Greetings, and welcome to Astec Industries' Second Quarter 2017 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to Steve Anderson, Vice President of Administration and Director of Investor Relations. Thank you. Please go ahead.

Thank you, Brenda. Good morning and welcome to the Astec Industries' conference call for the second quarter that ended June 30, 2017. As Brenda mentioned, my name is Steve Anderson. And 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 second 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. At this point, I’ll turn the call over to David to summarize our financial results for the second quarter.

All right, thanks, Steve, and I thank each of you for joining us this morning. Net sales for the quarter were $301.9 million compared to $294.4 million in same quarter last year. That's a 2.6% increase or $7.5 million increase. International sales were $65 million in the second quarter compared to $52.2 million for the same period last year, an increase of 24.6% or $12.8 million. International sales were 21.5% of total net sales for the quarter compared to 17.7% in Q2 of '16. That increase in international sales quarter-over-quarter occurred primarily in Russia, in Europe and in Canada. Those increases were offset by decreases in South America and in Africa. For the quarter, international sales increased in the Infrastructure Group and the Aggregate and Mining Group and decreased in Energy Group. Domestic sales were $236.9 million in the second quarter compared to $242.2 million in the second quarter of '16, a 2.2% decrease or $5.3 million decrease. Domestic sales were 78.5% of Q2 '17 sales compared to 82.3% of Q2 '16 sales. And for the quarter, those domestic sales increased in the Agg and Mining Group and the Energy Group and decreased in the Infrastructure Group. Part sales were 68.8 million in second quarter compared to 63.8 million in Q2 of '16. Part sales were 22.8% of net sales for the second quarter of '17 and 21.7% of net sales in the second quarter of '16. For the quarter, part sales increased in each of our groups. Foreign exchange translation had a small but negative impact on sales for the quarter of $200,000 and that is that if rates this year were the same as last year’s rates, sales would have been $200,000 higher. On a year-to-date basis, sales were 620.3 million compared to 573.1 million for the first…

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

Thank you, Steve, and thanks to everyone for joining us on our call today. As we commented in our earnings release this morning, we were disappointed with our net income for the second quarter. We were pleased that we were able to grow sales and backlog while also shipping new products during the quarter. Our second quarter sales were 301.9 million versus 294.4 million or an increase of 2.6%. Our earnings per share were $0.62 per share versus $0.79 per share in the same quarter of '16 for a decrease of 21.5%. Our earnings were mainly impacted by lower gross margin in new products as we expected and significantly lower than expected gross margin on pellet plant installation work. The significantly lower margin work was the main contributor in consolidated gross margin of 21.7% versus 25% last year. Most of that’s found in the Infrastructure Group with gross margins of 18.7% versus 24%. The new product gross margin was just below expectations in the group but very much in line with our projections. The pellet plant installed work was significantly lower than we expected. In Aggregate and Mining Group, gross margin was 24.1% versus 26.4% last year. New products in that group were just below expectations on gross margins but again very much in range with our projections. In the Energy Group, gross margins were up to 24.9% versus 24.5% less new products in the Energy Group; more industrial type projects which carry higher gross margins in the group. Year-to-date, EBITDA was 57.28 million giving us a rolling 12 months EBITDA percentage of 8.5% of sales versus 9.2% this time last year. Our backlog at June 30 was 352.4 million, down 5% versus last year but an improvement versus last quarter’s down 18% versus last year. Excluding pellet plants and…

Thank you, Ben. Brenda, at this time, we’d like to open the Q&A up and poll for questions.

Certainly. [Operator Instructions]. Our first question comes from the line of Mike Shlisky with Seaport Global. Please go ahead with your questions.

Good morning, guys.

Good morning.

Good morning.

So just quickly just turn to the pellet plant issue in the quarter just for a moment, if you would. Could you give us a little more color as to what kind of costs were the issue? Was there a labor issue or perhaps materials? And it’s something you said kind of past issue already here in Q3 but can future pellet plant contracts, if and when you get them, be structured in a way to avoid these kind of cost problems going forward?

Thanks, Mike. This is Ben. At the end of the day, we – and when we’re putting the plant up, we had a late add-on in the process, a change order with the construction firm that was our sub. And we had a cost miss estimate really mainly by our guys and what we thought it would cost. And it’s embarrassing. It’s a big mistake but it’s a mistake made and it’s one that’s behind us. And we know how we would handle that going forward. But it is behind us. It’s not something that shows back up again.

So it’s part of the learning curve, still a pretty new business for you guys, as to how you would characterize it?

I guess you could characterize that. We don’t like that we made the mistake but I guess you could characterize it that way. And we know it won’t happen going ahead. But it’s happened and our guys feel terrible about it and we feel terrible about it. But we know we won’t have it going ahead.

Okay, got it. Then just turning to the Energy segment, I saw your gross margins here. They were 24.9%. That was the highest we’ve seen in over five years in that segment. It sounded like then it might have been just the mix in this quarter but can you give us kind of your thoughts as to how this might trend in the back half? Often it goes down in the back half versus the first half. Is that a function of how the top line comes in, in the year or is something else at play here that make these 24% plus margins keep on going into the back half of the year here?

Part of what else was there, Mike, was our GEFCO unit had a couple of nice orders for pump trailers that came through at nice margin and then our Heatec group had some industrial orders that came through with nice margins. And it was just a good product mix quarter for us. The backlog that we have in that group is a pretty good product mix too. We just got to execute doing – but I think to say we’re going to push 25 for this quarter in that group might be a little bit of a stretch but we ought to be able to hold it fairly higher than it has been.

Okay, got it. And just want to turn quickly to the pellet plant backlog and a pellet plant order cadence here. It sounds like you got enough other business in infrastructure and elsewhere that’s kind of come in perhaps a little bit better than expected to offset what you were hoping for in pellet plants. Is that the way to look at it? It sounds like you were 5% to 10% before growth forecast and now you’re at 5, but is there enough elsewhere to kind of fill in the blanks for the rest of the year if you don’t get anything major on pellet plants in the back half?

Yes, I think so. We’ve got good backlog and good inquiry level. I’ve been with a lot of customers during the quarter, activity’s good. An example of that is I was talking this morning early with one of our parts fellows and he’s already quoting for next year and we’re in July and he’s got customers for inquiries for winter delivery now which is about two months earlier than normal. So we feel pretty comfortable about the 5% number. We really did think we had a shot at maybe getting one line in through the year but our infrastructure order activity’s been very strong and there’s no way even if we got the order, which is now think will be more towards the very end of the year on the pellet plant, that we could have slid something in. And that’s where we kind of had the change in the pellet plant estimates too.

Okay, Ben, thanks. I’ll hop back in the queue. I appreciate it.

Thank you.

Our next question comes from Mig Dobre with Robert W. Baird. Please go ahead with your questions.

Hi. Good morning, guys. This is Joe Grabowski on for Mig this morning.

Good morning.

Good morning. Could you give us a sense as to what the Infrastructure margin would have been ex the issue with the wood pellet plant?

Yes, I can. This is David. I can tell you that the infrastructure margin would have been about – for the second quarter without the pellet plant issue probably about 22.5% to 22.8% somewhere in that range.

Okay. So I guess it still would have been down maybe 150 basis points year-over-year?

If you’re going to do ex-pellets on Q2 this year, we would do ex-pellets last year where we did have. If you want to compare those particular margins, it would be about flat compared to last year without pellets in last year as well.

Got it, okay. That’s very helpful. And looking at the Infrastructure orders each for the last four years, the second quarter has had the lowest orders, maybe somewhere in the $80 million to $100 million. This year the orders were closer to 140 million, obviously very strong. Was there any sort of change in seasonality of orders this or do you think when we get to the end of the year, we’ll look back and see that orders were lowest in the second quarter this year again?

This is Ben, Joe. It’s just the money really started flowing from the federal government and it started to show the job’s out and our customer’s confidence level was high. I think it’s probably – I don’t think we’re going to see that as the lowest order intake period of the year or the highest. The question was, is this going to look back and say it’s the lowest? No, it’s not going to be the lowest.

Right, okay, all right. That makes sense.

I think if I understood your question right?

No, I think you got it exactly right because again it was much stronger than the past four second quarters. Maybe last question for me. So margins toward pellet plants were kind of flattish and Infrastructure, they were down a little bit. In Aggregate, I know you talked about the new products. Any other pressure on margins in the quarter and maybe thinking specifically about steel costs or any other cost of goods sold inflation?

No, we don’t think steel really had an effect on us. We’ve done a nice job on that. And most of our divisions are covered to the fourth quarter and a handful are already covered into the first of next year. We’ve also done some price adjustments for what we saw coming. So the combination of those things, I don’t think steel has affected us this year.

Got it, okay. Thanks, guys.

Thanks.

Our next question comes from the line of Stanley Elliott with Stifel. Please go ahead with your questions.

Good morning, guys. Thank you for taking my questions. Can you guys talk about where you could see margins going kind of eventually in the cycle, assuming we get a couple more years of decent growth?

I think this year getting back to the near 24% range will be where we’re working to get to and I think still we’re in the cycle, as we’ve talked in the past. Our high cycle is 25.5% range and trying to get there by the end of next year will be our target. As I mentioned on the comments, we’re slowing down R&D a little bit. Our heritage is R&D but we are slowing that down. We were heavy on that effort when in ConExpo and we’re getting our divisions more focused on executing on the products we’ve got out and selling new products and getting margin up. So we’re in a transition period to really focusing on slowing R&D down and get the margin up.

In that 25.5, would that be inclusive of Hazlehurst at kind of a breakeven margin?

Yes.

[Technical Difficulty] Go back through kind of the guidance, we’re talking about 5% to 10% initially and now we’re looking more at kind of 5%-ish but we’re not having the wood pellets. But you couldn’t have shipped any additional wood pellets it sounds like just because the infrastructure is running so good right now. If you can kind of just help us square all that up for me and make sure that I fully understand it?

Well, it’s not that we couldn’t, if we got an order to get part of a plant finished right now with our capacity, but to be able to ship and count the whole line for revenue recognition, we physically could not do that now.

Okay. And then lastly for me, with kind of some big acquisitions in this space, have you noticed anything changing on the competitive landscape either in terms of pricing or just anything along those lines would be helpful?

No change in the competitive pricing that we’ve seen. Obviously, we noticed that there was a big acquisition announced during the quarter. So we generally think that’s probably better for us than not. And we think that with that kind of purchase price, they’re going to need to show a return. And so we think that will help the competitive landscape long term.

Great, guys. Thank you very much.

Thank you.

Thank you. Our next question comes from the line of Mario Gabelli with Gabelli & Company. Please go ahead with your questions.

Hi. Thanks. You anticipated my question about [indiscernible] working.

Okay.

So I won’t add to that one. But you haven’t seen anything yet one way or the other from what they’re doing with it, are you?

No, net yet. We’ve been told that they already have three people living in Germany, so we’ll see how that plays out. And that will be --

Yes, they got a big facility in Mannheim for the last 40 years. Just from my point of view, when you look at 2018, you’re looking at the absence of ConExpo, you’re looking at the absence of this accounting issue in the pellet plant, you’re looking at better results from your new product launches. But is there a way for me to get a handle or my analysts to get a handle on the following; your incoming orders and the non-pellet business what the gross margin is given the mix that’s there incrementally?

I think we’ll be in the 24 range by the end of the year on those. And then in the next year, I think we can push them up and approach 25 by the end of next year.

All right, so you got a lot of pluses going into the first half of 2018. And any – I don’t want to get into the notion of what is out there on the pellet plant world and what the economics are. So I’m going to pass on this and thank you. Take care.

Okay. Thank you.

Thank you. Our next question comes from the line of Nicholas Coppola with Thompson Research. Please go ahead with your questions.

Hi. Good morning.

Good morning.

So on the Infrastructure Group excluding pellets, I’m seeing backlog’s up close to 20% year-over-year. Can you talk about growth rates in asphalt plants versus maybe mobile equipment, where are their deltas in this segment and where are you seeing demand be it geographically or however you can characterize it?

Nick, this is Ben. We’ve kind of seen it – both have been very active at the same time for us with our new distribution network, with the paving side. That’s really spread out the activity for the mobile equipment. So we’re seeing it coast-to-coast now which in the past with an up cycle we might see it more concentrated east of the Mississippi. But we’ve been very pleased with the new dealer network and Roadtec really having a terrific year and really aligning up for another great year next year we think. So it’s really – and for asphalt plants too, it’s coast-to-coast not as so much for us in the northwest U.S. for asphalt plants but just about everywhere else has been very active.

Okay, that’s good to hear. And then maybe just any additional color on your traditional mining markets, what are you seeing there?

The only thing we kind of referenced in the comments that we’ve seen a little bit of a heartbeat and that’s just a little more conversation. And then when we see a little bit of backlog in Brazil that means the mining’s just trying to turn a little bit, but that’s it. We don’t see a big trend. We just see maybe a blip on the screen for a heartbeat.

Okay. Thanks for taking my questions.

Okay. Thank you.

Thank you. Our next question comes from the line of Morris Ajzenman with Griffin Securities. Please go ahead with your questions.

Good morning, guys.

Good morning.

A follow up. When you gave a snapshot of what Infrastructure gross margins would have been without the wood pellet plant sales this quarter, gross margins would have been approximately 22.8%. So my question is, with your big improvement that’s been going on recently with infrastructure, why that division ex the wood pellet plant gross margins not much higher closer to 24%, 25%? What am I missing here apparently?

The main piece in that is the new equipment that was flowing through for us and that there was the new material transfer vehicle at Roadtec is a good example of that. Astec has a high RAP asphalt plant that was below margin coming out of the plant. Carlson’s got a couple of a new paver models going through. So that’s really where you’re seeing in that. And they were lower – they were a little bit lower than we thought but still in range with what we thought at the end of last quarter, but that’s where you’re seeing it.

This impact from new equipment sales continue into Q3 or Q4?

No, I think we’ll be increasing gross margin in Q3 and Q4?

All right, so then my question and b, if you were able to extract the impact of new equipment, where do you think adjusted Infrastructure gross margins could have been this past quarter?

It’s hypothetical really but I think we could be in the 24 range. But we got to get through and clean them up and get the margin right.

Got you. And I’m confused, give us an idea – question [ph] or idea, but what was Q3 pellet revenues last year?

I can do that, Morris. I have that information around here, so Q3 last year pellet revenues were 19 million; Q4 was 70.6 million.

Okay. And you’re expecting for the full year – for the remainder of the year approximately, I’m I right, 5 million or is that just one plant?

Yes, for the remainder of this year there’s about another 5 to be recognized.

Okay. Thank you.

Okay. Thank you.

Thank you. Our next question comes from the line of Jon Fisher with Dougherty & Company. Please go ahead with your questions.

Yes. Good morning. On the CapEx guidance that you gave, given how tight things are on the Infrastructure side of things, does that anticipate any additional capacity expansions in the Infrastructure Group?

Hi, Jon, this is Ben. Not for this year but potentially next year we’re looking at some additions in the Infrastructure Group.

Okay. And then given OpEx spend was lower year-over-year in this quarter, when you look out going forward the rest of this year, maybe into next year and obviously Q1’s got the ConExpo comparison. But how tightly can you manage OpEx? Can you keep OpEx spending negative year-over-year or flat year-over-year or was this quarter or Q2 just kind of a one-time anomaly?

I think Q2 was a pretty good quarter for keeping it down, but I do think we target that 15% range. So as sales go up, obviously it’s going to go up. But I think a good run rate for the rest of this year is probably in the 45 range per quarter.

Okay. And then when you talk in terms of 25% and exit rate gross margins for next year potential, does that include contribution from wood pellet plant revenues? Or if you do receive a third order, would that be dilutive to being able to attain that objective?

If we’re fortunate enough to get a pellet plant order and if we’re fortunate enough to deliver some of it in '18, it will not be diluted.

Okay. And then just the pricing dynamic other than steel recovering from steel, the demand environment obviously with bad luck seems to be really strong. What is your ability to get some additional pricing here either for this year or for orders that you’re already booking for next year?

Jon, a lot of our companies have tried to raise prices a little bit mid-summer because of the backlog frankly and the steel pricing, that’s kind of warnings, although we’ve been able to kind of offset that. But we’ll be relooking at that. Typically we’ll looking at pricing in September each year, so we’re very close to that. And we have a presidents meeting where we’ll discuss that with everybody at the end of August. So we will be on top of it. We do face – still even though we still have pretty good competition and they’re still pretty aggressive, the Europeans, but we’re doing a good job I think of getting a little bit more right now.

Okay. And then last question, it sounds like the new dealers are going well and generating some new business out west. What’s the possibility of picking up some working [ph] group dealers out west to even further your exposure and penetration out west?

Well, I don’t know if I can comment on that. I think they’ll probably just maintain the distribution the way it is. But who knows. We’re just waiting to see on that. We’re very happy with who we have now. We’ve got almost full coverage out west now, so I don’t necessary see us wanting to change.

Okay. Thank you.

Okay. Thanks.

Thank you. Our next question comes from the line of Mike Shlisky with Seaport Global. Please go ahead with your questions.

Hi, guys. Just a quick few follow-up questions for you while we have you on the phone. I wanted to ask first about the Astec Guardian System. I know that’s a relatively new introduction or improvement for you. Can you give us a sense as to how the uptake has been on your new system and whether it’s becoming a good opportunity for part sales in the back half of the year?

The Guardian System is a Roadtec product and that has helped us with part sales. I don’t think we have any exact numbers on that, but certainly being closer to have the machines operate and then not just run – just reading engine data but really understand the whole machines, it’s helped us. And to the point we’ve had to get a few extra square feet of capacity at the warehouse that we’re leasing. So it’s definitely helping us.

Okay, got it. And then on the concrete plant ramp up, I wasn’t sure if you kind of went into too much detail during your prepared comments. Can you just give us an update as to how that’s going, when there [ph] were products that currently ramped and sort of maybe the back half and maybe an early 2018 outlook for how that business might grow from here?

Sure. I don’t think it will be significant this year. We have three plants in operation right now and I personally went and saw one of them in Kansas during the quarter. The customers are happy with what we’re doing. I think with the lease that we have, we’re very solid. So I just think we have an opportunity to double that population, if not more, run into the year. And we’ve got a new sales manager in place for that division and that’s why we’re optimistic on their opportunities there.

Okay, great. And just one last one for me about finding enough labor out there to kind of build all these products. Obviously with a pretty hot employment market, just kind of curious if you can update us is there – are there any issues with trying to find workers for your plants and is there any way you can shift work from one country to another to kind of resolve those if they were to ever arise from the back half of the year here?

We have run up to some skilled labor issues during the quarter. As far as shifting work, the opportunities there would be more in the infrastructure process equipment groups, so Astec with some of the divisions in Infrastructure Group and we are looking at that.

Okay, Ben. Thanks for the follow-ups. I appreciate it.

Okay. Thank you.

Thank you. Our next question comes from the line of Larry De Maria with William Blair. Please go ahead with your questions.

Hi. Thanks. Good morning. First question and sorry if you said this, but obviously you are chasing a large pellet order for next year. What’s the size are we thinking about? And what kind of capacity do you have now for 2018?

We have plenty of capacity for 2018 but the size range of that order is 150 million.

Okay. And you could execute on all of that for next year, if you get it?

Well, that becomes dependent on permitting and site work that gets done. So it’s way too early to call on that. I wish I could tell you.

We could physically build it. It’s could the site – could everything be ready to go?

Got you. And then secondly, obviously this industry is still maturing on the pellet plant side. What kind of annual numbers should we think about in the industry? And what’s competition like for those now? Not getting the order yet, are there delays or are there competition or is the industry moving slowly? Just any kind of overall color on the industry would be helpful, so we can get more comfort around what an annual number should look like?

Well, for us, Larry, we’ve always thought if we can get one to one and half plant a year that would be kind of the business that we could handle, so in the $150 million to $200 million range for us. The market was not good last year for pellets but it’s much better right now. The environment’s better for the pellets. More capacity coming online in the UK to need pellets. The Japanese market is starting to get better for pellets. So think of it in terms of maybe two to three plant market up to about 35 to 40 in the U.S. over a 5 to 10-year period and that kind of matches up with what it was a few years ago. But it kind of took a break in demand for a little bit, but it’s come back.

Okay. Are we seeing pellet plants go in to supply Japan at this point, or is that just still talk right now?

To my knowledge, it’s still talk but we’ll double check and we can get back to you on that. But to my knowledge at this point I don’t see that there’s been a plant built for Japan demand that I’m aware of, but we’ll double check that.

Okay. Thank you. Good luck.

Thank you.

The next question comes from the line of Jon Fisher with Dougherty & Company. Please go ahead with your questions.

Thank you for the quick follow up, it’s on asphalt plants. What would your expectations be for the industry to produce for asphalt plants this year? And if you want to give a number forecast for next year or just directional, can the industry or will the industry produce more in '18 than they will in '17?

Jon, this is Ben. I really would want to revisit with our guys but my gut tells me about 125-plant market next year and we’re probably around 100 right now. But I need to go back and double check my gut on that. But I think that would be pretty close.

Okay. And you’re so comfortable maintaining your proximate two-thirds market share?

We feel pretty comfortable. We’ve been able to hold on to it, but I think we’re going to definitely be challenged with our backlog in the mine season this year. We may give us a little market share but we need to do it if – we need to get more margin if we’re to come back to the pricing question earlier. We’re going to be in a little bit of a dogfight on some deals with delivery I think next year.

Okay. Thank you.

Okay. Thank you.

Thank you. This concludes our question-and-answer session. I’d like to turn the floor back to Steve Anderson for closing comments.

All right. Thank you, Brenda. We appreciate your participation on this second quarter conference call and we 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 August 8, 2017 and an achieved webcast will be available for 90 days. A transcript will be available under the Investor Relations section of the Astec Industries’ Web site within the next seven days. All of that information is contained in the news release that was sent out earlier today. So as Brenda said, this concludes our call. We thank you all. Have a good week.

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