Astec Industries Inc (ASTE) 2013 Q2 法說會逐字稿

Greetings and welcome to the Astec Industries' second-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, Steve Anderson, Vice President of Administration. Thank you. Sir, you may now begin.

Thank you, Jesse. Good morning and welcome to the Astec Industries' conference call for the second quarter ended June 30, 2013. As Jesse 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; Ben Brock, Vice President of our Asphalt division; and David Silvious, Chief Financial Officer. In just a moment I'll turn the call over to David to summarize our financial results and then to Don to review our business activity during the 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 can 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. At this point I will turn the call over to David to summarize our financial results for the second quarter 2013.

All right, thanks, Steve, and we appreciate each of you who are listening in for your interest this morning. Net sales for the quarter were $248.1 million in 2013 versus $238.3 million in the second quarter of 2012, that is about a 4% increase or about $9.8 million. International sales for the quarter were $85.8 million compared to $83.9 million in the second quarter of 2012, that is a 2% increase, about $1.9 million.

International sales were 34.6% of second-quarter 2013 sales compared to 35.2% of second-quarter of 2012 sales. The increase in the international sales for the second quarter of 2013 compared to the second quarter of 2012 were primarily in Africa, in the West Indies, in the Middle East and in Brazil. These increases were offset by a decrease in Canada.

Domestic sales for the second quarter of 2013 were $162.3 million compared to $154.4 million in the second quarter of 2012, that is a 5% increase or $7.9 million. Domestic sales were 65.4% of the second-quarter of 2013 net sales compared to 64.8% for the second-quarter of 2012 sales.

Parts sales for the second quarter of 2013 were $62.7 million compared to $60.1 million for the second quarter of 2012, that's a 4% increase or $2.6 million. Parts sales were 25.3% of the quarterly sales in 2013 compared to 25.2% in the second quarter of 2012. Aggregate and the Mining Group had the largest dollar increase in the parts sales followed by the Asphalt Group and the other group compared to the second quarter of 2012. The Mobile Asphalt Paving Group and the Underground Group each had small decreases.

On a year-to-date basis net sales were $496 million compared to $490.2 million in 2012, that is a 1% increase or $5.8 million. International sales on a year-to-date basis in 2013 were $171.7 million compared to $180.8 million in 2012, that is a decrease of about 5% or $9.1 million. The decrease in international sales occurred primarily in Australia, the post-Soviet states and in South America. These decreases were offset by increases in Europe, Africa and the West Indies. International sales were 34.6% of net sales for 2013 compared to 36.9% for 2012 all on a year-to-date basis.

Domestic sales on a year-to-date basis in 2013 were $324.3 million compared to $309.4 million in 2012, that is a $14.9 million increase or a 5% increase. Domestic sales are 65.4% of 2013 total sales year-to-date compared to 63.1% of total sales in 2012 year-to-date. Parts sales year to date are $130.8 million compared to $132.9 million in 2012, that is about a 2% decrease or $2.1 million. Parts sales were 26.4% of total sales for 2013 year-to-date compared to 27.1% of total sales year-to-date 2012.

Gross profit for the quarter was $55.4 million in 2013 compared to $53.1 million for the second quarter of 2012, that is a $2.3 million increase or a 4% increase in gross profit dollars for the quarter. The gross profit percentage was flat at 22.3% for both Q2 of 2013 and 2012.

One major impact that we had during the quarter was a negative impact from the absorption variance of about $7 million and that occurred primarily in the Asphalt Group and in the Aggregate and Mining Group. On a year-to-date basis gross profit was $114 million compared to $111.7 million for the year to date 2012, that is a 2% increase or about $2.3 million. Gross profit percentage -- as a percentage of sales on a year-to-date basis is 23% compared to 22.8% on a year-to-date basis in 2012.

SGA&E for the quarter is $37.8 million or 15.2% of sales compared to $38.5 million or 16.1% of sales for the second quarter of 2012. A decrease of about $700,000 in dollar terms and a decrease of about 90 basis points as a percentage of sales. The big decrease that we had there is primarily in the research and development [expense]. For the year SGA&E was $78.2 million or 15.8% of sales compared to $78.6 million or 16% of sales, or a $400,000 decrease. Again, the big decrease there on a year-to-date basis contributing there was research and development expenses.

Income from operations increased to $17.6 million in the second quarter of 2013 from $14.6 million in the second quarter of 2012, that is a $3 million increase or a 20% increase. On a year-to-date basis income from operations is $35.8 million compared to $33.1 million for the year to date 2012, a $2.7 million increase or 8%.

Sales and income by segment are attached to your press release for your reference. Getting down to the tax rate, the effective tax rate on continuing operations for the quarter is 36.6% compared to 36.9% we are only down slightly.

On continuing ops, for the year they were at 33.1% compared to 37.3% for the year-to-date period in 2012. And if you will recall that is primarily driven by the research and development tax credit which was not in effect in 2012 but was passed in the first quarter of 2013, and so we are getting that credit this year in our provision that we didn't have in there last year.

Net income from continuing operations of $11.1 million for the quarter compared to $9.5 million for the second quarter of 2012, that is a 17% increase. Earnings per share for the quarter related to continuing operations is $0.48 compared to $0.41 per share in the second quarter of 2012, that is a 17% increase. And the year-to-date net income from continuing operations is $24.3 million compared to $21.5 million for the year-to-date period in 2012, a $2.7 million increase or 13%.

Diluted EPS for the year is $1.05 compared to diluted EPS for the 2012 period at $0.93, that is a 13% increase. On the bottom line net income attributable to controlling interest is $11.1 million in the current quarter compared to the second quarter of 2012 at $10.4 million, that is a 7% increase and earnings per share related to those numbers is $0.48 for the second quarter of 2013 compared to $0.45 for the second quarter of 2012, that is a 7% increase.

On a year-to-date basis net income attributable to controlling interest is $24.3 million in 2013 compared to $22.6 million in 2012, a $1.7 million increase or 7%. And the diluted EPS related to those earnings is $1.05 on a year-to-date basis in the current year compared to $0.98 on a year-to-date basis in 2012 for a 7% increase.

Our backlog -- recall that we did sell American Augurs in the fourth quarter of 2012 and therefore we have adjusted the backlog in the prior year for the discontinued operations. So our backlog at June 30 of 2013 is $240.6 million compared to $254.8 million at the same date in the prior year. That is a decrease of $14.2 million or a 6% decrease.

The international backlog at June 30, 2013 was $100.3 million compared to $107.7 million at June 30, 2012, that is a $7.4 million decrease or 7% decrease. Domestic backlog this year at June 30 was $140.3 million compared to $147.1 million at June 30 of 2012, a $6.8 million decrease or 5% decrease. Again, backlog by segment is in your press release.

The balance sheet continues to be very strong; our receivables are at $102.8 million at June 30, 2013 compared to $120 million at June 30, 2012, that is a $17.2 million decrease. However, $5.8 million of the decrease was due to American Augurs at June 30. And so, the true decrease, if you were to take American Augurs out of the prior year balance sheet would be $11.4 million.

The days outstanding are down from 42.5 days outstanding at June 30, 2012 down to 37.3 days outstanding at June 30, 2013.

Our inventories at $318.7 million this year at June 30 compared to $322.1 million for a $3.4 million decrease. However, we are moving American Augurs again from the prior year number will give you an increase of $27.8 million year over year. Inventory is at 2.3 turns this year compared to 2.5 turns in the prior year.

We have nothing owed on our $100 million credit facility. We have $41.2 million in cash and cash equivalents. You will notice that we do now have on the balance sheet in the press release an investment line item. That number has become material so we are disclosing that separately on the balance sheet. We did invest approximately $15 million of cash into some investments to get some yield on that. But you may wonder where some of the cash went. Well, it is in that line item.

Also in the second quarter we did pay our $0.10 per share quarterly dividend, that was about $2.285 million paid out during the quarter on that dividend. There is a credit or sitting of about $10.6 million, so our borrowing availability is at $89.4 million.

Second-quarter 2013 capital expenditures are at $5.8 million and on a year-to-date basis we are at $15.2 million. We are projecting about $43.6 million of capital expenditures for the year; depreciation is at $5.2 million for the quarter and $10.4 million on a year-to-date basis. And we have budgeted about $22 million for the 2013 calendar year. That concludes my remarks on the financial details; I will turn it back over to Steve.

Thank you, David. Don is going to provide some comments regarding our operations for the second quarter and will also offer some thoughts moving forward. Don?

During the quarter we continued to see flat revenues, as David said, with a slight [4%] increase. Our earnings from continuing operations were up 17% and our earnings -- our EPS was up 17%. The strong dollar has negatively affected our international sales.

We've experienced this year probably the wettest weather on record in the Eastern part of the country and especially in the Southeast. Here in Tennessee we were 47 inches about a week ago and have 17 inches above normal. This has delayed shipments of equipment and especially delayed our customers starting their work.

Our earnings, although better in the second quarter, were negatively affected by higher healthcare costs, higher taxes from our Canadian subsidiary and from the GEFCO acquisition. We see our customers remaining very cautious due to the uncertainty coming out of Washington; we find the market to be very competitive. Many customers on equipment are going from rent to rent instead of rent to own and are demanding more rental -- us to rent more equipment than we have seen in the past.

However, with all of these negatives we see residential and commercial work of our customers improving slightly. Each person that I talk to or each customer says after a long pause it is slightly better than it was last year, not great but it is improving. We have begun to ship our first large pellet plan after a delay of approximately 6 weeks due to the rain and our prospects are very good for this product and the market seems to be growing.

We are in the process of merging Astec underground into GEFCO and creating an energy group, eliminating the Underground Group as we sold off all of the equipment related to that that we manufactured. Looking forward to the third quarter we see the third-quarter to be slightly weaker than the second quarter but much stronger than third quarter last year.

We believe sales of our new products and models will backfill the shortfall of our conventional products and will give us -- should give us flat revenues even though the margins of these new products have not reached their desired peak that we hope to achieve.

Our backlog is essentially flat from last year. We continue as we go forward to work on margin improvement and struggle with under absorption due to the lack of volume in most of our plants. Our parts business continues to grow, we see people replacing parts instead of replacing equipment. As David said, our balance sheet remains strong and we continue to pursue acquisitions. We find them to be very competitive at this time.

We continue to prepare for secession of myself and Norm Smith at year end, Ben Brock and Rick Dorris are in the process of picking their replacements at Astec and Heatec. They are participating in our quarterly reviews and are traveling to each subsidiary. We are pleased with the progress and look forward to the continued growth of our Company under this new leadership. With that I will be glad to answer any questions. Ben is also on the call to answer any questions.

(Operator Instructions). Jack Kasprzak, BB&T Capital Markets.

I wanted to ask you about the third-quarter. I think I heard you say that revenues will be about flat and earnings will be less than Q2 but well above the Q3 last year. On flat revenues we're obviously thinking we're going to get a margin rebound in Q3 versus Q3 last year?

Yes, Jack, our biggest problem is under absorption in the plants, we just don't have -- we've got, as you can see our inventory is built up, we hope to probably reduce that a little bit during the third quarter so the actual built schedule in the third quarter is probably going to be less and it's not going to be indicative of the revenues. We had a lot of equipment delayed due to weather and so we will be shipping it during the third quarter, but we won't be building as much as we built in the second quarter.

Okay. The tax rates bounced (technical difficulty) around a little bit and I was wondering if David had a view on where it will be for the full year?

Yes, (technical difficulty) I think it will moderate back to our historical rate, 35.5%, 36% on a year-to-date basis.

Okay. And the -- I was going to ask you about the Underground gross margin, but now you are merging it -- you say you are merging with the GEFCO and creating an energy group. Will that start as far as reporting like that in Q3?

Year-end.

First quarter of next year.

First quarter of next year, Jack.

Okay.

The margin should be fairly good in that group. We are building larger pieces of equipment, we are out of the smallest line building pump trailers, we have two large, very large orders, one for $15 million and one for $8 million for vertical drilling rigs. So we are pretty optimistic; I guess maybe a little more optimistic than backlog indicates.

But our guys up there seem to think that the drill rigs, the pump trailers, the auxiliary equipment that goes with them is going to be a great product line and we seem to be on the leading edge in some of the things we are doing there.

Okay. And for the full year maybe -- the press release mentions maybe we get a little pick up in Q4 as the weather has cleared and projects get going. But that is only one quarter out of the whole year, sales are about flat. I mean this year is shaping up to be about a flat year up slightly for revenue. Is that probably a reasonable assumption?

Yes, I think that is right, Jack. You know, the customers seem to have good backlogs, but a lot of it is just due to weather delays. And I think they will be a little more optimistic. My discussion with most of them is they -- and a lot of them had losses last year and they are not -- probably not going to have losses this year, they may not make much money but they have delayed some purchases.

And I guess logically it tells me that they may buy a little more in the fourth quarter and the first quarter of next year than they have been doing in the past. But it is still -- it is up a little bit but not up much.

Got you. Okay, great. Thanks, everyone.

Rich Wesolowski, Sidoti & Company.

If I recall in the Asphalt Group you had raised product prices around year end and last call I think related very little inflation to purchase components. So I wonder if there is anything aside from volume that weighed on the Group's June quarter margin.

Ben, do you want to speak to that?

Well, I would say that on the sales that we have taken in the second quarter that we have given a little bit of that price increase back. We had a couple of -- one very large order that went into this next quarter in the Q3. But the orders really kind of slowed down for us during Q2. So our hours worked and absorption was up -- kind of got to us in the quarter.

Okay. Is 100 basis points of companywide gross margin expansion for 2013 still within reach or is volume precluding that number?

I would say that our gross margin is going to be about where it is right now, it doesn't look like -- we really saw a falloff in May and June and July, and just things slowed down. And the under absorption is what is really hurting us, Rich.

Right. You mentioned the six week delay because of the weather with regard to the pellet shipment. Are you still expecting to reach the performance target in 2013 or has that now been moved to perhaps the March quarter?

We are planning on it I guess but it's going to be close.

Right. So we will just --

Ben, do you want to add to that?

What I would add to that is his rain comment is really tough in South Georgia. It is a flat piece of land and we are virtually going to be delivering as the concrete is curing. And so, it will really be -- I hate to say weather dependent. We are going to do everything we can to be able to count that in Q4.

Did the customer add onto the original plant order that you are now shipping?

Not yet. They are waiting on the sustainability legislation in the UK. I was at a conference last week and a half ago and there was a lot of talk about that. And the general feeling is that that will get done before the end of September and that is talking with utilities, representatives and pellet suppliers that are working on the contracts.

Their contract is essentially done; it would add the two lines to the current one line plant. And once they get that supplier contract signed so they need the additional pellets for the next two lines, that would be what releases us from the next two. So we are then told by the customer to expect that by the end of September, now.

Okay, great. Thanks a lot. I appreciate it.

Mig Dobre, Robert W. Baird.

This is Brian Brophy in for Mig. Can you discuss what is giving you confidence that we'll see a pickup in demand in the fourth quarter as you mentioned in the release?

Brian, I guess the thing that -- when the customers have a decent year they will turn loose of capital expenditures. And I guess I am just going by gut feeling that in talking to different ones, if they made money this year they will probably spend a little.

Their equipment is getting old and I guess that is what I am counting on as much as anything. They have been delayed -- got a slow start due to the weather, but it is dried out now and there are a lot of people working. And there is pockets of prosperity in different --.

One of our major customers in Georgia has gotten so much that he has ever had because he is a major contractor there. Virginia has got a great program, they did away with the gas tax and put a sales tax on it, which raised a bunch more money, but the public didn't realize they was doing it. So that has got a good program in Virginia. And a number of states are looking at going to sales tax versus gas tax like Virginia; they are watching what happened there.

But due to the backup in the work and the amount of work that they are doing I guess I am saying they are going to finish the year stronger and probably have a better attitude, which will help their buying.

Got it. And then can you provide us some additional color on your comments of customers seeing a slight pickup in residential and commercial work? Are we beginning to see some expansion in housing starts to new neighborhoods as opposed to housing starts in existing lots?

To answer your question, yes, from what I have seen the housing starts obviously are up, they are kind of flat the last month or so. But the size of houses are smaller, they are not building as many big houses. But they are sucking up the subdivisions that were built before. And the commercial work has picked up. It is picked up from a very low level.

But any of that work is at a better margin generally than the state work. So the state work or federal work is kind of flat and what was not there is at least there on the commercial and residential. I am on the Board of a floor covering company and they are up like 25%. So the home building is certainly helping.

Got you. And then can you give us an update regarding the timing and the amount of revenue recognition for the first two asphalt plants for the Army?

Ben?

We are anticipating recognizing that in the third quarter. The testing -- I think I referenced this on the last call -- it has not gone as quickly as we'd want it to go, but we are told it will be finished this month and they are here so we think that will happen. So we do anticipate the first two plants being recognized this quarter.

And then can you remind us what is in backlog, what the total opportunity is and what the risk for those orders is given sequestration?

Yes. So we have five orders after these two that are in hand, they were originally -- they told us there would be eight. They say number eight is maybe a plant, maybe not, but we do have five. But they won't release us to build the next five until the testing is complete on these two. And there is a review that has to take place on that from Aberdeen that should take anywhere from 30 to 90 days, we have been told, probably in the 30-day range.

We would love to be released on those five right now because that will help us on under absorption. But we are waiting on the Army right now. We are pushing them, but the Army is tough to push. It is five and those are firm, we just don't have the release to build them.

Got it, thanks.

Todd Vencil, Sterne, Agee.

Thinking about this weather impact a little bit and where it is going. I mean do you have a number in your mind for how much revenue got sort of delayed on your end by the weather?

My guess would be $15 million to $20 million. If you take the pellet plant we would have started shipping it earlier but it wouldn't have been a complete shipment. But I would say $15 million to $20 million, in that range.

Got it. And if you talk to your customers, you mentioned, Dr. Brock, I think that things are starting to dry out. Are you hearing better color from them on the fact that they have been able to get up and going now?

Yes. I think most of them, I think July has been reasonably dry, still a lot of rain, but they were able to work. Most of them that I have talked to had pretty good late June's and early July's, they had good weather here in the last six weeks.

And are those customers feeling like they're going to be able to make up this year what they had delayed in 2Q, or is some of that going to get pushed into next year?

I think most of it will be made up. I mean it's -- the comments they've made to me is they better get going or they won't make it up. I think they have got going and I talked to one yesterday, he had a fantastic month in June. Said the first time he had made profit in 15 months. So he was pretty excited. And they had done a huge amount of work. A lot of them are actually running two shifts, running at night as well as the daytime. So they can catch up, there's a lot of capacity out there.

Got it. Thinking about that -- I guess this is it for David, thinking about that $7 million absorption variance, which is overall -- I think it crossed all the segments but mostly asphalt and aggregate mining. I mean if you guys -- if you hadn't had the weather delays would there have been a negative variance there or would it have been de minimis?

No, I think it would have been less, but I don't think it would have gone away because there are -- even without the rain delays there is still a little bit of a lack of hours that we are seeing.

Got it. What did that absorption variance look like in the second quarter last year?

Second quarter of last year was very small actually. That -- it was actually close to breakeven.

So gross margin was flat year-over-year even though you had a $7 million -- basically a $7 million negative swing in the absorption variance?

Right.

Okay.

We made some improvements except for the dog gone under absorption. The problem we have too is we have got a couple of the companies that are over absorbed that are doing quite well in the aggregate side of it. But in general asphalt has been real slow. And the aggregate companies that depend on international have been slow.

This is Ben. I would add to that that we have adjusted our hours in the Asphalt Group, but it can change fairly quickly as orders come in that are time dependent because jobs come up with the rain. So they are also even in international where jobs get released and they wait to buy the plant until the last second. So we picked up an order Friday night in Mexico that is a quick delivery, so all of a sudden we are going to adjust our hours again. So it can turn fairly quick depending on how those jobs get released.

Sticking with that a minute, you mentioned product mix issue that contributed to the asphalt margin coming in below where you thought it was going to be. What was that exactly?

We're generally going to the Tier 4 on the pavers and some of the new lines that we have got we still haven't recovered our margins to the point that we would like to have. A number of the new products we just -- we haven't reached our margin level that we have historically -- that we will get to and that we historically have. We just have not got there on a number of these new products.

Got it. So as we think about the two big things that you mentioned there in Asphalt, I mean that product mix, I appreciate that color and in the overhead absorption. How are you thinking about margins coming out of this a little bit of a swag there in the quarter, how should we think about the next couple quarters?

We see margins continuing to struggle. I mean there is -- due to the under absorption and due to the new products -- the new products are more in the mobile group and in some of the aggregate group where we have got the lowest margins that we have got to recover from. And the asphalt is strictly volume.

Got it, got it. Okay, thanks a lot.

Jason Ursaner, CJS Securities.

Just good morning, just a quick follow-up on the last question; I missed part of the beginning of the call, so I apologize. Just looking at the asphalt segment, revenue was down a little over $8 million sequentially and there was -- gross margin was also down a little over $8 million sequentially, so basically 100% flow through.

That was all -- that is all volume, there is no -- I know the last person talked about the legacy product mix factor in asphalt. I'm just trying to figure out how much specifically of that is absorption versus potential mix in asphalt?

This is Ben, Jason. I would say, yes, mostly it is the volume. We have a couple of new products, one in particular we are working on, higher recycle asphalt plants where typically our plants would run, the double barrel would be a 50% wrap plant, we are having a new design where we can go up to 70% or 75% and we have had some costs associated with that.

Okay. And any underground segments? You guys have talked about a sizable project in Kazakhstan. Just any update on that the delivery schedule and how revenue recognition and margin might work for that project?

It's probably going to ship in September, there is about half of that that is basically purchased items that will not be typical margins and they have got (inaudible) that we are building. That package, the one for Argentina we will be building more of the total package, but the Kazakhstan will be going out in September.

And that would be when you recognize it also?

Yes.

Okay. And then also in underground, just an update on the GEFCO business. It still appears to be underperforming from a demand perspective relative to where there had been last year maybe at peak times -- just maybe what the strategy is to grow the business?

We kind of screwed it up to be truthful in that we -- they were outsourcing a huge amount of their work, the machining; the machine tools when we bought that plant were 1960s vintage. They were outsourcing all the material prep and we brought in all of that work and we bought new machine tools and probably we did it too quick. We were having to train people, they are getting up to speed, the material prep seems to be working good.

The programming of the new machine tools is still a work in process and as a result of bringing the sub work in quicker than we should have we kind of screwed up the flow, to be truthful. And we are working our way out of that and it should reduce our cost substantially when we get everything up and running.

But it is not -- the end of the third quarter should be better and the fourth quarter should be better. We have got good backlogs there and we've got good prospects there. But we have rearranged the plant, it is a modern plant now but we are just getting up to speed.

Okay, great. I will jump back in the queue. Appreciate those details. Thanks.

Ted Grace, Susquehanna Financial Group.

Don, could you speak to the highway zone -- we are about 14 months out from the expiration of the call it 2.5 year mini bill. Just curious for what kind of insights you can share that are either -- are you picking up from subcommittee level or the actual committee levels on both the House and the Senate side and kind of what your outlook is or expectations at this point?

All of the politicians that our people talk to and I've talked to recognize the need for highway spending, they all sit there and agree with you, but they -- when you get to how are you going to pay for it they just shut up. And it is really frustrating. So we really just don't know. I guess, Ben, do you want to make any comments?

I guess we are getting to the point that the contractors are beginning to get nervous about it. There will be something but God only knows what it will be. The problem with the present administration when they talk infrastructure you better try to figure out what part of the infrastructure they are talking about too. I mean it is not necessarily roads and bridges. And so I am not giving you a very good answer, but we really -- of all the times I've seen we don't see a lot of momentum on it.

Ted, this is Ben. I would agree with what he said. I mean I had breakfast with customers this morning that are in town and their state has done a lot of work -- kind of like what you mentioned with Virginia earlier -- or what you heard about Virginia earlier, that it may be that the state is long-term taking this over, you don't have a lot of momentum for a highway bill.

But I know that the Asphalt Association out there had their midyear meeting in Boston last week and I was up there for one of their legislative sessions and they are definitely focused in and starting to fly in. So they seemed to be focused earlier, but I agree with Dr. Brock in that there is not a how do you pay for answer yet.

Okay, prepared in (inaudible) that is -- very much remains to be seen. But it sounds like certainly from your tone you are not (inaudible). We'll get anything that is certainly bigger and the risk may be skewed to the downside, would that be a fair interpretation?

I don't -- I would be surprised if there is any bigger because we don't have the funding where it is right now as you know raises about $35 billion. And we are at $40 billion. So --.

Okay. The second thing I was hoping to dig into is could you just update us on how the mining initiative is going within AMG? Obviously the mining markets are tough typically speaking. You guys have kind of a different strategy and some update there would be helpful just to understand how that business is tracking versus expectation and what your thoughts are looking out for the next couple years?

I didn't quite get the question.

Just an update on mining activity, how things are doing in the mining segment.

You know, obviously with commodity prices going down it slowed down the mining, we just completed our round of quarterly reviews. And talking to our South African operation, gold and platinum and a lot of those are down. Coal Is up in South Africa; as we cut down on the coal in America these other countries are picking it up. But in general most of the mining projects have slowed down.

We have a pretty good size order from Australia for a mining project and I guess what we see is we are in more of the processing side of it and there is a lot of replacement equipment, there is also a pretty good cadre of equipment that gets sold just to keep the leases. And we have been such a small player in the mining side of it, we see a slight growth that for us at least in that even in a down market. But overall I would say mining is going to be down the next couple of years.

And would I be correctly calibrated to think of that kind of 20% to 30% of revenue at AMG?

Yes, that would be about right.

Okay, [thanks a lot] this quarter, guys.

Morris Ajzenman, Griffin Securities.

Just a follow-up, back on the Asphalt Group, talking on the margins. We know that the asphalt plants are kind of aged and we have talked about in the past where you expect to see a pickup of orders, and you touched on it, into the fourth quarter. I am not sure with the previous answer if this was in reference to that, but gross margins in this quarter, 18.8%.

If you do get a pick up in the order rate for asphalt plants, I thought you had said the gross margins might be up some. I don't know if you were referring to asphalt specifically, but my presumption, if you had a pickup in the orders in asphalt plants, why would we see a big step up in asphalt gross margins?

I guess it is product mix. We expect to get the other two lines of the pellet plant down in Georgia to build in the fourth quarter. We kind of expect the Army to release those five other plants. So we think we are going to build the plant back up, that's the biggest thing. And then we have a number of customers' potential orders for larger stationary plants that they are replacing older plants that they have told us they are going to do in the fourth quarter. They don't want to shut down during the middle of the year.

So we see prospects there that we feel fairly confident about getting. So I guess the three of those items -- the pellet plant, the Army plants -- the Army is not great margins, but it puts -- on absorption, it helps our absorption in the plant. And then we've got a number of prospects that are talking about fourth-quarter orders for either fourth- or first-quarter deliveries, they want to be running next year.

All right and as a follow up, again, the Asphalt Group -- the overall target of 25% gross margin for all these divisions, for Asphalt Group is that realistic then to see over the next four quarters at some point in time, or will it take much longer to get to 25%?

When you consider 25% of their business is parts, it has to offset lower margins in the equipment and 25% may be a little rich, but 23% to 24% is probably reasonable.

Thank you. And one last question. Beyond the two lines for the coal plants are you in discussions with other end market utilities that -- from Europe that would have an interest in stepping up and ordering these plants, anything in the discussion phase?

Hi, Morris, this is Ben. We are talking to a handful of customers, we are not talking direct to any utilities. Frankly until the sustainability gets past everybody is -- they are getting quotes but not absolutely serious until that point. I think the financing is held up by that too. So we are -- but we are talking to a handful of other customers.

Thank you.

Brian Rafn, Morgan Dempsey.

Don, you spoke about the (technical difficulty) strength, some pockets of prosperity, you mentioned Georgia and Virginia (technical difficulty). Are you seeing the pockets of prosperity expanding (technical difficulty) geographically or is that kind of static from your estimate?

I think it is expanding some, there is -- (technical difficulty) states like Iowa are doing better. I could go through -- I don't know that I can go through all 50 of them, but I would say that it is probably 20% better than it was a year ago. Even California is a little better. Particularly in Southern -- more in Southern California than Northern.

But it seems to be doing better in the West than it is -- there is usually a wave that comes from the West to the East that as things pick up and looking at where we are selling crushing equipment typically crushing equipment is a year I had of asphalt equipment and most of the customers that I have talked to in the crushing say it's up, I think statistics show it is only up about 4%.

But I get the feeling that when the weather clears it's probably going to be that the aggregate side of the business is going to be -- I'm talking about our customers now -- probably more like 15% or 20% year over year.

Okay. Give me a sense, with the under absorption issues and that, how does that -- and some sluggishness, you talked about confidence. How does that translate for you guys in developing and innovating new products? Does this force you to create more new products from the standpoint of differentiating or do kind of draw back a little because there just isn't that end market demand?

Well, we have taken a more aggressive approach to try to develop new products. If I look at the last 10 years, if we hadn't developed new products we probably would be doing half the volume we are doing today. And most of the companies -- what we are building today we didn't build 10 years ago.

And it is a matter of survival is what it amounts to. If you don't continue to innovate you are going to get left behind. I look at it more for survival right now. You would like to -- we did it for growth but it has ended up being for the survival of the Company. You have got to continue to build new products.

Yes, okay, okay. What -- can you guys kind of give a ballpark on capacity utilization you talked about under absorption in the asphalt side. What might be running on a capacity utilization across your different groups?

I would say it is probably less than 70% right now.

Okay. And then how does that translate for you guys, there seems to be in the manufacturing side a lot of shortage of engineers and that. How do you guys look -- kind of based on your comments with innovating for survival, how do you look at a headcount and hiring and staffing? Is that kind of flat for you guys or are you kind of episodically hiring or are you looking at headcount (inaudible)?

We are basically hiring to replace retirees, you know, and we -- we are not really at this point trying to hire to grow because we just haven't been able to get the revenues. The growth in the last five years of our international certainly helped us in this downturn, the new products helped us in the downturn. But with international backing off and with the visibility not being too great we are trying to remain cautious.

Yes, okay. You talked a little bit, Don, about guys -- you expect maybe the asphalt side with obsolete equipment, aged equipment. At what point is there the ability to constantly just rent, rent ongoing or is at some point there a pent up demand to replace some of that infield obsolescence?

Well, it varies with the product on an asphalt plant, we certainly don't rent those. But crushing equipment particularly track mounted equipment, they are more prone to rent to rent. We are seeing a lot of that. Milling machines, mobile equipment, they would like to do more rent to rent or at least rent to own. A lot of the larger customers are limited -- their people on CapEx, but they are getting the work and so they have of choice but to rent to do the work. And it comes about from that.

On the asphalt plant side of it, the need to change depends on the need to run higher recycle. To be able to be competitive. The older plants you see I would say in a lot of areas of the country, 30% or more of the plants are shut down but there are older obsolete plants that may never be cranked back up. Because they wouldn't be very competitive because they can't run the higher recycle.

Okay. And what -- relative to the Army contract, are there any other demand for the asphalt across any of the other branches Marines or Air Force?

Not a lot, no.

Okay. And then you guys talked about tax rates. You got a CapEx budget for this year, 2013?

Yes, yes we do. We mentioned that the CapEx budget for 2013 will be at -- $43.6 million.

Okay. Thank you, guys.

You are welcome. A major -- a major part of that is building a plant in Brazil and that is kind of a one-time item that is probably in the $20 million, $25 million range.

Rich Wesolowski, Sidoti & Company.

With regard to the European incentives for biomass I was under the impression that utilities had already secured subsidies for burning wood and Ben had mentioned they are now waiting on something else, some other piece of legislation?

Yes, Rich, hey, this is Ben. They do have the floor price that they do have, the sustainability part is for the environmental side of it they want to make sure that all of the I's and T's or everything is taken care of as far as where is that -- where is the biomass or where is the wood coming from and are you replanting trees behind it? And they have to have all of that legislation in place, that is part of the deal.

And they want to make sure that that is reasonable, utilities and the suppliers of the pellets, before they go ahead. And it is -- so you are right the floor price is there, the utilities are happy with that, but that sustainability piece has to be finished before that will lock in.

I think, Rich, the environmental groups start pushing back on it and the parliament over there is trying to satisfy them. But they want you to be able to have a paper trail that shows that as you cut the wood you are going to replant the wood so that you've got that zero carbon footprint.

Right. Well, from what I gather either way they can't even [sniff] there larger renewables goals at the biomass, so it seems like a matter of time. But you spent a lot of time talking about the market potential for the pellets plants. Would you mind reminding us lastly the ways in which Astec's plants specifically stand out from the competitors' versions? Thanks.

I think we have got a very unique plant that we have patents pending on and that we do indirect drying with a tube type dryer, rotary tube type dryer. And as you drive particularly Southern Pine or even hardwood but Pine generates a lot more VOCs. On a typical plant you have to put what they call an RTO or it's an afterburner that would burn those VOCs up. In order to incinerate them you have got to heat it to about 1400 to 1600 degrees Fahrenheit.

We are taking the VOCS off of the rotary tube dryer and pulling them back to our thermal oil heater where we are heating the oil so we are basically using the energy out of the VOCs to help heat the heat transfer (inaudible) that's in the tube dryer. So our efficiency will be about 10% better from a drying cost and it -- it basically is a safer type operation.

And the biggest hot button I guess we have that the customers like, it is a modular plant, it is a somewhat skid mounted plant that if they run out of fiber at their what they call the wood basket they can pick it up and move it and not lose so much, they lose the concrete in the ground but that is about it.

Right.

The third thing is one substantial company offering a package. Right now they are being put together by engineering, procurement groups that buy a piece here and buy a piece there where we furnish the entire plant.

Okay, I appreciate the extra time. Thanks a lot.

Todd Vencil, Sterne, Agee.

Real quick, SG&A was better than we thought in the quarter and you mentioned that R&D was down again. What is the outlook for that and what kind of run rate should we be thinking about on as G&A?

Pretty well what you have got right now, pretty well what the second quarter was (inaudible).

Yes, that's right Don. In the past we have spent upwards of $8 million or $9 million the past couple years in R&D and our run rate over the past 10 years or so is in the $4.5 million to $5 million. We are probably heading back toward that run rate but we are still right now we are in the $7 million -- $7.5 million range.

Got it. Okay, thanks a bunch.

Thank you. We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Mr. Anderson for any concluding remarks.

Thank you, Jesse. We appreciate everyone's participation on this second-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 August 6, 2013 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 for 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 and have a good week.

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