Astec Industries Inc (ASTE) 2017 Q4 法說會逐字稿

Greetings, and welcome to the Fourth Quarter 2017 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Steve Anderson.

Thank you, Dana. Good morning, and welcome to the Astec Industries conference call for the fourth quarter and fiscal year that ended December 31, 2017. As Dana mentioned, my name's Steve Anderson, 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, 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 fourth quarter.

Before we begin, I'll remind you that our discussions this morning may contain forward-looking statements that relate to the future performance of the company, and these statements are intended to qualify for the Safe Harbor liability established by the Private Securities Litigation Reform Act. Any such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions.

So 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 2017. David?

All right. Thanks, Steve. Good morning, everyone. Thanks for dialing in.

Net sales for the quarter were $312.4 million compared to $326.6 million in Q4 '16, a decrease of 4.3% or $14.2 million decrease in net sales. International sales were $67 million in the quarter compared to $61.6 million in Q4 of 2016, an increase of 8.7% or $5.4 million increase in international sales. And those increases were primarily in the geographic regions of Canada, in Australasia, in Africa and Brazil. And those increases in those areas were offset by decreases in Mexico, in Japan, in South America excluding Brazil, in Europe, and Central America.

For the quarter, international sales increased in the Energy Group and the Infrastructure Group and decreased in the Aggregate and Mining Group. International sales represented 21.4% of Q4's net sales compared to 18.9% of Q4 '16 net sales.

Domestic sales were $245.4 million in Q4 of '17 compared to $265 million the same quarter last year, a decrease of 7.4% or $19.6 million decrease in domestic sales. Domestic sales represented 78.6% of Q4 '17 sales compared to 81.1% of Q4 '16 net sales. For the quarter, domestic sales increased in the Aggregate and Mining Group and the Energy Group and decreased in the Infrastructure Group.

Parts sales were $69.3 million in the quarter compared to $62.5 million in Q4 of '16, a $6.8 million increase or a 10.9% increase. Parts sales were 22.2% of quarterly net sales this year compared to 19.1% of Q4 '16 net sales. For the quarter, parts sales increased in the Aggregate and Mining Group and in the Energy Group and remained flat in the Infrastructure Group.

Foreign exchange translation had a positive impact on sales for the quarter-over-quarter of about $1.5 million. That is if rates were the same in Q4 as in Q4 last year, sales would have been $1.5 million lower.

For the quarter, pellet plant revenues were $5.6 million compared to $70.6 million in Q4 of '16. Recall that these sales are classified as domestic sales and also they're classified in the Infrastructure Group.

Net sales on a year-to-date basis were $1,184,700,000 compared to $1,147,400,000 in 2016, an increase of 3.3% year-over-year or a $37.3 million increase year-over-year.

For the year, international sales were $252.4 million compared to $206.2 million for the year last year, an increase of 22.5% or $46.2 million increase in international sales. Those increases occurred primarily in Canada, in Russia, in Australasia and in Brazil. And those increases were offset by decreases in South America excluding Brazil, in Japan, Mexico, and Central America. International sales represented 21.3% of year-to-date net sales compared to 18% of year-to-date '16 net sales. For the year, international sales increased in all of our reporting groups.

Domestic sales for the year were $932.3 million compared to $941.3 million in 2016, a decrease of 9.5% or $9 million decrease. Year-to-date, 2017 domestic sales were 78.7% of total sales compared to 82% of total sales for the 2016 year. Part sales for 2017 were $283.4 million compared to $263.5 million in 2016, a 7.6% increase or $19.9 million increase in part sales. Parts sales for the year of 2017 were 23.9% of total sales compared to 23.0% of total sales in 2016.

Foreign exchange translation had a positive impact on sales for the full year of 2017 of $2.9 million. And that is, if rates were the same this year as last year, sales would have been $2.9 million lower. For the year, pellet plant revenues were $8 million compared to $135.2 million in 2016; and again, these sales are classified as domestic sales and also in the Infrastructure Group.

Consolidated gross profit for the quarter was $62.8 million compared to $64.5 million in Q4 of '16, a decrease of 2.6% or $1.7 million decrease in gross profit in dollar terms. The gross profit percentage then was 20.1% for the quarter compared to 19.7% for Q4 of '16. The absorption variance for the fourth quarter of '17 was $3.8 million of underabsorbed overhead compared to $9 million of underabsorbed overhead in Q4 of '16, a positive change in net absorption variance of $5.2 million.

Consolidated gross profit for the year was $243.1 million compared to $265.3 million for the year of '16, a decrease of 8.4% or $22.2 million decrease. That yielded a gross profit percentage for the year of '17 of 20.5% compared to gross profit percentage of 23.1% for the full year of '16. The year-to-date '17 absorption variance was $1.3 million underabsorbed compared to $16.5 million of underabsorbed overhead in '16, a $15.2 million positive change in absorption for the year-over-year.

SGA&E for the quarter was $44.8 million or 14.3% of sales compared to $45.4 million or 13.9% of sales for the fourth quarter of '16, a decrease of $600,000 in dollar terms and an increase of 40 basis points as a percentage of sales. The primary driver there was reduced research and development cost and offset slightly by increase in payroll and benefits related expenses.

For the year, SGA&E was $187.6 million or 15.8% of sales compared to $178.1 million or 15.5% of sales for the full year of '16, an increase of $9.5 million or an increase of 30 basis points as a percent of sales. Primary drivers there were -- recall that we had ConExpo earlier in 2017 for $4.4 million, and that was also added to by payroll and benefit-related costs that were up year-over-year.

Operating income was $18 million for the quarter compared to $19.1 million for the fourth quarter of '16, a decrease of 5.8% or $1.1 million decrease. And for the year, operating income was $55.5 million compared to $87.2 million in 2016, a decrease of 36.4% or $31.7 million decrease in operating income.

Other income was $700,000 for the quarter compared to $63,000 in Q4 '16 and $2.7 million in the full year of '17 compared to $1.5 million in 2016. And recall that the primary source of that other income is license fee income and also investment income at our captive insurance company.

The effective tax rate for the quarter was 41.1% compared to 34.2% for the same quarter last year. While our tax rate for the quarter did include a benefit of approximately $1.1 million from the tax reform legislation, it's obviously higher than our historical average and significantly higher than last year's Q4 rate. And items that caused our rate to be elevated compared to last year include a smaller research and development tax credit in the current year, higher state tax expenses in the current year; and we had increased tax expense on intercompany sales that were deferred in prior years that were recaptured in the current year in consolidation.

For the year, our tax rate was 34.3% compared to 36.9% for the full year of 2016. The tax rate for the year is lower than the prior year due primarily to the impact of the domestic production activity deduction, or DPAD, and the research and development tax credits. And those were similar amounts in 2017 compared to '16. But they did have a higher percentage impact due to lower taxable income in the current year, as well as the aforementioned benefit from tax reform. On a go-forward basis, we believe our annual effective tax rate will be in the 25% to 26% range, and we will update this forecast for you on our Q1 call as we get through our first quarter tax provision process.

Net income attributable to controlling interest was $10.9 million for the quarter compared to $12.4 million for Q4 '16, a 12.1% decrease or $1.5 million decrease. Diluted earnings for the quarter then were $0.47 compared to $0.53 in Q4 '16, an 11.3% decrease or $0.06 per share decrease.

On a year-to-date basis, net income was $37.8 million compared to $55.2 million for the full year of '16, a decrease of 31.5% or $17.4 million decrease. And therefore, for the year, earnings per share were $1.63 per diluted share compared to $2.38 per diluted share in 2016, a decrease of 31.5% or $0.75 per diluted share.

As we previously announced, the company initiated significant design upgrades to its customers' Georgia and Arkansas wood pellet plants to meet full production rates. And that obviously negatively impacted our earnings per share in the third quarter and for the year by approximately $0.59 per share.

EBITDA for the quarter was $25 million compared to $25.6 million for the fourth quarter last year, a decrease of 2.3% or $600,000. And for the year, [EBIT] was $82.7 million compared to $112.7 million for the full year of '16, a decrease of 26.6% or $30 million decrease in EBITDA year-over-year.

Our backlog was down $411.5 million at December 31, '17, compared to $361.8 million at December 31, '16. With prior year adjusted for RexCon, recall that we acquired RexCon in October of 2017, and so we've adjusted all the prior year numbers in the backlog to reflect that. The increase in our backlog, December versus December, is $49.7 million or 13.7%. Our international backlog is up to $75.6 million compared to $62.7 million at December of last year, an increase of $12.9 million or 20.6%.

Our domestic backlog is $335.9 million. Last year it was $299.1 million at December. That's an increase of $36.8 million or 12.3% increase. Excluding pellet plant backlogs, our 12/31/17 backlog was $341.4 million, an increase of $57.3 million or 20.2% compared to 12/31/16. I know that our press release calls out an increase of 22.9%. However, that was an incorrect percentage. The actual percentage is 20.2% on that calculation. So I apologize for that number.

Sequentially, the December 31 backlog is $411.5 million compared to our September 30, '17, backlog of $386.5 million, a $25 million increase in the backlog sequentially or 6.5% increase sequentially. And at year-end, we typically announce our January backlog, and that is $448 million at January of '18 compared to $394.2 million at January of '17, a 13.6% increase in the January backlog.

The foreign currency translation impact on the backlog year-over-year is $2.3 million increase. That is the backlog would have been $2.3 million lower at prior year rates.

Onto the balance sheet. It still remains very strong. Our receivables are at $120 million compared to $110.7 million in the prior year, an increase of $9.3 million. Our days outstanding then are 34.3 days compared to 30.5 days at 12/31/16. Our inventories at $391.4 million at 12/31/17; and that compares to $360.4 million at December of '16, a $31 million increase in inventory. And that yielded 2.4 inventory turns in 2017 compared to 2.3 turns in 2016.

We owe nothing on our $100 million domestic credit facility, and we have $62.3 million of cash and cash equivalents on the balance sheet. Our letters of credit are at $9.8 million outstanding at the end of December, yielding a borrowing availability of $90.2 million. We do have $4 million of debt currently in Brazil, and that is used to finance the company's building fixture and inventory.

Capital expenditures for the quarter were $5.6 million, and capital expenditures for the year were $20 million. For 2018, we're forecasting around $35 million of CapEx.

Depreciation for the quarter was $5.4 million and $21.3 million for the full year 2017. And for 2018, we're forecasting somewhere in the range of $23.5 million of depreciation.

That concludes my prepared remarks on the financial details, and I will turn it back over to Steve Anderson.

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

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

Before going into my comments on our earnings release, I do want to take a minute to say thank you to our entire team at Astec for their efforts in 2017. We did end the year with a record $1.185 billion in sales. Although sales were only up slightly, that did get us another record; and an EBITDA of $82.7 million, with strong backlogs at the end of December and January, as David mentioned. It did take a total team effort in '17.

In my opinion, 2017 became a year of transition for us as we released an extraordinary amount of new products at the ConExpo show in March of 2017 and worked through installation and start-up issues for our customers at our 2 large pellet plants that we delivered.

Innovation and customer service are important values to us as a company, and the 2 transitional issues just referenced are normal for us historically, albeit at a much lower level historically as well.

New products normally carry lower margins as we build them the first few times, and a large number of them in the first half of 2017 was a challenge to our gross margin. These margins have recovered and will be in line with our normal margins in 2018. Our investments related to the installation and start-up of the wood pellet plants were front and center for us during the year as well, and we're making good progress on these plants.

Moving back to our earnings release. As we commented in the release this morning, we were pleased that our fourth quarter result was in line with our anticipated result that we mentioned on our last call. As for the year as a whole, our transitional issues held our EBITDA to $82.7 million or 6.98% of sales, which in my opinion, was a fairly good result, given all the new products introduced and wood pellet plant charges during the year.

For reference, our ex pellet charges EBITDA in 2017 would've been $103.7 million or 8.75% of sales. In addition, if we added back our previously stated new product margin effect in the first half of last year, which was a stated effect of approximately 100 basis points, we would have had a total EBITDA in 2017 at approximately $110 million or approximately 9.3% of sales. This indicates we performed close to our 2016 results in our core business areas, and 2016 was one of our stronger years. That being said, our actual 2017 results include our transitional issues, and with those essentially behind us, we are focused on the opportunity to have a very good 2018.

As David mentioned, our backlog at December 31 was $411.5 million. And our backlog at January 31 was $448 million.

Our Infrastructure Group continued good order intake during the quarter, mainly as a result of good economic conditions and the federal Highway Bill in the United States. Our Aggregate and Mining Group also saw increased backlog for the same reasons. Our Energy Group backlog was up as we experienced good order intake in the group for products targeted at the construction and industrial customers and their groups. We also experienced increased quoting activity for our oil and gas drilling products.

Our domestic and international backlogs were both up year-over-year. Our increase in domestic backlog overall was primarily due to the current long-term federal Highway Bill, new state and local government infrastructure funding mechanisms, and [good] private sector work levels for our infrastructure customers.

Our international backlog increase was a result of improved economic conditions and some larger-scale infrastructure projects in Europe, Russia, Canada and Australasia. We've also seen increased quoting activity in Africa. Our Astec Do Brasil facility continued to experience a slight increase in quoting activity in Brazil.

As you may recall, we've made the decision to maintain our international sales and service organization despite the significant challenge presented to us in the last few years by the strong U.S. dollar and with regards to exporting our equipment from the United States. The decision to do so has started to prove to be the right one, and it's paid off in increased international orders in backlog at the end of 2017.

We see a long-term opportunity to grow our equipment parts and service sales in international markets. To that end, we have hired Michael Norris as our new Managing Director of International Region Offices. Michael comes to us with a successful track record of increasing international construction equipment sales. He will drive our efforts to increase sales of our equipment parts and service internationally through our global region office networks.

Having offices in the regions we are serving worldwide will get us even closer to our customers, and help us as we work with them in an even better way, in their time zones and in their languages, as much as possible. Our region office strategy is reflective of successful international sales models in our industry, although tailored to meet our operational model of decentralization. We're excited to have Michael onboard and for our future growth in this area.

We do not expect the expense to execute the strategy to be extreme as we will roll our existing international sales and service personnel into our new region office division as we create each office over time. We expect to open 1 to 2 offices in 2018, and these regions are to be determined.

Changing subjects to wood pellet plants. 2017 was an extremely challenging year to us with regards to these plants as we took significant charges related to getting the 2 plants we have delivered installed and up to speed on production for our customers. As an update on our progress on the wood pellet plants, we are making good progress and believe that our announced charges during 2017 are adequate to cover our commitments to our customers.

Updating our current pellet plant quote activity. We do have ongoing quote productivity for new projects. However, as previously announced, we're not going to sign a new pellet plant order until we have finished both at the sites that the charges were announced for during last year.

Given our progress at the 2 pellet plant sites, we still believe we'll be in position to add an order in time to deliver a complete wood pellet plant in 2019. As a reminder, if we do get an order for another wood pellet plant, we'll only do so as the supplier of the equipment in accordance with our traditional equipment parts and service offerings.

Changing subjects to the Energy Group. We experienced good sales activity during the fourth quarter for products targeted at the infrastructure, oil, chemical and food industries, which contributed to the 35.2% increase in backlog in the group. Sales of wood chippers and grinders also remained consistent during the quarter. Our concrete plants are built in the Energy Group and quoting activity is good for these plants. The World of Concrete show was held in January, and our RexCon and CEI subsidiaries enjoyed great customer traffic through their displays. And both have secured orders as a result of being at the show.

Our RexCon and CEI teams are working together on our strategy to meet our goal to become the largest supplier of concrete plants in the United States. We are currently #2. As you can tell by these developments, we're optimistic on our outlook in the Energy Group.

Our new product development does continue in all groups; however, at a more typical rate versus the high rates of R&D in 2016 and 2017. Innovation is one of our core values, and in addition to our industry-leading service, a brand promise to our customers.

Looking ahead to the first quarter of 2018, we believe our first quarter 2018 revenue will be slightly higher than Q4 2017. And with regards to earnings in the first quarter 2018, we expect our earnings per share to be slightly better than our first quarter 2016 earnings per share.

Our current outlook for the full year of 2018 is core revenues up 7% to 12% versus last year with a much improved net income for the year. We expect to be paid on the pellet plant in Georgia in December, which would add $60 million to the sales number. But as a reminder, the sale will be a breakeven, margin-wise.

Despite the gains we believe we will show in 2018, we still have opportunities to be an even better company for our customers. Our focus is producing even higher-quality products than we already do for our customers while focusing on operational excellence internally.

To that end, we have hired Jim Joyner as our new Vice President of Global Operational Excellence. Jim has a proven track record of working with global manufacturing companies to increase quality and productivity. He has been working with us as a part-time consultant at 2 of our subsidiaries since the end of last summer, and we're excited to have him join our team. He will work with all of our subsidiaries to maximize quality and productivity in a systematic matter.

We have seen our vendor partners, especially those with products that contain steel, working to increase prices. We have also seen our steel supply vendors pushing for the same. We will work to offset these pressures in many ways, including our operational efforts with the addition of Jim to our team.

From our last earnings release to now, orders have been steady in Infrastructure Group, improving in the Aggregate and Mining Group, and improving in the Energy Group. Orders have been up internationally.

Bright spots for activity are hot mix asphalt equipment sales, asphalt plants and mobile equipment -- type equipment for asphalt, concrete plant quote activity, soil remediation, plant quoting activity, wood chippers and grinders, aggregate crushing and screening equipment quoting activity, and international quote activity.

Year-to-date parts sales were up 7% versus last year and were 23.9% of total sales versus 23% last year -- or in 2016.

For the whole of 2018, we are optimistic on our outlook. We believe all of our supporting groups have the opportunity to be up on sales and net income for the year. Acquisitions remain a key piece of our growth strategy along with organic growth.

To that end, we continue to work on potential additions to the Astec family of companies. Given our current financial position overall, we do have the ability to execute a larger than historically normal acquisition. However, we'll only do so if the acquisition is strategically aligned with the industries we serve.

That ends my comments on the quarter and what we see 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 Steve Anderson.

Thank you, Ben. Dana, we can open up the lines for questions now; be glad to entertain those.

(Operator Instructions) Our first question comes from the line of Mike Shlisky from Seaport Global Securities.

Wanted to start off with a gross margin question. I guess, are you still okay with your 25% gross margin target for the year? And is that more of a end-of-the-year goal than it is during the start of the year? And is that goal an area you can reach on a full year basis in 2019 and beyond?

Hey, Mike, this is Ben. We'd stated our goal to be at 25% exiting 2018. There'll be a little pressure on that with the pricing pressure we're seeing, mainly as a result of steel pricing. But we still have the opportunity to do that. That's one of the reasons that we added Jim Joyner to the team. We've done a nice job, to this point, on our lean effort, and I think that's helped us a little bit on maintaining some market shares. But we want to take it to the next level. And Jim's got a great history of doing that at many places around the world, and we're excited to have him on the team. But still a definite target for us coming out of '18; and then really too early to call on '19, but we would -- certainly, that would be our goal.

Okay. Got it. I also want to ask about some of the FAST Act impacts you've seen [so] far. At this point of the year, we'll be entering that halfway point of that act I guess sort of midpoint through 2018 here. So there's only 2 years left after this year. At some point, do you think the order activity that's kind of -- really that might slow it down? Or is that not going to happen for quite some time, in your opinion?

In my opinion, I guess that's maybe a 2-part answer. The first part is, we just had the National Asphalt Pavement Association annual meeting a few weeks ago and extremely well attended, one of the highest attended in many years, which is an indicator of how good things are for our customers. I personally visited with 31 different companies' worth of contractors over that time and -- well, at the meeting, and everyone feels very good about '18. Didn't talk to anybody that didn't feel good about '18, and okay about '19. But any time we see the end of a Highway Bill could be a slowdown in infrastructure equipment purchasing.

The second part of that answer is who knows what the Trump plan ends up being? It's -- if you've read it or if you've seen any of the analysis on it, it's probably, on the one hand, the most creative effort in the last couple of decades to fund infrastructure at a high level. But on the backside, really no great way to pay for it. So I know they came out with a proposal of a gas tax at $0.25, which will be $0.05 a year for 5 years, which we absolutely think is the best way to do it -- until you can get to a vehicle miles traveled way of paying for it. But I think there's a big jury out on that, but anything he gets would help us. And I think certainly everybody wants to do something. How they get there is different. But that's probably a little longer answer than you wanted.

But I guess timing-wise, there's probably another couple of years left on the equipment side. A lot of this money is [hit.] It's flowing. But also in addition to that, you've got the state and local initiatives that have happened over the last few years, and that's really provided funding out there. And private side is still staying strong, according to everybody we talk to out there -- or I talk to. So I would say probably a couple of years on the equipment side.

That's great color. Kind of a quick follow-up on that then. I mean, if you had this big bill that's kind of -- and I know everyone cites Washington, D.C. -- are your most recent quotes -- or some of your more recent talks with customers, are the quotes done? Is there pen in hand? Are they kind of waiting to sign as soon as that bill gets signed by the president? Or are your current quotes more sort of the kind of long-term view about their ability to buy equipment from the FAST Act; or their current business situation, regardless of what President Trump wants to do?

I didn't get the feel that anybody was banking on the Trump bill. And most -- our orders have been steady, good activity. Particularly the mobile side is -- our Roadtec division, Carlson, very strong. So I don't think that they're working on the -- with Trump in mind as they're executing right now.

Our next question comes from the line of Mig Dobre from Robert W. Baird & Company.

So you're not providing a revenue outlook for 2018, and I can appreciate why. But when I'm looking at your orders, you're exiting the year with pretty nice order growth, call it, 15% or thereabouts. You've got your backlog, if I exclude wood pellet plants, is up about 20%. So orders are pretty decent. Backlog is pretty decent. As we look into 2018, is there any reason to think that we would see a slowdown from the current levels? Is there anything that you've either seen in the market are you're hearing from customers? Any color?

Hey, Mig, this is Ben. I don't see it. I think we do have opportunities, like I said in the comments, to be up 7% to 12% over this year's number based on...

I must've missed that. I'm sorry about that.

Yes, and on top of that, with no margin is the wood pellet plant, the $60 million out at Hazlehurst. But on the core side, 7% to 12% off on top of this year's number, I think, is very possible.

All right. Okay. That makes sense. And I've struggled with this throughout 2017, trying to get a good grip on what your gross margins were, excluding the noise that you called out. You basically had issues with the wood pellet plants. But then you also had some all these new product investments that you don't necessarily expect to repeat. So if we look on a kind of [apples-to-apples] basis, what would the gross margins have been for the full year '17, excluding these items?

Sure. Good morning, Mig. This is David. The impact of the pellet charge on the gross margins was about $21 million. That's that $0.59 per share that we discussed. And so ex that, it would be about 22%; and probably more in the range of about 22.5%, when you exclude the impact of the first half of new products running through the shops.

Great. That's really helpful. So the baseline here is, call it, 22.5% as we start modeling 2018. You're expecting growth -- core growth in 2018 on top of that. I guess the question would be, you backed away from the 25% gross margin target. I understand that. But given what's happening with your input costs and your utilization, what's kind of a normal incremental gross margin pull-through that we should be thinking for these revenues for the full year?

That's a good question, Mig. This is Ben. I think I guess maybe to answer that, maybe not directly answering the question: maybe what the target for us would be, even with what's coming at us on the increases that you referenced, I do think we're getting just a little bit more on the pricing side as well. We don't have total pricing power, but we are doing a little bit better. And I think we're going to have to offset the steel with some operational improvements that having Jim part time, we've started to see that a little bit in the 2 divisions that he helped us with, just part time. And those were pretty quick gains where they were made. So we still think, coming through the end of the year, our target will be to exit the year in the 25% range.

Now will steel affect us, and could it keep us slightly below that? It could, although we are generally protected through the first half on steel, so through our buying agreements. We do -- about 75% of our steel would be in buying agreements, and 25% would be kind of left for opportunity purchases. And I think it's a little longer answer than you probably wanted; but if you look at our inventory being up a little bit, we did some opportunity purchases in raw, so that was up a little bit.

And then the behind the scenes on the finished goods piece was our Roadtec division went live on a new ERP system in the 1st of January. And we built up a little ahead for Roadtec on inventory, just in case; a little bit of a security blanket on that. And they're working their way through that pretty rapidly. But probably more answer than you wanted, and I guess I'm sorry to ramble.

No, no, it's great. It's actually a little less than what I wanted because I've got another question. If I'm thinking about gross margin then, you're saying that I've got materials locked in through the first half of the year, but I expect margin to ramp as the year progresses. It would imply to me that your steel costs are actually going to be up in the back half of the year, even more than what you're experiencing in the front half. So how do you do that?

I think if you believe in numbers that they're throwing at us -- and I think it'd be hard to argue against you; it's just -- and I know the tariff thing is kind of the question mark that is the cloud on the horizon. But I guess personally in our history, I don't want to say there's no way that steel is going to be everything we point to in the second half, but I think we've got -- I don't think it's going to be as big as everybody thinks, personally. Our experience is it's always a huge number that everybody talks about.

That being said, there is some allocation work going on in the background with the steel mills. So they're anticipating higher price coming, but we're going to work like mad to offset it. And I think between the things that we're going to do try to offset it, and it not being as big as they think that -- they always think it's going to be a whole lot more than it actually ends up being -- I think we still got a pretty decent shot at being where we think we could be by the end of the year.

Got it. And then last question from me, just making sure we have our expectations straight for 1Q '18. I'm trying to make sure that I understand your earnings guidance. You're saying you're going to be up versus 1Q '16. Obviously, your tax rate is going to be down a lot. And how do we -- where do we start on gross margin for the year? Is it 23%? Is it more than 23%?

We're exiting the year, the core gross margin around that 22.5%. So I think there will be -- we're going to have to make incrementally slight improvements each quarter if we're going to exit this year at 25%. So I think you can look for something in that range.

And your comment was against 1Q '16, not 1Q '17 for earnings?

That's correct, yes.

Our next question comes from the line of Stanley Elliott from Stifel.

On the 7% to 12%, does that include the $60 million from the wood pellets or not, just to make sure I'm crystal clear?

It does not, Stanley. I'm sorry, this is Ben. In my mind, I've just still got that there's no margin in it, so I threw it on top at the end. But that would be on top of the 7% to 12%.

That's fair. Are you guys seeing anything else -- you mentioned steel costs -- anything else from the supply chain about their ability to ramp with you guys and get you the products that you want and need kind of in a timely fashion?

This is Ben. Good question. We've talked about that through our first quarter reviews in the first couple weeks of the year with all of our companies. So far, we feel like we are okay. Not 100%; but high percentages of everybody being able to keep up and stay with what we're needing, anyway.

And then the shift on to more of a regional platform for the international sales, was that -- did you guys feel like you're missing out on sales or maybe the coverage wasn't quite what you were hoping for? Is it cost savings kind of -- help us if you could and maybe with a little more color there, please.

Sure, this is Ben. As we've kept our coverage in place and as things have come back, our market intelligence is a little bit better. We do think we've got an opportunity to add sales that maybe we're missing with more service support, closer to people and in their language and in their time zone. We do a pretty good job of supporting that globally and we do have service representatives all over the world, but we do see the opportunity to grow sales through that; and not huge R&D increase. And though we can do this within our typical R&D spend, slight adjustments to the equipment we have for the markets that they're in will help us sell more as well.

So it's kind of a two-pronged effort having the regional offices more knowledge on exactly what we need to be selling in. Because we've been almost trying to force our product built for the U.S. into some of these markets. Slight adjustments can get us more volume. And having more of that intelligence and with customers will help us grow sales.

Cost-wise, again, we don't think that's going to be -- there'll be a little bit more expense, but not extreme, because we do have people on the ground already. But we see a few key positions in each region to help us with the products and some of the marketing. And then as we grow sales, we add on the service side and more regional sales guys as the need comes up. And the other thing it'll help us do is target better on our dealers; have almost all of our divisions going through the stores, if not all of them. Some are a little unique and may not overlap. But I guess it's better sales coverage globally, and likely more dealers in more regions.

Our next question comes from the line of Jon Fisher from Dougherty & Company.

Very good Q4. Just question on SG&A trends. The last 3 quarters you've been right around that mid-40s number. As you're expecting sales growth, core business, 7% to 12% in '18, from an SG&A standpoint, is kind of that mid-40s rate about the right rate, with R&D probably being a little step down year-over-year? Or should we expect -- what kind of increase year-over-year should we expect from an SG&A standpoint?

Good morning. This is David. I believe you're going to see SG&A grow slightly. I think, we try to target that 15% to 16% range for SGA&E. And with R&D down, we're going to see some increases in other selling costs as activity picks up. So I think you can target that 15% to 16% range. But we are trying -- as you can see -- trying to hold SG&A pretty steady, but it does tend to increase with sales.

Okay. And then the CapEx increase year-over-year, if you could just kind of highlight what that's being targeted since that's -- just from a math standpoint, a pretty meaningful year-over-year increase?

Sure, hello, Jon. This is Ben. A good piece of that is at our Carlson division. We are growing our capacity there. We considered the options of moving some of the product from there, but the screeds that go behind the paver are really as much an art as a science. And we didn't want to leave the expertise that we have from there. And also we had a pretty nice environment with the government there to be able to add on there relatively easy. I mean, I don't think it's ever easy, but -- so we made the decision to invest in Tacoma.

We also, on the other -- rest of the CapEx is generally equipment for the shops. And what I would say is we do have return on investment calculations that we require for all of these CapExes; so getting multiple prices from each vendor, and then what's the return over time for them through spreadsheets. So that's where the main pieces are coming in.

Some of that -- although we have a full number in there -- some of that could change with Jim Joyner coming onboard. We may redirect some of it, but the number itself would not change. And we also have a history of not spending everything we capital expend -- we fit on our budget on CapEx. But this year, we'll have a better chance of getting to that number with the addition at Carlson.

Okay. And then on RexCon, great acquisition. Was just wondering if you could break out what the contribution was during Q4 and just how strong that business is from an '18 outlook standpoint, with Astec kind of behind the business, and being able to open up some opportunities for them that maybe they weren't able to access before?

Okay, thanks. I'll speak a little, Jon, and then David will come in and tell me if I'm wrong. They did a great job of selling everything they could right before we bought them. So their typical month, we would see in the range of $8 million to $10 million -- but our typical quarter. They were more in the range of $3 million to $4 million, so they struggled through the last part of the year. Well, the concrete was a good show for them. Their sales picked up. And so we're really excited about that.

One story I would tell you about the opportunity for crossover in selling is at the World of Concrete, we probably over descended on them. I was there. Norm Smith, who's our -- been with us forever and was there; and Rick Dorris, our COO, was there; all at different times. But it was interesting how many of our existing Astec customers we met at the RexCon booth. And even to the point of one contractor out of the Midwest said to Norm, you guys couldn't have bought a better company. There's only 2 companies we only get 1 price from: RexCon and Astec.

And I thought that was interesting that first of all, somebody would admit that, which is great; but because we usually have more competitors [that we ever deal with] than none. So I think 60% to 70% of our customers in asphalt plants have some type of concrete operation, and we're starting to see that come through.

The other thing we've seen is we do have a vendor finance program with DLL or DeLage Landen. I'm probably saying that...

DeLage Landen.

Yes. And we've already see them grab a couple of concrete plant deals as a result of having that vendor finance option that they might not have gotten in the past. So we're excited about it. And also excited about using their facility, which we think we have capacity in, and [CEI's] facility that we think we have a little capacity in, to design some new products or even pull some of the products that RexCon has that'll compete with other manufacturers, will give us a chance to grow market share. Our goal is to be #1 there, and I think we can get there. We're working on the plan to get there, but we definitely have the capacity to get there.

Okay. And then just one last question. You cited Europe as a weak spot in Q4 from an international standpoint. Was just wondering if that had anything to do with Deere acquiring Wirtgen Group and any change in behavior there? Or if it was something completely unrelated to that?

No, primarily it was a strong comp in the prior year, and it was just a quarter-over-quarter change that we called out. I think Ben had some commentary on European orders.

No, it's just our quote activity is pretty nice. And we actually got our first -- actually, I think it might be our second asphalt plant sale into Italy, of all places, which is a tough place for anybody outside of Italy to get an order in with manufacturers in-country. So we're cautiously optimistic. Our Telestack Group is getting good volume out of the U.K. And a good number of those orders are going into Europe. So I think, to David's point, I think we're okay there.

Okay. And then -- and just one last. Just no competitive dynamic. Your position on Deere's acquisition of Wirtgen Group hasn't really changed your kind of neutral to positive from a business competition standpoint?

That's correct. (multiple speakers)

Our next question comes from the line of Brian Rafn from Morgan Dempsey.

Let me ask -- Ben, you always give a really nice kind of strategic overview from the -- on the infrastructure side. If we get some of this rhetoric relative to an infrastructure plan from Trump or if we get long-term infrastructure banks, does that layer orders in over the top of the current run rate? Or you think it adds to the runway beyond 2019?

I personally believe it adds to the runway. I think it'll take people time to figure out exactly whatever that bill means, and I think it'll add to the runway. Although the runway may be -- there may be a little bit of overlap and where that could come in as part of that proposal is speeding up the approval process. And one of the things that they do is they take the EPA out of the waterway piece and the U.S. Corps of Engineers takes over. That's a little bit bigger deal than most people think because the corps will move quicker, and that could be a pretty good thing to get the bigger projects going. So the maintenance will go quickly, the mill and inlay work. But again, I think, there could be a little bit of overlap, but I think it just extends the runway 2 to 3 years.

2 to 3 years. 2 to 3 years, awesome.

It depends on the number, too. I mean, it's not going to be $1.5 trillion. I mean, the government spend in his proposal was only $200 billion, and then there was a lot of crazy ways to encourage states to do things. So where this ends up to what he proposed could be very different, but anything would be great.

Yes. Let me ask you again another strategic question. If you have kind of the same administration in there, do you think the next big secure act beyond the FAST Act -- we had I think a 10-year spread between -- to get the FAST Act passed, I mean, there were something like 36 or 37 extensions. Do you see this administration maybe getting the next Highway Act into 2020 done a little quicker than the last?

I would. If they can maintain control of all 3 -- the House, the Senate and the White House -- if they can maintain control, I do think they will get it done. But boy, that's -- I don't know if I have dice that can roll that many numbers.

Yes. I got you. I appreciate that.

I do think they would, if they have control.

Yes, okay. You talked a little bit about RexCon and CEI on the concrete side, going from #2 to #1. What size magnitude of sales jump would that be to get that #1 position?

Encouragingly, we think it's only about $5 million to $10 million. That's how close it is.

Okay. All right. And would you be more capacity constrained at CEI versus RexCon? Or the opposite?

Probably more at CEI at this stage. RexCon does do a little more outsourcing opportunity to bring some of that in. But there's room with some organization, maybe some flow work at RexCon to get more volume through.

Okay, okay. You talked a little bit about the parts initiative on the international side. I didn't get the breakout. What is the mix between domestic and international parts?

We don't...

We don't break that out. We have not broken that out in the past.

Okay. Let me ask you, Ben, from the standpoint on the parts. Given the fact that you're selling a lot more new infield pavers and [screeds] and some of it, the equipment, are you on plan? Are you satisfied with the level of parts you're seeing? Because, obviously, when the infield fleets are newer, you're not going to have as much repair. What's kind of your sense in what you saw on parts sales in 2017?

Brian, I guess, up 7%, which is double our growth rate on the overall sales, I guess that was -- I thought that was pretty good. But that being said, some of our division still have a good opportunity to put feet on the ground and selling more parts. And I think -- personally, I think concrete is one of those areas. So I think we still have opportunity to grow parts sales, and even with what should come with the new -- with all the equipment -- with the new equipment that's out there today. So hard not to be happy with 7% up, but I think we can do better.

Okay. All right. With everybody handing out 401(k) bonuses and stock, I know there's been a lot of talk. You guys, what is your sense in your SG&A payroll health-care costs? Is that -- for 2018, is that a low to mid-single digit growth? Or is there anything special in there?

No, there won't be anything special in there. Our compensation plans are tied to performance. And so as performance increases, that'll be a part of the increase in SG&A as that ramps up. But obviously, that's one of the reasons that payroll and benefit-related costs are down this year compared to the prior year is the incentive plans. But we don't see anything extraordinary in SG&A. So I would expect, as you've said there, some mid-single-digit growth in those costs.

Okay. Dave, from the standpoint, if you look across the 20 companies, where might you guys be going into 2018 capacity utilization? Where might you have some bottlenecks? What kind of shifts are you running? Where's overtime? And are you running 2 or 3 shifts in one area, and one in another area? Just kind of overall across the company.

Brian, this is Ben. We're not very much different than last quarter on that; about 80% in the Infrastructure Group on utilization; 70%, 75% in Aggregate and Mining. And really, the lower run rates there would be in South Africa and Brazil. Although they're getting better; I mean, mining is getting better for us. And then energy, 65%, 70% with kind of GEFCO; and like we mentioned CEI there. But GEFCO, though, with oil and gas is getting busier, had a good fourth quarter, coming along quite well. But still averaged all together, it's 70%, 75%.

Pressure points should be on asphalt plants and our paving equipment, despite the inventory they have. I mean, because every now and then somebody will come in and want something specific. But those would be the two: if we have pressure points there; and then also on our track-mounted crushing and screening equipment, there's pressure there.

Okay, okay. You guys talk a little bit about a more opportunistic or maybe a more positive kind of bid quote activity in order rates on oil and gas. Are there any specific products that are leading that?

Yes. The pumper trailers are pushing that. And those are the units that clean out the (technical difficulty) in the drilling. And those typically retail or sell for anywhere from $1.2 million to $1.8 million.

Okay. All right. And then I didn't hear for the $35 million CapEx that you guys talked about, where was that going? Or what -- how was that (multiple speakers)?

The biggest portion of that would be Carlson in Tacoma, Washington. Two things: we've done very well on our screed market share that goes behind not just Roadtec pavers, but all different brands of pavers. And then their small paver line has really taken off. And so it's a pleasure to see that. And they haven't even really attacked any international with that. So this growth of their facility will allow them to release a international targeted paver to help grow market share just even outside the U.S. But it's been very good for them in the last couple years.

Okay. And I'll just ask one more. When you look at the kind of the sales cycle between your initial bid quote and then actually getting a sale conversion, has that speed at all changed? Or is it about the same as it's always been?

Quote to order is still pretty close to the same time. It depends. The asterisk on that would be somebody picks up a quick job and then they're in a panic. I almost said the wrong thing I was going to say. But they get in a panic. And then hopefully -- at that point, you're hoping you've got something in stock; but generally other than that, it's about the same time frame.

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

Thank you, Dana. We appreciate your participation on this fourth quarter conference call, and thank you for your interest in Astec. As our news release indicates, today's conference call has been recorded. A replay of the conference call will be available through March 6, 2018, 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 is contained in the news release that was sent out earlier today. So again, this concludes our call. Thank you all. Have a good week.

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