Astec Industries Inc (ASTE) 2016 Q2 法說會逐字稿

Greetings and welcome to Astec Industries' second quarter 2016 earnings 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, Director of Investor Relations. Thank you, you may begin.

Thank you, Rob. Good morning and welcome to the Astec Industries conference call for the second quarter that ended June 30, 2016.

As Rob mentioned, I'm Steve Anderson and also on today's call are Ben Brock, our President and Chief Executive Officer, Rick Doris, Executive Vice President and Chief Operating Officer, David Silvius, 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 second quarter.

Before we begin, I will remind you that our call 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.

So, at this point, I will turn the call over to David to summarize our financial results for the second quarter. David?

All right. Thanks, Steve. Thanks to each of you for being with us this morning.

Net sales for the quarter were $294.4 million compared to $268 million in the second quarter last year, an increase of 9.9% or $26.4 million increase in sales. International sales were $52.2 million this quarter compared to $73.4 million last year, in Q2, a decrease of 28.9% or $21.2 million. International sales represented 17.7% of Q2 2016 sales compared to 27.4% of Q2 2015 sales.

The decrease in international sales compared to the second quarter of last year occurred primarily in Europe, Canada, Russia, Africa, and Australia. Those decreases were offset by small increases in South America and Japan.

Domestic sales in the second quarter were $242.2 million compared to $194.6 million Q2 last year, a 24.5% increase or $47.6 million increase. Domestic sales were 82.3% of Q2 2016 sales compared to 72.6% of Q2 2015 sales.

Part sales for the second quarter were $63.8 million compared to $67.4 million in Q2 last year. That's a 5.3% decrease or a $3.6 million decrease. Part sales were 21.7% of quarterly sales this quarter compared to 25.2% in Q2 of 2015.

For the quarter, part sales increased and the infrastructure group decreased in ag and mining and energy groups.

Foreign exchange translation impact on sales was $3.4 million. That is to say that if rates this year were equal to last year's rates, our sales would have been $3.4 million higher.

On a year-to-date basis, sales were $573.1 million compared to $556.8 million for the first half last year, a 2.9% increase or $16.3 million increase. International sales were $96.7 million compared to $151.1 million the first half last year, a decrease of 36% or $54.4 million.

The decrease year-over-year occurred in Canada, Australia, Africa, the Middle East, Europe, and in the post-Soviet states in Russia. Those were offset by small increases in Japan and in China.

International sales were 16.9% of our first test sales this year compared to 27.1% in the first half of 2015. For the year, international sales decreased across all of our reported groups.

Domestic sales were $476.4 million in the first half this year compared to $405.7 million in the first half of last year, a $70.7 million increase or 17.4% increase. Domestic sales were 83.1% of total sales in the first half compared to 72.9% in the first half last year. Part sales were $137.9 million compared to $140.5 million in the first half last year. It's a decrease of 1.8% or $2.6 million. Part sales year-to-date were 24.1% of total sales compared to 25.2% of year-to-date total sales in 2015.

Foreign exchange translation on the year-to-date sales figures had a negative impact of $7.5 million. Again, that is if rates were the same this year versus last year, sales would have been $7.5 million higher. Gross profit for the quarter was $73.4 million compared to $62.2 million at the second quarter of 2015, an 18.2% increase or an $11.2 million increase. That made the gross profit percentage 25% for the second quarter of 2016 versus 23.2% for the second quarter 2015. One of the factors impacting that gross profit was the absorption variance for the second quarter of 2016 which was actually just about $100,000 overabsorbed, whereas last year in the second quarter we were $2.4 million underabsorbed, so that's a $2.5 million improvement in efficiency in the shops.

Consolidated gross profit for the year was $145.4 million compared to $128.3 million last year for the first half as an increase of $17.1 million or a 13.3% increase in gross profit dollars. The gross profit percentage was 25.4% this year compared to 23% for the first half of last year.

The year-to-date 2016 absorption variants, we were underabsorbed $1.4 million for the first half compared to last year's first-half where we were under absorbed $4.5 million. That's a $3.1 million positive change in the absorption variance year-over-year. SGA&E for the quarter was $45 million or 15.3% of sales compared to $43.3 million or 16.2% of sales in the second quarter of 2015. That's a $1.7 million increase and decrease of 90 basis points as a percent of sales.

The factors impacting SGA&E quarter over quarter were primarily payroll and related expenses. Those increased $2.9 million. Our exhibit expense was up $1.1 million. Health insurance expense was actually down $1.5 million and IT and related consulting expense was down about $1 million.

For the year, SGA&E was $88.8 million or 15.5% of sales compared to $87.1 million last year, 15.6% of sales. That's an increase of $1.7 million year-over-year or a decrease of 10 basis points as a percent of sales. Factors impacting those numbers and the year-over-year payroll and related, that $3.4 million increase exhibit expense was about a $1.8 million increase. Health insurance was down about $2.9 million and IT and related consultant expenses were down $1.5 million.

Operating incomes in the second quarter is $28.5 million compared to $18.9 million in the second quarter of 2015, a $9.6 million increase or a 50.8% increase in operating income quarter over quarter.

Other income in Q2 was $327,000 versus $420,000 in Q2 of 2015 and was $900,000 for the first half compared to $2.4 million for the first half of 2015. The primary source as a reminder is license fee income and investment income by our captive insurance company, but do recall that the prior year year-to-date number does include approximately $1.2 million of [key man] life insurance proceeds.

The effective tax rate for the quarter is 36.2% compared to 37.9% for Q2 2015 and 36.8% on a year-to-date basis versus $37.4 million on a year-to-date basis in 2015. The things that impact the tax rate for both the quarter and year to date were the losses in our foreign jurisdictions for which we can't recognize a benefit and we had some higher state income tax expense at certain of our domestic subsidiaries.

Net income attributable to controlling interest was $18.2 million for the quarter compared to $11.8 million the second quarter of 2015. That's a $6.4 million increase or a 54.2% increase. Diluted EPS for the quarter was $0.79 compared to $0.51 for the second quarter of 2015. That's a $0.28 increase or a 54.9% increase in EPS quarter over quarter.

Year to date, net income attributable to controlling interests, $35.9 million compared to $26.9 million for the year-to-date 2015 period. That's a $9 million increase or a 33.5% increase. And that resulted in diluted EPS for the first half of 2016 at $1.55 compared to $1.16 for the first half of 2015, a $0.39 increase or 33.6% increase.

EBITDA for the second quarter was $34.6 million compared to $25.3 million for the Q2 of 2015, a $9.3 million increase or 36.8% increase and for the year, EBITDA was $68.9 million this year compared to $55.4 million for the first half of last year, so a $13.5 million increase for 24.4% increase in first-half EBITDA.

Our backlog at June 30 is $364.5 million compared to $229.5 million at June 30 last year. That's an increase of $135 million or 58.8%. International backlog was $54.5 million this year compared to $57.5 million at June 30 last year, a decrease of $3 million or 5.2%. Domestic backlog was $310 million this year compared to $172 million June 30 last year. That's a $138 million increase from 80.2% increase.

The foreign currency translation impact on the backlog compared to June 30 last year, again, if rates were the same, was a decrease of $3.6 million. So current year backlog would have been $3.6 million higher.

Our balance sheet continues to be very strong. Our receivables are sitting at $127.5 million compared to $118.2 million at June 30 last year. An increase of $9.3 million. Our days outstanding are $38.9 million compared to $40.2 million at June 30 last year.

Inventories at $379.5 million compared to $382.8 million at June 30 last year, a decrease of $3.3 million and our turns remained relatively flat at 2 turns compared to 2.1 last year.

We have nothing on our domestic credit facility of $100 million and we have $68.5 million in cash and cash equivalents on our balance sheet. Letters of credit outstanding are $17.2 million. That leaves us a borrowing availability on that credit line of $82.8 million.

We do have $10.6 million in debt in Brazil right now that choose to finance that companies buildings -- building and furniture and fixtures and inventory. That's where the interest expense is primarily derived from.

Capital expenditures for the quarter were $6.5 million and capital expenditures for the first half are $11.3 million. We're still forecasting around $30 million of capital expenditures for the year. Our depreciation is at $5.2 million for the quarter and at $10.3 million for the year and for 2016, the full year we're forecasting about $22.5 million of depreciation.

So that concludes my prepared remarks. I will turn it back over Steve.

All right, thank you, David. Ben Brock will now provide some comments regarding the second quarter of this year's operations. Ben?

Thank you, Steve. Thanks to everyone for being on our call today.

As we commented in our earnings release this morning we were pleased with our second-quarter results. While the headwinds of global oil and natural gas prices, the global mining slowdown, and the strong US dollar persisted and challenged us in two of our three financial reporting groups during the quarter, we were able to secure and ship orders as a result of the passage of the Federal Highway built in the United States which allowed us to earn a good result in the quarter in our traditional business areas.

We were also able to recognize $18 million in pellet plant revenue during the quarter.

As David mentioned, our earnings per share were $0.79 per share versus $0.51 per share in the second quarter of 2015, which was an increase of 54.9% and our second-quarter sales were $294.4 million versus $268 million for an increase of 9.8%. Year to date sales were $573.1 million versus $556.8 million for an increase of 2.9%. And again, as David mentioned, our EBITDA year-to-date was $68.9 million versus $55.4 million.

EBITDA is up again this quarter as our Companies maintain stronger gross margins versus last year. Our product mix included more special project work than last quarter, so we were pleased with our team's efforts to keep gross margins in range with last quarter's gross margins. Higher capacity utilization rates in Infrastructure Group and some of our Aggregate Group companies once again helped us on our gross margins.

Our backlog at June 30, 2016 was $364.4 million which was up 58.8% versus last year. Our backlog remains strong mainly as a result of the $122.5 million pellet plant order that we announced during the first quarter. The pellet plant order backlog is in the Infrastructure Group backlog.

Our Infrastructure Group also continued good order intake during the quarter mainly as a result of the Federal Highway Bill in the United States. Our aggregate mining group backlog was down due to the global mining industry being slow and delayed quarry investments in the United States. We've seen improved productivity since 1 of July in this group and we believe the Highway Bill will help this group late this year.

Our Energy Group backlog was down primarily due to the price of oil and natural gas slowing customer capital expenditures in those industries. Domestic backlog was up about 80% year over year and international backlog was down 5%.

At the end of last quarter, our international sales were down 44.2% year over year which was near our trend for the full year of 2015; so we did experience some slight improvement on an international percentage basis. The strong US dollar remains a significant headwind for export efforts. International backlog remains down primarily due to the strength of US dollar, oil, natural gas prices and the global mining slowdown. Our Astec do Brazil facility continues to experience everything you read in Brazil with regards to the slow economic times and the political environment is not helping it out at all.

We continue to work for orders in surrounding countries to help build this facility. We continue to hear from our infrastructure customers in the United States that they are experiencing good business levels. We also continued to pursue new business with new products in the United States and we are maintaining our international effort despite the challenges 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 a strong US dollar oil prices in the mining conditions remaining in place for the balance of this year at the least. Our lower backlog in international was a direct result of those headwinds.

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

Changing subjects to the Hazel Hearst Georgia pellet plant, that's the original pellet plant that we shipped that we have discussed on several calls. As a continuing reminder, it's a new product that we chose to finance at the time. As a result, we will recognize the revenue for this plant as we are paid.

This will have an effect on our cash and our inventory until it's paid in full. The order for all three lines was for [$60] million and we 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 during the first quarter, and as a reminder it's 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.

As we mentioned on our last call, our plan is to recognize the $122.5 million order as follows. During the second quarter, we recognized $18 million. During the third quarter, we anticipate recognizing about $20 million. During the fourth quarter, about $35 million. The balance of the order, which was around $45 million to $50 million, would be recognized in 2017 as site work installation and startup work completed.

Updating our current pellet plant quote activity, we do have ongoing quote activity for new projects and we believe that we will have new larger order late this year. We believe that that order will be in the range of $80 million.

As a reminder, these deals are long and complicated to get across the line. While we are optimistic that a new project will happen by the end of this year, it could always be longer than we anticipate. With regards to international sales overall given the well-documented challenge globally, with regards to the US dollar strength, global mining, and the global economic environment overall, we believe that we will remain challenged for at least the rest of this year with regard to sales internationally.

We remain committed to growing international sales over the long term and we will continue to maintain our sales and service coverage around the globe.

On the energy side, we remain extremely challenged in our drilling and pumping equipment sales activity for oil and gas. We mentioned on our last call that we were going to move our street grade equipment line production the most affected facility in Enid, Oklahoma. The line will keep its Roadtec brand name and will be sold and serviced by Roadtec. Demand for our [Brooms] has been strong as we release new models in the last year.

We are happy to report that the first Brooms have come off the production line and are successfully operating with customers in the field. We have slightly offset sales challenges in heaters for oil and gas. Industries with sales to food processing and chemical plants. We've also continued to see reasonable sales of what shippers and wood grinders.

Our concrete plants are built in the energy group and quoting activity remains good for these plants. We have also -- we also have our first ready-mix concrete plants set up on our yard at CI and Albuquerque in Mexico and testing phase, bringing us to two of the nine plant concrete models. We have named this new plant the Fusion plant.

We remain optimistic on our outlook in 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 at the third quarter of 2016 and the balance of the year, we were encouraged by our backlog, our domestic sales outlook, and our strong Infrastructure Group sales activity. Our new product development continues in all groups.

In addition to our new Fusion plant, we have our previously unannounced LTV 1100 material transfer vehicle built by Roadtec and field testing now. Designed and built here in Chattanooga, this machine will complement our industry-leading shovel buggie line with a smaller, easier to move material transfer vehicle.

Regarding new products, next year is a Con Expo year. We spent around $4 million on the prior Con Expo and expect to be in that range for the upcoming Con Expo. And 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 the next quarter and the balance of the year, we believe that our third quarter of 2016 will be better than our third quarter of 2015. Our current revenue outlook for the balance of 2016 is up 5% to 8% versus last year with improved bottom-line performance.

As a reminder, our revenues are up 2.9% year to date versus last year and our profit is up 33.6%. While our Infrastructure Group is performing very well, we are cautious on our outlook for the Aggregate Mining Group and Energy Group with the main headwinds for these groups being very real and persistent.

As mentioned in my earlier comments from our last earnings release to now, orders have been good in Infrastructure Group since early December last year mainly due to the Highway Bill in the United States. Orders are not strong internationally mainly due to the strong US dollar and mining slowdown.

Energy Group orders or software products targeted at the oil and gas industry, Aggregate Mining Group orders are soft for products targeted at the mining industry.

Bright spots for activity for us remain mixed asphalt equipment sales, both asphalt plants and mobile equipment, concrete plant-quoting activity with pellet plant quoting activity and what shippers and grinders quoting and sales activity.

Year to date parts sales were down by 1.8% versus last year and were 24.1% of total sales versus 25.2% of sales in 2015. 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 our gross margin as well. These efforts played a part in our 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 are experiencing a stable private market and we're focused on selling existing and new products. Given the headwinds we are facing, we are working to manage the businesses facing those headwinds to the market conditions where business warrants.

To that end, we did have staff and/or work hours reductions at the most effective divisions during the second quarter.

We mentioned on our last call that our goal is to add at least one company to our asset family during 2016 so long as the company was both a culturally and strategic fit within industries we serve. As most of you know, we were pleased to announce on July 7, 2016 that we signed an agreement to purchase Power Flame Incorporated for $43 million subject to final due diligence and any adjustments if necessary. Power Flame is located in Parsons, Kansas. They've been in business for over 50 years with Phil and Louisa [Weiner] as owners for the last 37 years Power Flame engineers, sales, and services burners for many industries including industrial and commercial uses. They are a profitable and successful business that we believe will add in the range of $40 million in revenues in 2017. They are a market share and technology leader in each segment that they serve.

Our heat tech and CI subsidiaries buy approximately 200 burners per year from them for their thermal hot oil heaters. We are not a large customer to them as they build thousands of burners per year. They specialize in burners from 400,000 BTUs to 25 million BTUs and have built burners as large as 100 million BTUs. Our Astec subsidiary builds burners for asphalt plants from 20 million BTUs to 150 million BTUs, so we believe we have good opportunity for a technology transfer between divisions, particularly on the control side.

We believe that Power Flame has very good technology for low emission burners that we can learn from at Astec. We believe we can help Power Flame with our corporate purchasing agreements and benchmarking with our other companies.

We are extremely pleased that Bill Weiner will remain with the Company as president. Power Flame will retain its name and location. They will join our Energy Group after the transaction is completed which we are targeting for this third quarter.

And our full-year revenue look of up 5% to 8% versus last year, we have included the anticipated revenue addition from Power Flame this year.

One last thing on Power Flame that I would like to say is thank you to Bill and Louise Weiner for working with us to get the agreement in place. They built a great company with great team members; and we are very fortunate to have a successful industry leader like Power Flame join our Company.

Acquisitions remain a key piece of our growth strategy along with organic growth. We are still diligently working on potential acquisitions.

That ends my comments on the quarter and what's in front of us. 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.

All right, thank you, Ben. Rob, if you would open the Q4 questions, we will be glad to entertain those.

(Operator Instructions) Stanley Elliot, Stifel.

Hey guys, good morning, congratulations, and thank you for taking the call. Quick question. Could you help us with the orders? I -- when you're looking at the infrastructure business, how much of that business is book and ship in the quarter and maybe -- or otherwise could you help us frame out how long the tip of the lag is between booking and sales?

This is Ben, Stanley. Thanks for the comments on the quarter. We -- in Infrastructure Group, depending on the division, our backlogs are pretty strong. So some of those orders on asphalt plants potentially could ship in 2017 now. We are -- it's very active. We thought we would see a little bit of a slowdown in the summer when the bill came in and we started getting orders because the customers would be working and they are definitely working.

We're not seeing a lot of customers during the quarter, but the activity has remained fairly good through the summer. We got a large order last night on our asphalt plant. So I would say that on the mobile side, definitely could be in this quarter, late third quarter to early fourth quarter on the asphalt plant side. It would be shipping first quarter next year.

Perfect. And then help us, from historical standpoint, once you have the Highway Bill or once we see a multiyear bill, if my memory serves that you see really good trends for probably 2 to 3 years from deciding the Highway Bill. Is that -- am I correct in that assessment or maybe if you can just help me out with that.

Yes, you are correct. And if you look at the funding, 2016 through 2020, it depends on who is writing that number down but in general, it's about a $1 billion year change from 2016 to 2017. About -- a little over -- may be close to $2 billion from 2017 to 2018, so the funding increase is there and it's in place which is nice.

Absolutely.

And it helps our customers frankly on spending money on larger CapEx. (inaudible)

Perfect. And last one for me, on that $80 million potential wood pellet order, would there be opportunities for additional add on, additional lines from that or does that seem to be pretty square?

I think that one is pretty square but say we are talking to probably as many as 10 people that -- five of them being pretty serious. So it's not the only one that we think will happen in the next 12 months or so. And we can deliver the whole 80 of that next one next year if it came soon enough. But it would have to be pretty close to the end of the year for us to do that.

Great, guys, I appreciate it. And best of luck.

Mig Dobre, Robert W. Baird.

Good morning everyone and I guess I agree with the gentleman prior. This was a pretty nice quarter. It was very good margins. I guess my question, Ben, is I'm trying to flush out a little more as to what is going on in your infrastructure segment. And I'm looking at your orders of call it $99 million and these orders seem to be a little bit below what we've seen in the past six months in terms of core infrastructure orders.

So excluding the wood pellet plants and a little more in line with the order pace that we've seen in 2015 before the passage of the Highway Bill. So I guess -- I'm trying to understand here what is really going on in the market and how you guys are thinking about the demand going forward in terms of not only just seasonal slowdown or acceleration, but really the sustainability of the bump in demand that we've seen after the Highway Bill passage.

Right. Thanks, Mig, this is Ben. We -- demand and the quoting activity, I can just say is very strong. The plant that we got last night was a very large plant -- and asphalt plant, and we -- it's pretty consistent. And we have more customers coming in this week on our asphalt plant so -- and then on the analysis side, David just looked a little bit at the backlog, he may have a comment on it but we have -- I feel really good about the infrastructure side.

The Roadtec backlog is very strong, but they're maybe picking up just a little bit of market share. We are transitioning there on the distribution side from West US to the East, to a dealer model which is really what that product should be sold through. And so we have been able to sign some Tier 1 dealers in the Northwest and in California that we are very excited about.

So it -- well, more in California and the Rocky Mountains, not in the Northwest. I'm sorry, we had another dealer that we signed on the agricon side in the Northwest. I'm sorry about that.

Feeling really good about that. Got a tier 1 dealer in Wisconsin. So I think for Roadtec, the future is very bright.

Yeah Mig, this is David. Just to give you a couple of numbers, on the backlog in Infrastructure Group, if you take out all the [pelletizer] business out of that particular group and compare it to the prior year, we are talking about an increase of backlog of $81 million and that's about 175% increase without any pelletizer business and I think as Ben -- as we had described back when the Highway Bill was in the process of being passed that we thought there would be an initial surge and a bit of a lull and then picking back up. And again, there's seasonality built into where we are right now as well.

Right, and I appreciate your comments, David. I guess the nature of my question was really more along the lines of I understand that your backlog is up, but it seems to me like the backlog was really up because of what happened in the fourth quarter and the first quarter rather than what happened this quarter.

And I don't mean to be splitting hairs here, but I'm trying to understand true demand versus seasonality. But I guess you answered that.

In terms of the back half of the year, can you help us think through the way revenues would flow and I appreciate the wood pellet detail. But do you -- should we expect revenues basically to be flat to up sequentially from the first half in infrastructure?

In infrastructure, it will be flattish. They were always -- the third quarter is always the top quarter because people are working -- and we'll have the equipment that will -- it will creep into the fourth quarter and the fourth quarter will be better than the third on infrastructure side. And that will hold true probably throughout all our groups, Mig.

It always seems like we are in -- hate to say hand-to-hand combat during the third but I mean the third always feels like it's a grind. But we do have good backlog coming into it and so I think it will be a better third than last year.

We only made $0.10 a share last year in the third quarter and the year prior we only made $0.08. So from $0.08 to $0.10, probably look good on a percentage basis but it still doesn't make us feel very good. So we have an opportunity to be better in the third this year.

Sure. And then maybe my last question -- David, this one's for you. In terms of again in infrastructure, if that is your revenue outlook or best guess for the back half of the year. How should we think about gross margin here given your absorption dynamics? And also maybe you can comment on raw material cost impact in the back half?

On the gross margin for the back half, I think you're going to see in that Infrastructure Group, they will be relatively flat.

Flat year-over-year or sequentially?

Sequentially. Yes, they are operating at pretty good efficiency in that group right now. And so taking more cost out of that process would be a challenge. Again, product mix has a lot to do with it but as far as the gross margin goes, they're going to be pretty good going forward on the gross margin compared to where they are now.

And material costs?

Well, we've all talked about that here, but -- this is Ben. The material cost -- steel is the one that's the big one that everybody is watching. We've just been to every -- in the last three weeks, we've been to every single division physically in the North American side and the steel mills would like to raise steel 12% to 15% on us right now but we are hedged. We are in pretty good shape through the end of the third and then we are keeping a close eye on it.

We will see if we want to lock in in August. But we will have to adjust prices for what we see. We don't think it will be that high but we think there will be some increase coming at us. Now at the same time, we are doing a pretty good job on the purchase side on the other items, so we're in good shape for the moment with keeping an eye on it in August.

Appreciate it, guys, thanks.

Schon Williams, BB&T Capital Markets.

I just wanted to talk quickly on the financing for Power Flame. Was most of that put on the revolver or you are going to pay part of it out of cash?

It will be all cash. We had $68 million at the end of the quarter, so will be.

In margins on that business, are they equivalent to the corporate rates or energy segment?

Yes.

All right. And then I wanted to just talk about the timing of the second Highland shipment. You did a $2 million this quarter. It was kind of slightly below the guidance last quarter of $20 million. Just want to get a sense of how are things ramping up and I don't know if this may be related to the expansion that is going on in Chattanooga right now. Can you just talk about as we get into full ramp-up mode on pellets through the rest of the year, you feel pretty comfortable with the schedule that you put out there?

We do Sean. This is Ben. Part of it is percentage completion at site 2. So the iron, we were in good shape on. So could be there were -- it's around $20 million. We've got weather. Depends on if it rains at Pine Bluff, Arkansas, or not. The console is down but -- in talking with our guys last week, we are starting to pick up some pretty good steam on an automatic on site. So we feel good about the schedule as it stands right now.

All right, that's helpful. And then energy had a particularly good top line this quarter. Sequentially, you don't see the pickups going into the spring. You do get some seasonal pickup, but this was quite robust. I'm just wondering can you talk a little bit more color, maybe, was there anything specific drag in that? And are those levels sustainable going forward?

Schon, this is Rick Dorris. Heatec had a good second quarter. Peterson has had a good year so far, and that continued in the second quarter. And at GEFCO, we started building some -- are doing some fabrication for some of the other divisions at GEFCO, so that helps them a little bit. And CEI was about flat with last year year to date.

And CEI, you were -- I thought there was some expectation that maybe that would be picking up here?

We do expect it to pick up for the second half.

Okay, and that would be cement plants?

Yes, concrete plants, yes.

Okay. All right, and then maybe just one last one if I may. Just any thoughts on -- I know you mentioned R&D picking up at some point. I'm just wondering maybe like the SG&A levels as we go into the back half, do you feel pretty comfortable with this $44 million level, $45 million level? Is there any kind of pluses or minuses we should be thinking about in the back?

Yes, no, I think we are in a good space on the SGA&E. The -- if anything, I would hope we would come in with a little bit of a downside surprise on that, but we are working hard to hold that steady. And with the volume that we are running, they (inaudible) additional cost. We really target the percentage. We would love to be at 15%.

Okay, great, guys, and congrats on the quarter.

Morris Ajzenman, Griffin Securities.

Hey, first question, aggregate and mining both from a revenue and on the backlog from this recent quarter, can you give us a more granularity, kind of breaking apart as best as you can, aggregate from the Mining Group? And then secondly, a similar question for the Energy Group if you can break apart energy from concrete, Heatec, etc.

Can you kind of give us some more granularity within each of those two divisions?

Sure Morris. This is Ben. You know mining, in the group typically might be 15% of the group, and where we are struggling is in South Africa, our (inaudible) group is off. They are profitable, but they are off there. And then, Brazil, as I mentioned on the call is looking like a pretty tall mountain, but we are going to be there when it turns around and it's an investment. We have got it sized down, they were -- actually we are slightly profitable in part of the quarter. So -- and we are looking for other products that we can build in that facility, maybe not even just for Brazil like we shipped in asphalt plant to Argentina. We've got a few others quoted out of there for around Brazil.

So the Telsmith group sells into mining a little bit as well and they had a really soft first half that they picked up. They've got a little more work now, so feels a lot better there.

On the energy side, right now the concrete is -- we've got the two plants going through right now. That will go to a customer like this month the first -- or first week -- first couple weeks of August which is a fairly large order of around $7 million altogether. So that will show up. We will see how -- that will be -- that alone could help them in their second half. They would meet that criteria immediately on concrete plants. But they've got pretty good work otherwise.

They have picked up a few asphalt type quarters and asphalt rubber blending type prospects so -- but right now, I would say concrete is not significant, next year, for CEI, $10 million to $20 million range would be pretty achievable. They -- I know that's a wide range, but they are coming in new to the industry and the Fusion plant that I referenced in my comments is a smaller ready-mix plant that is fairly -- it's a fairly simple process with newer style controls and those retail in the neighborhood of $450,000, so we're not talking -- it's going to take a lot of units to move that needle for the Company, but for them, it would move it a lot. It would be good man hours and a lot of work.

Any -- I hope that answers your question but that's kind of where we are on it.

Just as -- sort of a follow-on back with the Aggregate and Mining. Could you give us a little more discussion on the aggregate side of the business where we were in the quarter and how it looks going forward?

On the portable and track mounted side, it stayed steady, flat, but still steady. And the project work -- the larger quarry work has lagged -- we were hoping it would be quicker, but like we said on the last call, we now think and on my comments today, back half of the year for -- probably near the end of the year for the Highway Bill to help that group. And so we -- it's just come out and gave a little slower with the Highway Bill than we like. But good quoting activity that announces the first of. That doesn't -- we haven't earned the orders yet, but at least we've got more quoting activity.

Actually, we have had some orders from Telsmith though; but it feels a little better now than it did 25 days ago.

Last question. I don't think it had any major impact for you but Brexit at the end of June, have you seen any fallout or any rebound or any impact at all from that?

No, we haven't seen any impact at all. We are keeping an eye on the Labor side and for our Telestack group in Northern Ireland which is in the UK.

So we -- but for the moment, and they did. We talked with them within the last couple of weeks about it and there was not an overconcern about anything for them.

So the other concern for us when that happened was the [Tele] business of course because that's -- most of the driver for that business right now is the UK. Talking with our customers that are doing business there, they do not think it will affect what they're doing.

Thank you.

William Bremer, Maxim Group.

Just want to get a sense on overall pricing. I'm not sure if you gave a little commentary on that as of yet now and couple that with your capacity utilization of your plants. Is it necessary, given what we are seeing in steel to start adding up the price, or is it based upon capacity utilization that you are able to possibly increase prices here?

Bill, I'm sorry, this is Ben. We mentioned just a little bit ago that we are watching steel for sure and we may need to think about pricing in August or early September. I'm sure we will be watching that hard. All of our purchasing managers are on red alert, watching that because that's a big thing for us.

Utilization is good overall. It's up a little. We were seeing [70%-75%] last time. I would say we are probably in the [75%] range now as a company overall with infrastructure to run in [80%] plus. Aggregate mining running in the [70%-75%] range depending on the group. Energy around [65%].

It's interesting. We've been very fortunate, but you can feel as good as you can feel in Chattanooga, Tennessee, but our Infrastructure Group companies here, Astec, Heatec and Roadtec, you can feel maybe not as good if you go to GEFCO in Enid, Oklahoma, in the oil and gas business and water well business which is flat to down a little. So --.

But we been able to a backfill some of the man-hours through the shop and the quality of work they are doing is very good. So that is encouraging.

But we are definitely watching steel prices and I would say we've had -- we talked about last call I think having just a little bit of pricing power I think I talked about putting your thumb and your index finger almost touching and that was it. I think you could probably still have them together, but you could probably take them out about a millimeter. So we have (laughing) product development but we still are very competitive market. We face the international competition with where the euro is from Germany. They are pretty aggressive.

My next question is based upon just demand. Are there certain regions or states that you are surprised of in terms of their underlying demand for your products?

Without giving too much away competitively, I would say we have activity coast-to-coast and we have pretty strong activity in the Southeast United States. That could partially be because our coverage is typically better closer to home just because we started here. But we have good activity coast-to-coast.

And northern to our friends in Canada, what are you seeing there this time?

We have pretty good activity up there for quoting, and I don't know if they are getting comfortable with the currency where it is, but it is more east than west. Quiet in Alberta. That really depends on the oil sands, but we do have generally pretty good activity right now in Canada. Hopefully, the sales will follow if the activity is good.

Okay, thank you, gentlemen.

Mike Shlisky, Seaport Global.

Good morning, guys. Nice quarter. Can you hear me okay?

Yes.

Okay. And your commentary assuming it was not positive around the oil and gas industry and that segment in general, but are you going to tell us if you think conditions improved or perhaps worsened over the last two months since we last heard from you?

I think they are about the same. We have quoted some equipment, which is encouraging, because in the first part of the year, I'm not sure we were even quoting it. I will ask Rick Dorris to comment. He is closer to GEFCO on the quotes. But quoting activity had picked up some but mainly in the water well part of their business. That part of their business has picked up in the last couple of months and there's a little more activity there. Oil was still down, but a little better than it was.

Okay, got it. I also wanted to follow up on the last question earlier about your capacity utilization. So it looks like here, you are running about 80%, you said, infrastructure. Can you give us a sense as to perhaps when you expect to get it up to 100% and whether you have the ability to add on additional capacity at some point given the pretty strong orders you are seeing?

Yes, this is Ben, Mike. I would not anticipate 100%. There's just always going to be some underlying inefficiencies and when we do work on the shop, 100% is probably -- it would be a great goal, but probably an unrealistic -- I think in our best ever we had probably been 90%. And I think dependent on the division in the Infrastructure Group, we might be getting close to that. We are adding on at Astec Inc. and I would say they are probably pushing that number.

We are adding on for drums. The drums for the asphalt plants that do the drying in the aggregate and the drums that do the drying in the world -- the [Baylor building] will handle the big drums for the drying of the wood and it's also set up to build drums for asphalt plants and that's our bottleneck. And we think between that and a couple of things we've done in our Dillman division, we can handle the demand that is coming at us at the moment. On the asphalt plants.

Okay and on the (inaudible) asphalt plants, a while back you had mentioned that your order activity dramatically post the building past instrument did in December. Then we kind of follow up by some kind of lull eventually. And I thought -- I was wondering -- I thought it was going to be somewhere around Q2. Which just equates but does what happened in Q2, which was actually very very good count is your long or is that still yet to come or is it just not going to happen based on what's going on just in the asphalt plant market?

I think the quoting activity lulled a little bit but the quote to order stayed fairly consistent on the plants which was obviously a nice surprise. If you are going to be wrong, that's the right way to be wrong, I guess.

That's for sure.

But it -- but the quoting activity slowed as the summer came. But we've just been fortunate to be talking to people that were ready to do something and that's been great. Now the challenge of that is, to the point earlier, is we've had some people take them later to stay with us which has been great.

At some point -- so far, I think there's been one deal that I'm aware of that we lost due to delivery since December. And that was (multiple speakers) that they had to get in on. They had to start.

I guess that was the only question I have for this particular subject was is the opportunity -- is there a chance that some of your customers just [on the road] to wait as long as you've got. Of course you are already one of the modern leaders of course but is there a chance that you might have some similar translations out of your backlog at some point if you were to keep on coming in and demand actually stronger than you initially thought?

I don't think anybody would be canceling out of our backlog that is on hand. But we might not get orders or an order to, because they have got a project that they didn't anticipate getting that they need a plan for really quick, like an eight to 10 week delivery and we are dead in the water here with that. That potentially could happen if DOTs come out with quick mill and inlay work for the end of the year. That could happen.

That being said, we will do all we can to see if we could get there. We will call everybody and see we could do it. We wouldn't just lay down but that is possible because we are also not going to lie to our customer on delivery. We just can't do that.

Of course, sure. Got it. If I could just squeeze in one last one here on the pellet plant (inaudible) you got some new ones. You mentioned one was in the $80 million range. I assume that that is a smaller plant than what you have currently got in the backlog. I guess could you maybe kind of update us on the pricing and margin outlooks of what you're quoting? Is it similar to the $122 million one you've got now? Or any better or any worse?

Yes, no, that's a smaller plant. That is the plant that is going to -- I keep going between my head, Pine Bluff and Hazel Hearst. Pine Bluff is a four-line plant and we have all the install, so that's a big difference in the number between Hazel Hearst and Pine Bluff even though Hazel Hearst is a three-line and Pine Bluff is a four-line. That big spread is insulation, freight, all the electrical, a lot of stuff that Hazel Hearst would have self performed. But we -- this one is a two-line plant where we have all been -- everything, site work and everything if I remember what -- I think I'm remembering it right.

So that is more than just the iron. That also has [wood yard] in it which is more equipment there. We might outsource, but we are handling as an install on the equipment.

Okay, sure, got it. I will leave it there. Thanks, guys.

Nick Coppola, Thomson Research Group.

For wood pellets, can you just talk more about -- kind of at a high level, your expectations for demand there? So beyond that next order that you just got, what are you looking at maybe into 2017? What are your thoughts around demand?

We -- with who we are talking with -- Nick, this is Ben. With who we are talking with, 1 to 1.5 of these plants in 2017 is our goal that we are working for. We would love to have it sooner than later so we can balance demand and keep openings for our asphalt plants. We -- but our goal would be in the $100 million to $125 million range of revenue in 2017 with pellet plants.

Okay, that's helpful. And then can you just talk more about Power Flame and how you think that fits into your portfolio businesses from a strategic perspective?

They are -- this is Ben. They are a company that we have known for a long time. I've known them -- we purchased from them when I was a CEI. Went out there when I was 26. I'm 45 now. It's hard for me to admit that but -- so I've known them a long time, and known their culture, and then when you look at strategically what they bring, being in burners that long and we built burners, we can trade ideas on the burners. We can get more familiar with the industries they serve and their places where their burners going on boilers and things that we potentially could see for other industrial applications for our growth.

Some of the industries they go into that might tie into some of the Energy Group companies or into the bus pile industries, they gave us the visibility into those industries that we don't have being in all the things that they are in.

We can help them, we think, with purchasing and benchmarking because they have a broader view of other companies that are doing similar things. And I think between the two companies on the burner -- so, I mentioned earlier in my comments, the low emissions and being able to collaborate on that, some of the industries that they are in internationally, they do quite a bit of business in China and Russia and some of those industries we can go look into for some of our industrial equipment as well.

We're not necessarily -- wouldn't get too excited about becoming competitors to our customers in the boiler business or that type of thing. But getting around what those go into might have some interest to us on the industrial side for growth in the Energy Group.

Okay, that's very helpful. Thanks for taking my questions.

Brian Sponheimer, Gabelli & Co.

Just on the original plant that you financed, what remains for you to get paid on the $60 million?

Quite a bit.

So they are working out there, banking -- relating with their banking plan, I guess. Just getting the financing. So what we've got to do is we've got to complete the retrofit and installation of one particular line. All three lines up and running which, two of them are at their current design which is the final design, so that first line needs to be retrofitted and once that occurs, all three up and running according to spec and then the banks are all in. So, that's -- it's a matter of timing more than anything.

Okay, so of the original 60, you mentioned $20 million in the quarter, so $40 million remains, is that --?

Totally different project.

Yes, the $18 million that we recognized on the quarter was on the Highland Pellets project.

That was the other thing.

Yes, and the -- so there's almost all the $60 million that's due -- that we still have financed with Hazel Hearst (multiple speakers) and more color on that. All three lines have run pellets at production. What we needed to do was be able to burn woods exclusively on each line and we hit a wall on that on our burners, so we replaced -- we are replacing the burners and -- so the testing proving that the lines will do what we said on tons per hour is fine. The other two had the new burners on. They are running. We've got to put the third burner in. But they can get financing on that plant without it and that's the rest of the story.

So -- and we -- I want to make sure everybody understands, we're not in a jam or at risk or anything because there is no risk. We have met that and we're in good shape. But as far as how much money do we still have to collect, we have collected a little interest but if we were just thinking about it internally there's about $60 million plus the interest. (multiple speakers) Yes.

And just on the Highland plant, that's just percentage of construction there as you --

That's right, yes.

And that financing is in place and it's just a matter of completing the various terms of the contract.

Understood. Well, thank you very much.

[Ryan Hamilton, Morgan Dempsey Capital Management.]

I would just like to touch real quick on the Infrastructure Group. Could you talk a little bit about what you are seeing as far as your customers adding capacity or are they just filling orders as needed?

It is a mixture, Ryan, this is Ben. We've had some customers adding plants to their fleet and -- but we've also had consolidation of plants for bigger plants. So we have sold some mega plants -- what I call mega plants that would do 500 tons an hour plus and have up 6 to 9 storage silos on them.

There has been quite a few mega plants sold this year, but the use market is strong and so we've seen -- as we have traded and sold and helped broker some plants, they are not staying on the market very long either.

And then we've had some people that were not in the business get in the business. And so we have seen a couple plant orders that have shipped this year that have gone to customers that were not in the plant business but they were in the laydown business. They already had papers with paved asphalt. So it's a fairly active market for three of those reasons.

Sure. Thanks for the color. And then I was kind of wondering if you could talk about being that it's been so long since we've had a -- such a straightforward Highway Bill -- I forget, how many extensions over the last eight or so years. Is this happening as you would expect it to happen or are there things that are coming up that you say wow, this is different or unique?

No, I think it's been about what we expected with the exception being it's been fairly consistent on the buying side even though the quoting went down. It may be that we are still down on the order side. It just seems like it's more consistent through the summer. And being that they had a midyear -- there was a midyear Asphalt Association meeting a few weeks ago that we were able to spend a day and a half in and generally attitudes are very, very good.

Okay, great. Well, thanks, again and great quarter.

Ladies and gentlemen, we have reached the end of our question-and-answer session and I would like to turn the call back to Mr. Steve Anderson for closing comments.

All right, thank you Rob. Everyone, we appreciate your participation on the second-quarter conference call. 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 March 9 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 we sent out earlier today. As Rob said, this concludes our call, so thank you and have a good week.