less pricing pressure in mobile, better price/cost, et cetera?

I think the major two drivers of that is we are just not seeing the inflation in some of our components that we saw in the last year or so. While the government was saying that we didn't have much inflation, we saw a heck of a lot of it a year ago. That seems to have quieted down, we secondly, think we have continued to improve our manufacturing. IT is under-absorption is still a problem in a couple of the companies. As we have gone through our cessation planning, I told Ben and Rick, I said that this thing would be a piece of a cake if you could get all 18 of them making money. There are usually about two or three of them sick, and where our under-absorption is still in the Underground Group, and we have got to backfill more products into that, which we are doing to help that. A good part of the products that we have got have got decent margins in them. I would say it is more of the manufacturing improvement. If we get more volume through those plants, it will certainly take care of the under-absorption.

Got it. Could you give us a sense of what drove the decline in parts sales in 1Q, and do you continue to expect parts sales to be up on the year?

Basically, the doggone numbers are confusing in that we sold the company American Augers, so theirs come out of it, but the other two parts of the underground, the utility line and the trend core line, we just sold the lines, and as a result, if you would take the part sales primarily related to the utility line out of it, which is still in that comparison, it was flat, part sales were basically flat.

Got you. And then lastly, with regard to the timing of the pellet plants. Just trying to get a sense. When you get the order, is it generally installed one quarter later, and then I guess based on this current pellet plant, it sounds like there is about a two quarter delay before you with recognize revenue? Is that how we should look at it?

This again, the owner of the plant, or buyer of the plant are doing the construction of the site facility. We will be erecting it, but they are doing the site construction and the installation of the concrete and the buildings, and the things like that. The weather down in South Georgia has been atrocious, so they are probably two months behind. We are going to be ahead of them.

We are ahead of them on building the equipment, but it probably has caused a two-month delay. We expect probably to have the plant running by the end of the third quarter, and very shortly after that we will run the tests on it to improve our performance. The performance is just a tons per hour and the emissions out of the plant, so we are very confident based on the prototype plant that we build here and all that we ran on it, but the two accountants sitting next to me and E&Y are conservative.

Got it, that is for me. Thank you very much.

Our next question comes from Brian Rafn with Morgan Dempsey. Police proceed with your question.

Good morning, guys.

Good morning.

Go back to a comment you made, Don. You certainly talked about the federal funding on the highway side being somewhat tepid and flat. Are you seeing any pockets in funding just from state DOTs? Is Texas or Florida better than maybe some of the areas on the Atlantic seaboard? Are you seeing any strong regional pockets from a state-funding basis?

You look at where the oil is and the minerals, the center part of the country is doing better than the left coast and the right coast, obviously. Although California is slowly coming back, and we are seeing Nevada and some of those slowly coming back. Texas, they are spending a lot of money in Texas. Texas is okay, but they are tearing up the roads. The problem is that the pipelines are full with all of the oil they have got, so the pipelines are full, they are transporting a lot of it by truck, and there is just a lot of traffic when you are running in drill rigs and pump trailers, and all of that.

North Dakota has basically really got infrastructure problems. The thing that is happening there is they are setting up more rail yards there, and in Pennsylvania and New Jersey, and starting to shift the Bakken crude to the East Coast, which there is a lot of infrastructure related to that. But state-wise, it is kind of spotty. Virginia has got more money than they have had in a while. Indiana is continuing the strong road program. We saw Kansas pass more money, and then the Legislature turned around and took it out, so you get a few of those. One of the biggest, biggest things is that the public can't trust the politicians to do what they say they are going to do. We could get more taxes for our roads or more user fees if they believed they wouldn't steal it, and I could pretty well take you state to state and it is a mixed bag. There is probably 30% to 70% that's better, that is just a gut feeling.

Okay. When you look at demand for some of your asphalt equipment, you guys talked about Los Angeles fixing potholes. We own Granite Construction. The heavy civil design build business seems to be nationally doing pretty well. Is the offset in kind of that turn business declining, the housing, industrial parks and that, is that being at all being offset by a pretty robust, heavy civil, some of these huge multi-billion dollar projects?

Yes, a lot of it is. We have seen one big project in Florida that recently went. They are doing a lot of design build projects that are pretty sizeable. They have got asphalt in it. What would really help our customers profitability as the commercial business and residential comes back. I was talking to Jack earlier, that fills the gap. That business is not as competitive historically as the highway business. The highway business generally gives them the volume, but the others are smaller jobs giving them the profit. The thing that is happening is that a lot of the little people that bid the private work haven't made it through this recession, and I think as it comes back, maybe more stable, maybe stable is not the right word, but the people who own the asphalt plants will probably do better as we come out of this market, because they don't have as much competition from the little guys.

The other thing that is going to be good is the fact that there is just a certain pent-up demand. A lot of this equipment has worn out and they haven't been able to replace it. I have seen the customers that I talked to, the thing that makes me feel good is a number of them are talking about sizeable facilities for later this year to replace the old facilities, to modernize, run more recycle, and things like that.

Okay. You mentioned, Don, in the past that you talked about you are seeing with some of your pavers there is a penchant to trade in equipment for you guys' used equipment, and then have the state-of-the-art equipment, the highest efficiency, that type of thing. If you see 2013 continue to be somewhat tepid relative to the highway bill, do you see those same guys continuing with that trade-in?

Yes, we do. The one part of a paving spread, you start all of the way from the asphalt from the crushing plant to the asphalt plant, to the trucking to the lay down operation. A substantial amount of work is being done. It is just about all being done under traffic now. 80% of all of your asphalt is maintenance and rehabilitation. A lot of it is being done at night. You have got a tremendous amount of upstream equipment depending on that paver running and not breaking down. So the pavers and the shuttle buggies and the equipment in the paving train, they are going to replace that and keep that modern, and keep it low hours where it is dependable. They just can't afford to have a break down. You create all kinds of crisis, with traffic and everything. The other trend we are seeing is more night paving, and the traffic is getting so bad that one contractor told me last week, he said we pave at night in cities because we can't get the trucks to the paver during the day. So they are running these things day and night. They will run the city work at night shift, and then they will run the daytime out on the larger projects where the traffic is not quite as bad. They are getting more hours quicker through that type of a machine. That is such a critical thing, you will see more modern, keeping modern equipment. The other side of that is they are trading in 3,000 to 5,000 hour machines to us which are difficult to sell. We have to watch our trade-in value on them, make sure we don't have to take a hit later.

How viable, Don, is that used market, if you are talking about 3,000 to $5,000 machines? Where do those machines go?

A lot of them used to go to South America. A lot of them used to go to the residential/commercial guys, but not as much of that. We have to, the one thing that we do have that our competition doesn't do, is we have 16 or 18 rebuild centers where we rebuild these things, repaint them, and give a somewhat limited warranty, so we have had to make a market for it. The highway type pavers are too big for a lot of the third world countries, and too big for some of the commercial work. It really comes back to our rebuild program, and there are a number of contractors that will take those rebuilds.

When you guys do the rebuild, the retrofit, the painting, how many more hours can you get out of a used machine?

They will run some of them up to 20,000 hours, but that is not very advisable. I would say they probably go from, we have got a number of contractors trading in at 5,000 hours, and they have learned that if they trade before they start putting parts on it, they can come out better. We go ahead, one of our big abilities on the rebuild is we have got the parts, and we are guaranteeing we are getting the parts business when we do it. The margins, if you took the parts out of the rebuilds are not as good as they look, but there is margin in it. We make our margins on the parts we put on them. The rebuilds work out okay for us. In fact, it gives us a real advantage over people that are not selling direct.

Yes, okay, okay. You talked a little bit about certainly the pellet plants going into the UK. Any sense, if you look out maybe five or ten years, what kind of an infield installation might you see in the UK or Northern Europe? Are you talking about dozens of plants, or tens of plants, or hundreds of plants? I am just curious as to how you kind of see that strategically playing out?

Well, understand, the UK basically is switching to burning wood at a lot of these plants are coal burning it with coal, and their driver from that is to not have to put scrubbers on the plants. You don't have sulfur with the wood and the wood is carbon neutral, but they don't have the source of the wood, so the plants are going in the southeastern United States, and the Northwest where your wood baskets are. And probably the future internationally would probably be Brazil, and Chile, and close to the equator where the eucalyptus grows faster, probably in Australia, where the wood baskets are, where there are a lot of trees growing, is going to be your major market.

The other unknown market is the torrefecation of the wood, where you actually go ahead and keep cooking it, and make an artificial coal out of it that is clean and carbon neutral, and has no sulfur. It takes about one-third more wood to do that. The cost of it doesn't work economically, but as we start using more waste wood, when you torrefy it, you negate the environmental problems that would have been in the wood, because you cook it at 500 degrees, and that is probably the next advance in technology of starting to use waste products to convert it. And frankly, that has got to come in the United States. If we are going have renewable, solar is like using a bathroom in the ocean. You just don't have that many BTUs to it, and it is good an a local basis. Windmills, there are a bunch of windmills sitting there they can't afford to rebuild because they can't get enough out of the electricity. If the sun is not shining, and the wind is not blowing, you don't have base electricity, so wood has to come into the equation at some point here. Probably in the US if we could use more waste wood to mix with the new wood, it is just a further, instead of putting it into landfills, it is a better use for it, and that in my opinion, logically will eventually happen.

Okay. When you look at building out these pellet plants, Don, how many lines can you put on it? Is it just basically the amount of real estate that you have, or is there kind of an economy of scale as to how many lines you can put in on a plant?

The whole thing is one word, transportation. You have got, generally you have got to haul the wood into the plant, the trees into it, and wet wood, when you cut it, it weighs 25 pounds a cubic foot. When you bake it into a pellet, it weighs 45 pounds a cubic foot, and all the pellet plant is drying the wood, getting the moisture out of it, upping the BTUs, and making, it is densifying energy. If you are taken you are limited on wet wood, unless you are in some kind of unique situation to where you can't haul it much over 50 or 60 miles, so these plants are generally going to be in general 150,000-ton a year plants, which would be about a 20-ton an hour plant. However, the second thing is the cost of freight to get it to the ships to take it to Europe. You get a compromise between where you locate these things in a wood basket, and there are some of them up to 500,000-ton plants where they have got a unique situation where there is a lot of wood in that particular area, a more concentration of it. The positioning of these things is quite interesting and quite different, but it really comes back transportation to the plant and away from the plant.

Okay. How much, as you get into this wood pellet business Don, how much like from your asphalt, and your quarry operations, your pavers, how much parts business will be in these types of plants?

They wear the heck out of the pellet dyes and those things. It will be somewhat comparable to an asphalt plant. Probably not as much as a crushing plant, but somewhat comparable where you would expect it to be 20% to 25% of our business.

Okay. You guys talked, too, on the opening comments about a $0.40 cash dividend. Is that a secular dividend now going forward each quarter, or is that just a special dividend, depending on profitability?

It is each quarter, it is a dime a quarter.

Okay. Dime a quarter, okay, $0.40 for the year. Alright. Thanks, guys, appreciate it. Keep it up.

We have come to the end of the Q&A session for today. I would like to turn it over to management for closing comments.

Okay. We appreciate your participation on this first quarter call. Thank you for your interest in Astec. As our news release indicates, today's conference call has been recorded, and a replay of the call will be available through May 7th, and an archived webcast will be available for 90 days. The 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, and we thank you, and have a good week.

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