Astec Industries Inc (ASTE) 2014 Q3 法說會逐字稿

Greetings and welcome to Astec Industries' third-quarter 2014 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Steve Anderson, Vice President and Director of Investor Relations.

Thank you Rob. Good morning and welcome to the Astec Industries conference call for the third quarter that ended September 30, 2014. Also on today's call are Ben Brock, our President and Chief Executive Officer, Rick Dorris, Executive Vice President and Chief Operating Officer, and David Silvious, our Chief Financial Officer. In just a moment, I'll turn the call over to David to summarize our financial results, and then to Ben to review our business activity during the quarter.

Before we begin, I'll remind you that our discussions 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 that you familiarize yourself with those factors.

So, at this point, I'll turn the call over to David to summarize our financial results for the third quarter.

Thanks, Steve, and thank each of you for joining us this morning.

Net sales for the quarter were $220.2 million compared to $213.2 million for Q3 of 2013. That's a 3.3% increase or $7 million increase. International sales were $77.6 million this quarter compared to $80.8 million for Q3 of last year. That's a decrease of 4% or $3.2 million. International sales represented 35.2% of this quarter's sales compared to 37.9% of Q3 2013 sales. The decrease in international sales this quarter versus the same quarter last year occurred primarily in the post-Soviet states, in Africa and in Mexico. These decreases were offset primarily by increases in South America and Canada.

Domestic sales for the third quarter of 2014 were $142.6 million. That compares to $132.4 million for Q3 of 2013, a 7.7% increase, or a $10.2 million increase. Domestic sales were 64.8% of this quarter's sales compared to 62.1% of sales for Q3 of last year.

Parts sales for Q3 of this year were $61.5 million. That is compared to $59.4 million for Q3 of 2013. That's a 3.5% increase or a $2.1 million increase. Part sales represented 28% of quarterly sales this year compared to 27.9% of quarterly sales in 2013 for Q3. On a year-to-date basis, sales were $736.1 million. That compares to $709.1 million last year. It's a 3.8% increase or a $27 million increase. International sales for the year were $233.4 million compared to $252.5 million last year, a 7.6% decrease or a $19.1 million decrease. The decrease in international sales on a year-to-date basis occurred mainly in Africa, in Canada, the post-Soviet states and Australia and Europe. Those were offset by increases in Asia, South America and Russia.

International sales were 31.7% of sales year-to-date this year compared to 35.6% of sales year-to-date last year.

Domestic sales year-to-date were $502.7 million compared to $456.7 million last year, an increase of $46 million or 10.1%. That represents 68.3% of total sales this year compared to 64.4% of total sales for the same period in 2013.

Parts sales year-to-date 2014 were $191 million. That compares to $190.2 million, which is essentially flat, or an increase of 0.4%, or an $800,000 increase. Part sales represented 25.9% of total sales this year versus 26.8% of total sales last year.

Gross profit for the quarter was $43.3 million compared to $45.8 million in Q3 of 2013, a $2.5 million decrease or a 5.5% decrease. Gross profit percentage was 19.7% for the third quarter of 2014 compared to 21.5% for the third quarter of 2014.

The absorption variance decreased slightly. Last year, we had a $5.5 million unabsorbed overhead amount. This year, it is $5 million for the third quarter. So basically flat.

We had a foreign exchange transaction loss this year compared to a gain last year. This year, it was a $700,000 loss, last year a $240,000 gain.

The infrastructure group obviously struggled as you can see in your segment analysis during the quarter with its gross margin falling from 22.3% in Q3 of last year to 14.4% in Q3 of this year. This decrease was due to, primarily to the segment's 5.5% decline in volume. That's combined with pricing pressures, primarily in the asphalt plant market. The segment's gross margin compared to Q3 of last year was only negatively impacted by absorption by $300,000. There was a negative $300,000 change in unabsorbed overhead quarter-over-quarter.

On a year-to-date basis, the consolidated gross profit was $162.2 million compared to $159.8 million. That's an increase of $2.4 million or a 1.5% increase. Gross profit percentage on a year-to-date is 22% compared to 22.5% last year, a decrease of 50 basis points. The year-to-date unabsorbed overhead was only $11.1 million compared to $19.3 million last year. We've made an improvement in that factor of $8.2 million.

Foreign exchange on a year-to-date basis was a $1.1 million loss compared to a $530,000 gain last year.

SGA&E for the quarter was $38.9 million, or 17.7% of sales, compared to $36.6 million, or 17.2% of sales, last year. That's an increase of $2.3 million or an increase of 50 basis points as a percent of sales. The primary driver of that $2.3 million increase was the addition of Telestack on April 1, 2014. They are in this year's number but not in last year's number, and that increase was $1.6 million of the $2.3 million overall increase.

On a year-to-date basis, SGA&E was $122.5 million, or 16.6% of sales, compared to $114.8 million year-to-date last year, or 16.2% of sales, a $7.7 million increase. The primary drivers on a year-to-date basis for the increase in SGA&E again is the addition of Telestack, which was $3 million of the overall $7.7 million increase, and don't forget that we had ConExpo earlier this year, which was a $4 million charge to SGA&E. So total those two together, $7 million of the $7.7 million increase in SGA&E for the year.

Operating income was $4.4 million in the third quarter of 2014 compared to $9.2 million in the third quarter of 2013, a $4.8 million decrease or a 52.2% decrease for the quarter. Year-to-date operating income was $39.7 million compared to $45 million last year, a $5.3 million decrease or an 11.8% decrease.

We go down to the tax rate, it was quite a challenge this quarter for us. The effective tax rate in the quarter was 64%. That compares to 34.6% effective tax rate for Q3 of last year. That effective tax rate this quarter was impacted by net operating losses that we had in certain foreign jurisdictions, so certain of our foreign companies have had NOL amounts that we couldn't utilize to offset the taxable income in the US. We had adjustments to prior-year tax reserves, and we also had the continued delay in the passage of the research and development tax credit in 2014. Recall that in 2013, the R&D tax credit was passed in Q1 and that was retroactive for 2012 as well, so we were able to claim both 2012 and 2013 tax credits in the year 2013.

The tax rate for the year was 37.9% compared to 33.4% last year. We expect the tax rate for the year to remain in this 37% range if no research and development tax credit is passed by Congress this year. The rate could be down in the 35% range, which is our traditional run rate, around 35%, if we do get the R&D tax credit passed. We certainly don't expect anything to happen on that until at least after the elections.

Net income attributable to controlling interest is $1.9 million for the third quarter compared to $6.5 million for Q3 of 2013, a 70.8% decrease. Earnings-per-share were $0.08 versus $0.28 per share in Q3 of 2013. That's a decrease of 71.4%. And our year-to-date net income is $26 million compared to $30.8 million last year, a decrease of $4.8 million, or 15.6%.

EPS for the year was $1.12 compared to $1.33 last year. That's a 15.8% decrease.

The backlog -- and remember that the backlog for prior years that we state here has been restated to include the backlog of Telestack, which was acquired April 1, 2014, so you get a true apples-to-apples comparison. The backlog was $295 million at 9-30-2014 compared to $231 million at 9-30-2013. That's an increase of $64 million, or 27.7%. The international backlog this year at 9-30 was $105.8 million compared to $98.1 million at 9-30 of last year. That's an increase of $7.7 million, or 7.8%. And the domestic backlog for those same dates increased from $132.9 million last year to $189.2 million this year. It's a $56.3 million increase or a 42.4% increase. Sequentially, the backlog is up $30.9 million, or an 11.7% increase.

On the balance sheet, the balance sheet continues to be strong. Our receivables are at $108.8 million compared to $97.3 million last year, an increase of $11.5 million. Our days outstanding are 45.5 days compared to 41.8 last year. Our inventory is at $370.4 million compared to $339.8 million last year, an increase of $30.6 million. Our inventory turns are at 2.1 compared to 2.3 last year.

We owe nothing on our $100 million credit facility, and we have $13.8 million of cash on the balance sheet, plus about $1.9 million in investments. Our letters of credit are at $9.3 million. Our borrowing availability is $90.7 million.

For the year -- for the quarter, CapEx was $4.9 million, and for the year, it's at $18.5 million. We expect CapEx to end up in the $22 million to $23 million range for the year. Depreciation for the quarter was $5.4 million, and on a year-to-date basis was $15.9 million, and we expect depreciation to end up the year at $24 million.

That concludes my prepared remarks. I'll turn it back over to Steve.

Thank you David. Ben will now provide some comments regarding the third quarter of this year's operation. Ben?

Thank you Steve, and thank you to everyone for joining us on our call today.

As we mentioned in our earnings release this morning, we were disappointed with our earnings during the third quarter. However, we are optimistic for the fourth quarter and for 2015.

Our earnings-per-share were $0.08 per share in the third quarter versus $0.28 per share in the third quarter of 2013, and our year-to-date earnings-per-share was $1.12 per share versus $1.33 per share in 2013.

Our year-to-date EBITDA was $58.974 million versus $62.591 million in 2013. We had three unusual items that affected our year-to-date EBITDA. The first was our ConExpo expense of $4 million. The second is our fair market value inventory writeup at Telestack, part of our acquisition accounting for $1.418 million. And the third is a foreign exchange loss of $1.103 million. If you take the total of those three unusual items, that totals to $6.521 million. Adding the $6.521 million back to our year-to-date EBITDA of $58.974 million would've given us a year-to-date EBITDA of $65.495 million and that is versus the $62.591 million that we had last year year-to-date, which would have meant an EBITDA increase of $2.904 million versus last year. So despite our earnings and the set back in the third quarter on earnings, we are pleased to report that operationally we are remaining ahead of our performance last year.

The other good news is our backlog at September 30 was at $295 million, which was up 27.7% versus last year.

Regarding the sales environment that we have here in the United States, particularly in the infrastructure group, the reality continues to be that the uncertainty that's created by not having a highway bill out of Washington DC just continues to make our domestic highway infrastructure customers feel uneasy about major capital expenditures. The encouraging news for us though is that for the first time in about five years, we are hearing from our infrastructure customers that they are having a good year and do have backlogs of work to do, particularly on the private side. That's pretty exciting for our business. While it will take a long-term highway bill to speed growth in the large CapEx in the infrastructure group, we are encouraged that equipment is now running at higher capacities and we're quoting more large projects this year versus the same period last year.

We are always going to welcome a long-term highway bill with increased funding when and if it would get done, but in the meantime, we're going to continue to pursue new business with new products in the United States. And we are working to grow our international effort, and I think that seeing that backlog up is very helpful toward that end.

We are pleased to see our international backlog up in the quarter. We are pleased to report that Telestack was once again operationally profitable in the quarter.

As an update, the first line of the Hazelhurst wood pellet plant continued to perform well during the quarter. Line 2 is delivered and being installed now and line 3 is in process as well. As a continuing reminder, it's a new product that we've chosen to finance for 24 months, and as a result, we will recognize the revenue for this plant as we are paid. This will continue to have an effect on our cash and our inventory until it's paid in full. The order for all three lines, as a reminder, was for $60 million.

The startup of the pellet plant has created strong interest. We do expect to sell additional plants either late in the fourth quarter or in the first quarter. We do have customers coming to see us as soon as this week on that.

Internationally, we are again pleased to see our quote activity continue to increase during the third quarter along with the backlog increase.

On the energy side, we remain challenged in our drilling and pumping equipment with regards to shipments in the third quarter. We had two pump trailers that we expected to ship and they were delayed by the customer so we could customize the trailers for them. The good news is that there is more money involved for the trailers. The bad news was that they didn't ship. These trailers will ship in the fourth quarter now, and along with continued strength in heaters for gas processing, operations, increased sales of would shippers and grinders, we are optimistic on our outlook in the energy group.

We are working to grow our business in mining through our new facility in Belo Horizonte, Brazil. As a reminder, this facility's progress did take a big slowdown during the World Cup. We expected to have the facility open in October. We've been waiting on power, and now we expect it to open in November.

Our Osborn division in South Africa does about 90% of their business with the mining industry. Their big challenge in the third quarter was a large strike of workers in the metalworking industry that had several manufacturers close down. Osborn itself was closed down for about four weeks. However, we did ship parts from vendors and supported our customer service issues during the strike. And thanks to our team's effort in Johannesburg, the Osborn strike really had a very small effect on our results.

Looking ahead to the fourth quarter of 2014 and to next year, we have increased our backlog and we have mentioned an increase in quote activity internationally. From our last earnings release to now, orders have been good for the last three months with the exception of hot mixed asphalt plants which just continue to lag due to the highway bill uncertainty.

Our market share in asphalt plants remains very strong ,as in the past. We just need to see a bill to help move our customers along.

We see growth opportunities in oil drilling and pumping trailers, pellet plants, large crushers for mining, high recycle asphalt plants, small asphalt plants for export, and small commercial paving equipment. Parts sales are now up slightly for the first nine months versus last year. We do remain committed to improving our volume in parts in the long term along with working to increase competitive parts sales as well. We are continuing to work on our lean journey with regards to manufacturing and office operations, and we are seeing progress in nearly all of our divisions on that front.

Looking to the whole of 2014, of 2014 as a year, we were not pleased with our third-quarter earnings. We do expect to improve on our performance in the fourth quarter. The third quarter is traditionally slow for us as a whole. With our divisions' current backlogs and delivery schedules, we are optimistic that our fourth quarter will be in line with our fourth-quarter performance in 2013 with growth coming -- in 2013 with growth coming in 2015. And again, this is despite the current state of the highway bill in Washington DC.

Our customers are experiencing improved private market with some backlogs and we are focused on selling our existing and new diversified products not only in the United States but around the globe as well. We are also growing our business in energy and mining, two industries not dependent on the highway bill.

Acquisitions do remain a key piece of our growth strategy along with organic growth and targeted sales growth efforts, both in the United States and in international markets.

That ends my comments on the quarter and the year and what's in front of us. And we thank you again for taking the time to be on our call and for your support as we move ahead. I now turn it back over to Steve Anderson.

We will be happy to take questions. Rob, if you will poll for questions, we'd appreciate it.

(Operator Instructions). Jason Ursaner, CJS Securities.

First, I wanted to ask about the infrastructure group. Can you help break out a little bit of the accounting impact at the gross margin level from the wood pellet activities? And are you sort of writing that project to a specific margin that you're going to recognize when you get the revenue, and if that numbers kind of right or wrong you are essentially taking the variance in current results, or are you more identify specific costs on that project?

This is Ben. We are keeping it at a margin when we get done we will be okay on it when we ship it. So there has been some expense to that.

The bigger issue in the infrastructure group, particularly at Astec, was just the hot mix plant volume. That's our core business in that division. And while the pellet plants are great, they were taking up man-hours. We had deals that we thought we would ship in the quarter or that would happen that we could still ship in the quarter fairly recently and things just kind of stopped for Astec. The extension to May of 2015 kind of slowed down. The DOTs and letting and our customers did a gut check, and it was about a five-week delay in everything.

After the Labor Day holiday, the first week of September, we had a tremendous influx of orders. It was a great one-week run because after that it kind of went back to normal, but everybody got awfully excited right after Labor Day. But it's primarily a volume issue at Astec Inc. with that on the infrastructure side. And then Australia is struggling too. With mining being down, infrastructure is off a little bit too in Australia although now the mobile equipment seems to be picking back up for us in Australia.

Got it. I understand the hot mix impact. Just on the wood pellets particularly, are you guys recognizing some of that cost in man-hours for the work on line 2 and line 3 without any revenue?

Yes.

Okay. For the federal spending, you mentioned the continuing resolution in that you're still seeing challenges in the hot mix. Can you go back to your comment balancing the orders you've taken to advance the backlog position the way it did? Because it generally looks like you're positioned pretty well going into next year. So, I'm just wondering what opened some of the order flow in these other markets, and is there a way to get an acceleration in the core asphalt without an increase in funding?

Generally, what happened for us, the DOT started to really some more inlay work and some larger projects have also come along. In particular the state of Florida has done a lot of public-private partnership type of work, which basically means toll roads. So we've seen pockets, particularly the energy states, and that's where a lot of the orders that we've picked up went on the asphalt side. So again, the private market is really pretty decent for our customers, as I mentioned in the comments.

On the other side, when you talk about international and asphalt plants, the small plants seem to be going, okay, those are coming out of our Dillman operation, and Dillman is having a fairly good year.

On the larger plant side, it seems like we've gotten some things going in Europe for the first time in probably 2.5 to 3 years. So that was encouraging to us too. So, we've got good coverage. All of our sales groups were in, in last few weeks, in sales meetings, and they seemed, the international side seemed fairly upbeat.

Okay. The energy market -- just last one for me. Any concerns that the strength you've had contributed from there trails off a bit? Obviously, there's been some severe volatility in the end markets for energy. So I'm just wondering if you see that flowing through to project equipment.

Rick Dorris is in here, and he has worked closely with the energy group, and I'm going to let him answer that one for you.

We still feel good about our energy products going forward. We've had a good quarter for wood chippers and grinders and expect that to continue to be good. And we've had a good quarter for heaters for gas processing operations, and that continues to be good. So we are not expecting a downturn currently.

Okay, great. I'll jump back in the queue. Thanks guys.

Mig Dobre, Robert W. Baird.

Good morning guys. Maybe we can go back to discussing margin in the infrastructure group. I'm wondering if you can help me understand exactly what the moving pieces were here. We are looking at call it $5 million of lower revenue, but obviously gross profit declined by better than $7 million. So, you mentioned several items. Mix obviously is an issue, volume is an issue, but can you kind of break out maybe the impact of one versus the other?

This is Ben. It's more volume than mix. We had a couple of jobs that you probably -- they are special that you might stretch for because you are not busy in that group. But generally it's volume.

The comment I would make is we've done -- it's kind of a catch, because we've done a nice job on absorption, but we've held on and we've kept people clocked into jobs because we see a little bit of a shortage in skilled labor, particularly on the machining side. And so we took the approach that if we are seeing a little bit of a breather in these five-, six-week periods with the asphalt plant customers, we wanted to just maintain our labor. And it seems like that's a good move because now we've got pretty decent business, at least into the first part of next year in that business on the Astec side. So, that's why we feel comfortable that we will be better in the fourth quarter than in the third. But it was primarily a volume issue.

And if you can maybe calibrate expectations going forward, because, in this business, you've been running gross margins in the 20s%. And obviously that's not what happened this quarter. But for all I know, mix and pricing is something that might be around for a while. Should we be thinking that this is going to be call it a mid to high teens gross margin business as we look maybe over the next 12 to 18 months, or is it going to get back to 20%?

No, I think we will be back in the 20s%.

Okay. I also want to talk a little bit about orders. And I look at infrastructure specifically and according to my math, your orders were up nicely, almost 8% in the quarter. And they were pretty close to being on par with what you've done during ConExpo. What's sort of happening here? Is it that you see a lot of mobile product that's being demanded or how should we kind of parse out what you were saying in terms of customer hesitation with what I perceive to be pretty decent orders?

Yes, it is -- in the infrastructure group, it's the Tale of Two Cities because at the end of these highway bills, there's a lot of mill and inlay work, and so Roadtec is up slightly versus last year, so they've seen a pretty good demand. And then on the Carlson side, with their small pavers and their screed business, they've had a very good year. So that's what you're seeing. There's more mobile equipment being sold and in our business, the customers really need those pavers to work because when they get out on the job and they've got 15, 20 trucks out and they've closed off traffic, a paver becomes very, very critical to them. And so we've seen a good replacement cycle on paving and milling equipment.

I see. And I'm sorry to go back to this margin issue, but as you look at your backlog that currently exists in the infrastructure group, is it fair to say that your visibility -- that you have enough visibility there to sort of expect a rebound in gross margin as you're looking out, especially for next quarter?

Yes.

Great. And then the last question for me is going to be maybe around SG&A. How should we think about that number? Is $39 million kind of the run rate going forward?

This is David. I think -- I don't think that's the run rate going forward. I think it's going to be a little less than that. We've got $4 million of ConExpo this year, so if you average it out, I think --

No, but I mean that's what it was this quarter. You didn't have ConExpo, but you had everything else.

I think it will be slightly less than that on a run rate basis, yes.

I'll go back in the queue. Thank you guys.

Ted Grace, Susquehanna.

Hey gentlemen. How are you doing? Can we just come back -- I know you mentioned that Roadtec orders were up a bit and that Carlson was up nicely. Just could you give us, kind of for the mobile asphalt paving group versus the heater or the asphalt plant, kind of what orders did year-on-year, just so we have those numbers?

Say that question, the back end again? I'm sorry Ted.

Infrastructure orders were up 8% year-on-year.

Yes.

How should we think about kind of the mobile asphalt paving product orders versus the asphalt plants?

So basically the Roadtec versus the Astec. Ted, it's Steve. Ben had mentioned I think a few minutes ago where the hot mix plants had been soft, and that the Roadtec orders had been up, and they are having a pretty good year. Again, a lot of the work -- when you have a temporary extension, you're getting these short-term contract versus the longer-term contracts, and most of the $41 billion being spent on the federal basis is going towards restoration versus new projects. So, that kind of plays into the hands of Roadtec and also Carlson Paving.

Yes, I got that. I was wondering if you could quantify it, but if you are not comfortable quantifying it, then I can just move on to the next one.

We typically don't break down those items to anything lower than to the segment level.

Okay.

But I will say this, that it's up in each of the subsidiaries.

Okay. Maybe turning to the asphalt -- or the aggregate and mining group, could you just maybe speak to how aggregates did versus mining? I know you mentioned that Osborn struggled, but maybe some commentary on kind of what you're hearing from US aggregate producers and how the quarter trended?

On the aggregate and mining side, in the last 2 1/2 weeks, we've visited every North American location with the exception of BTI, because they had a huge rainstorm and we couldn't get in. In the aggregate group, generally the feeling was upbeat and that their customers were generally have pretty good years, and they feel very good going into 2015.

Okay. And then on the mining side, did you say you have a positive outlook in 2015 on large crushers, or could you speak to kind of what you're seeing in the mining markets now? Because that would be certainly better than what people probably would expect for mining.

Right. On the mining side, we are still very new into that. We have our T900 crusher, which is a 900 horsepower crusher made for the larger mines. I would tell you that, about six months ago, we might have had one okay lead, and I would tell you after being there last week, we have three pretty good leads to move that crusher into operation within the next three to four months.

We are so new in the larger mining equipment that, for us, one is a good number. We had to go through a little extra testing on the first one. It is now through testing, in our shop and being prepped for shipment when the customer is ready to take it. Talking too with our Australian division and our Brazil division, mining is still down overall as far as the mining side goes for us.

So it would've been a drag on the growth rate? Do you agree with that?

Slightly. It's not, for us, we are not -- other than in South Africa, it's very small, and even our Osborn division did okay even despite the strike. And they have -- generally their business outlook is okay.

Okay. And the last thing I was hoping to kind of circle back on, could you elaborate a little more on quotation levels domestically for kind of road and highway products broadly? Because I know you feel good about 4Q and you feel good heading into 2015, but could you just maybe talk about what you're hearing from the field and what your thoughts are on the highway bill at this point, whether there's any prospect for renewal during a lame-duck session?

Sure. Again, on the asphalt plant side, we are quoting more large plants and larger projects than we have been, which is encouraging. Our customers generally are doing pretty well on the asphalt side and that's mainly private work. There's some DOT -- there are some areas that are pockets that's going well.

So, but on the highway bill side, that's what moves the needle mentally for our customers, and the extension, as you know, runs out in May of 2015. Right now, most of the politicians are only thinking about the election, but we are continuing to push and keep the highway bill in front of everybody through letter-writing campaigns and things like that. You know, we need the bill to help accelerate the growth of large CapEx spending on asphalt plants. In the meantime, like we said with the paving equipment, it seems like there's a good base of demand for the paving and milling and material transfer devices.

I don't know how to say it any better for Astec Inc. For the plants, that's what we need. But in the meantime, we do have about half a dozen pellet plant prospects for Astec Inc. Two of them seem very, very warm. If we can get those in, that will help us too. So, we are trying to diversify so the highway bill doesn't affect us as much as it has in our history.

Got it. Great. I'll get back in queue. Best of luck this quarter, guys.

Nick Coppola, Thompson Research Group.

Good morning. I just want to kind of continue with that last train of thought. I guess what are your expectations for federal funding? Are you just looking for more continuing resolutions after May 31? What are you guys planning for?

We are going to plan for, in the asphalt business, like it isn't going to happen, like it will be flat funding. We're going to work toward helping get them to pass a bill. But in the meantime, we are going to continue work on the pellet plants and try to get that business going and help offset any flatness in the hot mix plant business.

Congress, their MO has been extension. So, for our planning, we're going to plan like it's flat for asphalt plants, and we're going to push hard on our pellet side. So, the biggest proposal that we are trying to help promote was the Corker and Murphy proposal for the $0.12 a gallon price increase -- gas tax increase, and that was $0.06 a year over two years. And then that was tied to a price index which would be tremendous. I can drive across town here in Chattanooga and see an $0.11 a gallon price difference. So in gas to the price of fuel, the gas is down right now, so there's an opportunity. We just need to get everybody back from the election cycle here.

Okay, that makes sense. And then on the energy, really strong growth in energy backlog. Was there anything particularly lumpy in there? I heard you mention a couple of sales that were delayed for customization. I'm wondering how much that moved the needle, and I guess just to better understand what's going on in energy backlog.

All of our energy group companies have increased backlog. There wasn't any one particular area where it was better, although wood chippers were good, and like I said, the heaters for gas processing were good. But backlog is up across all the companies in the whole group.

Okay, sounds pretty broad-based. And then I guess my last question, looking at CapEx guidance, it looks like, last quarter, you were talking 32% to 33% and then it came down to something like low 20s%. I guess what was the delta there?

We just had some projects that we were hoping to get into the year that we're just not going to get into the year. That's really what it comes down to. We're focused on our lean initiatives, and it's not necessarily an issue of things that we have canceled. But we maybe pushed something -- I know there's the ERP system and things like that, so --.

Yes, there's an ERP system in our aggregate mining group and two large machining groups -- two large machining centers in our aggregate mining group, and that's really the difference. And we didn't start manufacturing work in one of the divisions, so that's not going to be in this year. So, there's about those four things that would be not in this year's CapEx.

All right, very helpful. Thanks guys.

Morris Ajzenman, Griffin Securities.

Good morning guys. I'm just trying to get a little more color. In the call, you were presenting an improvement from the fourth quarter. Correct me if I'm wrong, but I think, in your presentation, you stated fourth quarter would be in line with fourth quarter last year. And if I look at fourth quarter last year, revenues were $224 million, and gross margin was 21.1%. First of all, is that correct? Did you say fourth quarter 2014 would be in line fourth quarter 2013?

Yes.

And you did say sequentially for the third quarter you would be about $220 million, $221 million things are going to be improving into the fourth quarter. So you put these companies together and it seems like you might be a little conservative in that statement, or are there things that I am missing? You know, I want to put those items all together.

I think what you will see is while why we have the work in asphalt plant business, there is still a lot of pricing pressure in that too. So we are being a little conservative on that probably, but the reality is, with some of the pricing pressures, we think in line with the fourth is a better way to look at it here.

And those gross margins of 21% last year, we should be looking at that sort of range into the fourth quarter this year?

Yes.

Okay. And one last thing. On the pellet plants, the new projects you are bidding on, will you be financing those also so there would be a deferral of revenue recognition or would that be an outright sale to these potential orders coming down the road?

They are outright sales. We are not interested in financing any more pellet plants. We did it to get the first one out. And we had a customer that we really trusted and respected, had been in the business a long time, and they really helped us with our design work, and they have been really good with working with us through the startup issues, which any time you have one this big, there's going to be some issues, and they have been great to work with. So, that is working out really well with them. Going ahead, we have a proven product now that we feel will sell without our financing. And we really have no interest in financing them.

Okay. And on a GAAP basis, with the existing third line, 1, 2, 3, when will we start seeing an impact to the income statement? Will it be fourth quarter, first quarter next year? Just give us some idea on that.

It will most likely be 2015, and it will be on an incremental basis. It will be on an installment basis as they make their cash payments to us.

So again, probably in the first quarter or not sure at this point?

I would say first quarter.

Thank you.

Ryan Cassil, Global Hunter Securities.

Hi guys. You noted some pricing pressures on the infrastructure side, but the expectations for gross margin are improving. Is pricing better in the current backlog versus Q3? And is that sustainable despite a highway bill going forward?

This is Ben. I would not say that pricing is that much better, is that we will have the volume. It's just the volume issue at Astec Inc. And now that we have volume in the plant, and it is mainly what we have is straight asphalt plants for this quarter, that's where it's coming from for us.

Okay, got it. But is pricing stable I guess? Is that the take-away then?

It's stable, lower than we want it, but yes, it's fairly stable.

Okay. And then in the energy business, any update on the kind of quarter-to-date trends you're seeing in the GEFCO business and whether you've started having conversations with customers on 2015 spending yet?

This is Rick. We are still struggling with the 500K rig domestically. We still have good interest internationally. I think that's just because it's a newer technology and it's the domestic drilling contractors seem to be slower to accept it. We have shipped two rigs internationally in the past year and a half, but we have not had any discussions with domestic contractors that would indicate there's any significant upturn domestically.

Okay. All right, thanks guys. Appreciate it.

Brian Rafn, Morgan Dempsey Capital Management.

Good morning guys. Give me a sense. What is -- and maybe you commented on this before -- what kind of delivery time do you guys see on that backlog of $295 million? Or maybe quarter by quarter?

That varies by division, because we are so decentralized. But that typically would be probably in the middle of the next quarter for a run rate.

Don't forget there's a significant piece of the infrastructure backlog related to the pelletizers.

Right.

And so we've discussed those in detail and sort of how those are going to play out. So, that's a chunk of the infrastructure piece. But the rest of them, as Ben says, because we are so decentralized, can roll out of that backlog over the next quarter to quarter and a half, maybe two quarters. So, it really depends.

Okay. You commented on -- maybe Ben commented a little bit. Where are you guys seeing regional pockets of strength? We are up here in Wisconsin. They are knocking down interstate projects throughout the entire Milwaukee corridor. What are you seeing state-by-state, or are you seeing better business on the infrastructure side?

This is Ben. Wisconsin is one of those states that we are seeing activity in. The energy states -- so Texas, Pennsylvania, New York, Utah -- have been busy. Also I mentioned Florida, Colorado. Those are kind of the main states that we would say we are seeing a lot of activity in.

Okay. If you kind of look at some of your discussions you guys have had with some of your larger road builder contractors, if we get a highway bill, what is your sense of their financial condition, their liquidity, access to credit? What is your sense of them being able to move up and begin taking down some more CapEx?

That question three years ago would've been a different answer than today. Three years ago, I would say we'd be fighting a little bit of a challenge on the financing side. Today, on the private side, I think people could pull the trigger very quickly. On the larger CapEx side, with the larger companies, it just takes longer with them. And not that it's a bad thing, it's just a longer process and it just takes a little longer.

But the nice thing is that 80% of our customers are privately held. And their ability to make that decision and make it quickly once they see a longer-term highway bill is exciting to us.

Yes, okay. Given what you're seeing now, if we continue in this ridiculous extension of what should be a six-year bill in the past with SAFETEA-LU and T21, your regular guys, either be for Carlson or Roadtec, are they extending the life span of equipment? Are you guys seeing more rental fleets? Are you seeing more demand for repair parts on older equipment? How are they mitigating some of that?

We've seen some rental, some lease from a competition standpoint, so we've seen some of that. But generally we've seen them keeping hours lower on their mobile equipment, again, because when they're out on the job site, they've got to keep moving. So we've seen that cycle stay fairly low.

On the parts side, particularly on the asphalt plants, the parts business has been good. And we have seen too that the capacity since they're running more mix in some of the plants that were not running are running now, and some of the plants that weren't running that they were stealing parts from we've seen a little bit of increase in parts business because those have been kind of used up. So, we've seen the paving equipment though still stay young.

Yes, okay. You guys mentioned a little bit, we were out at [Granite's] Utah site a few years ago, and they were talking about the difference between virgin asphalt and recycle. Is there a big demand, even with the weakness on the hot mix plants, for recycled or plants that can use more of a recycled content?

Again, on the private side, yes. And in the cities like New York, I was up there with a customer about four weeks ago. They can't use enough of it. They're piling it up. They had a pile that was probably -- gosh, this would be a guess, but probably around 700,000 tons just sitting there. So, we are working with DOTs in trying to educate them to be able to use more in-state work. But yes, our customers would love to run more recycle and more recycled asphalt shingles, which would be good for our Peterson business too because they make a shingle grinder.

Got you. Across all of the different subsidiaries and all the different business operating groups, you mentioned a little like grinders, wood chippers. Are you guys adding capacity anywhere? And kind of if you look across the entire business platform, what might you be running, say, capital -- capacity utilization?

If you took all of our companies together, our utilization is probably in the 65% range. But then if you go individual divisions, we have some that are running full out. Now, full out doesn't mean 100%. They're probably running in the high 80s%, and we are considering at two places some expansion.

Ultimately, you might say why, well, wouldn't you just move some of that work to another division? But it's a totally different type of manufacturing. Some of that equipment might be mobile, and it's hard to build mobile equipment at a stationary equipment plant that maybe does more project work than a one-off -- you don't say one-off but a unit type construction or manufacturing. So, we are considering that at a few plants right now.

Okay. And then what -- how is your headcount looking as you going into 2015? And would you say it would be kind of stable? Are you seeing any shortage, hiring anywhere?

We see it stable. Where we see shortages would be in the scaled side and the machining side. And what we're trying to do there is just come up and put together better training programs and try to grow our own machining talent. We are working with tech schools on that as well, but we are going to be doing a little more in-house training for that, probably, going ahead.

All right guys. Thanks much.

Jack Kasprzak, BB&T Capital Markets.

Thanks. Good morning guys. I got on the call a little late, so I apologize if you said this. But did you quantify or give some indication of the amount or the magnitude of the pricing pressure you are seeing in the asphalt group -- Astec group?

We did not, but the deals are thin. I can tell you that. That would be accurate.

I guess this -- Ben, this is a relatively new comment for you guys. Is it a situation where we are getting late in the year and people just want to move some -- book some work? Maybe it hasn't been as good a year as people thought to start with and that's the nature of the pricing pressure, or is there something else going on out there?

I think it's just not many asphalt plants have been sold this year, Jack, and our customers are smart buyers like we are. They get two to three people on every deal, and everybody, our competitors, we all need work in those businesses. So, it's just been thin.

Got you, okay. Switching gears, the highway bill question always comes up for you guys, obviously. And I know everybody is frustrated at the lack of progress. But is there something we could or should look out for in terms of a change in the nature of the conversation that might give us some encouragement? I mean, is there something that might flip the switch that would give us some real encouragement rather than just the usual, or what we've become used it is a lot of dialogue and no action?

One of our guys mentioned yesterday, I think it was a pretty good comment, our politicians are halfway there. They are admitting that we really need to do something to fix it. And then you've got the -- I mentioned the Corker-Murphy bill earlier about the $0.12 a gallon gas tax increase over two years tied to an index. If you notice, when they brought that out, the deal for the extension was already done when they proposed that. But when they proposed it, you didn't hear a lot of people just get up at their microphones and say those guys are crazy, we don't need to be doing that, which I think is a good sign for everybody getting into the mindset that we need to finally do something. And so that doesn't fix the longer-term issue of you've still got cars that do more miles per gallon and you've got more electric cars and hybrids that aren't paying the tax, but it could be the bridge between the longer longer-term issue and fixing that, which is either probably going to be vehicle miles traveled or to the toll roads which would be a shame, because toll roads are just going to cost us more than collecting the gas tax. But I guess we are encouraged that nobody got up just to tell them how bad that idea was, and we hear enough that we are encouraged that it's really on the table.

Yes.

So that's -- and we are going to continue to work with them. So the good news is is that Murphy is a Democrat and Corker is a Republican.

Right.

So, that was good to see a combination like that.

No question. Thanks as always, appreciate it guys.

Mig Dobre, Robert W. Baird.

Thanks for taking my follow-up guys. I know we are running a little long here. Just two questions to wrap it up. First, on the utilization discussion, you mentioned about 5% the current run rate. Now, I'm speculating here but I'm presuming that the area where you are seeing underutilization would be in the infrastructure group, maybe around asphalt. And you also bring up lean as something that you focused on. So what does that mean going forward? Should we expect maybe some cost action on your part given that the environment is what it is in terms of asphalt planned demand?

Yes. That is one thing we've identified to try and help our bottom-line going ahead. And so the downside is just the volume at Astec. The good side is if you walk through the plant right now, with the work we have done, we've put a team together that's focused on laying at this facility. It looks great. So, when it comes back, we are pretty excited about what we could do here if we get some volume going.

But this is basically good incremental margin on additional volume. You're not talking about a certain cost component that you're looking to eliminate.

Not at this time. Not at this time.

All right. And then my last question is on tax. I understand that there were some losses, operating losses, outside of the US and that impacted the tax rate. Is this something that could potentially skew the tax rate going forward as well, or should we expect some normalization here?

I think you should expect some normalization. The mathematical driver of the issue was that income was so low, and so the tax impact of those issues have -- those issues have always been out there. We've had these NOLs for a few years. We're talking about Brazil. We're talking about Germany. We're talking about startup type companies that eventually will start making a profit and those issues go away. However, since the income was so low, taxable income was so low here in this quarter, that it just popped that rate sky-high and it just looks crazy. But I would expect that to mitigate.

All right. Thank you.

Morris Ajzenman.

You kind of touched on this two questions ago. Today, in the Wall Street Journal, there was a story about toll roads and how that might be the wave of the future. It's just an article picking up on recent trends. But you touched on it just two questions ago, but this might be one of the ways going forward, which you kind of hinted might not be the best for the American public. But can you give us just sort of the dynamics, and will they start having longer legs, and private toll roads, etc., would that be a potential wave of the future? Just curious. As that plays out, is that public or private?

This is Ben, Morris. In the last six or seven years I guess, I've been to over 50 countries traveling trying to help our guys in selling equipment. And what I would tell you is most of those countries are growing their road programs through toll roads, and they are typically private concessions with some government backing in case it just completely -- there's no traffic. But they're typically private consortiums and large companies that invest in the road. And then they have -- there would be typically anywhere from 20 to 30 years where then they turn it back over to the government.

The downside is that, depending on which numbers you look at, it can cost as much as 20% to 30% of the cost of the collection of the toll to collect the toll. And it will cost about 2% of the gas tax to collect the gas tax. And then on top of the -- on the toll road side, you've got the investor that needs to make a return, and you've got the contractor that's going to make a return. And it's just a compounding deal for the cost to the end-user, which is the driver.

I drove on a road from Santiago, Chile to Valparaiso to see a customer, and the gas tax versus the toll would blow you away. It's about 78% more to drive on the toll on that road versus the gas tax.

Now, the flipside to that is that project doesn't get built without the toll. So if that's the way it's going to go, then we need work. And we don't love it, but if it helps us, it helps us, and it helps the country get the roads we are not going to get because we are not going to do more gas tax, then it is what it is and we need to move on.

Thank you.

There are no further questions at this time. Now, I would like to turn the call over to Steve Anderson for closing remarks.

Thank you, Rob. 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 4, 2014, 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 was contained in our news release sent out earlier today.

And as Rob said, this concludes our call, so thank you all and have a good week.