Astec Industries Inc (ASTE) 2016 Q4 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 your host Mr. Steve Anderson VP, Director of IR for Astec Industries. Thank you. You may begin.

Thank you, Melissa and good morning welcome to the Astec Industries conference call for the fourth quarter and fiscal year that ended December 31, 2016. As Melissa mentioned, I'm Steve Anderson, VP of Administration and Director of Investor Relations for the Company. Also on today's call are Benjamin G. Brock our President and Chief Executive Officer, Richard Dorris, Executive Vice President and Chief Operating Officer and David Silvious, our Chief Financial Officer.

In just a minute I will turn the call over to David to summarize our financial results and then to Ben to review our business activity during the fourth quarter. Before we 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. Factors that could influence our results are highlighted in today's financial news release and others are contained in our annual report and our filings with the SEC. As usual, we ask that you familiarize yourself with those factors.

At this point, I'll turn the call over to David to summarize our financial results for the fourth quarter and the full year of 2016. David?

All right, thanks, Steve. Good morning, everyone. Thanks for joining us this morning. Net sales for the quarter were $326.6 million compared to $215 million in Q4 of last year. That's a 51.9% increase or $111.6 million increase in sales. International sales were $61.6 million compared to $54.7 million in Q4 last year. 12.6% increase or $6.9 million increase. International sales represented 18.9% of Q4 sales this year compared to 25.5% of Q4 2015 sales. The increase in international sales quarter-over-quarter occurred primarily in Mexico and Japan and in Australia.

These increases were offset by decreases in the Middle East, in Africa and in Russia. Domestic sales for the quarter were $265 million compared to $160.3 million in Q4 of 2015, an increase of 65.3% or $104.7 million increase. Domestic sales were 81.1% of Q4 2016 sales compared to $74.5% of Q4 2015 sales. Part sales for Q4 2016 were flat at $62.5 million compared to 62.6 million in Q4 2015. That makes part sales 19.1% of quarterly sales in 2016 versus 29.1% in Q4 of 2015. For the quarter part sales increased in the infrastructure group and decreased in the Ag and mining group and in the energy group.

Our fourth quarter revenues were boosted by the recognition of higher than expected pellet plant revenues based on where we are in the delivery and in the construction schedule on that project. Foreign exchange translation has a negative impact on sales for the quarter of $600,000. That is if the rates this year were equal to last year's rates in the fourth quarter, sales would have been $600,000 higher. On a year-to-date basis, sales were $1.147 billion. That compares to $983.2 million in the last year of 2015. That's an increase of 16.7% or $164.2 million increase in sales year-over-year.

International sales were $202.6 million for the year compared to $260.9 million in 2015. That's a decrease of 21% or $54.7 million decrease in international sales year-over-year. The decrease in international sales year-over-year occurred primarily in Canada, the Middle East and in Africa and those decreases were offset by increases in Japan and Mexico for the year. International sales were 18% of net sales in 2016 compared to 26.5% in 2015. For the year, international sales decreased in each of our groups. Domestic sales year-to-date were $941.3 million compared to $722.3 million for 2015, a $219 million or 30.3% increase.

Domestic sales were 82% of 2016 sales compared to 73.5% of 2015 sales. Part sales year-to-date were $263.5 million compared to $265.1 million in 2015. That is a decrease of a little less than 1% or 1.6 million decrease. Part sales were 23% of total sales in 2016 compared to 27% of sales in 2015. Again the foreign exchange translation had a negative impact on sales for 2016 of $10.1 million. That is if the rates this year were equal to last year's rates, the sales would have been $10.1 million higher. Gross profit for the quarter was $64.5 million compared to $45.4 million in Q4 2015, a 41.9% increase or $19.1 million increase. The gross profit percentage then for Q4 was 19.7% compared to 21.1% for Q4 of 2015.

The absorption variance was $9 million unabsorbed for the fourth quarter compared to $4.4 million unabsorbed as a negative change of $4.6 million. Foreign exchanges transaction gain or loss was a loss of $0.5 million in 2016 compared to a slight gain in Q4 2015. On a consolidated basis for the year, gross profit was $265.3 million compared to $218.8 million in 2015 a $46.5 million increase or 21.3% increase in gross profit dollars. That made the gross profit percentage in 2016, 23.1% compared to 22.3% for the full year of 2015. Our year-to-date absorption variance was $16.5 million underabsorbed compared to 14.3 million underabsorbed in 2015 as a 2.2 million negative change in the absorption variance.

Foreign exchanges transaction gains and loss for the year were flat. They were just under $1.0 million loss in 2016 and in 2015. SG&A for the quarter was $45.4 million or 13.9% of sales compared to $40.7 million or 18.9% of sales in Q4 of 2015. That is a $4.7 million increase or a decrease of 500 bases points when considered as a percentage of sales. The dollar increase was driven primarily by payroll and related expenses including profit share expenses, health insurance expense went up. Those increases were offset by a decrease in repairs and maintenance expense for the quarter. For the year, SG&A was $178.1 million or 15.5% are sales compared to $168.9 million or 17.2% of sales, an increase of $9.2 million or a decrease of 170 bases points as a percent of sales.

Payroll and related expenses drove some of that increase as well as profit share expense year-over-year, exhibit expense, you'll recall that we had Obama earlier in the year and we had decreases offsetting those increases during the year of health insurance expense and repairs and maintenance which were both down year-over-year. Operating income for the fourth quarter was $19.1 million compared to $4.7 million in Q4 of 2015, an increase of $14.4 million or 306.4% increase. For the year, operating income was $87.2 million compared to $50 million in the prior year, an increase of $37.2 million or 74.4%.

Other income was $63,000 for the fourth quarter compared to $1.2 million in the fourth quarter of last year. And was $1.5 million in the year compared to $4.4 million for the year of 2015. You'll recall that primary source of our other income is license fee income and investment income but our captive insurance company. The year-to-date prior year amount in 2015 also includes Key Man Life Insurance proceeds of approximately $1.2 million. The effective tax rate for the quarter wars 32.2% in 2016 compared to 36.1% in 2015 and for the year, the effective tax rate's 36.9% compared to 38.5% last year.

The effective rates for both the quarter and the year were favorably impacted by state tax jobs credits, federal and state R&D credits, increases in domestic production activity deduction and a decrease in our foreign subsidiaries losses for which the tax benefit could not be recognized. Net income attributable to controlling interest in the fourth quarter was $12.4 million compared to $3.6 million in Q4 of 2015. A $8.8 million or 244.4% increase. Diluted EPS for the quarter was $0.53 compared to $0.16 in Q4 of 2015. A $0.37 increase or 231.3% increase in diluted EPS.

Net income for the year was $55.2 million compared to $32.8 million for the full year of 2015, an increase of $22.4 million or 68.3% increase. And that made diluted EPS for the year $2.38 compared to $1.42 in the prior year, a $0.96 increase or 67.6% increase in diluted EPS. EBITDA for the fourth quarter was $25.6 million compared to $11.8 million in Q4 2015. That's a $13.8 million increase in EBITDA or 117.1% increase in EBITDA for the quarter. And for the year, EBITDA was $112.7 million compared to $78 million in the prior year of $34.7 million increase or 44.5% increase in EBITDA year-over-year.

Our backlog at December of 2016 is $357.4 million compared to $315.9 million at the end of 2015. And remember that we always adjust prior years when we have an acquisition to reflect the backlog of that acquisition. So you get a true apples to apples comparison. And we did have the acquisition of Power Flame in August 1, 2016. That's an increase of $41.5 million in December backlog compared to last year or a 13.1% increase. International backlog at the end of this year or end of 2016 was $62.6 million compared to $54.1 million at the end of 1231 of 2015 as an increase of $8.5 million or 15.6% increase in international backlog. Domestic backlog at the end of 2016 was $294.8 million compared to $261.8 million at the end of 2015, a $33 million or 12.6% increase. The December backlog of $357.4 million compared to the September 30, backlog as we previously released, was down $31.9 million or 8.2% sequentially. The January 2017 backlog is $386.3, that's a record high for our January month end.

$386.3 million, that's an increase of 9% over last January's backlog at the end of January restated for Power Flame as well. And an increase of 8% in sequentially over the December 2016 backlog. Foreign currency translation impact on the backlog compared to December of last year was a negative impact of $1.4 million. Some folks like to ask about the backlog without the various pellet plants in there, so the backlog without pellets at December of 2016 is $279.9 million compared to $229.6 million at the end of 2015. That's an increase of $50.3 million or 22% increase in backlog without pellet plants in there.

Our balance sheet continues to be very strong. Our receivables are at $110.7 million compared to $102 million at the end of last year and $8.7 million increase in receivables, however our days outstanding are down to 30-and-a-half days at the end of 2016 compared to 43.1 at the end of 2015. Our inventory's at $360.4 million compared to $384.8 million at the end of last year, a decrease of $24.4 million.

Making our turns in 2016, 2.3 inventory turns compared to a 2.0 inventory turns in 2015. We owe nothing on our $100 million domestic credit facility and we have at the end of 2016, $82.4 million in cash and cash equivalents. Our letters of credit outstanding are $8.9 million making our borrowing availability $91.1 million on that facility. Recall we have financed some of the construction, the building, the fixtures, the inventory in Brazil with debt in that country, and that debt is at $6.7 million at the end of 2016. Capital expenditure, to the fourth quarter were $8.4 million and for the year, CapEx was $27.4 million.

For 2017, we're looking at somewhere around $30 million in capital expenditures. Depreciation in the fourth quarter of 2016 was $5.3 million and for the year of 2016, depreciation was $20.8 million and for 2017, we're looking at around $23.5 million of depreciation. So that concludes my remarks on the financial details.

I'll turn it back over to Mr. Anderson.

All right. Thank you, David. Ben will now provide some comments regarding the fourth quarter of this year's operation and we'll offer some thoughts going forward. Ben?

Thank you, Steve. And thank you to everybody for joining us on our call today. Before going into my comments on the earnings release, I do want to take a minute to just say a word of thanks for our entire team at Astec for a very good year in 2016. . We ended the year with a record $1.15 billion in sales, a strong EBITDA of $112.7 million and a new record backlog at the end of the months of December and January.

That takes a total team effort to execute a very good year and we look forward to getting even better in 2017. As we commented in the earnings release this morning, we're pleased with our fourth quarter and our full year 2016 results. Our headwinds are still constant. The low yet stabilizing oil and natural gas prices, the global mining industry glut and the strong US dollar all continued to present challenges to us.

We continue to secure and ship orders as a result of the passage Federal Highway Bill in the United States which allowed us to earn a good result for the quarter and for the year in our traditional business areas. As David covered during his comments, we recognized a much larger than anticipated $70.6 million in pellet plant revenue during the quarter. Frankly we're just ahead of where we thought we were and it's a big project but I guess if you're going to be ahead, it's better than being behind. But $70.6 million in pellet plant revenue during the quarter.

Our earnings per share were $0.53 per share versus $0.16 per share in the fourth quarter of 2015, an increase of 231%. The sales in the fourth quarter were $326.6 million versus $215 million, an increase of 52%. Year-to-date sales as I mentioned were right at $1.15 billion versus $983 million last year, an increase of 17% and earnings per share at $2.38 per share for the year versus $1.42, an increase of 68%. And as mentioned our EBITDA was up to $112.7 million versus $77.7 million, an increase of $44.4%.

Again we mentioned our backlogs. Our January 31st backlog was a new January record at $386.3 million. Our infrastructure group continued good order intake during the quarter mainly as a result of the Federal Highway Bill in the US. Our aggregate mining group also saw increased backlog again mainly as a result of the Federal Highway Bill. Our energy group backlog was down slightly however we experienced good order intake in the group during January for products targeted at the construction industry and we also experienced a slightly increased quoting activity for our oil and gas drilling products.

Domestic backlog was up 13% year-over-year in international backlog was up 16%. Our higher backlog and domestic again was primarily due to the passage of the long-term Federal Highway Bill and good private sector work levels continued for our infrastructure customers. Regarding our increased international backlog, we continue to experience slight improvement in international quoting and sales. Our increase in backlog in internationals once again a direct result of pent up demand and our team (inaudible) where we could for orders.

One thing I would add to that is I did travel to Europe during-- already this year and the feedback is things seem to be getting better there as a whole. Despite our gains, internationally, the strong US dollar remains a significant headwinds for our export efforts. Our Astec do Brasil facility experienced a very, very slight increase in quoting activity in Brazil. However we believe that economic and political environment remains a challenge to us for at least the rest of this year in Brazil. We continue to pursue work for the facility in countries that surround Brazil. We're maintaining our international effort despite the challenge presented to us by the strong dollar and depressed mining industries in our key markets.

While we're keeping our long view with regards to international, we do see the strong 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 had discussed in several calls, and this is the first pellet plant that we built. Sometimes it gets a little confusing with Hazlehurst and Highland. This is the Hazlehurst, the first pellet plant. As a continuing reminder it was a new product that we chose to finance. As a result we're recognize the revenue for this plant as we are paid. This will have an effect on our cash and inventory until it's paid in full. In order for all three lines is for $60 million. In December we agreed with the partners of Hazlehurst to extend the loan term to final payment due at December 2018 in lieu of July 2017.

Given the fact that Hazlehurst has a good partner to help us get into the business, has allowed several potential customers including Highland Pellets, our second pellet plant we sold to visit the site for sales purposes we agreed to the extension. The main reason for the extension is it a temporary lull in wood pellet demand that is widely expected to recover this year. We now expect the final payment in December 2018 and as a reminder the interest on the rate-- the interest rate on note is 6%. With regards to Hazlehurst, please keep in mind that we're carrying it on our books is break even so its effect on us is only inventory and cash.

As a reminder from David's comment our cash at year end stood at 82.4 million versus $25.06 million last year so we also feel comfortable with the extension from Hazelhurst from a cash standpoint. The plant sits in our inventory at $60 million. As most of you on the call know today, we were pleased to be on schedule all year long during 2016 and our revenue recognition of our $122.5 million wood pellet plant order with Highland pellets. This was the $122.5 million portion of a total order of $152.5 million. As a reminder, our plan was to recognize the $122.5 million order as follows; In the second quarter, about $20 million it ended up about $18 million and the third quarter about $20 million and ended up at $19 million and the fourth quarter, we expected to recognize about $35 million for a total of about $105 million in 2016. And as mentioned earlier during David's comments and in mine, we ended up recognizing $70.6 million in the fourth quarter.

This leaves us with approximately $15 to $20 million that we expect to recognize on the highland pellet projects during 2017. Margin on the amount left to recognize a slightly below normal major equivalent margins as it is site work installation start-up-type work. Updating our current pellet plant activity, we do have ongoing quote activity for new projects and we anticipated that we would have an added new large order late last year, early next year for delivery in 2017. We do not have this order yet. We still believe an order will be coming in 2017, however the timing of it remains elusive to us.

Given what we know, we believe the next sizable order will come in the second half of this year. We're also working on other projects that are in the $75 million to $100 million range each that would not happen until late this year at the earliest. Based on what we know today, and because we are now ahead on the highland pellets revenue recognition, we project that our pellet plant revenues will be in the range of $40 to $50 million in 2017.

This includes the remaining $15 million to $20 million that we anticipate from the Highland pellets project. As we have said many times, wood pellet plant 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 always could be longer than we anticipate. Changing subjects to the energy group, we remain challenged in our drilling and pumping sales activity during the fourth quarter, however we have seen a slight increase in quote activity this year. We remain -- we continue to increase our street room equipment line production in Enid, Oklahoma which was our most effective facility in energy group and that line does remain a Roadtec brand name line and is sold and serviced by Roadtec. We offset sales challenges in heaters for oil and natural gas industries with sales of asphalt terminal systems and hot asphalt storage tanks during the quarter. Sales of wood chippers and grinders remain consistent during the fourth quarter.

Our concrete plants are built in the energy group and quoting activity is good for these plants however our sales of these concrete plants have not been where we would like them to be at this point. We remain optimistic on our outlook in the energy group in the long term, however barring an unexpected change in some of the markets we serve, we will be challenged in this group during 2017. Our new product development continues in all groups. Regarding new products, the CONEXPO trade show starts just 14 days from today. We spent around $4.2 million on the prior CONEXPO and we expect to be in that range for the upcoming CONEXPO. We have been working on new products for the show for some time and we're proud to announce that we will display 65 of our products at the show.

We're equally proud to announce that of the 65 products, 27 will be new products and an additional 22 products displayed will be improved products. So with 49 out of 65 products being new and/or improved, we're energized and excited about our opportunities at CONEXPO. Given the current industry economy, we expect attendance to be very strong at CONEXPO. Looking ahead to the first quarter of 2017, we are encouraged by our backlog, our domestic sales outlook and our strong infrastructure group sales activity. Given these encouraging signs, we believe that our first quarter 2017 revenue will be slightly ahead of our first quarter 2016 revenue.

With regards to our earnings in the first quarter 2017, as we mentioned in our earnings release this morning, we do have a larger than normal level of new products in our manufacturing plants this quarter. Which will temper our bottom line results to more in the range of our first quarter 2015 results rather than our first quarter 2016 results. While still a profitable bottom line and historically a good bottom line for us, it will feel more like a slight step back versus our first quarter 2016 result. These new products are good for our long-term outlook but they are also likely to affect our margins and our warranty costs in the first half of this year which will likely put our net income behind our 2016 performance at the end of the first half but ahead of our first half of 2015 performance.

Our current outlook for the full year of 2017 is revenue's up 5% to 10% versus last year with an improved net income for the year as a whole which indicates that we believe that we will have an improved third and fourth quarter in 2017 versus 2016. Our outlook for 2017 combined with our 2016 performance also indicates we believe that by the end of 2017, we will have grown our company sales in the range of 22% to 27% over the two-year period along with increased net income. This would represent strong growth and good performance in our industry segment.

Despite the gains, we still have opportunities to get even better and our focus will be on increasing gross margins again this year. Our infrastructure group is performing well and we are slightly more than cautiously optimistic on our outlook for the aggregate mining group. We remain cautious on our outlook for the energy group with the main headwinds for this group being very real and persistent. From our last earnings release to now orders have been good in the infrastructure group and improving in the aggregate mining group mainly due to the Highway Bill.

Orders were slightly better internationally however not strong internationally mainly due to the strength of the US dollar and the mining slow-down. Energy group orders are still soft for products targeted at the oil and gas industry with slightly increased quoting activity. Orders in the energy group are improved for products targeted at infrastructure customers. Aggregate mining group orders are soft for products targeted at the mining industry. Bright spots for activity are hot mix asphalt equipment sales including hot mix asphalt plants and mobile paving equipment, concrete plant quoting activity, and as I mentioned earlier we need to start selling activity. Wood pellet plant quoting activity, wood chippers and grinders and aggregate crushing and screening equipment quoting activity. And international quote activity despite the strong dollar.

For competitive reasons, we won't be indicating regions of activity, however we do feel a responsibility to indicate that our quote levels do remain slightly increased. As David mentioned, we did have sales increases in Japan and Mexico.

Year-to-date part sales were down by just under 1% versus last year and were 23% of total sales versus 27% of total sales in 2016. This basically represents a flat part sales versus last year, however our part sales activity picked up in January in the start of the year well ahead of last year's pace. We remain committed to improving our part sales volume in the long term along with working increase our competitive part sales and service sales. We slightly increased gross margin in 2016. Our focus will be to continue to increase gross margins during 2017.

The majority of our customers in the United States are experiencing a stable product market and we're focused on selling existing and new products. Peeking ahead to 2017, we are optimistic with regards to our infrastructure group's outlook on infrastructure-related equipment. We remain cautiously optimistic on wood pellet plants in the group and we believe our aggregate mining group will be up slightly next year and we believe our energy group will improve the bottom line in 2017 despite the challenges we face. Taking all of that together, we will have the opportunity to successfully grow and operationally improve our company for the fourth year in a row in 2017.

Acquisitions remain a key piece of our growth strategy along with organic growth. To that end we continue to work on potential additions to our Astec family. Given our current financial position overall, we do have the ability to execute a larger than historically normal acquisition however we will only do so if the acquisition is strategically aligned with the industries we serve. 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 back over to Steven Anderson.

Thank you, Ben. Melissa, if you would open up the Q & A, we would appreciate it.

(Operator instructions) Our first question comes from the line of MIG Dobre with Robert W Baird.

Congratulations on 2016. I guess, Ben, I really appreciated all the detail in terms of the puts and takes on the guidance. Maybe my question to kind of clarify things a little further. By my own math, you have gone close it $137 million of pellet plant revenue in 2016. You're saying that you're going to do $40 million to $50 million in 2017. You only have $15 to $20 million left in Highland. That would be in the backlog. I don't know if the remainder would be an additional order or if there's something else in the backlog that I need to be aware of. So that would be the first part of the question. And the second part would be, so when I'm looking at the headwind that you're going to have from pellet plants, 2016 versus 2017, it looks like about $92 million. Your guidance implies, call it $85 million worth of growth. So net-net we're looking at your core business excluding pellet plants increasing something to the tune of $180 million in 2017 versus 2016. How confident are you that the end markets are strong enough to support this kind of growth at this point in the year?

Mig, this is Ben. I'm confident enough to say I think we'll still be up 5% to 10% for the year. And, we had the national asphalt association meet this year and attended that and more than just a hello, we asked everybody to track how many people they talked to more than a passby, hi and I talked to over 70 customers during that week. I feel just pretty comfortable that that market that market's going to stay pretty strong this year. Aggregate has a pretty good heartbeat coming in with seeing the Highway Bill results and I still think we have an opportunity to get some pellet plant business, at least through the number we said and possibly more. But at least to the number we said. So taking those together with a slight heartbeat in international, that's where we came up with the 5% to10% number.

Well, I guess the thing that confuses me. I understand that we have a multi-year Highway Bill in place. Which in theory should have probably helped demand in 2016. But when I'm looking at the art bought construction project, when I'm looking at the contract on the highway contract, I'm for one not seeing a whole lot of growth out there. So I guess what I'm wondering here is, -- how sustainable is this growth because when I'm looking at your infrastructure orders, for instance, in the fourth quarter, to me they didn't seem like they've accelerated in any meaningful form.

Right. I think when you look at the Highway Bill, the 2016 numbers, $37.8 billion and the 2017 numbers, $39.7 billion, the 2018 $41.8 billion, goes to $42.3 and $ 43.4, that's the base line that our customers are looking at to go ahead and invest the capital and the equipment. And so the confidence level outside of the ARTBA number is I feel pretty good about replacing what I have or getting a new plant and that's what we're experiencing. So,-- you gotta have a little bit of a feel for what's going on and talking to the guys on the ground and that's just doing that and traveling and seeing customers and, going to Europe and talking to people and that's where we are. I mean that's how we feel about this year, sitting where we are today.

All right. Well, can you however confirm to me that you did recognize $137 million of wood pellet plant revenue in 2016 and headwind base on your guidance would be $92 million from wood pellets in 2017?

Yeah, it was about $135 million, Mig, this is David so you're right there on the number. That number's correct, yeah.

Okay. And the last question before I go back in the queue. Maybe a little more color on the gross margin in the fourth quarter in infrastructure specifically. I suspect that the reason why we're looking at sub 18% is because of the incremental pellet plant revenue that has been recognized in the quarter. Can you sort of confirm that that's what drove the year-over-year margin contraction and maybe a comment on how the core business is operating ex-pellet plants.

Hey, Mig, this is David. You're right. That additional revenue that was booked on the Highlands pellet plant was related primarily to construction. And that bears a much lower margin. A lot of that is subcontracted out and so it carries a much lower margin than equipment does and our traditional equipment margins. So you are correct. As far as the -- without that number in there, you would wind up in a much more traditional margin profile that you're used to seeing.

Okay, thank you.

Thank you. Our next question comes from the line of Stanley Elliott with Stifel. Please proceed with your question.

Hey, guys, good morning. Thanks for taking the question. So just make sure I heard that right. So the gross profit ex-the wood pellet would be more on the normal side. I want to make sure that the profitability of the wood pellet plants is going to be at least inline, maybe even ahead of expectations. Then kind of roll that forward thinking about the year, with the goal of helping to improve margins but in a likelihood higher material costs, some of the mix issues. Can you talk about the competence of being able to drive margin growth on the gross line in 2017.

Thanks, Stanley. This is Ben. On the total margin for the wood pellet plant, I think going ahead, we feel really good about being in line with our major equipment gross margins and frankly a little ahead. I think we've made good -- have good momentum on that and the lines are repetitive. They're 20-time prior lines so feel good about the equipment margins. You know, as far as growing gross margin this year, I still think we can do that. We do feel like we're going to see a steel increase later in the year. We're okay on steel to the third quarter. We have booked in the third quarter at some of our divisions. But we're on top of it. We're talking with our presidents and making sure we're watching pricing. But yeah, we do think we're going to see an increase in steel prices in the third quarter.

And the mills are talking, again similar ranges to last call. I think we were talking 12% to 15% last time if I recall it correctly and that's about what we're hearing this time. Again it remains to be seen if they can get through. Part of that is depending on what the president does with tariffs and that type of thing the border taxes and all that good stuff, of course there's a lot that remains to be seen on that, but as soon as anything happens there, they'll increase the prices. So we're guarding and watching and watching pricing as a result of that. But we're doing a lot of things in place over the last few years on the lean side and how we're doing purchasing, we're working to just continually chip away. It's never a single thing that helps you get gross margin up and we're just trying to execute the basics to try to get gross margin up and again in the cycles, our high side gross margins, 25.5% to 26%, we're still talking with our guys, that's where we want to get to during this cycle.

We didn't go as high as we wanted to for the year as we brought in lower margin $37 million worth of additional revenue on the pellet plant construction but we were close to two without it. So our guys are doing a good job but we can do better. I mean we still have opportunity despite how well we've done. And that's kind of an energizing and exciting thing for us. We can do better and we're going to keep working at it. But I do think we will be challenged in the first half a little bit with the new products and it's only fair that we mention that because there's a lot and it's not just in one place. There's several divisions so for competitive reasons, I don't want to name each division but I mean when you've got 27 new products at a show and some of those are going through -- they're sold already, there's always going to be some fun around that I guess. I hate to say fun but challenges.

I hear ya. You always have a good read on the pulse and what happened in the space. Love to hear kind of some high level thoughts what you're hearing from your customers and what you're hearing around the (inaudible) and the prospects of that or products around that or the infrastructure sort of program coming down the pipe in 2017.

Coming out of the asphalt association meeting which was very well attended didn't talk to anybody that wasn't having a really good year last year and expected a really good year this year. Had some contractors that wanted to be off the record saying they're already full for the year. That means it's pretty good. Aggregate side we're starting to sell more in the quarries which is kind of what we have thought and we sent out at few calls that we thought would be a little bit delayed there. We're seeing a little bit of uptick. That's reflected in the backlog for aggregate mining group. On the mining side we're seeing some upticks in production at some of the larger mining companies and we have inquiries but it's just -- it doesn't feel great. Osborn is right in the middle of mining current in South Africa. They held in there quite well for the year given what's around them so they did a good job considering what the environment was. And the oil and gas side, for our energy group, there is a little bit of a heartbeat there. Oil has been kind of hanging around in the 50s. We did get a -- mention activity. We did get an order in our GEFCO facility for two pumpers in January for $4 million. It felt really good but until there's another something or other that keeps coming on the order side it's hard to call that a trend but it sure felt really good because it's been a long time since we had a nice order like that at GEFCO. So I guess that kind of covers the three groups. The equipment and the infrastructure group are in -- the energy group goes to the infrastructure industries has seen an uptick. So we're seeing good quoting activity there.

And any comments around the (inaudible) kind of what you're hearing in the field?

Yeah, sorry about that. I think it's too early to call. The people that we've talked to that we know still think we'll see something in the neighborhood of $400 to $500 billion that would be spent over five to ten years, that the money would start flowing in 2018. But gosh, projecting and predicting what our current president's going to do is interesting. So we certainly welcome that and we would love it, but that's kind of what we're hearing now. (Inaudible), I haven't heard much on that on the momentum side. I've just heard the number on the sides of the Bill, not how to pay for it.

I hear you. Great, guys. And best of luck.

Thank you.

Thank you. Our next question comes from the line of Mike Shlisky with Seaport Global Securities. Please proceed with your question.

Good morning, this is Jordan Bender on for Mike this morning. I was just wondering if there's a specific segment that you could point to that drove the January backlog increase?

Well, in David's got those numbers. I know that our Astec division had a great order intake in January and that our energy group had a good January. So I don't think we have that number in front of us.

Not in front of me, sorry.

But if somebody asked me the order of where it came from, to me it's infrastructure, energy had a good January, and then aggregate had an okay January.

Got it. Do you guys get the sense that the increased order activity is from increased business confidence coming out of this new administration or is it just more of a general business trend?

In talking to our customers, they really like President Trump. It feels better and not just our customers. I mean if you go talking to people in other industries, they feel, like, they just feel better. But I think the Highway Bill and the general private side for our customers is driving it more than just having Trump in office.

Okay. Let me squeeze one more in here. Do you think once the early warranty issues are ironed out, your new products will be positive for margin mix or are they going to be more in line?

I think they will be in line with major equipment margins. Yeah, maybe it would be helpful. On the CONEXPO show to give you an example of some of the new products, we'll have a fusion plant from CEI model. It's a small concrete plant. GEFCO, we'll have a new stratus star five drill rig that's a geotech real rig. KPI, our crushing and screening division will have a new dual power track mounted -- pressure system, its a diesel electric unit. Peterson will have a new small drum chipper that will fit in a container that can go international. Roadtec will have a new material transfer vehicle, an MTV-1100 and a new 8-foot paver an RP-175E. Telsmith will have brand new 500 ton hour T500 cone crusher on the floor. Carlson will have a brand new 8 foot paver, CP 130 Carlson will have a brand new 8-foot pair of, CP130. Heatech will have a new redesigned terminal models that they've done for asphalt terminals.

So those are -- that's a quick cross-section of new things that we'll have to show that, some of those things end up in shops pretty quick as we start to develop them and as sales. And we're also going to have something that will probably draw people into the show that's a smaller dollar item that what we call an Astec will release the silo bite at the show which will be a robot with magnetic wheels that will climb up the inside of a silo and take thickness measurements of the steel and do a video inspection of the inside of hot mix silo, so customers don't have to put people inside the silo tots do the inspections. That will probably get a lot of play because it's going to be really neat looking and climbing up the wall in a booth. Pretty exciting things. First round of what we do when we're doing new products, always a little lower margin.

All right. Well I appreciate it.

Thank you.

Thank you. Our next question comes from the line of Mario Gabelli with GAMCO investors.

Thanks. It was good to follow up on the list of products that you guys are showing at CONEXPO. When I watch an movie being released, this industry will speculate on kind of how much money that might gross domestically. What's your gut on what you think your orders will be and might you tell me what a silo bot would cost? We want to have that in lieu of something else in our firm.

Silo bot's going to be pretty inexpensive. It's probably not going to be more than I think it's not even more than $15,000. But what it replaces the safety from our customers is the big deal. This confined space issue for them and unless they have to get in a silo.

No, I'm just curious because I can see those silo bot equivalency going through pipelines for inspection which they're doing now in water. A lot of potential. Where do you produce that one? And how much of the value added is internal technology and software?

We produce it here in Astec, Inc. It came out of our controls department. Not sure on the value added piece of that. But it's almost --

That's okay. I will get that off-line another time. Just your gut on your total size of your orders? What would be a good number that we should think about come the middle of April that you're going to report in Q1?

For the silo bot?

No, just for the entire CONEXPO product line-ups that you've had, you've got to have a dream list.

Oh, a dream coming out of CONEXPO, I think if we could see we came out with, you know, $20 millionish to $30 millionish, that would be incredibly good because it's not a selling show normally.

Yeah, no, I got. What is your cost to attend the show and are you expensing that what you gave us a an estimate for Q1.

Yes, we are experiencing it and it's in the range of $4.2 million.

Listen --

Hello?

I believe he may have dropped. Melissa, let's go onto the next call.

Sorry, thank you. Our next question comes from the line of Nick Coppola with Thompson Research Group. Please proceed with your question.

Hey, good morning.

Good morning.

International sales and backlog were up in the quarter despite the drag you talked about for the stronger US dollar. Is there any lumpiness from that you would call out and what do you expect going forward in terms of your international performance?

This is Ben. I think, reference to pent up demand in the call and in my mind there's a pent up demand for US made products and I think some of the countries have gotten used to the spread and thinking well, it's just not going to change soon, I want to go ahead. So it feels really good because it's been so down and so -- we hate to say that it's back and it's going to continue to going up just because the currency aren't moving and in some cases they move a still stronger US dollar. So I would almost say that's why we're cautiously optimistic. We want to keep reporting on that and if it becomes a trend that would be awesome but with the currency where it is, it's hard to say that it's going to be consistent.

Okay. That makes sense. And then I want to shift gears a bit to the energy segment. You called out pockets of demands in certain segments of industrial. And so I was hoping you could just elaborate on that and what segment of the market are you seeing trends, what product types and that kind of thing.

In the industrial side, Rick Dorris is here who's been speaking with them recently. You might want to speak to a couple of those.

Yeah, they filled heaters into chemical plants and some even food processing plants. They've also recently started selling some small heaters for gas processing pipelines or heating the gas as its let down in pressure. And that's been a pretty good market for them recently.

Okay. That's helpful. Thanks for taking my questions.

Thank you.

Thank you. Our next question comes from the line of John Fisher with Doherty and Company. Please proceed with your question.

Yes, good morning. Just looking at your backlog ex-wood pellet the roughly 20% year-over-year increase through December, would you expect a similar type of increase in 2017 driven by the FAST Act and since the FAST Act's kind of a five-year bill, the slope of the line from a demand standpoint for you is-kind of where does that start to level off? Is it year 5, is it past year 5 or does it start to level off from a growth and demand standpoint in kind of year two or three?

John, this is Ben. You know, it will vary by group but in the infrastructure group on the asphalt equipment side, it typically would tail off about a year or year-and-a-half before the end of the bill. So two to three years from now. It would maybe go a little longer on the aggregate side because it started a little slower with the aggregate side. The asterisk on all of that is, not having a crystal ball on what President Trump will do and what comes out of his infrastructure plan. That could change the normal model for us, normal outlook, you know, it's going to tail off at some point and that's logical, but if there's another, $400 billion or $500 billion that comes in on top of what's there, that would change what we just mentioned.

Sure, okay. And then again just looking at the year-over-year 2016 versus 2015, you know, the roughly 20% increase there, a lot of that I'm sure driven by the FAST Act. Is 20% give or take, a good expectation for 2017 over 2016 ex-wood pellets? Or would you expect a greater increase off of that $280 million exit rate?

You know, I guess I have to apologize. I didn't follow that question. Your question was --

Well you talked about backlog as of the end of December being 280 versus 229.6. I am just trying to get a feel for ex-wood pellet plant, kind of what would be a good expectation for backlog growth in 2017 versus 2016?

I think in terms of the growth of backlog, it would somewhat mirror what we're saying on our total revenues, so 5% to 10%.

Okay. And then when you look at growth out of the aggregate mining and the energy groups, and international I guess too, if that were to be better than expected over the course of 2017, is that margin dilutive, or would that be margin accretive?

It would be accretive.

Okay. Thank you.

Thank you. Our next question comes from the line of Brian Sponheimer with Gabelli and Company. Please proceed with your question.

Hi, good morning, thanks for having me on.

Good morning.

Just to ask a similar question a different way. When you're talking to your customers particularly at the asphalt conference, was there any sense that some of them were waiting to pull the trigger on orders until they get clarity on how CapEx and interest is going to be treated should tax reform begin to take hold?

Brian this is Ben. I didn't have anybody mention that when I talked to them.

Okay. That's good. Also just thinking about Astec as an export base, what would you say the amount that you export from the US is on a year-to-year basis?

We have few divisions outside of the U.S., our Osborne division and Telestat that manufacture outside the U.S. and Brazil which has not been great. But those are three locations we are actually (inaudible) record technology. So of that about 19% of our business last year probably half of that was exported in the U.S.

Yeah. In a good year and in a good international year when international's 40% or whatever, it would be probably be upward of 75% when the dollar's weak and encouraging those folks overseas to buy. But with the US dollar headwinds, I think Ben's right.

The other thing I would add to that is can I visit Telestack too when I was over in Europe and I told you we've been very pleased with the acquisition. Those guys are doing a great job and they've got a good backlog. So they've been really a pleasure to have with us.

That's helpful. Just two other smaller ones. Regarding the slow-down in wood pellets that you spoke to with some confidence for the back half of the year, what's driving that?

There is a frankly an oversupply of pellets because it's been warm on the private market. In Europe they haven't needed as many pellets for the housing so there's an oversupply of pellets so there's some spot buying going on that's slowed it down. The other thing that helps us feel good that it's going to come back is there's utilities coming online in 2018 and the demand is going to go up. So that -- you don't have to have the housing market for the demand to go up.

Okay. And just finally, the Power Flame contribution in the quarter?

Yep. I'll get that right. Let me get that number for you.

Sure.

In the quarter Power Flame was -- it's about $8 million in revenues and ex-amortization which we've buried amortization of their intangibles as you know in acquisition accounting, they did about $350,000 of contribution profit before amortization.

All right. Terrific. Well thank you so much and good luck on another successful year.

Thank you.

Thank you. Our next question comes from the line of Ryan Hamilton with Morgan Dempsey Capital Management. Please proceed with your question.

'morning, guys.

'morning.

This is kind of been asked and I might ask it in a little bit different way. Can you give us a feel as far as what you're feeling in your infrastructure group if you're getting feel it isn't more pent up demand versus maybe expansion? Could you maybe just -- I know you kind of touched on that a little bit. Just kind of get a feel for that.

Sure. Hey, this is Ben. You know, actually until about two or three months ago, most of it's been pent up demand but we've had some new plants for new area purchases in the last two to three months. It's now the pent up demand stage in my opinion.

Okay. Is there any regions in the US that you're kind of seeing accelerate faster than others? You know, anything of note?

I'll tell you, it's really consistent across the US. It's more where it's not and where it's not is more the Dakotas still depressed. But it's pretty active consistently across the country right now for us.

Okay, thanks. The rest of my questions have been answered.

Thank you.

Thank you. At this time there are no further questions. I would like to turn the call back to Mr. Anderson for final remarks.

Thank you, Melissa. We appreciate your participation in this fourth quarter conference call and thought for your interest in Astec. As our news release indicates, today's conference call has been recorded. A replay will be available through March 7, 2017 in 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 7 days. All of that information was contained in the news release that was sent out earlier today. This will conclude our call. Thank you, all. Have a good week.

Thank you. This concludes the teleconference. You may disconnect your lines at this time. Thank you for your participation