Astec Industries Inc (ASTE) 2016 Q1 法說會逐字稿

Greetings and welcome to the Astec Industries first-quarter 2016 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Steve Anderson, Vice President of Investor Relations for Astec Industries. Thank you, sir. You may begin.

Thank you, Melissa. Good morning and welcome to the Astec Industries conference call for the first quarter that ended March 31, 2016. As Melissa mentioned, my name is Steve Anderson. I am Vice President of Administration and Director of Investor Relations for the Company.

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 will turn the call over to David to summarize our financial results and then to Ben to review our business activity during the quarter.

Before I 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.

At this point, I will turn the call over to David to summarize our financial results for the first quarter.

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

Net sales for the quarter were $278.7 million. That compares to $288.7 million in Q1 of last year, a decrease of 3.5% or $10 million. International sales were $44.5 million for the quarter, compared to $77.7 million in Q1 of 2015. That's a 42.7% decrease or a $33.2 million decrease.

International sales were 16% of our Q1 sales this year, compared to 26.9% of Q1 2015 sales. Those decreases in international sales occurred primarily in Canada, in the Middle East, Australia, and Africa, in post-Soviet states, and in South America outside of Brazil. Those decreases were offset by some relatively small increases in Mexico, Japan, and China.

For the quarter, international sales decreased in each of our groups.

Domestic sales for the quarter were $234.2 million, compared to $211 million in the first quarter of 2015, an 11% increase or a $23.2 million increase. Domestic sales were 84% of Q1 2016 sales, compared to 73.1% of Q1 2015 sales.

Parts sales were $74.1 million, compared to $73.1 million in Q1 of 2015. That's a 1.3% increase or a $1 million increase. Part sales represented 26.6% of quarterly sales in 2016 versus 25.3% in Q1 of 2015. For the quarter, parts sales increased in the infrastructure group and then they decreased in the ag and mining and energy groups.

The foreign exchange translation impact on the sales number was $4.1 million to the negative. That means that if rates this year had been equal to the ForEx rates in Q1 of last year, sales would have been $4.1 million higher on a comparative basis.

For the quarter, gross profit was $72 million, compared to $66 million in Q1 of 2015, a 9.1% increase or a $6 million increase. That led to a gross profit percentage of 25.8% for the first quarter, compared to 22.9% for Q1 of 2015. The resulting variance for the quarter was $1.5 million underabsorbed, which was an improvement over last year's Q1 number of $2.1 million, so you had a positive change in absorption variance of $600,000 there contributing to the uptick in the gross profit percentage.

Also impacting the gross profit percentage was the foreign exchange gains or losses that we recognized during the quarter. We had a $115,000 gain in the first quarter of 2016, compared to a $734,000 loss in the first quarter of 2015.

SGA&E for the quarter was $43.8 million, or 15.7% of sales, practically the same number in Q1 of 2015, $43.8 million, but it represented 15.2% of sales in that quarter, so it was flat in dollar terms with a 50 basis-point increase as a percent of sales. Some of the things that impacted SGA&E on the upside, so things that increased SGA&E, were exhibit expenses and travel, payroll and related expenses, some travel expenses, like I said, bad debt expense, and R&D expense increased. Each of those increased fairly [smalley].

On the other side, impacting SGA&E on the downside, was our health insurance expense, which was down compared to the prior year.

Operating income for the quarter was $28.2 million, compared to $22.2 million last year in Q1, an increase of $6 million or 27%. Interest expense was $467,000 in Q1 of 2016, compared to $297,000 in Q1 of 2015. Remember that we do have some debt in Brazil to finance the building, furniture, fixtures, and equipment that are in that facility in Brazil.

Other income for the first quarter was $0.5 million, compared to $1.8 million in the first quarter of 2015. Remember that the primary source of other income is license fee income and investment income in our captive insurance company. But last year, we did have some key man life insurance proceeds of approximately $1.2 million that we recognized in the first quarter.

The effective tax rate was 37.4% in the first quarter of 2016, compared to 37.1% in the first quarter of 2015. That rate was impacted negatively, which caused it to increase, by losses in some of our foreign jurisdictions where we couldn't claim a benefit for those losses. Also, we did have some higher state income taxes in certain of our domestic subsidiaries, and so that negatively impacted the effective tax rate.

Net income attributable to controlling interest for the first quarter was $17.7 million, compared to $15.1 million in Q1 of the prior year, a $2.6 million increase or a 17.2% increase. Diluted EPS for the quarter was $0.77, compared to $0.65 in the first quarter of 2015. That is a $0.12 increase or a 18.5% increase.

EBITDA for the quarter was $34.3 million, compared to $30.1 million in the first quarter of 2015, a $4.2 million increase or a 14% increase in EBITDA.

Our backlog at the end of March was $432.8 million, compared to $291.2 million at the end of March 2015. That is a $141.6 million increase or a 48.7% increase.

Our international backlog at the end of March this year was $50.4 million, compared to $90.2 million of international backlog at the end of March in 2015, a $39.8 million decrease or a 44.2% decrease. However, our domestic backlog at the end of March this year was $382.4 million, compared to $201 million at the end of March last year, a $181.4 million increase or a 90.2% increase in domestic backlog.

Now the March 31 backlog this year compared to the 12/31/15 backlog of $313.3 million represents a $119.5 million increase in backlog or a 38.1% increase sequentially.

The foreign currency translation impact on the backlog compared to March 31 of last year, again if rates were even, then the backlog would have been $3.6 million higher at the end of this March compared to the end of March 2015.

The balance sheet continues to be very strong. Our receivables are sitting at $119.4 million and that compares to $129.9 million last year, a decrease of $10.5 million, and that represents days outstanding of 38.7, compared to 39.7 at the end of March 2015 for a reduction of one day outstanding.

Inventories, $389.5 million compared to $388.7 million last year. That's an increase of about $800,000, and we are sitting at 2 turns this year, compared to 2.1 turns last year.

Domestically, we owe nothing on our $100 million credit facility and we have $62.4 million in cash and cash equivalents globally. Our letters of credit are sitting at $17.6 million outstanding right now, so our borrowing availability on that credit line is $82.4 million.

Like I said before under the interest expense discussion, we had $10.9 million of debt outstanding in Brazil to finance that company's building, fixtures, inventory, and imports.

Capital expenditures for the first quarter were $4.9 million and we are forecasting for 2016 to be in the $30 million range. Depreciation for the first quarter was $5.1 million and we are forecasting depreciation for the full year of 2016 to be about $22.5 million.

That concludes my prepared remarks on the financial details, so I'll turn that back over to Mr. Steve Anderson.

Thank you, David. At this time, Ben will give some comments regarding the first quarter of the operation, also some comments for the year going forward. Ben.

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

As we commented in our earnings release this morning, we were pleased with our first-quarter results. We do still have headwinds of lower oil and natural gas prices, the global mining slowdown, and the strong US dollar persisting, and they challenged us during the quarter.

Despite those headwinds, we were able to secure and ship orders, mainly as the result of the passage of the federal highway bill in the United States, which allowed us to earn a good result for the quarter in our traditional business areas, and we were also able to recognize our $30 million pellet plant order during the quarter.

As David mentioned, our earnings per share for the quarter were $0.77 versus $0.65 in the same quarter last year and our year-to-date first-quarter sales were $278 million versus $288 million, for a decrease of 3.5%. Our first-quarter EBITDA was $34.3 million versus $30.1 million for -- and that's an increase of $4.2 million in EBITDA on a $10 million decrease in sales. EBITDA was up mainly due to historical high gross margins as the result of a favorable product mix and higher capacity utilizations in the infrastructure and aggregate and mining groups.

Our backlog at March 31 was a record at $432.8 million and that was up 48.7% versus last year. Our backlog is at a record level, mainly as a result of the $122.5 million pellet plant order we announced during the quarter. However, backlog without the pellet plant order would have been up $22.9 million versus last year, again mainly in our infrastructure group. Domestic backlog was up 90.3% year over year and international backlog was down 44.2%.

At the end of last quarter, our international sales were down 50.7% year over year, which was near our trend for the full-year 2015, though we did at least experience some slight improvement in international on a percentage basis. But international is a challenge.

While the strong US dollar has been more than a significant headwind for our export efforts, we have seen better quoting and sales activity in the infrastructure group internationally in the last three weeks. International activity remains low in other groups, though.

International backlog remains down versus our norms, primarily due to the US dollar strength, low oil and natural gas prices, and the global mining slowdown. Our Astec do Brasil facility continues to experience everything you read about in Brazil with regards to the slow economic times, and the terrible political environment in Brazil is not helping at all. We continue to work for orders in surrounding countries to try to help this facility out.

Domestic order intake has been very good in our infrastructure group since the United States long-term federal highway bill was signed in early December. Aggregate and mining group order intake has been fairly flat since January 1, mainly due to mining equipment and international sales being slow. The Group's backlog was up 2.1% for the quarter. We believe that this group will start to see benefits from the federal highway bill in the United States late this year.

Order intake in our energy group has remained soft, with the exceptions of asphalt storage and heating systems for hot mix asphalt plants. One other bright spot in this group is concrete plant quoting activity.

We do continue to hear from our infrastructure customers that they are experiencing good business levels in the United States, particularly on the private side, along with good maintenance contracts in those states that have increased funding through gas taxes and/or other mechanisms. We do continue pursuing new business with new products in the United States and we are maintaining our international effort, despite the challenge presented to us by the strong US dollar and depressed mining industries in our key markets.

We are keeping our long view with regards to international and we do see those headwinds of the strong dollar, the low oil prices, and depressed mining conditions remaining in place for the balance of this year, at the least. Our lower backlog in international is a direct result of those headwinds.

Our higher backlog in domestic was primarily due to the passage of the long-term highway bill, good private sector work levels for our infrastructure customers, and the pellet order we announced during the quarter.

Changing subjects to the original pellet plant in Hazlehurst, Georgia, that we discussed on several calls, as a continued reminder we did choose to finance that product is a new product and as a result will recognize revenue for this plant as we are paid. This will have an effect on our cash and our inventory until it is paid in full. As a reminder, the order for all three lines at that site was for $60 million.

Also as a reminder from our last call, we did agree with the customer to allow them more time before taking us out of financing and expect the final payment in 2017. As a reminder, the interest rate on the note is 6%.

We were pleased to report the $122.5 million pellet plant order during the quarter. It is an add-on to the $30 million order that we recognized during the first quarter with Highland Pellets, bringing the total project order amount to $152.5 million.

Our plan is to recognize the new $122.5 million order as follows -- in the second quarter, approximately $20 million; in the third quarter, approximately $20 million; and in the fourth quarter, approximately $35 million, bringing the total for the three quarters left in the year to about $75 million. And if you add the $30 million we just recognized, that would be a total of around $105 million in recognized revenue this year for the pellet plant, with the balance around $45 million to $50 million being recognized in 2017 and that would include site work installation start-up and other items.

Updating our current pellet plant quote activity, we do have ongoing quote activity for new projects and we do believe that we will add a new large order late this year. As a reminder, these deals are long and complicated to get across the line, and while we're optimistic that a new project will happen by the end of this year, it always could take longer than we anticipate.

With regards to international sales overall, given the well-documented challenges globally that we have discussed and the global economic environment overall, we believe that despite our recent quote and order activity internationally in the infrastructure group we will remain challenged for at least the rest of this year with regards to sales internationally. But we do remain committed to growing our international sales over the long term and will continue to maintain our sales and service coverage around the globe.

On the energy group side, we remain extremely challenged in our drilling and pumping equipment sales activity, and we are not in the end of the current low oil prices and low natural gas prices with regards to our drilling and pumper businesses.

We are moving our street broom equipment line production to the most affected facility at Enid, Oklahoma. However, it will keep its Roadtec brand name and will be sold and serviced by Roadtec. Demand for our brooms has been strong as we have released new products in the last year and the federal highway bill has been signed.

We have slightly offset sales challenges in heaters for oil and natural gas industries with sales to food processing and chemical plants. We have also continued to see reasonable sales of wood chippers and grinders in the energy group.

Our concrete plants are also built in the energy group and quoting activity is good for these plants. We remain optimistic on our outlook in our energy group in the long term. However, barring an unexpected change in the majority of the markets we serve, we will be challenged in this group overall in 2016.

Looking ahead to the second quarter of this year and the balance of the full year, we are encouraged by our record $432.8 million backlog, our domestic sales outlook, and our strong infrastructure group sales activity. In addition, our new product development continues in all groups. Most notably this quarter, our new, previously unannounced five-foot Double Barrel plant sold to NCC in Sweden and displayed at the BAUMA show a few weeks ago in Munich, Germany. Bauma attendance was okay overall; however, the quality of visitors to our stand was very high, and as a result we were fortunate to sell all salable units at the show during the show and secured additional orders in some new international markets.

For reference, as David mentioned, our exhibit expense is up in the quarter. We spent approximately $2 million on the BAUMA show.

Next year is a CONEXPO year, speaking of shows. We went -- we spent around $4 million on the prior CONEXPO and expect to be in that same range for the upcoming CONEXPO. We're also working on new products for this show, which will slightly increase our R&D for the balance of this year and into the first quarter of 2017.

Changing subjects to our outlook for next quarter and the balance of the year, we believe that our second quarter will be in the range of our first quarter this year. Our current revenue outlook for the balance of 2016 remains up 5% versus last year with improved bottom-line performance. While our infrastructure group is performing very well, we are cautious on our outlook for our aggregate and mining group and energy group, with the main headwinds for these groups being very real and very persistent.

As mentioned earlier in my comments, from our last earnings release to now, orders have been strong in the infrastructure group since early December last year, mainly due to the highway bill and the pellet plant. Orders are not strong internationally, mainly due to the headwinds we mentioned of the strong US dollar and the mining slowdown and low oil prices.

Energy group orders are soft for products targeted at the oil and gas industry; aggregate and mining group orders are soft for products targeted at the mining industry. Bright spots for activity are hot mix asphalt equipment sales, including asphalt plants, mobile paving equipment, concrete plant quoting activity, wood pellet plant quoting activity, and wood chippers and grinder sales and quote activity.

We continue to see growth opportunities for aftermarket parts and service. Parts sales for the first quarter increased by 1.3% versus last year and were 26.6% of total sales, versus 25.3% last year. We remain committed to improving our parts sales volume in the long term, along with working to increase competitive parts sales.

We continue to see results of our lean effort helping us be a better Company. We continue to focus on gross margins as well. These efforts played a part in our higher gross margins during the quarter.

Looking to the whole of 2016, we are optimistic that we will end the year ahead of 2015. The majority of our customers in the United States continue to experience a stable private market and we are focused on selling both our existing and new products.

Given the headwinds we are facing, we are working to manage the businesses to the market conditions where our businesses warrant, and that is on a division-by-division basis. To that end, we did have staff and/or work hour reductions at the most affected divisions during the quarter.

Acquisitions do remain a key piece of our growth strategy, along with organic growth. Our goal is to add at least one company to our Astec family during this year, so long as the company is a cultural and strategic fit within the industries we serve. We are very active in this part of our effort to grow, and we do believe that we will grow our Company this year not only organically, but through acquisition as well.

That ends my comments on the quarter and the year and what we see 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 will now turn it back over to Steve Anderson.

Okay, thank you, Ben. Melissa, if you would open the queue for questions, we would be glad to take those now.

(Operator Instructions). Mig Dobre, Robert W. Baird.

I have lots of questions, but I'm going to try to only stick to two or three before going back in the queue. I guess the first one for me, looking at infrastructure, if I am to take the wood pellet plant out, it looks like your bookings in the quarter were roughly $150 million, which is largely consistent with what you have seen in the prior quarter, in the fourth quarter. And I guess my question is this. How is demand progressing thus far? What have you seen through the quarter in terms of customer [expert] for this kind of asphalt plants and the core infrastructure product? And then, how do you think we should be thinking about in terms of demand going forward for the rest of the year?

Mig, this is Ben. We have seen it be very strong. I think in prior calls we have mentioned we thought we would see a pretty quick two-month run of pent-up demand orders once the highway bill was signed, and I think we have actually absolutely seen that and I think it has been a little longer than that.

Our customers will go back to work heavy in the summer, so I suspect we will see a slowdown, although activity right now is still very good. But I think what that will translate into is that we have a better backlog between what we have now in infrastructure and the pellets to put us in a much better position for third quarter than we have been in the last couple of years.

And then I think we will see more of the highway bill effect in the next buying season and for the next couple years, which buying season for us would start after September 1, typically. It was a little delayed last year. That's why we struggled so much in the fourth last year. Customers seem to be in good moods and feel good about the work they have.

I see. Okay. And then, if we -- you did a good job in outlining how your revenues from the wood pellet are going to flow through this year. What is your assumption for infrastructure revenues, core infrastructure revenues, for the year, based on where you see demand and what you have got in the backlog?

Mig, I think it will be up. The reason we gut check our full year at 5% is just -- I think we're a little bit of a product of our prior two years of what's going on around us. Our guys have done a great job of holding in there, but energy and aggregate, probably energy is going to continue to be a challenge and aggregates will be flat to slightly up. But I think the infrastructure side could be up 10% to 15%, if you take out the pellet plant.

But in the aggregate when you put them all together, it still just feels a little sluggish. We have got plenty of work to do, despite how good it feels.

Okay, okay. And then, last one before I jump in the queue, maybe you can talk a little more about your concrete plant product. I am trying to understand why, to begin with, this is flowing through your energy segment. Do you have any orders that you have booked? Where do you see opportunity for this product in terms of revenue over the next, call it, 12, 24 months, however you want to frame it?

Sure. It's a new product and it is a little bit of a paradigm shift for traditional concrete manufacturing because it has been a batch process and we're basing ours off a continuous process, similar to what we have with asphalt plants, and that just takes a long time.

It is in the energy group mainly because CEI is in the energy group. But the second piece is is that the continuous plants lend themselves to dam projects, building dams, and the first sale, the big, sizable sale that we have with the two plants we have mentioned, they will be going to a DOE project to start.

So, you can make an argument, is the volume growth big enough for CEI? Should it move into the infrastructure group, but for the moment where the sales are, energy group is where it belongs. And that first order was two plants -- well, it's really the second order. But it is two -- the most recent order is two plants with some conveying equipment from our aggregate group, so it is around a $7 million order that will deliver this year.

We are developing -- eventually, we will have nine different line -- nine different models of concrete plants, and some of those will get into the more traditional back plant model areas, but our heritage is new products and trying to change the rules of the game, and that's what the first one is.

The second plant we have in design, which would be a more traditional ready-mix plant. I was out in CEI about two or three weeks ago and we are starting to build that now. We are building it for stock for testing, but we are just slowly building that line. I wouldn't say it will be significant to us for another year, year and a half, only because it just takes so much time to build out that base in the field that customers can go see the plants running.

I appreciate that, but can you size this market, this opportunity?

I think for us, of course, year one looks like it could be $10 million to $15 million range in sales. That might be high side on $15 million because some of these plants will be much less dollar volume because they can range in anywhere from a couple hundred thousand up to $1.8 million to $2 million or more, depending -- the ones that we sold are more. I think in a couple of years $20 million to $30 million in revenue would be accurate for us for a target.

Thank you. Appreciate it.

Schon Williams, BB&T Capital Markets.

Wonder if we could just talk about maybe surprises in the quarter. I think the last time we came on the call here you guys were talking about more flattish year-over-year growth on the earnings, I guess, versus my model. A lot of the upside came on the margin side.

So I just want to get at your perspective on maybe what went better than you thought in the quarter. And then, as a follow-on, how sustainable are some of the margins? Some of the gross margins that we saw this quarter, how sustainable are those going forward?

Sure, Schon, this is Ben. For a lot of it, it had to do with product mix and being able to get orders out that we got after December 1, and that was a pleasant surprise. Our absorption was improved quite a bit. I think David mentioned around $600,000 in his comments.

We were -- the foreign exchange, sometimes that's a win and sometimes it is a lose. We had a pretty good win this quarter by about $800,000, I guess. And our parts volume, up $1 million, and we got better pricing on parts because of demand right now. So, that helped us.

We have a little bit -- and when I say a little, if you put your finger and your thumb together, they should almost be touching, but we have a little bit of pricing power on major equipment right now with what has happened in the infrastructure side. But it's not much, and we have some pretty fierce competition and we have very savvy customers that have not just us on jobs.

Steel prices have remained fairly low, although we do see they're talking about increases on the horizon, but we are fairly protected everywhere through June and into the first part of July with our agreements. The lean work started to show up, and again, product mix has a lot to do with it.

Now going ahead, how does that go, I don't see us having it this high. This is a little early in our cycle to have this high a margin. I think we've talked about that on the calls before. I think we will probably see some steel increases and we will see some of that flow through our purchased parts. We don't have as great a product mix in this quarter that we had last quarter, and we have a little more visibility on that now that we have some backlog.

And we never really know exactly what's going to happen with ForEx. That seems to be a pretty good swing for us, but typically when we sustain good gross margins, we have got a little better international, so a little weaker dollar. Our utilization is a little more consistent because right now, companywide, we are probably running between 70% and 75%, but the energy group is lower and the infrastructure group is higher and the aggregate group is probably right there at that 70%, 75% range.

And we have got a little better oil prices to help on our energy side, too. So, somewhere between where we were at the end of last year and where we ended up this quarter, I think, is a better target for our margin going ahead this year.

Schon, this is David, too. Just a couple of other things. Loudon went away, and so that was a cost savings that we -- there were costs in first quarter last year that we don't have this year.

And also, if you notice on the segment page, we had a recapture of intercompany profit and that goes through cost of goods sold or goes through the gross profit as well. So, that helped us pick -- last year, we had a deferral just because of intercompany sales, and this year we had a pickup because we moved some equipment in some locations that were sister companies that had bought it from one of our manufacturers.

And so, those things added to -- none of them had a huge impact, but they all added to in the gross margin line.

Okay, and just so I am clear, even though you are saying, I guess, the mix is not shaping up quite as well going into Q2 as it was in Q1, you are still talking about earnings in line with the Q1 figure? Help me reconcile that.

Yes, I do think that, and, yes, I think our volume might be a little bit better and margin might not be as strong, although I would love to be surprised. Our guys are doing a pretty good job. I think the lean is showing up. Where we are right now, that's what we see.

All right, that's very helpful. And then one more, if I may. One of your competitors was out yesterday talking about pickup in some of their aggregate business, specifically in North America. Can you just talk about any signs of maybe -- I understand the international headwinds, I understand the mining headwinds, but any thoughts on domestic aggregate business perking up?

The inquiries are up. The business is still fairly flat and I think that's reflected in our backlog in the group. Our aggregate group also includes Brazil, which is pretty difficult, and Osborn in South Africa, which is pretty difficult now. It just continues to drag on, although we are more in the maintenance side at Osborn, so we're probably maybe not as challenged as others. Yes, we would say that our guys are feeling a little better about the second half right now.

All right, that's helpful, guys. I will get back in queue.

Stanley Elliott, Stifel.

Thanks for taking my question. On the wood pellet plant, could you talk about just the number of conversations that you guys are having? Is it above and beyond potentially another plant with Highland? Just help us frame out some of that opportunity as we think about 2017.

Sure, this is Ben. We got five customers, really. We could argue it is six, but really it is five that are pretty serious about plants and looking at -- not current pellet demand. Right now, pellet demand would be really off because they have had a couple of warm winters in Europe.

But as utilities have planned switchovers to using pellets, there are contracts being made now and people are looking at plans to be able to supply that future need. So, that's where our comfort level comes of saying we should get about 1 by the end of the year. Potentially, is there more? Yes, but we feel good about one. And that is out of the five that we are talking to.

Would that be one line or does this have a, similar to 150, sort of $1 million three-line plant? How should we size that out?

I think closer to the $100 million range. But at one point, we thought the Highland was going to be more like that, so they -- they are so -- it really requires patience on our part because it feels like the ball is always moving on these projects, but I think as we're thinking about it, we are thinking of it in the $100 million range right now.

Perfect. With more of the profits, revenues coming from North America, how should we think about the tax rate this year?

I think the tax rate is going to be down from what it was in the first quarter. We have got some planning going on, and we did incur a couple of oddities in the first quarter that drove it up a little bit, some state income taxes and things. So, I think you're going to be back down to 36%, and if -- depending on the planning that we implemented, it could even go lower than that. But I think I would stay in that 35% to 36% range.

Then lastly, looking at the international backlog, on a year-over-year basis this is really the big step down. It sounds like that, while international markets are still pretty tough, that we should see maybe more of a stabilization in this business. Is that a way to possibly think about how the backlog might build through the rest of this year, and then whatever happens on the domestic side would be really what drives the overall?

We love the idea of that, but it has just been tough.

Now on the flip side, as we mentioned during the comments, we have started to get some spot orders in areas that we weren't necessarily sure we were in the game on. So, we do think that possibly Canada is getting more used to where the value is now, and possibly we are seeing that a little bit in Australia. So those are two markets where we've really traditionally done very well.

So, we really would like to say there is a bottom, but I think to be fair, with the experience we have had, we are saying that maybe we don't see anything moving again until after this year. But certainly, this is the case. The case is we are still staying in front of customers and still working because eventually it will swing, and we want to be known that we didn't leave and that we are there for the long term.

So we are still invested in our coverage and in our service coverage in international because in the long term we think that's in our best interest.

That sounds great. One last one. I was on a conference call last week. They talked about some pretty large-sized infrastructure spending bills in Canada. Is that something you all have heard about recently? I think that would be interesting, given the business trend that you are seeing there.

Yes, we have seen and heard the same thing and we would be obviously all for it. So, our customers talk about it. I think they have done some of that already, but we will be ready when it happens, for sure.

Perfect, guys. Thank you and best of luck.

Mike Shlisky, Seaport Global.

I wanted to -- I want to talk -- just asking about the large pellet plant order. Is there a difference in the timing of the margins that you could actually get from this order compared to the revenue recognition? Is there a thing where you are going to wait until the various thing is installed to get a good chunk of that operating cost out of there or is it pretty much scaled the same way that the revenues are?

It will come with the revenues. Yes, we will count it as we have the revenues and margin. And the margins are in line with our major equipment margins.

And there is no difference in the installation margin at the end there? There is no kind of cleanup as to what's being held back until the actual plant is installed? It is all going to be (multiple speakers)

It is -- the margin on the back end is slightly less, but still in the range of our major equipment margins. And we are -- the parameters around the last payment, because it is a big project, our parameters that we are very, very confident we will meet or we wouldn't have taken the job. We have enough experience in proving what we are doing at Hazlehurst to feel very good about that.

Excellent, excellent. I also wanted to touch on the free cash outlook for 2015 into 2017. Do you see Astec being a little bit more positive on the free cash in 2016 or will you have to invest it in inventories for the pellet plant at the end of the year here and would it be a better outlook for 2017 perhaps once that payments start to roll in?

I think we will be okay on our cash, and we will be able to -- we have a payment schedule on the pellet plant, and of course, we recognize and get the cash on the Hazlehurst next year. I think what we'll be looking to do with that is acquisition work.

Got it. It makes sense. I will jump back in queue, guys. Thanks.

Nick Coppola, Thompson Research Group.

Can you talk about strength of the infrastructure group post the highway bill? And so, is there any distinctions for the ramp on asphalt plants for maybe some equipment at Roadtec? And so, really, what are you seeing within that infrastructure group, whether it is based on pent-up demand or the need that is out there?

Both sides are seeing strong activity as far as asphalt plant and the savings drives to that, Astec and Roadtec, also Carlson, who makes a screed that goes on the back of pavers, and their small commercial plant pavers are doing very well. So, we have seen pretty good activity across the line here, including our Dillman division. Good, strong activity.

Okay, that makes sense. And then, really just another question on that infrastructure business. By region, where are you seeing particular strength, and then, what are you seeing in energy-intensive areas like Texas?

Texas has been good, and regionally, it has been pretty consistent. Probably it is maybe better to talk about where it is not as strong, which would probably be more in the western US, California. Everywhere, it is pretty -- the demand is pretty spread out. Maybe not up in the Dakotas so much, but Northeast, Midsouth, Middle Atlantic, Southeast, I am just going through my mind thinking about orders and where they are coming from. It is fairly consistent.

Okay, that makes sense. Thanks for taking my questions.

Morris Ajzenman, Griffin Securities.

My question is on allocation of capital. You mentioned earlier in the conversation you still have a positive outlook looking out a handful of years for the energy group. How are you allocating capital? Is there being any shift away from energy to other parts of the group? Just share your thoughts on that with us, please.

The biggest one we have going right now is we're adding a bay on at our Astec, Inc., facility for the -- mainly to build the large drums for the pellet plant, and that should be completed by September.

Also, that is a bottleneck for our asphalt business, so the ability to build more drums will be something we need over the next few years.

We are managing to our -- our CapEx for the year is around $30 million, but we always say that with an asterisk because we will manage the businesses to the business that we have, to the demand. So, some will get probably less and some will get probably more, based on how the year is playing out.

But thinking in the range of $30 million is the right place to think for our CapEx this year. We have been really running about depreciation the last several years, which depreciation is about $23 million. So we will spend maybe a little bit more this year. However, if things turn, we can -- we are very quick and we can slow it fast.

And just a clarification, I thought earlier in the call you had stated revenues would be similar in the second quarter as the first quarter. But then after another question, I thought you then said EPS would be in line. Could you just clarify what you had said about the second quarter versus the first quarter for revenues and EPS?

Yes, I probably -- that's a good point, Morris. We really feel like the whole quarter is going to be pretty close to what we just had. Now that is earnings per share, and then the volume maybe a little higher if the margin is off a little bit. But we do think we will be in the range.

Thank you.

Todd Vencil, Sterne Agee CRT.

Many of my questions have been answered, but I will ask this one. Thinking about the 5% topline growth bogey that you guys have reaffirmed, you said last quarter and then again today. Looking out at what you can see in your backlog and what you see in your order trends and what you expect, what do you think the swing factors on that are going to be, positive or negative? If you end up more at the 5%, what is going to be the driver, and similarly if you end up under that?

If we end up over it, I think it will be aggregate mining waking up a little bit in the second half, and if we end up under it, I think it will be flat to down.

I think the infrastructure is going to have a good year overall and I think energy is -- they're doing a good job with what they have, but it is going to be a challenge the rest of the year.

Barring a huge swing from what we see right now, I don't see us being down on that 5%, but I think that opportunity would be to be above it. I think, again, as I said earlier, I think we're a little bit of a -- our experience in the last few years, it has just been -- it has been kind of tough. We get a lot of questions why not higher, but I think based on what we know right now, the 5% range is the right number.

Okay, good. And given that aggregate and mining you just said are the swing factors, is that -- I am going to guess that is more on the aggregate side than on the mining side. Is that right?

That's correct because we don't think the mining side is going to get much worse or much better.

Okay. And I don't want to pick at you anymore on the gross margin. I think you have done a good job of answering the question, but I just want to say really nice performance in the quarter on that.

Larry De Maria, William Blair.

Curious on the sustainability in your outlook for pellet plants. In other words, what are the prospects beyond what we are quoting, and when can the industry -- what can the industry do and where do we get to the point where we can talk about more than one-off plants? When can this be a sustainable business and you're competing for a few plants in the marketplace?

And secondly, where would you estimate annual sustainable parts sales would be from pellet plants? In other words, if you did $109 million in sales this year, would that lead to $25 million or around 25% in parts annually in a recurring basis? Thanks.

This is Ben. I think it is still such a relatively new industry; it could be years before it is a sustainable industry. We feel like it is.

If you went with the pellet projections, even with being down right now, you would still think there would be 25 to 35 pellet plants built in the eastern seaboard, large plants, over the next 5 to 8 years or so.

We're in a really good position on that. I will give you an example. Line three at Hazlehurst, when we turned it on and ran full production another two weeks on a tons-per-hour basis, that's crossing the line. It is a never-been-done line. So we feel really good about our abilities, but on the other hand, we still have to be able to support it. It is another being able to build it.

I think we're in a good position. I think if we do as well as we feel like we're going to do at Highland, people will be coming to us first and we might have ability to work on our pricing, too, to get our margin up a little more. But we're excited about it. We feel like if we can get 1 to 1.5 in the next year, in the next two years, and continue to build that, we will be in a good position.

But I think it is hard because some of it is policy driven, to say exactly when that turning point is where you are like, wow, this is an ongoing business for a long, long time. We still continue in Europe, but South Korea and Japan and China are looking at it pretty hard. There is a pellet conference in Japan coming up, so maybe stay tuned on that.

But we -- parts wise, I think it will be in line volume to current parts that we have on asphalt equipment. So as we look at volumes at pellet plants, and, of course, the early stages of them, they don't need very many parts, but as they get older, they start to need parts and then it depends on how well it is maintained by the Company that owns it.

So, I think thinking of it in terms of in the long run being the same percentage of parts business would be a good way to look at it.

Okay, thanks. But I guess part of the -- that's very helpful. I guess part of the issue is that you get the one or two large plants and then we don't know about the year ahead and that creates some uncertainty with regards to the outlook. So is it safe to say that you have -- you think you have the visibility that, at least for the base-level business, that you'll at least do 1 to 1.5 a year so that wouldn't provide a hole in the outlook?

And then, secondly, you did mention MINExpo costs. I am assuming that won't be significant, then?

MINExpo will not be hugely significant. That is in Las Vegas in September, and then CONEXPO, we will start to see expenses on that probably midway through this year, and the total expense will be like it was last time, which was around $4 million.

I think, though, our goal that we are working for is to make sure that we can get 1 to 1.5 pellet plants a year for a while, and we're putting ourselves in a position to be able to do that with how we're doing it at Hazlehurst and how we feel like we're going to do it at Highland, given what we know.

Great. Thanks a lot. Good luck, guys.

Schon Williams, BB&T Capital Markets.

I just want to follow up. You mentioned some of the capacity expansion there in Tennessee, but at what point do you get concerned about capacity as the infrastructure business starts to ramp up? Do you feel comfortable that you can still significantly ramp infrastructure and then layer on another 1 to 1.5 pellet plants for the next -- I don't know, as we look out over the next 12 to 24 months? Is that still plausible, given the capacity expansion that is already in the works?

Schon, for the moment the answer to that is yes, because the pellet plants are planned out far enough that we are able to talk with our infrastructure customers and get their deliveries in and around them, which has really been great to see.

I am still a peddler at heart, so I have been involved in some deals and we have had some customers say, okay, I will wait until December because we've said, hey, can you wait until December? So far, to my knowledge, we haven't lost a deal on delivery on asphalt plants, and so we have been okay on that, but we are consistently keeping our eye on that, and we do have capacity to help with that, particularly in Oklahoma where we are working on some infrastructure products there now, not just the brooms, but we are building some filler silos there.

So we have capacity if it really, really went going, but for the moment, we have been okay, and we think we will be okay even into the next couple years with the expansion we are doing here at Astec and some of the things we are doing at Dillman on their shop flow. I think we will be okay.

All right, thanks, guys.

Thank you. Ladies and gentlemen, we have come to the end of our time allowed for questions. I will turn the floor back to Mr. Anderson for any final remarks.

All right, thank you, Melissa. We appreciate everyone's participation on our first-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 May 12, 2016, and an archived webcast will be available for 90 days. A transcript will be available under the investor relations section of the Astec Industries website within the next seven days. All of that information is contained in the news release that was sent out earlier today.

As Melissa said, this concludes our call, so thank you all and have a good week.

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