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Astec Industries (NASDAQ:ASTE)

Q1 2013 Earnings Call

April 23, 2013 10:00 am ET

Executives

Stephen C. Anderson - Vice President of Administration, Director of Investor Relations and Secretary

David C. Silvious - Chief Financial Officer, Vice President and Treasurer

J. Don Brock - Chairman of The Board and Chairman of Executive Committee

Benjamin G. Brock - Chief Executive Officer and President

Analysts

Morris Ajzenman - Griffin Securities, Inc., Research Division

John F. Kasprzak - BB&T Capital Markets, Research Division

Richard Wesolowski - Sidoti & Company, LLC

Michael Laskin

Nicholas A. Coppola - Thompson Research Group, LLC

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Operator

Greetings, and welcome to the Astec Industries First Quarter 2013 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Steve Anderson. Thank you, Mr. Anderson. You may begin.

Stephen C. Anderson

Thank you, Bethania. Good morning, and welcome to the Astec Industries conference call for the first quarter ended March 31, 2013. And as Bethania said, my name is Steve Anderson, and I'm the Vice President of Administration and Director of Investor Relations for the company. Also on today's call are Dr. Don Brock, our Chairman and Chief Executive Officer; Norman Smith, President and Chief Operating Officer; David Silvious, our Chief Financial Officer; and Ben Brock, our Corporate Vice President over the Asphalt Group and also President of Astec, Inc., our largest subsidiary company. In just a moment, I'll turn the call over to David to summarize our financial results, and then to Don to review our business activity during the 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 that 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 can 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.

At this point, I'll turn the call over to David to summarize our financial results for the first quarter. David?

David C. Silvious

All right. Thank you, Steve, and good morning to everyone. Thank you for joining us this morning. Let me preface my comments at this time by saying that you may recall that we sold American Augers in late 2012 during the fourth quarter. And therefore, they're shown as a discontinued operation in the financial statements that were sent out. And so my comments will address the line items as they're presented in these financial statements with American Augers removed out of these line items.

Sales for the quarter were $247.8 million versus $252 million in the first quarter of '12. That's a decrease of about 1.7% or $4.2 million. International sales for the quarter were $85.9 million compared to $96.9 million last year. That's a decrease of 11.4% or $11 million. Decrease in dollars for international sales were primarily in Australia, in Brazil, in the post-Soviet states, and these decreases were offset by increases in Europe, in Africa and in Russia during the quarter. International sales were 34.7% of revenues in the first quarter of '13 compared to 38.5% of revenue in the first quarter of '12. Quarter-to-date international sales decreased in each of the segments, except for the Aggregate and Mining Group.

Domestic sales for the first quarter of '13 were $161.9 million compared to $155.1 million in the first quarter of '12. That's a 4.4% increase or $6.8 million. Domestic sales were 65.3% of first quarter revenues this year compared to 61.5% first quarter revenues last year. Parts sales for the first quarter of '13 were $68 million compared to $72.8 million for the first quarter of '12. That's a $4.8 million or 6.6% decrease. Parts sales were 27.5% of revenues for the first quarter of '13 compared to 28.9% for the first quarter of '12. Segment revenues for the first quarter of '13 are attached to the press release as supplemental information. Also included with that segment supplemental information is the quarterly detail on the sales and earnings of American Augers for 2011 and 2012. And some folks had asked for that, and so we wanted to get that to you so you could use that information.

Gross profit for the quarter was $58.6 million compared to $58.6 million last year, relatively flat there on the gross profit dollar line. However, the gross profit percentage actually went up 30 basis points to 23.6% from 23.3% last year. SGA&E for the quarter is $40.4 million, which was -- represented 16.3% of sales compared to $40.1 million or 15.9% of sales. That's about a $300,000 increase in dollar terms and a 40-basis-point increase as a percent of sales. The increases were primarily concentrated in the payroll and benefits line items. Operating income for the first quarter of '13 was $18.2 million compared to $18.5 million for the first quarter of '12. That's about a $300,000 decrease or 1.6%. Again, income by segment is attached to your press release.

Income from continuing operations before income taxes was $18.9 million compared to $19.3 million in the first quarter of '12, that's a decrease of 2.1% or about $400,000. The effective tax rate was interesting this quarter. As we had previously discussed in other conference calls, the first quarter '13 tax rate was lower than the '12 tax rate, simply due to -- primarily due to the R&D tax credit. And you may recall, Congress did not enact the 2012 R&D credit legislation until early in January of '13. Therefore, the 2012 credit for the full year was included as a discrete item in our first quarter of '13 tax rate. In addition, the portion that was allocable to the first quarter of '13 for our projected '13 credit was also taken into consideration in the first quarter tax provision.

Net income from continuing operations for the first quarter was $13.3 million compared to $12 million last year. That's a 10.8% increase or $1.3 million. And diluted earnings per share for net income from continuing operations was $0.57 compared to $0.52 last year, that's a 9.6% increase. Net income attributable to controlling interest, that has the minority interest that we have in Osborn and in Brazil removed from that number, gives you $13.2 million this year compared to $12.2 million last year. That's an 8.2% increase or $1 million. And EPS for the quarter on that line item was $0.57 compared to $0.53 in the prior year. That's a 7.5% increase.

Our backlog at March 31 of '13 is $276.5 million compared to $276.2 million March 31 of the prior year, basically flat. The international backlog this year was $109.2 million compared to $116.5 million at March 31 of last year. That's a $7.3 million decrease or 6.3% decrease. Domestic backlog this year is $167.3 million compared to $159.7 million last year. That's an increase of $7.6 million or 4.8%. And backlog by segment is attached to the press release.

The balance sheet remains very strong. Our receivables are at $104.6 million at March 31 of this year compared to $113.6 million last year. Now that number does include American Augers. They were not removed. The accounting does not require you to remove them from the balance sheet for the discontinued presentation. But I have those numbers for you, so you can compare those. With Augers in there, it was a $9 million decrease. Augers was $2 million of receivables in the prior year, so it's really a $7 million decrease on receivables. Days outstanding are 37.1 this year compared to 38.1, so that has improved to 1 day over March 31 of last year.

Our inventory as it's presented is $322 million from this year compared to $313.4 million last year, an $8.6 million or 2.7% increase. The actual increase without Augers in the prior year is $38.9 million, and that removes Augers from the prior year. Our turns are at 2.4 turns this year compared to 2.6 turns in the prior year. We got nothing owed on our $100 million credit facility. We have about $73.2 million in cash and cash equivalents on the balance sheet. Our letters of credit outstanding are at $10.3 million, resulting in borrowing availability about $89.7 million. Capital expenditures for the quarter were $9.4 million. We're projecting somewhere in the tune of $40 million for the year, maybe slightly above $40 million for 2013. Our depreciation was $5.4 million for the quarter and we're projecting around $22 million for 2013 for depreciation.

That concludes my prepared remarks on the financials, and I'll be around to answer questions.

Stephen C. Anderson

Thanks, David. Don's going to provide some comments regarding the first quarter and will also offer some thoughts going forward. And then Ben Brock and Norm Smith attended the Bauma trade show in Munich last week and may share some observations about that show. Don?

J. Don Brock

Thank you, Steve. During the quarter, we continued to see flat revenues as David had mentioned. Our domestic customers tend to remain cautious. Their attitude this year was weakened by very a wet winter and particularly, in the southern states and kind of resulting in a late start-up of paving projects. Many of them that I've talked to said our backlogs are good, not because of the volume of work, but because of being unable to do work. Ben talked to a customer this morning in Virginia and said it was about 30 degrees up there today. So things are still slow starting, but this has accumulated good backlog for them due to the fact of not doing the work.

International sales continue to be slow due to the fiscal problems of many countries. Fortunately, we've been able to backfill the products going to other industries. As of April 1, the U.K. did approve the ROC credit for utilities that would burn wood pellets and change from coal-fired plants to wood plants. We see this as a real opportunity for other growth in the wood pellets plant business. We see this product as filling the gap in our volume in the next few years as infrastructure continues to be somewhat slow.

In selling American Augers and selling the utility line to Trencor and -- I mean, to Toro and selling the Trencor line to Charles Machine company, we had certain supply contracts that we had to fill, at basically just cost, and we are completing these contracts at year end and during the first quarter. We have tried to backfill and are backfilling these lines in the Loudon plant with the pump trailer lines and the vertical oil-drilling rigs that we maintain from Astec Underground and from American Augers. We've grown our sales force in this area and are obtaining orders from both pump trailers and vertical rigs, and the market is interesting, it's -- we're doing better in vertical rigs in international, and a pump trailer is more domestically used in the service side of the business.

While our revenues were flat, our margins are improving. Our earnings increased, as David said, from $12 million to $13.2 million, and our EPS went from $0.52 to $0.57 a share. While the earnings increase was benefited from the R&D tax credit carryover from 2012, we benefited from 30-basis-point improvements in margins from quarter 1 to quarter 1 and 260 basis point from quarter 1 to quarter 4.

Our major focus in 2013 has been on, really, margin improvement, we've been -- even if our revenues remained flat, we think we have opportunities to start returning our margins to more normal levels. We entered the second quarter with a backlog of $276 million, which is flat from last year. We expect the second quarter to be similar to the first quarter. The visibility is difficult to see beyond 1 quarter. We do see improvements in homebuilding and commercial business, although somewhat slow. Infrastructure improvement related to oil and gas exploration, and transportation of these products is improving, which should help the energy drilling and exploration to start growing again. We expect highway spending to remain flat, but not down.

We continue to receive new orders and additions to existing orders for wood pellet plants. Due to the size of these orders, our quarters are going to be lumpy. Also on the first plant, our auditors have indicated that we will be unable to recognize revenues until the production guarantees of this facility are met. We expect to have this plant running by the end of the first quarter and probably the end of the fourth quarter before we recognize the revenues.

We continue to grow our -- have a strong balance sheet with no debt. We continue to grow cash. And for this reason, our Board of Directors has chosen to begin $0.25 per share dividend or $0.40 per year dividend as a cash return to our stockholders. This will not affect our flexibility and making opportunities for [ph] acquisitions as they become available.

We're excited about the new products we've developed over the last 3 years. We've invested a lot in R&D and our ability to diversify with these products in the energy and mining industry will broaden our base in the infrastructure market. As the infrastructure markets improve, we will be well positioned to grow and take advantage of opportunity as they occur. Although energy markets and mining continue to grow, and mining is slow, we see this as temporary and we expect to see the needs for our equipment in these markets to continue to increase.

One of the biggest things, as I mentioned earlier is we're drilling more oil than we can get moved before it needs to be moved. And that situation has certainly helped adding more railroads and more roads and particularly in those areas. We see the -- with the need of minerals and the number of population growth in the world, that to be a temporary lull, but mining to come back on a steady basis, as well as energy.

With that, we'll be glad to answer any questions. This completes my remarks.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Morris Ajzenman with Griffin Securities.

Morris Ajzenman - Griffin Securities, Inc., Research Division

Just on the wood pelletization plants with the Parliament approval. On the previous call, you indicated the 1 utility that you already sold 1 line to, if approved, then Parliament has approved -- has potential orders for additional $31 million. Can you comment on that? Or just comment on how this all plays out now that the Parliament has improved the tax credit?

J. Don Brock

Dave, you want to answer that one?

David C. Silvious

Well, the customer is working on the finalization of their supply contract for more pellets, and they anticipate giving us the go ahead on an additional 2 lines by the middle of May at the latest, could be sooner than that. We feel very certain that, that will happen, that'd be an add-on to their 1-line plant.

Morris Ajzenman - Griffin Securities, Inc., Research Division

And any thoughts, discussions now just, again, the tax credit's been approved about additional orders elsewhere, conversations you're having, without being specific?

David C. Silvious

Yes, yes, we've -- in the last 2 weeks, we've had multiple contacts from customers. Some are based in Europe, looking to put in plants in the United States. Some are local to U.S. to just supply the pellets to Europe. They're in the size of the plant that we're supplying to Georgia. They would be 2 to 3 line plants, either 40 or 60-ton-per-hour plants, primarily in the Carolinas.

J. Don Brock

It's an interesting industry. They need a supply contract to sell the pellets, which that now is coming available very quickly. There is a -- make sure you get enough fiber to feed the plants, but the big gap seems to be in construction planning in seeing [ph] these plants. They're big and permanent financing doesn't seem to be a problem, but they're – if all of them that are talking came through, you can't build enough of them. But the real dilemma is getting construction financing, because finance companies seem to be a little reluctant to come up with the cash to do that. And that -- I think that'll get fixed as more of these plants are successfully running, and we feel like this first one we're building will be a – we'll be the only one offering a packaged plant that they can look at and see and say, "Yes, this is the real thing."

Morris Ajzenman - Griffin Securities, Inc., Research Division

One other question unrelated, and I'll get back in queue. Aggregate and Mining for the quarter, basically flat, down very modestly. Give us the sense of what percent of revenues is this from mining? And then separate that, just give us a flavor of how aggregate business occur [ph] year-over-year?

J. Don Brock

I'd say the – to answer the second question first. The aggregate in the United States, there's been such a delay in doing upgrades, that seems to be better domestically than it is internationally. In the mining side, internationally, there's been a lot of -- we've seen a slowdown in new projects, but there are a lot of them that are well on the way that we have -- they are finishing and they're continuing to do. One good part about the products we build, they basically are making a little rock or little minerals out of big minerals and they wear them out. And so it's a pretty good -- it's something that a sustainable business, even when the market's not that great. Mining is only about 1/3 of that segment now, and we continue to grow. We also, the big capital expenditure this year is on that plant in Brazil and if we -- the Brazilians want about a 50% to 60% content coming out of Brazil. We think that will certainly help as we get that online towards the end of the year to grow more in the mining side.

Operator

Our next question comes from John Kasprzak with BB&T Capital Markets.

John F. Kasprzak - BB&T Capital Markets, Research Division

First question is the margin improvement overall, David mentioned for gross margin, it looks like it really came from the Asphalt Group. I was wondering if you could talk about the margin improvement there on only modestly higher sales. And then staying on the subject of margins, in Mobile, it was -- gross margin was down. Are you still being affected by the engine change over there? Is that some lingering effect, or is there something else going on?

J. Don Brock

Yes, I think, first on the Asphalt side, we have not seen commodity prices hit us as hard as it had been. Steel seems to be fairly flat, and in fact, some cases dropping down a little bit. And frankly, in the Asphalt side of it I guess, Ben, you could comment if you want to, we've put a lot of effort into trying to improve our lean operations. We've done better -- I accused the guy of running these operations at Astec, Heatec and Roadtec that they have done good over the years and probably haven't made as many improvements. They really focused on that, and they've -- both companies, we're seeing real improvements in our manufacturing. Roadtec is still lingering a little bit on the Tier 4, we're getting all those products out. We've introduced the line of 4 models of stabilizers that are beginning to sell quite well. And frankly, if you look at both of the companies, Jack, parts help us a bunch on margins and the equipment margins have improved enough and most of the improvements have been in the equipment margins. You want to add anything to that, Ben?

Benjamin G. Brock

Yes, I would agree with what you're saying. I think the other thing that helped us is, our product mix was right. We did a lot of new products last year through this plant, and having the core product in the first quarter definitely helped us. And the self-sufficient days really did work, too. That's part of the lean, but certainly, not having as many new products in the shop did help.

J. Don Brock

Some of the international -- the products going internationally need to be -- sounds pretty simple, but they need the Asphalt plant to be smaller, narrower-width plant where they move it without permits, and we came out with a new model of that. And that's sold very well in Australia. And but the first ones had no margins in them and we're seeing if that didn't correct.

John F. Kasprzak - BB&T Capital Markets, Research Division

And I was going to ask about your comments, Don, on housing and commercial. We all look at the same statistics on housing starts and see the improvement, but it's been a long time since, maybe, you guys have felt a demand pull from the private sector. I mean, are we really, do you think at the at the point where there's some sustainable demand in terms of for your equipment, for projects like housing, developments and commercial developments?

J. Don Brock

We're seeing that kind of a different thing. If you look at that industry, if you go back into 2007 in that area, about 1/3 of the people got married, which is a 1.5 million weddings a year, 1/3 of them went into apartments, 1/3 of them went into 1,500 square-foot houses and 1/3 of them went into 2,200, 2,300 square feet. And as you know, the big houses are the ones that have caught the heck. And what we see from contractors that new site development work is that a lot of the big housing -- homebuilders called up a lot of that land and have shrunk the size of the houses that they're building. And the $150,000 to $180,000 homes are the ones that are selling, and the apartments are selling. And as a result, gosh, this has been a 4 or 5-year recession or depression. But they have used up more of the prepared subdivisions, as you'd call them, than they would have normally done in what I'd call a classic market. So we are seeing or our customers are telling us, they are starting to see more residential developments coming back. While the number – we're still at 900,000 starts and that's a long way from 1.5 million, but the homes that are being built are those midsized ones, as you know. And that's the difference we're seeing there.

Operator

Our next question comes from Rich Wesolowski with Sidoti & Company.

Richard Wesolowski - Sidoti & Company, LLC

1Q is typically a seasonally strong bookings quarter for the company. Would you mind discussing how 2013's March quarter awards set you up relative to your annual revenue budgets for the year?

J. Don Brock

We have seen, it's – you can be optimistic on a daily or weekly basis, but we have seen somewhat of a slowdown in March, I guess, in the Asphalt side of it. In the Aggregate side, we've seen it pick up fairly well. In fact, they're pretty pleased on the Aggregate. Not as much international as domestic, and there's a lot of projects out there that, particularly international projects on the Aggregate side, they're the fairly substantial that we're working. On the Asphalt side, we're seeing a lot of prospects for third and fourth quarter orders. And it seems to be a lot of our customers are looking at finally replacing facilities that -- but most of them are looking at ordering in the third and replacing in the fourth. So we did see a lull here right at the end of the quarter. Unfortunately, we got -- but the backlog's okay, at this point.

Richard Wesolowski - Sidoti & Company, LLC

Right. Regarding the international mining area. I'm wondering if your confidence in your own sales is reflective of a broad market outlook that would be somewhat at odds with some of the other suppliers, or rather a confidence that you'll be able to establish a position there with the new products, even in a difficult market?

J. Don Brock

There's really been 1 and, maybe, 2 suppliers, primarily to the mining industry around the world. The big one being Metso and then Sandvik is also in it now, but FLSmidth is in it somewhat, but not directly as much competing with us. There seems to be a real want for a strong second or third supplier, and we've been most surprised and pleased at the willingness to buy our products. There is somewhat, in many parts of many mining companies, a little unhappiness with the existing suppliers. So we feel that we've got good opportunities there. Larger projects, we historically have not been in on as many of those, but we're in on a number of them now, and that we seem to be being accepted in those.

Richard Wesolowski - Sidoti & Company, LLC

Okay. And then lastly, you spoke a little bit about the wood pellet plants. And I'm wondering what are the other new products that you've introduced over the last 18 to 24 months that you would expect to move the needle in 2013 sales?

J. Don Brock

Yes, I think it did obviously do the size of the wood pellet plants where you're looking $40 million, $50 million plants moves the needle pretty good. It does make things lumpy. The other products like the stabilizers at Roadtec, the new models at Roadtec, we have a number of larger, bigger crushers coming out of Telsmith. The one place we're still losing money, but we are beginning to see -- at least we've got profitable products at the Loudon facility with these pump trailers. They have been very, very well-accepted in the market as being state-of-the-art. They're much smoother, much quieter, much – you can round them up to 15,000 of PSI with no vibration and others generally vibrate out of the trailer. So we've applied some of our technology to those industries that they haven't seen before. The vertical oil drilling rigs, we're still very excited. In fact, we have $115 million order going to Kazakhstan for a complete rig. Normally, we're just selling the drilling rigs. Now we are selling and beginning to build everything surrounding the drill rigs, all the auxiliary equipment, and those are – could be sizable projects. And they still offer a tremendous advantage, particularly as natural gas comes back, we see a lot more opportunity in the shallow gas and oil markets for those.

Operator

Our next question comes from Jason Ursaner with CJS Securities.

Michael Laskin

This is Michael Laskin. I'm calling in for Jason. So my first question. In the Asphalt segment, did the Army accept delivery of their orders and was that revenue recognized?

J. Don Brock

David?

David C. Silvious

No, they haven't accepted. They're still -- it feels like every call we get to talk about Aberdeen, Maryland and the proving ground but it's just a slow go there. So it's going well, but it's just slow.

Michael Laskin

Do you have any idea when that revenue might be recognized or is it still…

David C. Silvious

It will either be late this quarter or the first of the third quarter.

Michael Laskin

Got it. Understood. And have you seen any of the pricing issues related to your European competitors stockpiling the Tier 3 engines resolve itself?

J. Don Brock

They still seem to have a bunch of them left.

Michael Laskin

So do you have any idea when you can expect them to run out?

J. Don Brock

We had seen a little stabilizing in the market there. We've -- they're not quite competitive as they were. I'd say the competition is not as severe in the Mobile side as it was last year. Our margin's already improving in our equipment and what we're -- we've done 2 things. We've reduced our manufacturing cost or are reducing it, and we're -- the prices are sticking a little better. So we -- while we're still seeing them bring in Tier 3s, we expect that to run out this year.

Operator

Our next question comes from Nick Coppola with Thompson Reuters.

Nicholas A. Coppola - Thompson Research Group, LLC

Thompson Research Group. So on the public infrastructure side, I heard your comments, you talk about the lack of a strong highway bill, and I remember in previous quarters, you talked about how the bill was passed too late in the wedding season for it to have a real positive impact. So now that we're getting into the spring of '13, are you going to start seeing a real positive impact and DOT's having greater visibility, even at past flat funding?

J. Don Brock

I think what I guess I'm seeing in talking to our customers is that there was a knee-jerk in highway lettings this spring because of the sequester question and the extension of the Authorization Bill. That's pretty well gone away, and there's some pretty good lettings going on right now in most states. We are also seeing -- we're seeing some states like Virginia, Indiana, a lot of them divert some of the money that they had diverted out of the highway funds back into the highway funds. So they were giving -- the highway patrol was being paid in Indiana, for example, by the Road Fund. They have now put that back to the general fund. Tags and things like that, they're putting back into the Road Fund. I guess one of the interesting things in Businessweek this week, the election in Los Angeles, the hot button out there is fixing potholes. Well, both mayors are trying to say they're going to do a better job of fixing the roads than the others – than the other one is. They've even got them out there with shovels, doing some of the patching of the potholes themselves. So it's very exciting to finally see there's some of the politician recognized infrastructure's coming apart. So we see more improvement at the state level, and of course, the federal level is flat. The sequester didn't affect the highway trust fund that much. It affected only the amount that was being put in from the general fund. So it was about $500 million of $the 40 billion.

Nicholas A. Coppola - Thompson Research Group, LLC

Interesting. And then what kind of factor are you expecting from TPIA?

J. Don Brock

Kind of factor from?

Nicholas A. Coppola - Thompson Research Group, LLC

From TPIA?

David C. Silvious

Yes, on the TPIA program's got a good multiplier effect, so it's beginning to create some additional funds that just weren't there before. As you know, the fund can be used to help contractors achieve investment-grade ratings, so it makes financing easier. So a lot of obligations have been incurred. Right now, the work's just now beginning to approach the job site. Not a big impact so far, but it's a positive that hasn't been there in the past.

Operator

[Operator Instructions] Our next question comes from Tim Robertson [ph] with Susquehanna.

Unknown Analyst

I just wanted to touch base on your comments about expecting margin improvement even if fill [ph] are flat. And I was just wondering if you were to rank the primary drivers that would result in the margin improvement, is it better absorption? Is it less pricing pressure in Mobile, better price cost, et cetera?

J. Don Brock

I think the major 2 drivers of that is we're just -- we're not seeing the inflation in some of our components that we saw in the last year or so. While the government was saying we didn't have much inflation, we saw a heck of a lot of it a year ago. That seems to quieting down. We -- secondly, I think we continue to improve our manufacturing. It's – under absorption is still a problem in a couple of companies. As we've gone through our succession planning, I told Ben and Rick, I said, "This thing will be a piece of cake if you can get all 18 of them making money." There's usually about 2 or 3 of them sick and where our under absorption is, is still in the underground group, and we have got to backfill more products into that which we're doing to help that. And the good part of the products we've got have got decent margins in them. So I'll tell you, it's more of the manufacturing improvement. If we get more volume through those plants, it will certainly take your under absorption.

Unknown Analyst

Got it. And I was wondering if you could give us a sense for what drove the decline in parts sales in 1Q, and do you continue to expect parts sales to be up on the year?

J. Don Brock

Basically, the doggone numbers are confusing in that we sold the company American Augers. So theirs come out of it, but the other 2 parts of the underground, the utility line and the Trencor line, we just sold the lines. And as a result, if you would take the parts sales primarily related to the utility line out of it, which is still in the comparison, it was flat. Part sales were basically flat.

Unknown Analyst

Got you. And then lastly, with regard to the timing of the pellet plant, just trying to get a sense. So when you get the order, is it generally installed 1 quarter later? And then, I guess based on this current pellet plant, sounds like there's about a 2-quarter delay before you can recognize revenue. Is that, I guess, how we should look at it?

J. Don Brock

This again, the owner of the plant or buyer of the plant are doing the construction of the site facility. We will be erecting it, but they are doing the site construction and the installation of the concrete and the buildings and things like that. The weather down in South Georgia has been atrocious. It's -- and so they are probably 2 months behind. We're going to be ahead of them. We're ahead of them on building the equipment, but it probably has caused a 2 months delay. We expect probably to have the plant running by the end of the third quarter, and very shortly after that, we'll run the test on it to prove our performance. The performance is just the tons per hour and the emissions out of the plant. So that's -- we're very confident based on the prototype plant that we built here and all that we ran on it, but these 2 accountants sitting next to me and Ian Wyatt [ph] are conservative.

Operator

Our next question comes from Brian Rafn with Morgan Dempsey.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Go back to a comment you made, Don, you certainly talked about the federal funding on the highway side being somewhat tepid and flat. Are you seeing any pockets in funding just from state DOTs? Is Texas or Florida better than maybe some areas in the Atlantic seaboard? Are you seeing any kind of strong regional pockets from the state funding basis?

J. Don Brock

You look at where the oil is and the minerals, the center part of the country is doing better than the left coast and the right coast, obviously. Although California is slowly coming back, and we're seeing Nevada and some of those slowly come back. Texas is -- there's been a lot of money in Texas. Texas is okay, but they are tearing up the roads. The problem is that the pipelines are full with all the oil they got. So the pipelines are full. They're transporting a lot of it by truck, and there's just a lot of traffic when you're running them drill rigs and pump trailers and all that. North Dakota is basically, really, got infrastructure problems. The thing that is happening there is they are setting up more rail yards there, and in Pennsylvania and New Jersey, and starting to ship the Bakken crude to the East Coast, which there's a lot of infrastructure related to that. But state-wise, it's kind of a spotty. Virginia's got more money than they've had in a while. Indiana's continuing a strong road program. We saw Kansas price more money, and then the legislator turned around and took it out. So you get a few of those. But one of the biggest, biggest things is that the public can't trust the politicians to do what they say they're going to do. We could get more taxes for roads or more user fees if they believe they wouldn't steal it. And that's -- but I can pretty well take you state to state, and it's a mixed bag. There's probably 30% to 70% that's better. That's just a gut feeling.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Okay. When you look at demand for some of your Asphalt equipment, you guys talked about Los Angeles fixing potholes. We own granite construction and the heavy civil design-build business seems to be nationally doing pretty well. Is the offset in kind of that turn business declining, the housing, industrial parts and that, is that being at all offset by a pretty robust heavy civil, some of these huge multibillion-dollar projects?

J. Don Brock

Yes, a lot of it is. We've seen some bit -- 1 big project in Florida that just recently went that they're doing a lot of design-build projects that are pretty sizable. Now they've got Asphalt in it. But what would really help our customers' profitability is as the commercial business and the residential comes back as -- was talking to Jack earlier, that fills the gap. That's not -- that business is not as competitive historically as the highway business. The highway business generally gives them the volume, but the other are smaller jobs giving them the profit. The thing that is happening is a lot of the little people that did the private work haven't made it through this recession, and I think as it comes back, are more stable. Maybe stable is not the right word, but the people who own the Asphalt plants probably will do better as we come out of this market because they don't have as much competition from the little guys. But it's -- the other thing that's going to be good is the fact that there is just a certain pent-up demand. There's a lot of this equipment wearing out, and they haven't been able to replace it. And I see the customers that I've talked to, the thing makes me feel good is a number of them are talking about sizable facilities for later this year to replace the old facilities, to modernize, run more recycle and things like that.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Okay, okay. You mentioned, Don, in the past that you talked about you're seeing with some of your pavers, there's a penchant to trade in equipment for you guys, used equipment and then have the state-of-the-art equipment, the highest efficiency, that type of thing. Do you see 2013 continue to be somewhat tepid relative to the highway build, you see those same guys continuing with that trade-in?

J. Don Brock

Yes, we do. The 1 part of a paving spread, you start all the way from the Asphalt, from the crushing plant to the Asphalt plant, to the truck end, to the lay-down operation. A substantial amount of work is being done -- it's just about all being done under traffic now. 80% of all your Asphalt is maintenance and rehabilitation. A lot of it's being done at night. You have got a tremendous amount of upstream equipment, depending on that paver running and not breaking down. So the pavers and the shuttle buggies and the equipment and the paving training, they're going to replace that and keep that modern and keep it low hours where it's dependable. They just can't afford to have a breakdown. You create all kinds of crises with traffic and everything. The other trend we're seeing is more night paving and that the traffic is getting so bad that one contractor told me last week, he said, "We pave at night in cities because we can't get the trucks to the paver during the day." And so they're running these things day and night. They'll run in the city, work at night [indiscernible] then they'll run in the daytime out on the larger highway projects where the traffic's not quite as bad. So they're getting more hours quicker through that type of machine, but that is such a critical thing. You're going to see more modern – keeping modern equipment. The other side of that is they're trading in 3,000- to 5,000-hour machines to us, it's difficult to sell. We have to watch our trade-in value on them, make sure we don't have to take a hit later.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Yes. Well, how viable, Don, is that used market? You're talking about 3,000- or 5,000-hour machines, where do those machines go?

J. Don Brock

Well, a lot of them used to go to South America. A lot of them used to go to the residential, commercial guys, but not as much of that. We have to -- the one thing that we do have that our competition doesn't do is we have 16 or 18 rebuild centers, where we rebuild these things, repaint hem and give a somewhat limited warranty. So we've had to make a market for it. The highway-type pavers are too big for a lot of the third-world countries and too big for some of the commercial work. So it really comes back to our rebuild program, and there are a number of contractors that will take those rebuilds.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

When you guys do kind of the rebuild retrofit painting, how many more hours can you get out of a used machine?

J. Don Brock

Well, they'll run some of them up to 20,000 hours, but that's not very advisable. But I would say they probably go from -- we got a number of contractors trading in at 5,000 hours and they have learned that if they trade before they start putting parts on it, they can come out better. We go ahead and one of our big abilities on the rebuild is we get the parts, and we're guaranteeing we're getting the parts business when we do it. The margins, if you took the parts out of the rebuilds, are not as good as they look. But there's margin in it and we make our margins on the parts we put on them. So the rebuilds work out okay for us. In fact, it gives us a real advantage over people that are not selling direct.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Yes, okay, okay. You talked a little bit about, certainly, the pellet plants going into the U.K. Any sense what -- if you look maybe out 5, 10 years, what kind of an infield installation might you see in the U.K. or on Northern Europe? Are you talking about dozens of plants or tens of plants or hundreds of plants? I'm just curious as to how you kind of see that strategically playing out?

J. Don Brock

Well, understand the U.K., basically, is switching to burning wood at a lot of these plants or co-burning it with coal. And their driver from that is to not have to put scrubbers on the plants. You don't have sulfur with the wood and their carbon -- the wood's carbon neutral. But they don't have the source of the wood. So the plants are going in the Southeastern United States, in the Northwest where your wood baskets are. And probably the future, internationally, would be Brazil and Chile and close to the equator where the eucalyptus grow faster. Probably in Australia where the wood baskets are, where there's a lot of trees growing is going to be your major market. The other unknown market is the torification of the wood where you actually go ahead and keep cooking it and making artificial coal out of it, that's clean and carbon neutral and has no sulfur. It takes about 1/3 more wood to do that. The cost of it doesn't work economically. But as we start using more waste wood when you torify it, you kind of negate the environmental problems that would have been in the wood because you cook it at 500 degrees. And that's probably the next advance in technology of us starting to use waste products to convert it. And frankly, that's got to come in the United States. If we're going to have renewable, solar is like using a bathroom in the ocean. Ain't got much -- you just don't have that many BTUs to it, and hey, it's good on a local basis; windmills, there's a bunch of windmills sitting there that they can't afford to rebuild because they can't get enough out of electricity. And if the sun's not shining and the wind's not blowing, you don't have basic electricity. So wood has got to come into the equation at some point here. And probably in the U.S. if we could use more waste wood to mix with the new wood, it's just a further -- instead of putting it in landfills, it's a better use for it. And that, in my opinion, logically will eventually happen.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Okay, okay. When you look at the building out these pellet plants, Don, what -- how many lines can you put on it? Is it just amount of – basically the amount of real estate that you have? Or is there a kind of economy of scale as to how many lines you can put in a plant?

J. Don Brock

The whole thing at one word: transportation. You've got -- generally, you've got to haul the wood into the plant, the trees into it, and wet wood, when you cut, it weighs 25 pounds a cubic foot. And when you make it into pellet, it weighs 45 pounds a cubic foot. And all the pellet plant is doing is drying the wood, getting the moisture out of it, open the BTUs and making – it's densifying energy. Whether -- you take it and you're limited on wet wood unless you're in some kind of unique situation to where you can't haul it much over 50 or 60 miles. So these plants are generally going to be, in general, 150,000 ton-a-year plants, which would be about 20-ton-an-hour plant. However, the second thing is the cost of freight to get it to the ships to take it to Europe. And so you get a compromise between where you locate these things in the wood basket. And there are some of them, up to 500,000-ton plants, where they've got a unique situation where there's a lot of wood in that particular area, a more concentration of it. But the position of these things is quite interesting and quite different, but it really comes back --transportation to the plant and away from the plant.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Okay, okay. And then, just how much -- as you get into this wood pellet business, Don, how much -- from the standpoint like your Asphalt and your quarry operations, your pavers, how much parts of business will be in these types of plants?

J. Don Brock

They wear out the heck out of the pellet dies in those things, and it will be somewhat comparable to an Asphalt plant. Probably not as much as a crushing plant, but somewhat comparable where you would expect it to be 20%, 25% of our business.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Okay. You guys talked to, in the opening comments, about a $0.40 cash dividend, is that a secular dividend now going forward each quarter? Or is that just a special dividend depending on profitability?

J. Don Brock

It's each quarter. It's $0.10 a quarter.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Okay, $0.10 a quarter. Okay, $0.40 for the year. All right. Okay.

Operator

We have come to the end of the Q&A session for today. I would like to turn the call back over to management for closing comments.

Stephen C. Anderson

Okay. We appreciate your participation on this first quarter call ad 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 May 7 and an archived webcast will be available for 90 days. The 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. This will conclude our call, and we thank you, and have a good week.

Operator

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.

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