Astec Industries Inc (ASTE) 2016 Q3 法說會逐字稿

Greetings and welcome to Astec Industries third quarter 2016 earnings call. (Operator Instructions). And as a reminder this conference is being recorded. I would now like to turn the conference over to Steve Anderson. Thank you. You may begin.

Thank you, Brenda. Good morning and welcome to the Astec Industries call for the third quarter that ended September 30. My name is Steve Anderson, as Brenda noted, and I'm the 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, the Executive Vice President and Chief Operating Officer; and David Silvious, our Chief Financial Officer. In just a moment, I'll turn the call over to David to summarize our financial results and then to Ben to review our business activity during the third quarter.

Before I begin, I'll 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'll turn the call over to David to summarize our third-quarter results. David?

All right. Thanks, Steve. Good morning, everybody. Glad you are with us this morning. Our net sales for the quarter were $247.8 million compared to $211.4 million in Q3 of 2015. That's a 17.2% increase in sales or $36.4 million increase. International sales were $47.9 million in the quarter compared to $55 million last year in Q3. That's a decrease of 12.9% or $7.1 million decrease in international sales. International sales represented 19.3% of this year's Q3 sales compared to 26% of last year's Q3 sales.

The decrease in international sales for the third quarter compared to the same quarter last year occurred primarily in Canada, in Africa, and in South America. These decreases were offset by some increases in Australia, Central America, and in the West Indies. Domestic sales for the third quarter were $199.9 million compared to $156.3 million in Q3 2015, for an increase of 27.9% or $43.6 million increase in domestic sales. Those domestic sales were 80.7% of our Q3 2016 sales compared to 74% for Q3 of last year.

Parts sales for the third quarter were $63.1 million compared to $62 million for Q3 of 2015. That's an increase of 1.8% or $1.1 million increase in parts sales. Those parts sales were 25.5% of our Q3 quarterly sales compared to 29.3% for Q3 of 2015. For the quarter, parts sales increased in the energy group and in the infrastructure group and decreased in the ag and mining group.

Foreign exchange translation on sales had a negative impact of $2 million, and that is if rates this year were the same as rates last year sales would have comparatively been $2 million higher. Net sales year to date were $820.9 million compared to $768.1 million for the first nine months of last year. That's a 6.9% increase or $52.8 million increase. International sales for that period this year were $144.6 million compared to $206.1 million for the first nine months last year. That's a 29.8% decrease or $61.5 million decrease.

The decrease on a year-to-date basis year-over-year was primarily in Canada, Africa, the Middle East, South America, and in Europe. Those decreases were offset by some small increases in Southeast Asia and in China. International sales represented 17.6% of net sales for the year-to-date period this year compared to 26.8% for the year-to-date period in 2015. For the year, international sales decreased in each of our groups.

Domestic sales were $676.3 million compared to $562 million for the first nine months last year, an increase of $114.3 million or 20.3%. Year-to-date those domestic sales are 82.4% of 2016's year-to-date sales compared to 73.2% of year-to-date sales in 2015. Parts sales for the year-to-date period were $201 million compared to $202.5 million in the prior year. That is a decrease of 0.8% or a $1.5 million decrease in parts sales year-over-year. Parts sales for the year-to-date 2016 period were 24.5% of total sales compared to 26.4% of total sales for the year-to-date period in 2015.

The foreign exchange translation again had a negative impact on sales for 2016 of $9.5 million. That is, that if rates were the same this year compared to last year, sales would have been comparatively $9.5 million higher. Gross profit for the quarter was $55.4 million compared to $45.1 million in the third quarter of 2015, a 22.7% increase, or $10.3 million increase. Gross profit percentage was 22.4% for the third quarter compared to 21.4% in Q3 of 2015.

Our absorption variance for the third quarter of this year was $6 million of unabsorbed overhead. That compares to $5.4 million of unabsorbed overhead in the third quarter last year, so we did have a negative change in absorption variance of about $600,000 quarter-over-quarter.

Gross profit on a year to date basis was $200.8 million compared to $173.4 million. That's a $27.4 million increase or a 15.8% increase. Gross profit percentage as a result was 24.5% for this year-to-date period compared to 22.6% for year-to-date 2015. The absorption variance on a year-to-date basis was $7.5 million of unabsorbed overhead compared to $9.9 million of unabsorbed overhead in 2015. That is a $2.4 million positive change in absorption variance year-to-date versus year-to-date.

SGA&E for the quarter was $44 million, or 17.7% of sales compared to $41 million, or 19.4% of sales in Q3 of 2015. That's a $3 million increase in dollar terms but a decrease of 170 basis points as a percent of sales. The primary drivers in there were -- in the increase were payroll and related expenses, some profit share expenses, and research and development. Those were offset by repairs and maintenance expense decrease -- remember, last year we had a major repair on an aircraft engine that we had to take, and we did not have that again this year.

For the year to date had $132.7 million of SGA&E or 16.2% of sales compared to $128.1 million of SGA&E in the prior year, or 16.7% of sales. That's a $4.6 million increase on a year-to-date basis or a 50 basis point decrease as a percent of sales on a year-to-date basis. Again, the primary drivers of the dollar increase were payroll and related expenses, profit share expenses, and we had exhibit expenses earlier in the year. We offset those increases with decreases in health insurance expense and again, as previously mentioned, the repair and maintenance expense that was incurred last year but not this year. We believe that the Q4 run rate for SGA&E will be in that $43 million range.

Operating income in the third quarter was $11.4 million compared to $4.1 million for Q3 of 2015. That's an increase of $7.3 million or a 178% increase in income from operations quarter-over-quarter. Year to date, operating income was $68.1 million compared to $45.3 million in the year-to-date period last year, an increase of $22.8 million or a 50.3% increase.

Interest expense, again, was $264,000 for the quarter compared to $505,000 last year and $1,057,000 for the year to date compared to $1,222,000 in the prior year. Remember that the primary driver of interest expense for us is currently the debt that we have in Brazil. We are financing their plant and their equipment and the inventory down there. Although the debt is down, down there, from 09/30 of 2015; it was $8 million last year at this time. It's down to $6.9 million this year.

Other income is $508,000 for the quarter compared to $844,000 last year and $1.4 million for the year-to-date compared to $3.2 million for the year-to-date period last year. The primary source of other income for us is license fee income and investment income at are captive insurance company. The year-to-date prior amount also includes key man life insurance proceeds of approximately $1.2 million.

The effective tax rate for the quarter was 41.5% compared to 52.5% in the prior year. And for the year is 37.6% compared to 38.8% for the year-to-date period last year. Now, the effective rates for the quarter and the year-to-date were impacted primarily by increasing a portion that's domestically in the high tax rate states, along with higher rates in those non-combined filing states. And we also had losses at certain subsidiaries for which the Company could not recognize a tax benefit. Those things contributed to the effective rates being higher than the statutory rates.

Net income attributable to controlling interest for the quarter was $6.8 million compared to $2.3 million in the third quarter last year. It's an increase of $4.5 million or a 195.7% increase in net income. Diluted earnings for the quarter was $0.30 compared to $0.10 in the same quarter last year, an increase of $0.20 or a 200% increase in EPS quarter-over-quarter. Year to date our net income was $42.8 million compared to $29.2 million in the year-to-date period last year, an increase of $13.6 million or 46.6% increase. And EPS for the year-to-date period is $1.85 compared to $1.26 in the same period last year, a $0.59 increase or 46.8% increase.

EBITDA for the quarter was $18.1 million compared to $10.8 million for the quarter last year, a $7.3 million or 68.2% increase. And for the year-to-date EBITDA is $87 million compared to $66.1 million for the year-to-date period last year, a $20.9 million increase, or 31.6% increase.

Our backlog at September 30 is $389.3 million compared to the September 30 last year of $251.8 million. Remember that the prior year backlog is adjusted for our acquisition of Power Flame, which occurred on August 1 of this year, so you do have a true apples-to-apples comparison there. That increase in backlog is $137.5 million or 54.6%. The international backlog this year is $63.7 million compared to $58.7 million at 09/30 of last year. That's an increase of $5 million or 8.6%.

Our domestic backlog this year is $325.6 million compared to $193.1 million at a 9/30 of last year, a $132.4 million increase or 68.6% increase. The 9/30 backlog of $389.3 million compares to the June 30 backlog of $364.5 million, so sequentially we're up $24.8 million or 6.8% up in backlog sequentially. The foreign currency translation impact on the backlog was minimal. It was about $900,000.

Our balance sheet remains very strong. Our receivables are at $111.8 million compared to $105.2 million this time last year, a $6.6 million increase. But our days outstanding are down. They are at 40.8 days outstanding compared to 45.9 last year. Our inventory is at $399.7 million compared to $384.5 million at this time last year, a $15.2 million increase. And are turns remain flat at about 2 turns this year and last year.

We own nothing on our $100 million domestic credit facility and we have $52.5 million in cash and cash equivalents on the balance sheet. Letters of credit outstanding are $15.2 million, leaving us borrowing availability of $84.8 million. Recall we previously mentioned we do have $6.9 million of debt currently in Brazil used to finance that company's building and fixtures and inventory.

Our capital expenditures for the quarter are $7.6 million and year to date we are at $19 million. And for 2016 we think we're going to end up around $23 million of CapEx. Our depreciation for the quarter was $5.2 million and our year-to-date depreciation is $15.5 million. And we believe that we'll end up 2016 somewhere in the $21 million range on depreciation. So that concludes my prepared remarks on the financials. I want to turn it back over to Steve Anderson.

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

Thank you, Steve, and thank you to everyone for joining us on our call today. As we commented in our earnings release this morning, we were pleased with our third quarter results. While the ever persistent headwinds of low yet stabilizing oil and natural gas prices, the global mining industry glut, and the strong US dollar continue to present challenges to us, we continue to secure and ship orders as a 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. We were also able to recognize $19 million in pellet plant revenue here in the quarter.

Our earnings per share for the quarter were $0.30 per share versus $0.10 per share in the same quarter last year, for an increase of 200%. Our third quarter sales were $247.7 million versus $211.4 million last year, for an increase of 17.2%. Our year-to-date sales were $820.8 million versus $768.1 million, for an increase of 6.9%. And again, as David mentioned, our year-to-date EBITDA was $87 million versus $66.1 million, for an increase of $20.9 million in EBITDA on a $52.7 million increase in sales.

EBITDA was up again this quarter as our companies maintained stronger gross margins versus last year. Our major product mix was fairly normal this quarter. Higher capacity utilization rates in the infrastructure group once again helped our gross margins. Our backlog at September 30 was $389.2 million, up 54.6% versus last year. Our backlog remains strong partially as a result of the $122.5 million pellet plant order we announced during the first quarter this year. 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 of the United States.

Our aggregate mining group backlog was down due to the global mining industry being slow and delayed core investments in the United States. We have seen improved domestic quote and order activity in this group since October 1, and we believe the Highway Bill will help this group as we move into next year.

Our energy group backlog was up slightly as products targeted at infrastructure customers gained some momentum and Power Flame's backlog joined the group as well. Domestic backlog was up 68.6% year-over-year and international backlog was up 8.6%. Our higher backlog in domestic was primarily due to the passage of the long-term Federal Highway Bill, good private-sector work levels for our infrastructure customers, and the pellet plant order that we just discussed a minute ago.

Regarding our increase in international backlog, we mentioned on our last call that we experienced slight improvement in international on a percentage basis during the second quarter. Given that our backlog in international was up for the first time in a long while versus the prior year's quarter, we are encouraged to say that we have seen a slight improvement once again.

Our increase in backlog in international was a direct result of pent-up demand and our team executing where we could for orders. Despite our gains internationally, the strong US dollar remains a significant headwind for our export efforts from the United States-based operations. International backlog remains down historically, primarily due to the strength of the dollar, low oil and natural gas prices, and the global mining slowdown.

Our Astec do Brasil facility continues to experience everything you read about Brazil with regards to slow economic times. We are committed to this facility for the long-term and we will be in good position when conditions improve in Brazil. However, in the meantime, we continue to pursue work for this facility in countries that surround Brazil. We are maintaining our international effort despite the challenges presented to us by the strong dollar and depressed mining industries in our key markets. While we are keeping our long view with regards to international, we do see a strong US dollar, flat oil prices, and flat mining conditions remaining in place for the foreseeable future.

Changing subjects to the Hazlehurst, Georgia, pellet plant that we have discussed on several calls, as a continuing reminder, it was a new product that we chose to finance. 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 reminder, the interest rate on the note is 6%.

We were pleased to report a $122.5 million pellet plant order during the first quarter this year. 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. As we mentioned on our last call, our plan is to recognize the $122.5 million order as follows: in the second quarter, about $20 million; and it ended up at about $18 million. In the third quarter, about $20 million; and it ended up about $19 million. And in the fourth quarter, about $35 million, for a total for approximately $105 million in 2016, with the balance of the order being recognized in 2017 in the range of $45 million to $50 million. That's the site work, installation, and startup. I was able to visit the Highland site a few weeks ago and I'm happy to report that the site looked great and the project is on schedule. We anticipate starting line 1 in November.

Updating our current pellet plant quote activity, we do have ongoing quote activity for new projects and we believe that we will add a new large order late this year or early next year for delivery in 2017. We believe the order will be in the range of $50 million rather than the $80 million we mentioned on our last call. We are also working on new projects that are in the $100 million range each.

Based on what we know today, we project that our pellet plant revenues will be in the range of $100 million to $125 million in 2017. This includes the remaining $45 million to $50 million that we anticipate from the Highland Pellets project. This projection does not include the $60 million Hazlehurst Wood pellet plant. Assuming we are paid on Hazlehurst in 2017, it would be in addition to our projection. However, as mentioned on prior calls, we would only breakeven on the revenue. As a reminder, these deals are long and complicated to get across the line. While we are optimistic that a new project will happen in the time frame mentioned, it could always be longer than we anticipate.

Changing subjects to the energy group, we remain extremely challenged in our drilling and pumping equipment sales activity. We continue to increase our street broom equipment line production in Enid, Oklahoma, at our most effective facility in the energy group. The line remains a Roadtec brand name line and it is sold and serviced by Roadtec.

We have slightly offset sales challenges in heaters for oil and natural gas industries with sales of asphalt terminal systems during the quarter. Sales of wood chippers and grinders remained consistent during the quarter. At our concrete plants that are built in the energy group, we have very good quoting activity.

We mentioned on our last call that we had our first ready-mix concrete plant set up on our yard, CI and testing, which brought us to two of nine planned concrete plant models completed. As a reminder, we named this new plan the Fusion plant. We are pleased to announce that we have sold this plant. We remain optimistic on our outlook in our energy group in the long term. However, barring an unexpected change in some of the key markets we serve, we will be challenged in this group overall for the rest of this year and at least during the first half of 2017.

Our new product development continues in all groups. In addition to our energy group's new Fusion plant that we have sold, our aggregate and mining group completed the engineering and manufacture of a new flexible production modular crushing system. Jointly designed by our JCI and KPI subsidiaries, this new system will have the flexibility to provide cone crushers for 200, 300, or 400 tons per hour production rates, while being able to be easily shipped in standard shipping containers. We are happy to report that this system was not only built during the third quarter, it was also just sold.

Regarding new products, the CONEXPO trade show starts just 133 days from today. We spent around $4.2 million on the prior CONEXPO, and expect to be in that range for the upcoming CONEXPO. We have been working on a new product for the show which was slightly increase our R&D for the balance of this year and into the first quarter 2017.

Looking ahead to the fourth quarter of this year, 2016, we are encouraged by our backlog, our domestic sales outlook, and are strong infrastructure group sales activity. Given these encouraging signs, we believe that our fourth quarter this year will be better than our fourth quarter last year.

Our current revenue outlook for the full year 2016 is up between 6% and 9% versus last year, with improved bottom-line performance. As a reminder, our revenues are up 6.9% year to date versus last year and our profit is up 47.1%. While our infrastructure group is performing very well, we are cautiously optimistic on our outlook for aggregate mining group and cautious on our outlook for the energy group, with the main headwinds for this group being very real and very persistent.

From our last earnings release until now, orders have been good in the infrastructure group mainly due to the Highway Bill. Orders are slightly better internationally. However, not strong internationally, mainly due to the strong US dollar and mining slowdown. Energy group orders are soft for products targeted at the oil and gas industry but improved for products targeted at the infrastructure customers. Aggregate and mining group orders are soft for the products targeted at the mining industries.

Bright spots for activity are hot-mix asphalt equipment sales, asphalt plants and mobile tech equipment, concrete plant quoting activity, wood plant quoting activity, wood chippers and grinders, and international quote activity despite the strong dollar. For competitive reasons, we will not be indicating the regions of activity. However, we do feel a responsibility to indicate that our quote levels have increased internationally.

Year-to-date parts sales were down by just under 1% versus last year and were 24.5% of sales versus 26.4% of sales in 2015. This represents an improvement from last quarter's result. We remain committed to improving our parts sales volume in the long-term, along with working to increase competitive parts sales and service sales. We continue to see results of our Lean effort helping us be a better company and we continue to focus on our gross margins. These efforts played a part in our gross margins increasing quarter-over-quarter.

The majority of our customers in the United States are experiencing a stable private market and we are focused in selling existing and new products. Given the headwinds we are facing, we are working to manage the business in the market conditions where the business warrants. To that end, we did have staff and/or work hour reductions at our most affected divisions during the quarter. As most of you know, we were pleased to announce on July 7 that we signed the agreement to purchase Power Flame, Incorporated for $43 million, subject to final due diligence and any adjustments, if necessary. As we announced, this deal closed on August 1 and they were accretive to us during the quarter.

Power Flame engineers, sells, 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 revenue in 2017. They are a market share and technology leader in each segment that they serve. Our Heatec and CEI subsidiaries do buy approximately 200 burners per year from them for their thermal hot oil heaters. However, we are not large customers for them, as they build thousands of burners per year.

They specialize in burners from 400,000 BTU to 25 million BTU, but have built up to over 100 million BTU burners. Our Astec subsidiary builds burners from 20 million BTUs to 150 million BTU, so we believe we have good opportunities for technology transfer between the divisions particularly on our controls side. We believe that Power Flame has very good technology for low emission burners that we can learn from at Astec. And we believe that we can help Power Flame with our corporate purchasing agreement and benchmarking with our other subsidiaries.

And we've already found purchasing benefits, not only Astec helping Power Flame, but Power Flame helping Astec. We were pleased that Bill Wiener remained with the company as President. As a reminder, Power Flame retained its name and its location and they have joined our energy group reporting group. In our full-year revenue outlook of up between 6% and 9% versus last year, we have included the anticipated revenue addition from Power Flame this year.

With regards to the energy group, we were proud to add a new group President of the energy group during the quarter. His name is Jaco van der Merwe. Jaco comes to us from Atlas Copco. Jaco was with Atlas Copco for over 18 years in progressive roles that included some global responsibilities. Rick Dorris, our COO, was previously providing oversight of the energy group in addition to his role as COO. The addition of the Jaco to our team will free Rick up to fully focus on his COO duties.

Peeking ahead to 2017, we are optimistic with regards to our infrastructure bridge outlook on infrastructure related equipment. We are cautiously optimistic on wood pellet plants in this group. We believe our aggregate mining group will be up slightly next year and we believe that our energy group will improve on the bottom line in 2017, despite the challenges we face. Taking all that together, we will have the opportunity to successfully grow and operationally improve our Company for the fourth year in a row in 2017.

In closing, 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'll now turn it over to Steve Anderson.

All right. Thank you, Ben. Brenda, if you'd open the queue we'll be glad to take questions.

(Operator Instructions). Stanley Elliott, Stifel.

A quick question. Could you talk about the cadence in the deceleration sequentially in the infrastructure group from 2Q to 3Q? Is all of that your typical seasonality? Is some of that the wood pellets coming out? Just help us reconcile that move. And then along those lines, you had mentioned the negative variance on the absorption in the quarter. If you could throw that in there, too.

Hi, Stanley. This is Ben. On the volume side, the third quarter for us is always -- I hate to say hand-to-hand combat, but it sure feels like that. And then you have some that don't make it across the line. Like, if you have terms of over the rail for international shipping, for instance. We had one that was over the rail but the ship wasn't disconnected from the port. So, sometimes we run into that, and the third quarter is always a bear. Although I would say that it sure feels a lot better this third quarter than the last two third quarters, because we were really, really struggling in the last two third quarters. So it feels a lot better, but yes, we had a few with those this time.

Stan, on the unabsorbed overhead piece of that, the increase there occurred primarily in the ag and mining group. There was a little bit of a slow down there, primarily related to mining. It was not necessarily on the ag side but mostly related to the mining side.

And then could you give us an update on the capacity expansion that you all had put out? Was that -- happened this quarter? Or was that going to happen in November? If you could refresh my memory with that.

Yes, this is Ben again. We originally planned to be fully operating in the middle of October. We are building some equipment in the new bay at Astec, Inc. but it's not fully operational; that's probably a couple of weeks away. Quicker if we get lucky, but the building is finished. It looks great but we need more iron in there.

And then lastly, you mentioned the Hazlehurst piece. And you threw out the word, assumed, that it would get paid for in 2017. Is that really a question or was it really more just a timing as to when we can expect that revenue to fall into 2017?

Well, I used a bad words there. I feel like we're getting paid in 2017. I just didn't fit it in the projection because there's not profit in it. And I was afraid it would fit in that big projection, if we had margin in it as people ran their models, we would all get tangled up. It's really -- we get paid, but there's not really profit in it. It's not a loss, either; we are maintaining it at a breakeven.

So we'll be at a breakeven level into next year? Great. Thanks, guys. Best of luck.

Mig Dobre, Baird.

Yes. Good morning, guys. I want to maybe go back to Stanley's first point in the infrastructure group about the sequential revenue decline. And if I'm looking sequentially what happens here seasonally, you do have a decline, but it seems like this year is a little more pronounced than what I've seen in prior years. Even though it doesn't look like you had that big of a shift from the second to the third quarter in terms of realized revenues on the wood pellet plants. So my question is this: do you have capacity constraints at this point, and that's what's causing this sequential revenue movement, or is there something else?

Hey, Nate, this is Ben. No, we're okay on capacity. I think the other thing that -- thinking about the question some more. Australia and Germany are in that group as well, and they did not have great quarters, and I think that affected it a little, bit. And that's more US dollar related. Although I would tell you we've got a little bit of a heartbeat in Australia, which is great, and Germany has got a few things going. So they're in the right place; just hoping we can get some of these things across the line very soon.

Okay. Well, then maybe I can ask this differently. In terms of your capacity utilization within this group, where are you now versus -- I don't know what you would consider normal -- and this addition of a new production bay. What does that do exactly for your capacity going forward?

So, in the infrastructure group on the asphalt plant side, we're running 80% to 85%. Probably the same on the mobile equipment side. And we have moved some of that production for delivery issues to our GEFCO facility. We've built some asphalt equipment there. But we've lost, to my knowledge -- and I was -- had breakfast with some of our sales guys. We got them in here today for some training. We've lost one plant on pure delivery reasons and that was to a nontraditional Astec customer.

If we had delivery 50-50 we could have gotten it. Now, it could be a challenge to us in the next few months, but we've got to get it to stay open. We've got to have -- we can do some shift work at one of our facilities to help that. And we are adding people in Chattanooga, and we are able to get people. It's taking a little bit longer, but the people that we're getting are good people. So, we feel okay about ability to deliver in this market.

Okay. And then, I don't know -- maybe coming out of the last call, last quarter, my understanding was that you guys were really thinking here in the infrastructure business that you are going to have the back half revenue and margin -- largely gross margin, that is largely similar to the front half. Now, maybe I misunderstood the way you tried to communicate that, but when I'm looking at the third quarter and the way you are talking about the fourth quarter, there seems to be a bit of a delta here. And I'm trying to reconcile that in the back of my mind, like what is different versus what you originally expected? And how do we think about gross margin in infrastructure going forward?

Well, I think gross margin in the fourth quarter, we'll have more pellet plant volume. As we build more lines we're getting better at those margins, so they're now on the high side of our normal margin. So I think you can think of those gross margins in the infrastructure group in the range of what we saw earlier this year in the fourth quarter.

And in terms of revenue out of your backlog, because we're talking -- call it almost $90 million worth of backlog -- what's your visibility as to what you are able to convert in the fourth quarter?

Well, we don't give revenue guidance on that. So I would just say that we feel pretty good about having a good fourth quarter.

But -- this is my last question. I'm asking this because I think, if you look at this quarter, this is where the big variance was. And I'm trying to make sure that we all have our models straight for the fourth quarter, given what's coming out of your backlog. Can you help us of all as to fourth quarter versus the first half or versus the third quarter, however you want to put it?

Mig, we just don't give revenue guidance. I'm not sure we can really answer. I would love to tell you what we think our sales and net income and gross margin exactly would be, but we just don't give that guidance. It should be better than last year's fourth quarter.

Okay. Well, it was worth a try. Thank you.

Mike Shlisky, Seaport Global.

Good morning. This is Jordan Bender on for Mike Shlisky this morning. My first question is that your cash levels remain quite high even after the Power Flame deal. You mentioned in your prepared remarks you are working on acquisitions, but could you give us an update on any potential cash used through the first half of the year? Thanks.

This is Ben. We're active on the acquisition front and we would like to use cash toward acquisitions that are in what we do. So, we're -- energy, aggregate mining, and infrastructure industries. If that's our city, I've always said we want to stay in our metro area. And that everything that we're looking at is in that. And we're not looking to load up on a lot of debt. We're not going to bet the house on anything, but there are opportunities for us. And it's interesting how that works. We've looked at a lot that we haven't moved on, but we want to have a cultural fit with whatever we do. And so we're active on that. So we would pull the trigger for the right one.

Got it. I'm going to throw one more in here. Could you comment on the upcoming election cycle without giving us any type of endorsement either way? Could you maybe give us your thoughts on what a presidency and Congress with the same party controlling both sides -- if that were to happen, either party, what would it mean for potential increases to infrastructure and highway spending?

Sure. Both candidates seem to be good for infrastructure. Hillary Clinton is on the record at $275 billion over five years, and Donald Trump has had $500 billion with really no time frame tied to it. So while getting into politics -- I'd love to, but we won't -- but they both sound good for infrastructure. And infrastructure, when you look at stimulus -- every President seems to want a stimulus package in their first year. There's not a whole lot to go into that well and pull out for stimulus, so thankfully infrastructure is usually bipartisan. So we feel good that either one of them, even at discounted numbers on top of the current Highway Bill, would be good for us.

And I would only add to that, thank goodness we have a Highway Bill in place while all this craziness in the election is going on. And I think if it wasn't, it would be a total lockdown for our customers. So we've been very fortunate to have a Highway Bill in place while these two candidates really embarrass us all globally. So, that's what I'd say about that. They both sound pretty good, even at a discounted number after it gets through the Congress.

All right. I appreciate the color.

Nick Coppola, Thompson Research.

So, I just wanted to ask about how the FAST Act has been flowing through your business. And so it sounds like the aggregate side of aggregate and mining has seen a longer lag than, say, asphalt plants in the infrastructure group. Maybe you can help us think about that and your expectations for quarry type equipment as dollars turn into construction projects.

Sure, Nick. This is Ben. I think part of the weakness that we identified earlier on the aggregate group, a lot of that was at Telsmith, who traditionally focuses on the big quarry projects. And those just didn't come out of the gate as strong as the other on-site crushing and open pit type crushing. But they picked up. They got some work and we think that's a result of the highway money coming through the system. It always takes a little while for that money to come through the system.

And I've been staying in touch with customers, and last week I was with a few of them, and they're not sure the private wasn't really what was pushing it. Now they're seeing the state money coming through on the ones that I was with. So I think it's just been a delayed reaction. But based on the quote activity and the sales activity at Telsmith, we think that is starting to show up.

And then on the asphalt side, how would you characterize the impact? It sounds like that's already --.

I do think it affected the buying decisions earlier than it did on the quarry side. Because we've just seen pretty consistent activity there and better activity through the summer than normal, when they're working. We talked about when it first started, we thought there would be a two month run when there was a bill signed, and then maybe a lull as people figured out what was happening. And then it would kind of kick back in for maybe two or three years. And what we saw was is that we had the two months run and then it stayed fairly -- it just stayed better through the summer as far as activity. And so now we're in the buying season and there's quite a bit of activity.

Wayne Pinsent, Gabelli Funds.

Congrats on the fabulous gross margin in the quarter. And you touched on infrastructure gross margin earlier, but could you tell any expectations of where overall margins could end up in the current quarter versus 3Q?

Wayne, this is Ben. It should be better. We've got good utilization and we've got a little more work to cover up some hours in aggregate group. When we started this with the Highway Bill and looking back historically, in the 25% to 26% range was the high side. I guess we pushed 26% on the high side. And I think we can get back in that range during this cycle. And we already went over it when we were really, really loaded up and things just kind of hit. But I think 25% to 26% in this two- to three-year cycle is a target we need to be trying to hit as we add this volume.

And do you have any anticipation of when you would hit the high side of the cycle?

Well, you know, we've touched it. We've already been in the 26% range as we started. We've got a Highway Bill in place that is going to help our business, we believe, for 2 to 3 years. And if we can get oil and gas to come back a little bit and mining to come back just a little bit, we have an opportunity to maintain that a little bit here for a couple-three years.

All right. Thank you very much.

Mig Dobre, Baird.

Yes, thanks for taking my follow-up. Just a cleanup question on energy: can you remind us what the Power Flame contribution to revenue in orders were in the quarter.

The revenue for the quarter was in the $5 million to $6 million range. We bought them August 1, recall that. And then from a backlog standpoint, the contribution to backlog was -- I've got that right here, somewhere. No I don't. Sorry. Let me look that up for you quickly, Mig. I've got it right here.

If need be we can follow up off-line on that, and that's fine.

Yes, let's do that. It's -- okay, no, it's right here, Mig. Yes, $3.5 million.

In backlog?

At September 30 of this year. And in the backlog last year, just so you know, it was $6 million. Because we did adjust prior year's backlog, so recall that.

Got you. And I'm sorry, the $3.5 million versus the $6 million; I'm trying to equate that. Is that their own backlog declining to that extent? Or is it that your recognizing a partial quarter or something like that? I'm -- how do I reconcile those two numbers?

No, those were orders in place at the end of the month.

Got it. Okay, okay. And then last question: I know we talked about this a little bit in the past, but I'm wondering if you can give us an update on raw material costs. Steel prices have been volatile. At what point do you start to see some impact from higher steel prices? Is it a fourth quarter, is it next year?

Hey, Mig, it's Ben. The last quarter we were getting indications that the steel mills and all their suppliers wanted 12% to 15%. And we saw some steel pricing increase at a couple of divisions, and it affected them slightly, but not much. Really they haven't been able to get the increase. And we have had a couple of notices actually today, of people trying again.

But we're doing a little buying ahead now. Hedge -- using the word hedge is the wrong word; we're doing more longer-term buy-ins right now. It's still relatively pretty good. (multiple speakers) That being said, we've met with all our presidents in person the last week of August and absolutely harped on watching costs in steel and pricing. Because if that moves on us, as everybody knows, that's a big deal. So our presidents, we are on top of it.

But should I understand that this is not really a concern for you or a material headwind to margin going forward?

Not right now, not for us.

Okay. Thank you.

Brian Rafn, Morgan Dempsey.

Yes, give me a sense -- you talked a little bit, Ben, about the pent-up demand with some of the road builders. Can you put any more flavor in demand, say, from a national design/build contractor versus maybe sales? How robust sales are at the regional or local level with some of the smaller contractors?

Sure, Brian. It's an interesting question because I'm just lucky because I asked that question last week. And what it is -- in the asphalt plant side, over 95% of what's happened with our orders since December 1 of last year has been privately held companies. So that means that most of our business with the larger, bigger contractor companies is probably still yet to come. And I have spent time personally with some leadership of those public companies and they are anticipating increased CapEx next year at a rate higher than depreciation.

But we have -- and we're starting to see that quote activity, but they have not pulled the trigger. Of course, they are just at the end of their budget process, but the private companies pulled the trigger quicker than the public companies when the Bill was signed.

Yes, okay. And what do you see -- you mentioned asphalt plants, but what are you seeing on the mobile equipment side? Same trend?

Same trends. Same trends.

Okay. How much -- you talked a little bit about the strong dollar being obviously an impairment to export; in maybe the asphalt hot mix or some of the mobile highway roadbuilding equipment, how much of a competition do you have from foreigners coming in and selling parts? Obviously, time-to-market, service/supply, repair parts, customer service -- that's real important. Probably a little tougher to do that from Europe for a US domestic, but how much does the import compete against you guys?

Not so much on the parts side, but on the major equipment side right now it's a good fight on deals where they are involved. On the parts side, we're finding we're regaining a little market share on supporting their equipment once they get it here, if they lose the deal. We're seeing that not just in the US; we're seeing that in other countries.

Yes. How price-elastic, Ben, are -- as you said, we've got a pent-up demand. You guys expect a little lull. It's been pretty steady. How much price discipline is in there?

I made the comment last call, I remember putting my thumb and my index finger together and just barely pulling them apart and looking through. And it's maybe just a little bit further away from the thumb, but it's not much. And it's really because all of the people that we deal with are shrewd buyers, and it's rare that we are ever alone. And all of our competitors are working like mad to get the deals, too. So I think our guys have really done a nice job, given it's competitive as every deal really is. But we're doing a little bit better at that but it's not a lot.

Okay, all right. And then on the pellet plant side, as you guys begin building that up as an ongoing business, what kind of ongoing parts/repair might be service for that business?

It would be similar to the asphalt plants as far as the percentage. So I don't see it necessarily moving our needle on a percentage basis of parts/sales annually, but the more we can get out there it will grow volume. And so, the top line hopefully keeps moving with it as we sell more pellet plants, too. But I see the parts business as being fairly similar.

Yes. Ben, on the parts side, as you have the pent-up demand, new equipment is obviously out in the field, specifically on the mobile highway side. Do you see parts sales maybe plateauing for a while as you're not grinding through used equipment? Or because there's a bigger infield installation of just sheer numbers, do you see parts going along with that?

I feel like we can still increase our parts sales. But partially what you're saying is true, because when new equipment is out there it just takes less parts. But the other thing that we can work toward is supporting competitors' equipment that don't do as good a job on parts in the field, and service sales, too, which would show up in the parts.

So I still think, even though to your point, the newer equipment will take less parts, I think there's still an opportunity in service and support of other brands' parts, because it's just hard to get people. And we think there's an opportunity in service sales as well that will help our parts side. There's actually probably better margin in the added service.

Okay, okay. And then you guys mentioned the new products; anything specifically that you're willing to comment on for CONEXPO 2017?

Boy, oh, boy. Very excited about CONEXPO. Excited about the number of new products that we're going to have on the floor. Gosh, I think for competitive reasons, if we can someone to ask that in the February call we'd be happy to say. But I think they've got long enough to react (laughter). I hate to not to, but I can say this: we will have more new products on the floor at this CONEXPO than we had three years ago.

Okay, and then just one final one. You talked a little bit about capacity utilization, I think, at the asphalt hot-mix and some of the mobile. What would be your -- obviously the worst areas, what might be your toughest -- I'm sure it's in mining and that, or energy; what might be the lowest-level capacity utilization you might have?

Well, our GEFCO facility in Enid, Oklahoma, is our number one challenge. And their utilization -- Rick Dorris, our COO, is here -- is very low. It's almost embarrassingly low. So, that's why we're moving street broom production there from Roadtec as they're -- that could free up room for more mills and pavers to be built. We've done -- it's our overload shop, so we're trying to ask everybody do not outsource; let's insource if you need capacity, so we're just trying everything we can to get man-hours through there.

The good news is, Jaco van der Merwe, who I mentioned on the comments, our new group President of Energy, came from Atlas Copco. And his last assignment with them was in the drilling business in Texas, although he's worked all over the world. He is a native of South Africa. But he has a good vision -- visibility into that market, and the products, and I think he's going to help them. It won't be an immediate effect, but I think 6 to 10 months from now, I think we could be in a much better position in Enid, Oklahoma.

All right, guys. Hey, congratulations. Great quarter.

Thank you. We've reached the end of our question-and-answer session. I would like to turn the floor back to management for any closing comments.

All right. Thank you, Brenda. We appreciate your participation on this third-quarter conference call and thank you for your interest in Astec. As today's news release indicates, the conference call has been recorded. A replay of this conference call will be available through November 8, 2016, and an archived current 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.

This concludes our call. Again, thank you and have a good week.