Astec Industries' (ASTE) CEO Ben Brock on Q2 2014 Results - Earnings Call Transcript

Jul.22.14 | About: Astec Industries, (ASTE)

Astec Industries, Inc. (NASDAQ:ASTE)

Q2 2014 Earnings Conference Call

July 22, 2014 10:00 AM ET

Executives

Steve Anderson – Director, IR

David Silvious – VP, CFO and Treasurer

Ben Brock – President and CEO

Analysts

Jack Kasprzak – BB&T

Mig Dobre – Robert W Baird

Jason Ursaner – CJS Securities

Nick Coppola – Thompson Research

Ted Grace – Susquehanna

Walter Liptak – Global Hunter Securities

Larry De Maria – William Blair

Operator

Greetings, and welcome to the Astec Industries Second Quarter 2014 Earnings Conference 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.

It is now my pleasure to introduce your host, Steve Anderson, Vice President, Director of Investor Relations. Thank you, sir, you may begin.

Steve Anderson

Thank you, Christine. Good morning, and welcome to the Astec Industries conference call for the second quarter that ended June 30, 2014. Also on today’s call are Benjamin 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 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. As usual, we ask that you familiarize yourself with those factors.

So, at this point, I’ll turn the call over to David to summarize our financial results for the second quarter.

David Silvious

All right. Thanks, Steve and good morning everyone. Thank you for joining us this morning.

Net sales for the second were $277.3 million compared to Q2 of last year of $248.1 million, its 11.8% increase or $29.2 million increase. International sales for the quarter were $92.6 million compared to $85.8 million last year, it’s an increase of 7.9% or $6.8 million increase. International sales represented 33.4% of second quarter sales this year compared to 34.6% for the second quarter last year.

Those increases in international sales occurred primarily in Russia, in the Southeast Asia, in China and Mexico during the second quarter. Those increases were offset primarily by decreases in Canada and Africa, Australia and the West Indies.

Domestic sales for the quarter were $184.7 million that compares to $162.3 million in the second quarter of ‘13, for a 13.8% increase or $22.4 million increase. Domestic sales represented 66.6% of sales this year compared to 65.4% of sales for Q2 last year.

Parts sales this quarter were $60.2 million that compares to $62.7 million in the second quarter of ‘13. That’s a 4% decrease or $2.5 million decrease. Parts sales represented 21.7% of quarterly sales this year compared to 25.3% in Q2 of last year.

On a year-to-date basis, our sales were $515.9 million that compares to $496 million year-to-date last year or 4% increase from $19.9 million increase. International sales this year were $155.8 million for the six months compared to $171.7 million for the first half of last year, that’s a decrease of 9.3% or $15.9 million.

The decrease in international sales this year over last year occurred primarily in Canada, in Africa, Australia, Europe, the West Indies and in Mexico. And those were offset by increases in international sales in Southeast Asia, post-Soviet states in Russia and in China.

International sales were 30.2% of sales for the first half of this year and that compares to 34.6% of sales for the first half of last year.

Domestic sales for the first half were $360.1 million, compared to $324.3 million for the first half last year to $35.8 million increase or 11% increase. Domestic sales represented 69.8% of sales for the first half this year compared to 65.4% the same period last year.

Parts sales for the first half this year were $129.4 million compared to $130.8 million last year, it’s a decrease of just over 1% or $1.4 million decrease. Parts sales were 25.1% of total sales this year compared to 26.4% last year.

Gross profit for the quarter on a dollar basis was $62.2 million that compared to $55.4 million for the second quarter last year. It’s a $6.8 million increase or 12.3% increase. That yielded a gross profit percentage of 22.4% for the second quarter this year compared to 22.3% for the same period last year.

One of the major positive impacts that we had in the second quarter of ‘14 was a reduction in our unabsorbed overhead that last year, you may recall that it was $7.2 million in the second quarter. We have reduced that down to $2.8 million in the second quarter of 2014.

On a year-to-date basis, gross profit dollar wise was $118.9 million this year compared to $114 million last year, it’s a $4.9 million increase or 4.3% increase. And that yielded a gross profit percentage of 23.1% for the first half this year compared to 23% last year.

The same thing happened at unabsorbed overhead. On a year-to-date basis, we decreased unabsorbed overhead from $13.8 million for the first half last year to $6.1 million for the first half this year, a $7.7 million decrease.

The SGA&E line for the quarter, it was $40.2 million or 14.5% of sales, compared to $37.8 million for the second quarter of 2013 or 15.2% of sales. That is a $2.4 million increase or a decrease of 70 basis points as a percentage of sales.

On a year-to-date basis, SG&A was $83.7 million or 16.2% of sales compared to $78.2 million for the first half last year or 15.8% of sales, a $5.5 million increase. Now that increase primarily was driven by our ConExpo expenditures of just over $4 million in the first quarter of 2014.

We also had the addition on April 1, of Telestack, and that represented another $1.3 million increase in SGA&E for the quarter. So that impacted both the quarter and year-to-date periods.

Operating income increased to $21.9 million for the second quarter of ‘14 compared to $17.6 million for the second quarter of ‘13, a $4.3 million increase or 24.4% increase. For the first half, it was $35.3 million versus $35.8 million last year, that is a $0.5 million decrease or 1.4% decrease.

The other income line had some impact during the quarter. And the year-to-date it’s a little larger than it was last year. And it was $736,000 for the quarter versus some expense last year of about $29,000. And for the year-to-date it was $1.5 million income versus about $600,000 income last year. Those numbers are primarily driven by license fee income and investment income in our capital insurance company.

The effective tax rate for the quarter was 35.7% and this year and 36.6% last year, and for the year, it was 34.4% and 33.1% last year. You may recall that R&D credit can impact our tax rate significantly and so this year, they have not passed the R&D credit. Yet we believe that it will pass at some point this year. But last year that R&D credit passed early in the year and we were able to take advantage of that in last year’s tax rate but have not been able to yet in this year’s tax rate.

Our net income line was $14.5 million for the second quarter of this year compared to $11.1 million in Q2 of ‘13, that’s a 30.6% increase. And that resulted in earnings per diluted share of $0.63 for the quarter compared to $0.48 per diluted share in the second quarter of ‘13, a 31.3% increase.

For the first half, our net income was $24 million compared to $24.3 million for the first half last year, a $300,000 decrease or slightly over 1% decrease, which resulted in earnings per diluted share of $1.4 for the first half this year compared to $1.5 for the first half last year.

Our backlog and it’s by way of reminder, our backlog has been adjusted in these prior year numbers that I’m going to read to you. Those have been adjusted for the addition of Telestack, so the prior numbers do have Telestack’s prior year, June 30 backlog in so apples-to-apples.

At June 30, our backlog was $264.1 million compared to $247.3 million at June 30 of last year, that’s a $16.8 million increase or 6.8% increase. International backlog this year is at $106.7 million compared to $106.6 million last year relatively flat. And our domestic backlog is at $157.4 million compared to $147 million at June 30 last year, a $16.7 million or 11.9% increase in domestic backlog.

To the balance sheet, the balance sheet continues to be fairly strong. And we are sitting at $119.7 million in receivables at June 30 that compares to $102.8 million last year, a $16.9 million increase in receivables that, results in days outstanding of 39.1 days this year compared to 37.3 days last year.

Our inventory is sitting at $364.1 million compared to $322.8 million last year and an increase of $41.3 million that, results in 2.1 turns this year compared to 2.3 turns in the prior year.

We owe nothing on our $100 million credit facility and we have $18.6 million in cash plus some short-term investments there. Our layers of credit outstanding are about $6 million which leaves us a borrowing availability right now of $94 million.

Capital expenditures for the second quarter were $5.3 million, and year-to-date we’re $13.6 million. We are forecasting that our capital expenditures for the year will end up in the $32 million to $33 million range.

Depreciation for the quarter was $5.3 million and on a year-to-date basis, it’s $10.5 million. We’re still forecasting that our depreciation will come in very close to $24 million.

So that concludes my prepared remarks. So I’ll turn it back over to Steve.

Steve Anderson

Thank you, David. Ben, will now provide some comments regarding our second quarter results. And talk a little bit about our operations. Ben?

Ben Brock

Thanks Steve. Thanks everybody for joining us on our call today. As we mentioned in our earnings release this morning, we’re pleased with our results during the second quarter and for the first half of the year.

Earnings per share were $0.63 per share versus $0.48 per share in the second quarter of ‘13 and earnings per share for the first half this year were $1.4 versus $1.5 in 2013. As a reminder, from our last quarter’s release, in discussion we did ConExpo extensive of about $4 million or $0.12 per share expense that we did not have in the first quarter of 2013.

And the first quarter also this year did not have a $0.05 per share R&D tax credit that we did have available to us in 2013. So, adding the ConExpo and R&D back to the first half, we’re looking at $1.21 a share versus $1.05 per share in ‘13. So, we are pleased that accounting for the ConExpo and R&D tax credit, our focus on our operations is resulting in higher earnings and continuing operations for the third quarter in a row.

Our backlog at June 30 was $264.1 million which was up 7% versus last year. Now, regarding the sales environment that we’re – we are here in the United States, the reality does continue to be that the uncertainty created by are represented as in Washington continues to make our domestic highway infrastructure customers feel uneasy about major capital expenditures.

The latest effort by Congress to fund the Highway bill to May of 2015 is very welcomed. However it is sure-sighted for our customers. We will work to support Tennessee Center of (inaudible) proposal made with Senator Murphy of Connecticut that would increase the gas tax $0.12 per gallon over two-year period to fully fund the Highway bill going forward along with the provision to tie the tax to price index.

To give everyone on the call an idea of what the increase gas tax that was proposed by them remained to the average driver in the United States. The average automobile, it is driven about 15,000 miles per year and gets 23.6 miles per gallon. That means that the average automobile would use about 636 gallons of gas per year.

That, 636 gallons at a $0.12 tax increase would equate to $76.32 per year for automobile gas tax increase, which equates out to $1.47 per week, about the price of a cup of coffee. There are stages that have shown that the savings in automobile fuel consumption and maintenance would amount to more than two times that amount for each automobile so we did think it makes good fiscal sense for the nation.

We would always welcome a long-term bill with increased funding. And but in the meantime, we’re going to continue pursue new business with our new products in the United States. And we’re working to grow our international effort. Our customers are continuing to see slow marginal improvement in the private sector.

As most of you know, the Telestack Company based in Northern Ireland and joined our family companies on April 1. As a reminder they engineer sale on manufacturing material handling systems used in ports, large mining operations and quarries.

They are for large port and mining material handling systems that were not available in any of our other 17 divisions, so with the acquisitions we added not only new products but also manufacturing division in Europe that has delivered equipment to six different continents.

We’re pleased to report that Telestack was operationally profitable during the quarter and has a backlog that, tapes into end of this year. Due to acquisition accounting they do not show a profit in the quarter, we expect them to show a profit going ahead.

As the new products update, the first one is the Hazelhurst, with Pellet Plant, continued to perform well during the quarter and we’ll finish delivering line 2 and 3 during the third quarter. As a continuing reminder, it is a new product that we chose in the finance for 24 months.

And as a result we’ll recognize the revenue for this plant as we’re paid. This will have an effect on our cash and our inventory until it’s paid in full. As a reminder the order for alliance 2 and 3 was for $40 million.

The startup of the plant has created strong interest and we do expect to sell an, additional one or two plants by the end of this year. Internationally we’re pleased to see our volume start to come back up and the code activity increased during the second quarter. As an example we delivered equivalent to 36 countries during the second quarter. By comparison, we delivered equivalent to 28 countries in the first quarter this year.

On the energy side, we remain challenged in our drilling and pumping equipment with regards to shipments in the second quarter. And we’re happy to report that we will ship an oil rig and three pump trailers during the third quarter. This, along with continued strength and heaters for gas processing operations and increased sales of wood chippers and grinders has as optimistic on our outlook in energy group.

Rick Dorris and I were in Texas last week visiting one of our key suppliers. And they made the comment that drilling in Texas had picked up significantly in the last three to four weeks, which it translated into an up-tick and order form.

We’re working to grow our business in mining through our new facility in Bello Horizonte, Brazil. This facility was – the progress on the facility took a big slowdown during the World Cup. We do expect to have the facility open and operating in October.

Our Osborn division in South Africa does about 90% of their business with the mining industry. Their biggest challenge at the moment is a large strike of workers in the metal working industry in South Africa that has several manufacturers in the country closed. Osborn has been closed for three weeks with no visibility on when the strike will end.

We are shipping parts from vendors and supporting our customer service issues during the strike, should the strike continue, it could slightly affect our third quarter performance.

Looking ahead to the third quarter 2014 and the rest of this year, we obviously have maintained a nice backlog and have mentioned an increase in code activity internationally.

From our last earnings release to now, orders have been normal for the summer months with the exception of Hot Mix Asphalt plants, which have continued the lag to Highway bill uncertainty.

Our market share remains as strong as ever in the Hot Mix Asphalt plants. As we have mentioned before with the soft Hot Mix Asphalt plant market has been good to have the Pellet Plant business as an offset at our Astec subsidiary.

We see growth opportunities in the oil drilling in the Pellet plants large crushers for mining, target recycle asphalt plants and still small commercial paving equipment.

Our parts sales remain flat to slightly down for the first half versus last year. We remain committed to improving our parts sales volume in the long term, and working to increase our competitive parts sales volume.

We are continuing work on our lean journey with regards to manufacturing and our office operations. As an update, as David mentioned, we are happy to report that we remain over 52% better versus the same period of last year on our absorption.

Looking to the whole of 2014, we expect to improve on our performance versus 2013 the third quarter is traditionally slow quarter for us as a whole. With our division’s current backlogs and delivery schedules, we are cautiously optimistic that we’re available to be ahead of Q3 last year.

And again, this is despite the current state of how we’re dealing with Washington DC. Our customers are experiencing an improved private market and we’re focused on selling existing and new products not only in the United States but around the globe. We’re also growing our business in energy and mining, two industries that are not dependent on the Highway bill.

Acquisitions do remain a key piece of our growth strategy along with organic growth through new product introductions and targeted sales growth efforts both in the U.S. and international markets.

That ends my comments on the quarter and the year, and what’s in front of us. Thank you 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.

Steve Anderson

Okay, thank you Ben. Christine, if you could open the lines, we’d be glad to take questions at this point.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Thank you. Our first question comes from the line of Jack Kasprzak with BB&T. Please proceed with your question.

Jack Kasprzak – BB&T

Thanks, good morning everyone.

Ben Brock

Good morning, Jack.

Jack Kasprzak – BB&T

First question is just on the issue of highway, federal highway funding. I mean, are you guys saying that this lack of sort of stop gap funding measure that I guess has made some considerable progress in Congress but it’s yet to be passed, is affecting orders such that when it is passed, the $11 billion or so infusion that it might serve to relieve your customers? And perhaps bring them back into the mix in terms of orders?

Ben Brock

Jack, this is Ben. It really would help move them along. The truth is in talking to our customers in the last month. Their business seems to be better than ours, particularly in the asphalt side. The more we talk to them there is, work out there that they’ve got. The profit is good. They’re spending money on the smaller ticket CapEx items, the papers, mills and things like that.

So, the demand is slowly improved for that type of equipment. But there is pent-up demand on the large ticket items like the Asphalt Plants. They just want the visibility. We went up to the Fly-In for the Transportation Construction Coalition; Fly-In that we kind of not feeling very good about it. But the proposal by quarter somebody stepping out and trying to get something done, which we fully applied, and it would help our customer’s psyche for sure.

The other thing that we also said, what Congress has proven is that they will continue to do extensions. So the message we’re trying to send our customers with our salesman answer that it’s not what we want but it is there. They are spending some money on roads.

And so the baseline is there, yeah – the mindset, there is nothing like a Highway bill to help their mindsets on their purchases.

Jack Kasprzak – BB&T

Okay. And is there a sort of average price or ticket for the Pellet Plants that you’re selling?

Ben Brock

Well, we sell them in 2010 per hour lines. The Pellet Plant at Hazlehurst is a three-line plant. So, that’s about $60 million project, I think it’s just under running around $59 million. But the ones that we’re quoting are two-line plants.

Jack Kasprzak – BB&T

So that’s about $20 million a line?

Ben Brock

Yes, each one would be about $40 million.

Jack Kasprzak – BB&T

Yes, okay. And on your first quarter call following the ConExpo Show, I think you were happy with the attendance and the customer feedback and order potential. But maybe the orders would kind of flow-in over the course of the year. Are they flowing in as you thought, I mean, are you still happy with kind of how the return on investment on the share if you will?

Ben Brock

We are, we have picked up a few orders from leads that we’ve picked up at the show that we didn’t have before the show. Biggest example of that would be a polymer plant in Brazil. We’re still working a few other opportunities. But yes, we would still say we were happy with the show.

Jack Kasprzak – BB&T

Okay, that does it for me. Thank you very much.

Steve Anderson

Thank you.

Operator

Our next question comes from the line of Mig Dobre with Robert W Baird. Please proceed with your question.

Mig Dobre – Robert W Baird

Hi, good morning guys.

Ben Brock

Hi Mig, good morning. Ben, just to clarify something on cost of a coffee cup comment earlier, most places coffee cup is a little more than a $1 and change, so, for perspective to keep that in mind. I do have a couple of questions on aggregate and mining.

I guess, can you provide a little bit of color on the sequential up-tick in orders, how much of that was Telestack and maybe try to parse that with happening from the pure aggregate side versus what you’re seeing in mining?

Ben Brock

Well, on the backlog side, part of that was them being added in. We’re seeing some more, bigger project work come toward our Telsmith division. So, we’re seeing some of that start to flow through as, like I mentioned some of our customers as we’re talking to them, seems like they’re doing all better and nice. And that holds true on the aggregate side too.

So, we are seeing some of that. Where they’ve been off a little bit has been on the international side. And we have seen more projects on that side too start to come up on quarter.

Mig Dobre – Robert W Baird

But, is there a way to kind of frame the year-over-year growth in aggregate versus what’s happening in mining. I’m trying to figure out, if mining stay down 20% or whatever percent in aggregate is growing or how should I be thinking about that?

Ben Brock

Well, most of our mining work Mig is that at the Osborn division frankly, as we’ve mentioned in the past. And what we would say is it’s probably about equal. Of those are Osborn Group has a good backlog. Of that a lot of that is in traditional aggregates right now. So, I would be thinking about it as being kind of equal as far as the dollars.

Mig Dobre – Robert W Baird

Okay. And then, sticking with Telestack, can you help us with the swing maybe in profitability you mentioned that because of purchase accounting and what not, this acquisition didn’t contribute really or rather with headwind to net income this quarter, but you’re expecting it to contribute going forward. Can you calibrate that at all?

David Silvious

Yes, absolutely. Hi Mig, this is David. The comment was that they were operationally profitable and that due to acquisition accounting that they actually had just a small loss for the quarter. And we don’t expect that to exist going forward. We do expect them to be showing accounting profit, reportable profit going forward.

And the reason for that in the acquisition accounting is primarily the biggest chunk of it was the write-up of inventory, when we bought it and allocated the purchase price that inventory gets written up. And then, it gets sold. Now the vast majority of that was written up was sold during the second quarter. And so, that increase in basis has moved through the P&L so we don’t expect that to exist going forward at all.

Mig Dobre – Robert W Baird

I see, I see. But can you provide me with a number on this that I understand the impact, what the write-up was?

David Silvious

Yes, I believe it was in the neighborhood of $800,000 to $900,000.

Mig Dobre – Robert W Baird

Okay. Thank you for that. I’m also wondering if you can give us a little more color as far as additional potential demand for the Wood Tele Plants. You did mention some folks are looking at the plants and you reiterated the fact that you expect sell some by year-end. Has your conviction increased or unchanged or decreased as far as your ability to get additional orders this year?

David Silvious

I think for this year, we would say one to two for delivery in 2015. There could be more but they would be next year. So, we wouldn’t say anymore than that for now Mig really for what we’re talking to. We have more prospects than that but those seem to be the two worms that we have.

Mig Dobre – Robert W Baird

That was last quarter as well, but I’m wondering have you made progress with these – with these plants that you apparently have in your pipeline?

Ben Brock

Right. We have really we do have some excitement around the plant. It’s exceeded the guaranteed tons we guaranteed 15 tons on the first one because it was our first one. But we’ve run over 20 tons an hour on the line.

We actually were – we’ve gone through our problems I mean, it’s the first. So, we’ve had issues but we did get it up running, right after where we ran them out of their base material, they ran out of chips. So that was a good sign. But we’ve had visitors on site. They’re excited about the prospects.

A lot of the comments are, nobody is close to you you’re doing great. So, it just takes so long for the projects because of the financing and getting the sites ready, and it’s really a transportation business on the pellets, so getting all that lined up just takes a long time.

But when we can get people to decide, we seem like we’re moving into a lead position for opportunities to get deals. One or two this year potentially more than that number for next year but it’s really too early to talk as we got to figure out which gas has the money. But that’s kind of where we are right now.

Mig Dobre – Robert W Baird

I appreciate that. Then, last one before I jump back in the queue, on energy. Nice bump in orders there sequentially and year-over-year as well. With that in mind and looking at the backlog, how should we think about margin here in the back half of the year for this segment? Is it reasonable to assume a similar run rate to what you’ve had in the first half? Or given your backlog mix, can we be thinking something else?

Ben Brock

Well, part of that backlog is newer rigs and the newer technology. And we continue to change that as we go along. I think the way to look at that would be the same type of margins.

We think next year we can start raising those a little bit because we’re getting the name for ourselves and on the front trailers. But right now, I would look at it as the same margins for the balance of the year.

Mig Dobre – Robert W Baird

Great. Thank you.

Operator

Our next question comes from the line of Jason Ursaner with CJS Securities. Please proceed with your question.

Jason Ursaner – CJS Securities

Good morning.

Ben Brock

Good morning.

Jason Ursaner – CJS Securities

First I have a couple of questions on the infrastructure group. Normally Q1 and Q2 were roughly comparable through the company but sales were up almost 20% sequentially. So, would most of that increase relate to weather? I know last quarter you talked about that impact of some of the timing of deliveries. And just trying to break that between weather and maybe ConExpo?

Ben Brock

Jason, I would probably agree with you on the weather to a point, it was awfully wet in the first quarter. But the other side of that, on the infrastructure is with Roadtec being in there and seeing the spending on the smaller ticket CapEx items.

And they’re gaining some market share we feel like in the papers. I think that’s where you’re seeing a piece of that. And also our small favors with our Carlson Group. They’re doing as well as ever on sales and backlog that they’ve ever done.

Jason Ursaner – CJS Securities

Okay. And (inaudible) but just on the wood pellet, the quarter included no revenue for any recognition on the initial one, that’s on the customer financial arrangements?

Ben Brock

That’s correct.

David Silvious

That’s correct.

Jason Ursaner – CJS Securities

Okay. And in terms of the cautious commentary on short-term spending, maybe just a little bit more detail there. Is it, because customers had already been holding off, waiting for the Highway bill. So, is the commentary that this is just a continuation of that, is it trying to signal maybe more of that or is it just signaling kind of normal seasonality that domestically second half tends to be lower than the first half to begin with?

Ben Brock

It’s a combination Jason. I mean, the Hot Mix Plant business is just pretty tough right now, frankly. And we’re getting our – and our market share is really pretty good in a weak market. The fall buying season or traditional buying season, we’re starting to quote for that.

But we don’t – we’re on the short-term, this is going to take a while to get our customers through the work season and get them into the buying mode. So I think it’s a combination of traditional buying season and the fact that we’re on another extension to 2015.

Jason Ursaner – CJS Securities

Okay. And overall parts sales obviously declined a couple of percent in the quarter on a year-to-year basis. You mentioned, there has been an effort to increase the investment in sales there to grow that after-market portion.

Was there anything specifically going on in the quarter or the first half that may have skewed that or I guess how are you going to term that towards growth?

Ben Brock

Well, we were frankly a little disappointed because we have been focusing on it. And we’ve seen a little bit more since then in the quarter, parts coming back a little bit. Our answer from the field is it’s just not as many parts has been bought on the Asphalt side in particular, one of our private parts competitors is reducing staff.

But as we get into, we’re going to continue. We’re going to keep working on the competitive parts side of it. We’ve been – some divisions have done better than others on that, so we have an opportunity there. So, we’re working through that frankly Jason, we want to increase it and we’re going to continue focus on it during the quarter.

And part of that will be a little bit better effort on how we’re covering the territory with our boots on the grounds because we do have more boots on the ground. And we think we can get that back here going into second half.

Jason Ursaner – CJS Securities

Okay. Great, I think that’s it from me. I’ll jump back in the queue. Thanks.

Ben Brock

Okay, thank you.

Operator

Our next question comes from the line of Nick Coppola with Thompson Research. Please proceed with your question.

Nick Coppola – Thompson Research

Hi, good morning.

Ben Brock

Good morning.

David Silvious

Good morning.

Nick Coppola – Thompson Research

Can you add a little more color about the activity you’re seeing at the state level to get highway projects completed. And then kind of as a follow-up to that, are you seeing substantially stronger pockets of growth where additional funding mechanisms are being put in place?

Ben Brock

Sure, the ones that we’ve talked about, we’ve kind of talked about them in the past Nick that the Virginia effort with moving to more of a sales tax set-up. I was up there in late June and July with a customer. And they’re starting to see a little bit of that.

But they were busy. They kind of said we were busy. But part of it is, we had a wet first part of the year. But that the projects that were coming, we’re looking good to them. They were in the Northern part of Virginia.

The other states, Pennsylvania has done some work on that to try to get more sales tax going. And that’s trying to – part of that is go away from some of the gas tax to go to some – to the state tax or the sales tax side. But those were couple of examples that are out there that seemed to be working.

Now the other pockets where there is work, of course is kind of where there is oil. So we’ve seen Texas being strong for instance. And that makes sense for what they’ve got going down in that part of the world.

Nick Coppola – Thompson Research

Okay, that’s certainly helpful. And then, in terms of international sales, we saw one of the strongest year-over-year growth we’ve seen in quality quarters. Assuming Telestack helped to move the needle there. If there is any commentary that gives us kind of to either quantify that or commentary about broader based international trends that would be helpful?

Ben Brock

Sure. Telestack did have an effect on that. And then also, in this country as David mentioned in his comments, Russia and Post-Soviet states have been good for us. And one of the questions that may come up is, how are we seeing the Russia and the Ukraine situation and is that affecting us? We have not seen it yet. We’re keeping heck of an eye on it.

But what we’ve seen is things are moving as usual. We’ve had a lot of mobile equipment shipped into Russia. We had an Asphalt plant that is shipping, we got paid last week. It’s on the way over. In the Ukraine we’ve got a project coming out at Telestack that’s shipping this week, it started shipping yesterday. So, we have not seen that affect us in that region.

Nick Coppola – Thompson Research

All right, that’s helpful. Thanks for taking my questions.

Steve Anderson

Okay. Thank you.

Operator

Our next question comes from the line of Ted Grace with Susquehanna. Please proceed with your question.

Ted Grace – Susquehanna

Hi guys, congratulations on a good quarter.

Ben Brock

Thanks Ted.

Ted Grace – Susquehanna

I was hoping you could circle back on a couple of items and maybe parts just because it was just discussed. Ben, I apologize if I missed it, but specifically where was the weakness most achieved in the quarter that drove kind of a decline and maybe you could just start there?

Ben Brock

Well, we had, on our energy side we were off a little bit with our Hitec Parks. And they had a pretty significant order last year that was off a little bit for them. And our Telsmith Group was off on their parts a little bit. So, those were the two main culprits, if you say culprits, but they’re working on getting it back up. I mean, that we have pockets where they’re pretty good, those were the two main ones.

Ted Grace – Susquehanna

So, energy and I apologize to note that from ahead, but Telsmith is in AMG?

Ben Brock

Yes.

Ted Grace – Susquehanna

And the end-markets based specifically on what?

Ben Brock

The Telsmith is primarily quarry and aggregates. They have some mining equipments and then they’re developing the large (inaudible) account for the mining. And then, Hitec is in the energy side, and primarily hurdle heaters and power planning systems the ones in existence.

Ted Grace – Susquehanna

So, to your prior comment that domestic aggregates is okay in international comp, is it fair to say you met your domestic parts business in for AMG was up or would that be rating too much in what you are saying?

Ben Brock

No, I think it would be, maybe reading a little bit too much. And I think it’s not to that degree.

Ted Grace – Susquehanna

Okay. But when you talk to customers on a domestic aggregate side that they’re – I mean, volumes are clearly up nicely, productions up nicely in the second quarter. You just have yet to see that kind of translate into parts and consumables?

Ben Brock

Yes, we think we’re going to start seeing it.

Ted Grace – Susquehanna

Okay. And you don’t think that the market share issue or third parties, you think this is the timing factor?

Ben Brock

I don’t think its beneficiary issue.

Ted Grace – Susquehanna

Okay, perfect. That’s helpful. Then, the second thing I was hoping there, just circle back and then I apologize if I missed something. But in terms of the AMG margins, the incremental were softer than friend (ph). I know you had some one-time items related to Telestack. But could we just maybe walk-through what those one-time items were just so we understand what the underlying kind of profitability of AMG look like?

Ben Brock

Well, they have – I think what you’re referring to when you talk about their margins, frankly they had a couple of large projects that were price competitive. And I think that’s what you’re seeing Ted. We don’t really have anything other than that when we talk there. Their product makes us pretty good. They just had a couple of big jobs that were price competitive.

Ted Grace – Susquehanna

Okay. So, kind of pricing and mix we had more win in that kind of? And the one-time items I know, I heard $800,000 to $900,000 of inventory step-up. Was that all realized in the quarter or is that what we’re expecting for the year?

Ben Brock

That was, I’d say 90% to 95% of it was realized during the quarter. I’d say the lower end of that range was realized during the quarter. There may be just little bit left. I think they had one piece of equipment left that existed at the acquisition date. So, and that piece should move out this quarter we believe or at some point the remainder of the year.

Ted Grace – Susquehanna

Okay. So, the one-time items are behind and things kind of normalize 3Q and beyond?

Ben Brock

That’s correct.

Ted Grace – Susquehanna

Okay. And then, clearly on the energy margins comment on the back half. We think it would be similar year-on-year or the second half of ‘14 should be similar to the first half of ‘14?

Ben Brock

The second half of ‘14 should be similar to the first half of ‘14.

Ted Grace – Susquehanna

Great, okay. That’s helpful here. The last thing I wanted to ask as I know of you is that, you just kind of look forward two or three years. What lean and all the other initiatives you have underway, can you just talk about the longer term opportunity you see to improve margins, structurally, so forgetting volumes and mix and pricing in those dynamics. Just in terms of improving your kinds of your fixed cost structure, how much opportunities do you have left, two to three years? And I’ll get back in queue?

Ben Brock

Ted, we were working on the lean again as I’ve said in the past, I think we’ve been slower than a lot of companies that maybe built one after the other things because of our build of order. And most of our businesses set up that we are making the journey and we’re now ranking our divisions against each other, which is a great, best practices driver. And we’re starting to see that take effect, I mean, we do on quarterly reviews travel to the divisions and we’re seeing some results visibly in the shops.

And as they do, what the companies that have already done that, as that comes through, we think we’re going to see better margins and start to – part of it will be volume, I mean, we are a volume story sometimes with the margin that we’re getting the things in place to be able to get back if we can get the volume to get back to the historical high margins. And so that would be our goal as to get back to that point. As a combination of the lean effort in volume that’s just too we are in our major setup.

Ted Grace – Susquehanna

Understand. All right, that’s very helpful guys. Best of luck this quarter.

Ben Brock

Thank you.

Operator

Our next question comes from the line of Walter Liptak with Global Hunter Securities. Please proceed with your question.

Walter Liptak – Global Hunter Securities

Hi, thanks good morning guys.

Ben Brock

Good morning. Just a couple of follow-ups. First, in your outlook you commented a little bit about third quarter. And I think you commented that revenues are going to be challenging. I wonder if you can just kind of review that with us and I think you said, EPS might be up in the third quarter directionally. I wonder if can get more color there?

Ben Brock

Well, this is Ben. I think we’ll be ahead of the third quarter last year at the end of this third quarter. And based on what we have in our backlog and then the scheduled shipments, and I think that’s about where we believe that we how much can – with our quarters.

Sometimes even we get a little frustrated because of permitting and sites not being ready and that type of thing and we have a little bit of kind of our core creep into the quarters over into the next quarter a bit. What we see right now, we think we’ll be ahead of last year.

Walter Liptak – Global Hunter Securities

Okay. Kind of along those lines in energy for the order, activity was strong. Is that book in ship, can that ship in the third quarter or some of it ship in the third or is it more waited towards the fourth?

Ben Brock

Some of it will and we’ve got our Peterson divisions doing quite well. And a good portion of that is in that group and the Hitec Group.

Walter Liptak – Global Hunter Securities

Okay, okay, great. Thank you.

Ben Brock

Thanks.

Operator

Our next question comes from the line of Larry De Maria with William Blair. Please proceed with your question.

Larry De Maria – William Blair

Hi, good morning. Thank you. Couple of questions. First from the sequential infrastructure incremental, they are relatively weak sequentially but obviously they’re really large year-over-year. Is it relating to the seasonality to the cost in that segment that would affect 1Q to 2Q? And then how should we think about second half gross margins given the run rate we’re at now? Thank you.

Ben Brock

Larry, I want to apologize on this, I missed the first part of the question, this is Ben.

Larry De Maria – William Blair

Hi Ben. No, just about the sequential infrastructure margins, maybe weren’t as hard as obviously they were year-over-year. And is there anything seasonally with the costs, is there anything like that we should think about because they’re trying to get a proper run rate to get into the second half. So, just trying to understand the seasonality and then what the second half might look like?

Ben Brock

Okay, thank you. I’m sorry about not hearing the first part. We will see some seasonality. What will help a little bit at the Astec division for example is we do have the hours or the Pellet plant to help on the hours absorbed. So I think we’ll see about – with the volume we have some other divisions. I think it will be even to slightly ahead of last year in the infrastructure, probably a little ahead.

Larry De Maria – William Blair

Okay, that’s fair. And then, secondly on the Pellet Plants, I guess, how do we think about strictly within that category, obviously the gross margins probably start off lower than you were hoping and then they obviously grow as they come up the curve and get more orders. But how do we think about the trajectories which gross margins specifically for the Tele Plants?

And then, it sounds like you won’t be financing subsequent orders with customers. Is that an issue for you guys or your competitors thinking about doing that or is it just you need to evolve and that needs to just get better?

Ben Brock

Well, the Pellet plant margins, we’re seeing are in line with our major equipment gross margins. So, we’re happy to put forward that. So, going ahead, we’d like to raise them. And we will as we build one after the other, we can get – where we got our order behind each other. We naturally do better.

Competitor wise, it’s really difficult for somebody to come in and the exactly what we are because there is a large investment to get to that point. As we stand right now, we supply everything on the plant with the exception of two pieces pretty critical piece is the Pellet crest itself. And we’ve partnered with Carl out at Germany and use their unit as our standard unit.

And then we have some hammer mills that we bought out from another company that eventually we can design our own hammer mill. But we’re in a unique position as a build the order one-stop shop for Pellet Plant, unless the other plants are engineering firms, pulling equipment from multiple suppliers together to build a plant.

And where you have one finger point at Astec is we take responsibility for everything. And we will handle the other press and the hammer mills because we’ve gone through the training on them. It’s different when you have an EPC contractor that, engineering company that brings in 10 different people and take a look at each other say who is the – who is causing this problem. That’s pretty attractive to the end-user. We’re on a unique position right now.

Larry De Maria – William Blair

Got you, that makes a lot of sense. And then, just finally, how do we think about capacity lines given that you guys are maybe I guess hard to say, a bit more vertically integrated than some of the competitors when we’re assembly and contractual based. How do we think about the number of lines we can actually think about getting towards or is there no real limit we can drive that?

Ben Brock

If you look at the charts and the projections that we see coming out of meetings and going to association meetings too, general conferences. 60-ton an hour plant you think of that as maybe a sweet spot in size, which would be three lines.

The market that has projected for Europe, which the pellets get to replace coal for the emissions reductions, and so you look at the projection as then as the number of pellets or the tons that they will need, it would tell you that somewhere in the range of 35 to 50 pellet plants in the 60-ton hour range, would be sold in the United States to supply that.

And of course you’ll end up having some competition Latin America would get into supplying pellets. And a lot of it comes down to transportation, they’ve got to be first in the fiber bit, around the trees, and second, close enough to a cheap enough form of transportation and get it there economically for the price that they’re willing to pay for the pellets. So that’s kind of that’s where the limit comes in and where it’s not 300 pellet plants.

Larry De Maria – William Blair

Right. I guess, I’m thinking about your guy’s capacity in terms of how many lines you can do in a year, how limited you guys are if this market really takes off?

Ben Brock

Right. Well, capacity wise, we could handle six lines to nine lines in a year pretty well. Now, the Hot Mix Plant business comes back, we’ll have an opportunity. But we can add on fairly quickly, we’ve got – we already have the plans should that happen. So we’re six to nine lines in a year right now where we would really be.

Larry De Maria – William Blair

Got it. Thanks very much. Good luck.

Ben Brock

Thank you.

Operator

Our next question comes from the line of (inaudible) with Morgan Dempsey. Please proceed with your question.

Unidentified Analyst

Good morning guys.

Ben Brock

Good morning.

Unidentified Analyst

Yes, let me ask you guys talked a little bit about parts, is the parts sales levered to utilization and I would ask that if you go with this kind of a net Washington in the Highway bill and the fields installation of equipment continues to gage and the light spans continue to the longer.

I would think that over time that would cause a demand increase for parts or is it strictly on just utilization and usage?

Ben Brock

Now, I would agree with your comment. I mean, if the plants continue to aid, there will be more parts sold. Utilization of those older plants does matter. I mean, if the plants must if it’s not working, they’re not going to be buying any parts.

But one of the things we’ve seen is people have gotten a little more work and gotten busy and as they started up their plants, they realized the cost – that’s cost them in the back half of last year, in the first part of this year. So, I think that helps add to the pent-up demand if we can get a long term bill we can see some movement on the large plants.

Unidentified Analyst

Yes, okay. Also Ben, you talked about what 17 company subsidiaries, give us kind of a sense maybe from a 50,000-foot view, kind of what you’re running shifts and kind of where your capacity utilization might be, you’re not the one to reach one but just kind of maybe the hide on the wall?

Ben Brock

Well, as a group, we’re probably running about 65% utilization today. We could, our current volumes we could probably get another if you say, we’re $900 billion-company we could probably get it to 1.5 or 1.6 with our current facilities.

And that’s what you had in second third shifts and that type of thing. Our lean effort will help that a little bit. Give us ability to get more through the existing facilities.

Unidentified Analyst

Okay. And correct if I’m wrong, I think you had 40 or 41 new products, the ConExpo, is there anything that’s tracking better or the reception adoption is better any of those products?

Ben Brock

Well, at our Carlson group, the news greet have really taken off, they have got lot of orders, there are more pavers have done extremely well that they announced at the show. So, if there was one at pick out, I would pick that out but there is lot of excitement through a lot of the division’s equipment, the new the guardian system on the road tech favors to be able to see what’s happening on the road on your smartphone and that type of stuff, that’s very popular.

We’ve seen pretty good interest in the people carrier that BTI had at the show and they didn’t expect to get activity on it. The new water drill rig that Geoff Co has the show is had the line interest. Well, I would like to talk about this for an hour but we have had some pretty good interest in the new equipment that we showed there.

Unidentified Analyst

Okay, okay. Of the, just from the standpoint of the kind of a global scope for pellet plant, you mentioned Europe 35 to 50, 60-ton plant, is that specifically concentrated in the U.K. or that’s spread all over the European continent?

Ben Brock

The primary driver demand is the U.K. Now the pellet plants themselves would be here in the United States. And the Pellets would ship to Europe. But we have seen an up-tick with the price of natural gas coming out of Russia at about $16 I guess a thousand right now.

The wood is competitive. So we’ve seen a residential up-tick through the winter last year in Italy and Germany. So our customers are shipping some pellets to that area too. And they get a little more money on the private side, which is similar to asphalt business. But we have seen an up-tick there.

Unidentified Analyst

All right. Thanks guys.

Ben Brock

Thank you.

Operator

Our next question is a follow-up from Mig Dobre with Robert W Baird. Please proceed with your question.

Mig Dobre – Robert W Baird

Yes, thanks for taking my follow-up. Just a couple of clarification. First is on the SG&A run rate, if I remember correctly you mentioned Telestack added something like $1.2 million, is that the right rate going forward or is that number supposed to come down from as the year progresses.

Ben Brock

I’d say that’s a good range to use for a while.

Mig Dobre – Robert W Baird

All right, all right, that’s helpful. And then I’m trying to sort of triangulate where we’re supposed to be really on – what expectations on the earnings side for the third quarter. You did mention up year-over-year which should make some sense to me, just given the fact that you’ve got different absorption than what you had last year.

But I’m wondering as we’re looking at revenue as well as earnings compared to say for instance the first quarter of this year, are we talking lower, are we talking flat, how should we frame that?

Ben Brock

Well, hopefully I’m hearing your question right – the question is on the revenue side, well how much up will we be?

Mig Dobre – Robert W Baird

Right, exactly. You’re going to be up year-over-year and I understand that. I’m just trying to understand as to whether you can sort of frame the third quarter performance versus what we’ve seen thus far this year, either versus the first quarter or maybe the average of the six months or however you can or want to do it?

Ben Brock

It will be, I have to tell you, it will be up versus 2013, but I mean, when I’m saying quarter to quarter, third quarter to third quarter, it will be down versus the first quarter this year, if that’s the question.

Mig Dobre – Robert W Baird

Okay. That is the question.

Ben Brock

Yes, yes.

Mig Dobre – Robert W Baird

And the last point here is on the tax rate, which was a little higher than what I was expecting. Is this a good run rate going forward?

Ben Brock

I would use this until I pass R&D tax credit. If they do that it could – it will impact our tax rate and we’ll – as soon as they pass it, we get to – we account for that whole credit in that period. But I think this higher rate is the new normal right now.

Mig Dobre – Robert W Baird

Got it. Thank you, guys.

Steve Anderson

Thank you.

Operator

Mr. Anderson, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Steve Anderson

Thank you, Christine. We appreciate your participation on this second quarter conference call. And thank you for your interest in Astec. As our news release indicates, today’s call has been recorded. A replay of the conference call will be available through August 5, 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, this will conclude our call. Thank you all. Have a good week.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation. And have a wonderful day.

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Astec Industries (NASDAQ:ASTE): Q2 EPS of $0.63 beats by $0.01. Revenue of $277.25M (+11.7% Y/Y) beats by $12.99M.