Ben Brock - President, Chief Executive Officer Rick Dorris - Executive Vice President, Chief Operating Officer David Silvious - Chief Financial Officer Steve Anderson - Vice President, Administration & Director of Investor Relations.

Schon Williams - BB&T Capital Markets Joe Grabowski - Robert Baird Nick Coppola - Thompson Research Group Jason Ursaner - CJS Securities Ted Grace - Susquehanna William Bremer - Maxim Group Todd Vencil - Sterne Agee Morris Ajzenman - Griffin Securities Brian Rafn - Morgan Dempsey Capital Management.

Greetings, and welcome to the Astec Industries Second Quarter 2015 Earnings Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Steve Anderson.

Thank you sir, you may begin..

All right. Thank you, Adam. Good morning and welcome to the Astec Industries' conference call for the second quarter that ended June 30, 2015. As Adam mentioned, my name is Steve Anderson. I'm the Vice President of Administration and Director of Investor Relations for the company.

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 who will summarize our financial results and then to Ben who will review our business activity during the second quarter.

Before we begin, I'll remind you that our discussion this morning may contain forward-looking statements that relate to the future performance of the company, and these statements are intended to qualify for the Safe Harbor liability established by the Private Securities Litigation Reform Act.

Any such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions. With this point, I will turn the call over to David to summarize our financial results for the second quarter. .

All right. Thanks, Steve and good morning everyone. Thanks for joining us on this call this morning. Net sales for the quarter were $268 million compared to $277.3 million in the second quarter of ’14. That is a 3.4% decrease or a $9.3 million decrease.

International sales for the second quarter of ’15 were $73.4 million compared to $92.6 million in international sales for the second quarter of ‘14, the decrease of 20.7% or $19.2 million decrease. International sales represented 27.4% of Q2 ’15 sales compared to 33.4% of Q2, 2014 sales.

The decrease in international sales in the second quarter of ’15 compared to the same period last year occurred primarily in Russia, in South East Asia, in China and in South America and these decreases were offset by increases in international sales in Europe, in Canada and in India.

For the quarter international sales decreased in the infrastructure group and the aggregate and mining group and slightly increased in the energy group. Domestic sales for the second quarter of ’15 were $194.6 million compared to $184.7 million in the second quarter of ‘14, an increase of 5.4%, or $9.9 million increase.

Domestic sales represented 72.6% of Q2 ‘15 sales compared to 66.6% of Q2 ‘14 sales. Part sales for the second quarter of ‘15 were $67.4 million. That compares to $60.2 million for the second quarter of ’14. That’s a 12% increase of a $7.2 million increase. Part sales again represented 25.2% of Q2, 2015 sales compared to 21.7% of Q2, 2014 sales.

Parts sales increased in all groups for the quarter. On a year-to-date basis sales were $556.8 million compared to $515.9 million in the first half of ’14. That’s an increase of 7.9% or $40.9 million increase in revenues.

International sales for the first half were $151.1 million compared to $155.8 million first half of ’14, a decrease of 3% or $4.7 million decrease. That decrease occurred primarily in Russia, in South East Asia, in China and in Mexico for the first half of ’15 compared to ’14.

Those decreases were offset by increases in Europe, in Canada and Australia and in the Middle East. International sales represented 27.1% of net sales first half ’15 compared to 30.2% of first half ’14 sales. For the year international sales decreased in the agg amount and in infrastructure groups and increased in the energy group.

Domestic sales for the first half were $405.7 million compared to $360.1 million in the first half of ‘14, an increase of $45.6 million or a 12.7% increase. In the first half domestic sales represented 72.9% of total sales compared to 69.8% for the same period last year.

Parts sales on a year-to-date basis for $140.5 million compared to $129.4 million for the first half of last year, that’s an increase of 8.6% or $11.1 million increase. Part sales were 25.2% of total sales this year compared to 25.1% for the first half last year.

Gross profit for the quarter in dollar terms was $62.2 million and that compared to the same amount last year, so it remained flat as far as dollar terms go. However as a percentage of sales gross profit increased to 23.2% of sales compared to 22.4% for the second quarter of ’14.

Our absorption variance decreased about $400,000 quarter compared to quarter from $2.8 million last year to $2.4 million this year. On a year-to-date basis the gross profit dollars were $128.3 million compared to $118.9 million last year, that’s an increase of $9.4 million or 7.9%.

The gross profit percentage remained relatively flat year-over-year at 23% this year and 23.1% in the first half of ’14. Unabsorbed overhead for the year was $4.5 million in the first half of ’15 to $36.1 million in the first half of ’14, that is a $1.6 million positive improvement in unabsorbed overheads.

Recall that we had previously announced that the termination of operations that are allowed in facility would occur on May 31 and as a result of that we incurred approximately $1.5 million in restructuring costs, approximately half of which was accrued in the first quarter and we discussed that in the first quarter, but the rest of it was incurred in the second quarter.

Almost all of that was encountered in the gross margin line item. SGA&E for the quarter was $43.3 million or 16.2% of sales compared to $40.2 million or 14.5% of sales for the second quarter of ’14. That’s an increase of $3.1 million or an increase of 170 basis points as a percentage of sales.

The drivers on that increase for the quarter were about $1 million of computer and consulting expense, $800,000 of payroll related increases, research and development increases of about $1 million and some unexpected high incidence in our health insurance.

We are a self insured company for health insurance purposes and so we incurred about an additional $800,000 over the same quarter last year in Q2 of this year related to health insurances. Now I previously called out a run rate of something slightly north of $41 million last quarter. Obviously we didn’t hit that this quarter.

I still believe that we can achieve something less than $43 million on a consistent run rate, but I do believe that give our research and development spend and the implementation of the ERP systems that we are going through in various subsidiaries, that we do need to ratchet up the run rate prediction on the SG&A to $42.5 million or somewhere in that range, give or take just a little bit.

I think that is probably a more appropriate run rate to work with. On a year to date basis SGA&E was $87.1 million or 15.6% of sales compared to $83.7 million for the first half of ’14, 16.2% of sales. That’s an increase in dollar terms of $3.4 million dollars.

For the year the same holds true as far as the drivers of the increase in SGA&E, you had computer and consulting expenses related to ERP implementations and computer systems implementations of about $2.5 million, health insurance expense increases of about $2 million, payroll and related expenses of approximately $2 million and research and development increases of about $1.3 million.

Recall that in the first quarter of 2014 we had incurred about $4 million of comp expo expense. Obviously we don’t have that expense this year. Operating income for the second quarter was $18.9 million. It was $21.9 million in the second quarter of ’14; that’s a decrease of $3 million or 13.7%.

The first half operating income was $41.2 million compared to $35.3 million in the first half of ’14, an increase of $5.9 million or 16.7% increase in operating income.

Interest expense was $420,000 in the second quarter of ’15, a $311,000 increase over the $109,000 we show for the second quarter of ’14 and on a year-to-date basis its $117,000 compared to $182,000 in the first half of ’14, a $535,000 increase.

Primary driver on interest expense is that we are incurring debt and borrowing money in Brazil as we have built that factory and it is up and going. So it’s the first quarter and we are financing that with local borrowings in Brazil.

Other income was $420,000 in the second quarter compared to $736,000 in the second quarter of ’14 and $2.4 million for the first half of ’15 compared to $1.5 million in the first half of ’14. The primary source as usual of other income is license fee income and investment income that are kept at the insurance company.

However, the year-to-date amount for ’15 also includes key main life insurance proceeds in the first quarter of 2015 of approximately a $1 million to $2 million. The effective tax rate for the quarter was 37.9% compared to 35.75% in 2014 Q2 and for the year its 37.4% compared to 34.4% for the year in 2014 at June 30.

Effective tax rate for ’15 is slightly higher than our expected rate of around 36% due to some increasing state tax rates that we are incurring, as well as our inability to book tax benefits for losses at certain of our foreign companies, along with certain true-ups that we had during the quarter and year-to-date periods related to various tax audits that we have in jurisdictions in which we operate.

The effective rate for ‘14 is lower than our traditional effective rate due to the true-up in certain tax benefits that we receive related to our basis in certain of our foreign subsidiaries. But I do expect that nether year has the R&D credit included in the tax rate up through June 30.

Recall that it was passed late in 2014, but I do expect the R&D credit to be passed later in 2015 and if is, our rate for the year would be more in the 35.5% to 36% range, which is our traditional run rate on income tax effective rate.

Net income was $11.8 million in the second quarter of ’15 compared to $14.5 million in the second quarter of ‘14, a $2.7 million decrease or 18.6% decrease. That resulted in diluted earnings for the quarter of $0.51 compared to $0.63 in the second quarter of ’14, a $0.12 decrease or 19% decrease.

For the first half net income was 26.9% million compared to $24 million in the first half of ’14, a $2.9 million increase or 12.1% increase. That resulted in earnings of $1.16 per share in the first half of ’15 compared to $1.04 per share in the first half of ’14, a $0.12 increase or a 11.5% increase.

Our backlog at the end of June was $229.5 million compared to $264.1 million at the June in ’14, that’s a decrease of $34.6 million or 13.1% decrease. Our international backlog, the international component of that backlog was $57.5 million compared to $106.7 million at June 30 last year, that’s a decrease of $49.2 million or 46%.

Our domestic backlog at the end of June increased from $157.4 million last year to $172 million this year, that’s an increase of $14.6 million or a 9% increase. Our balance sheet continues to be very strong. We have receivables of $118.2 million at June 30 compared to $119.7 million, so down slightly, down about $1.5 million year-over-year.

Days outstanding remain relatively flat. They are at 40.2 this year compared to 39.1 last year. Our inventories at $382.8 million compared to $364.1 million at June 30 last year, an increase of $18.7 million and our turns remain flat. We were at 2.1 last year and we are at 2.1 inventory turns this year.

We had no money over in our domestic $100 million credit facility and we have $16.4 million in cash and cash equivalence sitting on the balance sheet right now. Letters of credit are $11.8 million. That leaves borrowing availability on our credit facility of $88.2 million. CapEx for the quarter was $3.8 million.

CapEx for the year through the first half is $10.7 million. We previously discussed CapEx budget for the year of about $30 million; however, we believe that the rate at which we are spending on capital will end up somewhere between $20 million and $25 million, which will be relative to our depreciation.

Our depreciation was $5.2 million for the second quarter; its $10.4 million for the first half. We still believe that depreciation will hold at $23.1 million for the full year of 2015. That concludes my prepared remarks on the financials. I’ll turn it back over to Steve Anderson..

Thank you, David. Ben will now provide some comments regarding the second quarter of this year’s operations. I’ll turn it over to Ben now. .

Thank you, Steve. Thanks to everybody for being on the call this morning. As we mentioned in our earnings release this morning, we were disappointed with our second quarter results. We were pleased with our year-to-date earnings per share which were up 12% versus last year.

However earnings per share in the second quarter were $0.51 per share versus $0.63 per share in the second quarter of 2014 with a decrease of 19%. Our year-to-date earnings per share were $1.16 versus $1.04 last year for an increase of 12%. Year-to-date EBITDA was $55.1 million versus $47.7 million for an increase of 15.5%.

Our backlog at June 30 was $229.5 million, which is down 13.1% versus last year. Domestic backlog was up 9% year-over-year and international backlog was down 46% versus last year. International backlog was down primarily due to the strengthening of the U.S. dollar and the global mining slowdown.

Regarding international sales, we are pleased to report an increase in quoting activity in our international sales groups and the addition in multiple orders since July 1 at our Astec new Brazil subsidiary for our large aggregate processing project and for two hot-mix asphalt plants.

The encouraging news for us remains that as we mentioned on last quarter’s call, we continue to hear from our infrastructure customers in the United States that they are experiencing good business levels and they have backlogs of work to do, particularly on the product side.

This has been good for our infrastructure business this year with the exception of the 45 days following the latest extension of the federal highway bill in the United States which slowed the ordering of equipment.

While it will take a long time for the highway bill to bring sustained growth in large CapEx spending bar infrastructure group customers, we are encouraged that our customers’ equipment is running in our capacities and we have seen a slightly stronger hot mix asphalt plat market this year versus last year.

With regards to the highway bill we continue to stay in close contact with our elected officials in Washington DC and we are encouraging our customers, vendors and other industry members to do the same through our Don't Let America Dead Effort. More info on this can be found in our Don't Let America Dead website.

The situation remains very fluid in Washington DC with the House passing the short term extension last week in order to set up working towards running a long term bill by the end of this year and the senate possible saying a McConnell-Boxer long term bill being announced as early as today.

Regardless of what happens over the next 10 days in Washington DC, we’re optimistic that there will be the long term highway bill of some kind passed this calendar year.

As we work and wait on our long term highway bill, we continue to pursue new business with new products in the United States and we continue to maintain our international effort despite the challenges presented to us, by the strong U.S. dollar and depressed mining industries in some of our key markets.

Our lower backlog in international is a direct result of those two developments. Updating everyone on the Pellet Plant that we delivered to Hazlehurst, Georgia, line one of three continues to run; line two is near the start up phase and line three is nearly installed and full are near the testing phase.

As a continuing reminder, it’s a new product that we’ve chosen to finance and as a result we’ll recognize the revenue for this plant as we are paid. This will have an effect on our cash and our inventory until it’s paid in full. As a reminder, the order for all three lines was for $60 million.

We expected to announce the sale of a new Pellet Plant last quarter. Local permitting, pellet supply contracts and customer finance on these sized projects takes a very long time for these plants and is requiring a high level of patience for us as we progressed towards the next Pellet Plant order.

We believe that we will be in position to announce a foreign Pellet Plant order very soon. If and when we secure the order we will announce the order to the market. With regards to international sales overall, given the well documented challenges, globally with regards to the U.S.

dollar strength, global mining and politics, particularly in Russia, we remain challenged for the moment with regards to sales internationally. We remain committed to growing our international sales over the long term and we will continue to maintain and in some cases increase our sales and service coverage around the globe.

To that end and as a reminder, we opened our Astec do Brazil facility in Belo Horizonte on March 26 this year, and as mentioned, we are happy to report that we have secured new work for this plant and a large aggregate equipment project and two hot mix plant orders.

We are already building crushers and screens in the facility for other customers and the asphalt plants will be manufactured and delivered this year.

On the energy side we remain challenged in our drilling and pumping equipment with regards to shipments and margins in the second quarter and we are not immune to the current oil prices with regards to our oil drilling and pumper business.

As a reminder, as a result of the low price of oil and over capacity at our GEFCO Loudon facility, we regretfully informed our employees at the Loudon facility earlier this year that we will be closing the facility effective at the end of May this year. As David mentioned, this closure was completed on May 31.

The total cost of this event was more than we expected at $1.5 million year-to-date, however it was still result in cost savings in this year that will outweigh the cost of closing the facility. The product launch and related inventory at Loudon had been relocated to our GEFCO, Enid facility.

The main product lines at Loudon were the oil drill rigs and pump trailers. In other energy group news we saw stable sales in heater for gas processing operations and stable sales of wood chippers and grinders. We remain optimistic on our outlook in the energy group in the long term.

Looking ahead to the third quarter of 2015 and the rest of the year, we have seen a slower backlog at the end of the second quarter; however, we are encouraged by our opportunities on Pellet Plants, recent hot mix asphalt plant activity and our optimism surrounding the federal highway bill in the United States.

We are confident that our third quarter 2015 will outperform our third quarter 2014 and that we’ll remain ahead of our year-to-date performance last year at the end of the third quarter this year.

As mentioned in my earlier comments, from our last earnings release to now, orders have been slower during the last three months, mainly due to the strong U.S.

dollar and the short term highway bill extension and oil prices, that’s with the exception of three areas; complete hot mix asphalt plants which have been okay during this most recent selling season into this day, but have also continued at like historical levels due to the highway bill uncertainty, which represent grinders have been okay and have seen growth strength across the globe.

Wood Pellet Plant coating activity has increased during the second quarter.

We see growth opportunities in the Pellet Plants, large pressures from mining despite the mining industry being down, high recycled asphalt plants that will recycle up to 65%, small commercial paving equipment which continues to be strong for us, concrete production facilities and aftermarket parts and service.

With regards to the concrete production facilities we delivered our first large concrete production facility during the quarter from our CEI division. We see concrete plants as a growth area starting more in 2016, but we are excited to have our first new plant from CEI delivered to our customer. The plant was sold for $1.7 million.

Part sales increased in the second quarter, 12% versus the second quarter 2014 and year-to-date part sales have increased by 8.6% versus last year. We remain committed to improving our part sales volume in the long term along with working to increase competitive part sales.

We are continuing to work on our lien journey with regards to manufacturing and office operations and we do continue to see results of the effort helping us to be a better company. We will also continue to focus on our gross margins. Looking to the whole of 2015, we do remain optimistic despite our backlog level at the end of the second quarter.

We expect to continue on our operational performance versus 2014. We are optimistic that our third quarter of ’15 will be improved versus last year and that our fourth quarter has the same opportunity and again, this is despite the current state of the highway bill in Washington DC.

The majority of our customers are experiencing a stable private market and we’re focused on selling existing and new products, not only in the United States, but around the globe, although as mentioned we are facing the currency challenge at the moment internationally.

We are also focused on growing our product sales targeted at multiple energy segments and this includes segments above mass oil and gas and they are not dependant on the highway bill.

Acquisitions remain a key piece of our growth strategy along with organic growth through new product introductions like the CEI concrete plant and targeted sales growth efforts, both in the United States and target international markets. That ends my comments on the quarter and the year and what’s in front of us.

I want to thank everybody again for taking time to be on our call, for your support as we move ahead. I’ll now turn it back over to Steve Anderson..

Thank you, Ben. Adam, if you would poll for questions. I know we already have some people in the queue, so we’ll open that up to the analysts here just momentarily..

[Operator Instructions] Our first question comes from the line of Schon Williams with BB&T Capital Markets. Please go ahead with your question..

Hi, good morning gentlemen. .

Good morning..

I was wondering if we could maybe zero in the agg amounting business, maybe a bit weaker than I would have expected this quarter.

I mean it’s actually fairly unusual for Q2 to back up from Q1 in terms of sales and then I wonder if you could just maybe elaborate a little bit more about what specific end markets or minerals, you are seeing kind of – where are we seeing the weakness, maybe geographically.

Just a little bit more detail maybe to help us kind of hone in on where the weakness is coming from. And then also maybe you talk a little bit about your expectations for Q3. Seasonally Q3 tends to be weaker in that segment as well, so should we expect that to kind of follow normal historical patterns. Thank you..

Thanks Schon. This is Ben. I think most of what we’re seeing in there are larger customers on the aggregate side are doing fine.

Our customers on the onsite crushing, we’ve had a very wet beginning to the season and what we’re seeing I think is a slowdown a little bit there and it’s just got everybody – their backlogs are good, they’ve got the work, but it’s just really slowed down a little bit.

I was with a lot of customers in the last 90 days, 42 customers and there are very few of them that had worked a complete full week this year. One fellow in Chicago, he only worked one five day week this season and that was at the end of June. So I think that’s where we are seeing the slowdown there.

I do think we’ll see a historical third quarter slowdown, particularly since they’ll be working through their backlogs and then I think we’ll see it start to pick up on the order side, you know first week of September..

Okay, thanks. And then if I could maybe just turn in on some of the big SG&A costs. It sounds like you’ve got some computing and consulting.

Can you just give a little bit more detail? Am I understanding that’s a ERP implementation, just maybe a kind of a status update on where we are with that project, what inning are we in and then maybe also elaborate a little bit on some of the R&D costs.

Should we expect those types of levels over the next couple of quarters and then when does that turn into kind of new product introductions that we should be kind of having an eye out for. Thanks..

True. This is David, Schon. On the computer side, we are later in the game on the major ERP implementation that we are doing right now. We have them in various stages. We have one in South Africa that’s very, very late in the game. It’s actually implemented; you got to clean up after the game I guess.

We’re doing one here in the states that we’re very late in the game on and we have one of two they are investigating what they want to do and so that’s where we all know.

We think we’ve incurred most of the costs on the one here in the states, the vast majority of that, so I don’t expect much more costs to come through on that, certainly not to the extent that we’ve experience thus fall.

On the R&D, I’m sorry, Ben do you want to say sometime about computers?.

Yes, I would just say as far as I mean what inning they are in, I mean on the big ones where Roadtec is going three to one right now and I would say that they are in about the seventh inning stretch. They are coming along – came out of the gate pretty slow, but that had an order system for a long time, the legacy system.

They having to change a little bit how they operate and that’s going to help them long time. They needed to do some of those changes, so its cost us a little more than we wanted, but at the end of the day, in the long run its going to be great for Roadtec..

Would it be fair to say that you’ll be complete in 2015 though?.

Yes, they’ll go live in ’16. They are not drinking from a water hose; they are taking it slow because it’s a dramatic change. So I don’t think you’ll see the numbers that you – I mean, I know we won’t see the numbers we’ve seen so far. They are in good shape. They are doing a lot of testing..

Okay, that is helpful, and then on the new products..

Yes, on the R&D side I would expect to see expenditures continue. I mean we – as Ben said, we are targeting certain markets with new products, we’re developing those products over time and that’s part of our DNA and so I would expect to see that run rate continue on R&D and that’s why I’ve jacked up the SGA&E slightly to where we have..

Okay, and would we see any of that materialize this year in terms of new product introductions?.

I think we will. For competitive purposes I’d rather not announce those on call, but I do think we’ll see some in the fourth quarter..

Okay, thanks guys. I’ll get back in the queue here..

Thanks..

Thank you. Our next question comes from the line of Mig Dobre with Robert W. Baird. Please go ahead with your question..

Good morning guys. This is Joe Grabowski sitting in for Mig this morning. If we could start in the energy segment, I know you touched on it a little bit, but the orders were pretty soft in the quarter.

We’re just wondering maybe if you could just remind us, how many of the pieces in energy are impacted by lower crude prices and did that impact the orders in the quarter or are there other factors?.

Heatec and GEFCO would be the main companies impacted by the lower oil prices. Mainly at GEFCO where we built oil drilling rigs and pumper trailers..

Okay, and again is that sort of why the orders were soft in the quarter or what’s the kind of upside of those two businesses?.

No, that’s the main. The bulk of it was at GEFCO, we’ve done some orders that was at GEFCO..

And Joe, so you know that’s Rick Dorris our COO answering that question. .

Okay, thanks. .

The energy group is in his group..

Okay.

And if crude prices kind of stay around these levels, do you expect the rate of orders to continue like that or…?.

Yes, I don’t expect the orders on those products to improve much until oil prices start to come back up..

Okay, thanks. And then maybe moving onto the highway bill, I believe the headline that I saw was that the McConnell-Boxer Funding proposal that they had would kindly get them a three year highway bill. You guys talk a lot about a long term highway bill.

Is three years long enough to provide visibility for your customers to increase their capital spending..

Joe, this is Ben. That will be the longest bill we’ve had in about 10 years. It would help.

One of the things that our ad said, it was a six year bill with three years worth of funding in it and that was kind of the rest of the funding and that would help a lot of our customers, how they feel and actually I’ve been with all our customers and they are doing better than last year for sure and the feelings are pretty good.

The midyear asphalt association meeting was out in Colorado in the last few weeks. The general feeling there was good coming out of there. I think we have a three year bill that’s helped us quite a bit..

Okay. And maybe one more from me on Wood Pellet Plants; it sounds like the second order is pretty imminent, but you also mentioned that the coating activity was up in Q2.

Could you maybe elaborate on that a little more and would there be a chance to maybe get a third major order by year end?.

Yes, but I don’t think it will be as big as the one that I’m talking about in the comments, but I do think there is a very good chance at a smaller plant..

Okay, great. I’ll jump back in queue. Thanks very much..

Thank you..

Thank you. Our next question comes from the line of Nick Coppola, with Thompson Research Group. Please go ahead with your question..

Hey, good morning.

So looking at the year over year decline in backlog in both the infrastructure, aggregate and mining groups, is that decline entirely driven by international markets and I’m trying to think about how that kind of performance syncs up with flattish public funding and stronger demand for private work domestically?.

Yes, it does. It ties directly to international.

Those groups were – the decline and backlog in both of those groups was directly as a result of the international backlog and we believe as we’ve seen in most cases in the market, in announcements of other companies and just what we’ve heard from customers, a lot of it, the vast majority of it is tied to the currency and the decline in those markets overseas; they just cannot, they cannot buy the products right now at the going rates..

Okay, that makes sense. And then just want to follow up on the SGA&E question from earlier. As we head into ’16 are you expecting to get back to that $41 million type run rate or is the kind of the R&D you’re talking about going to continue to trend out and maybe lead to a little bit higher number going forward..

Yes, I think we’re going to – we’re working hard on SGA&E and as we close out some of these ERP implementations in computer costs as we try to manage this healthcare a little better, as we drive down those SGA&E costs. I would like to see it and I think our hope – the entire management team needs to see it head back towards $41 million.

Will we get there? That’s hard to say. A lot of these things are unpredictable, especially things like healthcare and you get a big case or two coming through during the quarter and it can spike, but we would love to see it hit south and back towards $41 million..

Okay, and then last question from me….

Nick, hi Nick, this is Ben.

I would say, to add to David’s comment, $41 million is our target range where I’d love to see it go up as if we’ve got a bunch of sales and we’re paying more commissions, but I think we’ll definitely have one or two companies come ask us in the fall about ERP2, so we may have one or two that we approve that might keep us in the $42.5 million range like David mentioned, just to give you a little more information on it..

Okay, it’s certainly helpful. Okay, and then last question on part sales up about 12% year-over-year, I guess a bright spot in the quarter there.

Could you talk a little bit about where you’re seeing part sales and I’m wondering how much of that is maybe driven by a break fix type mentality or if there’s anything else that I’m missing?.

Nick, this is Ben. I think there’s a little bit of break fix mentality, still especially with the two month extension announced, but the other thing I would say is the only things we start to measure is the percentage of our part sales that are on competitive equipment, on other makes of equipment and we are making headway on that..

Okay, thanks for taking my questions..

Thank you..

Thank you. Our next question comes from the line of Jason Ursaner with CJS Securities. Please go ahead with your question..

Good morning..

Good morning..

You mentioned in the prepared remarks your optimism on the federal highway bill getting past sometime this year. So I guess just the first question, with 10 days left it sounds like you’re kind of under the assumption nothing gets completed by the end of July and we’re sort of differing out towards later in the year..

Yes Jason, this is Ben. It’s such a fluid deal out there. I was in DC twice in the last 90 days and I know that I need to do it, it’s how to pay for it and I think it will be interesting to see what McConnell-Boxer, they announced, what they talked about in the last, I guess 24 hours, what they might announce.

I just think that – I don’t want to use the word dysfunctional. I just, I don’t know if I can get anything other than an extension by July 31, so that’s why the comment on by the end of the year, because I do have been out there and seen a lot of different people.

I really do get the sense that there will be a highway bill by the end of the year at the latest. Not to say that they don’t work a magic deal over the next 10 days and we don’t have a longer term bill, but I think it’s just very fluid right now in Washington..

Okay, and in terms of funding levels, you’ve talked about increased levels in the past. There are kind of two big plans being talked about. One is a more traditional; I think it’s a $275 billion, six year bill.

You mentioned that those issues were kind funded, but is that kind of what you’re talking about in terms of level versus where we are now or do you need something more substantial..

I think talking to everybody and again where the wind blows up there the things change, but to me generally the consensus is a $48 billion to $53 billion per year, what they’d like to have for a bill, where they’ve been in the $41 billion per year range and I think it’s paying to – making up the difference in finding all the – they always call the paid for and I think that’s what they are trying to get done and they talk about repatriation, they talk about, there is one proposal when we were up there, we were the only ones that generated a $0.11 a gallon gas tax within $133 write off for people that made $75,000 a year or less.

There were a lot of proposals floating around when I was up there and that was in late June or middle of June really. So I think everybody wants to do it, but they evolve.

All the republicans have signed off saying that they won’t raise gas taxes as long as they are up there breathing, and so they are trying to figure out a way to get the money in place to fund it and I think eventually they will get there..

And the really big proposal though, I know the Anthony Foxx and Joban [ph], they are kind of championing to grow America1 and that’s a bigger bill, just no political appetite for something that large..

Well, I’ll tell you, just being up there, nobody talks about that one very much. In fact the last trip I didn’t hear anybody talk about that, but we are on the hill. But I did gather one group meeting. There’s a lot of people, so it wasn’t just me, but there was one with the White House staff and they obviously would like a bigger bill..

And the Wood Pellet System, just for the Hazlehurst plant, can you remind people what the terms are for the customer loan there and just how that gets treated from an accounting perspective?.

Yes, hey Jason, this is David. The terms on that are that it runs through June 2016 and obviously we’re working closely with them on the plant and we’ve got our folks down there and they’ve been down there since the beginning. So as the customer Hazlehurst is financed by their ultimate banking partners, then they’ll take us out.

They have to by June of ’16, but they will take us out and that point is when we’ll recognize the revenue. We’re financing that for them as a reminder to everyone who are financing that for them, because it is unit number one, but it’s also a marketing tool for us to show other customers and it’s an impressive sight..

Okay, and following-up on the question about quoting activity, there’s been a lot written recently about the utility pellet market actually slowing down a fair amount.

Coal and natural gas prices are down, the conversion to biomass is a bit less economical and the UK government just kind of retroactively changed some of their view on the carving credits.

How do you see that kind of balancing with what you’re seeing here on the quoting activity since a lot of the product ends up in Europe and is that impacting the timing on the large order at all?.

The answer on the large order is no, it does not impact it. When they announced that, their assumption is that there was a lot of those subsidies that they had in place. They were helping companies outside of the UK and they really kind of backed off on that according to our customers.

But even if that was in full, it doesn’t affect the ones that we are taking to right now. There is enough need for pellets in that market right that they are needing these supply contracts. So in the long term, absolutely probably it would be a concern for us, but in the short term it’s not for the projects that I mentioned on the call. .

Okay I appreciate it. Thanks guys..

Thanks. .

Thank you. Our next question comes from the line of Ted Grace of Susquehanna. Please go ahead with your question. .

Good morning guys. .

Good morning. .

Ben, I wanted to come back to one of your final prepared comments when you said that there is a focus on gross margins and if we look at Astec over the last five or 10 years, gross margins have been remarkably stable, kind of a 22.7% with a very, very minor standard deviation. They haven’t gotten better, they haven’t gotten worst.

But over the last five or 10 years if you look at US corporate projects and margins they have increased pretty dramatically. There’s been a lot written about this. You guys haven’t shown that same dynamic and so I’m just wondering whether you or Rick could talk about really how you aim to get there.

I know that GEFCO was kind of one step, now that’s end market drive so that is structural in some regards but also cyclical. But in terms of the structural opportunities, you guys have to really start improving that gross margin that’s really been stable, but not improved at all in 10 years.

Can you just walk us through what that opportunity set looks like. .

It’s actually a multi department answer. One of the things that – I mean the first place it would start as if we could get a better market place for as the US dollar being strong and then you got a highway bill often and old business being where it is and mining been off. We got some pretty good headwinds. Our sales guys did a great job.

Our market shares are really holding and actually in a lot of cases they are up. So I think if we could get more market, we have a little more pricing power that we really don’t have where we are right now and I think that’s step one. Step two is in manufacturing and in offices. With our lien effort we are ranking our divisions on that.

We’ve got a lot of different categories that they are ranked on and its common across all division and we are getting better that. And to a certain extent I think that’s helped us maintain our growing market share in some places as we’ve gotten more efficient in the shops. We use some of that ability to price to keep the volume.

So I think if we can get more pricing power, you are going to see that come through. Because just – I go through all our plants, we are getting better. So I think if we get more pricing power we are going to be pretty good shape coming out of it.

And then I think the last part of that is in the part sales side where you see is slowing increasing our competitive part sales and getting more percentage of our sales of parts on our equipment; that’s showing up. So I think we got a great opportunity in the long run to get that up, whereas as you kind of like to say Ben flat for quite some time.

But we’ve been a challenging market for quite some time and I’m pretty proud of our guys for keeping us where we are getting the market shares up and we are in a traditional third quarter I think where we are going to be in a little bit of a dog fight, in fact we are going to be better than we were last year in the third, because we have a little watermark there, but I think we are in position to get the margin up, coming up here in the next few quarters.

.

Maybe asked differently, if we were to rewind five years ago, to when your sales inflected, you know your sales were up 35%, 40% kind of 2010 to 2015.

Would you have guessed that your gross margin would be at that level? I mean I recognize the headwinds in energy and mining and the impact of the dollar, but just in terms of like you’re internal like, I guess assessment of your margin results.

I mean assuming the answer is you’re below where you would have thought you’d be given that 37% improvement in sales in five years. Is that a fair way to ….

Well I think maybe and maybe not, because in that there has been a lot of R&D and the first few iterations of anything that we sell are lower margin and you take Roadtec for an example over that time period, just about every single project that they have is brand through tier 4 and that holds through to Peterson, that holds through to our track model crushing and screening equipment.

We got the pellet plants that we built at Astec, the concrete plants and then we had a lot of new product innovations that kind of slows down your margin.

So I would say that my answer would be, we have more volume, we are not having more gross margin, but the segment looking back behind it with the R&D that we have done, you can kind of say well we’ve done pretty good considering all our R&D that we’ve done. .

Okay, fair enough. The second question, [inaudible] by you a quarter ago it sounded like the M&A prospect list was improved sequentially. Just want to know if there is any update there on how the M&A environment feels when you guys are looking at the targets. .

I would say it feels better this quarter than last quarter..

So improved sequentially 2Q versus 1Q and 1Q versus this quarter. .

Yes..

All right. Any characterization of big deals, small deals in the context of what you guys typically do, multiples U.S.

versus international?.

Well you know, that’s a – I would say I don’t have a answer to that, other than yes to all of them. We have some bigger ones and some smaller ones and multiple wise we are not going to get for in the range we’ve done in the past. .

Okay. All right, well best of luck this quarter guys. .

Okay, thanks..

Thank you. Our next question comes from the line of William Bremer with Maxim Group. Please go ahead with your question. .

Good morning gentlemen. .

Good morning..

You know taking a positive from this quarter; I was quite impressed with the gross margins, specifically in the infrastructure and the aggregates. And my question is, is what you are booking now is it at those margins or better.

How do I look at pricing specifically in those two segments?.

I would say that we are booking about the same level, right now..

Okay, so, it’s really about utilization that’s affecting the operating income right now, but the selling price is solid. .

I would say that yes, we are okay in the selling price. I think we could do better with a stronger market. .

Okay. And that is all I have, I appreciate it. Thank you..

Thank you. .

Thank you. Our next question comes from the line of Todd Vencil with Sterne Agee. Please go ahead with your question. .

Thanks, good morning guys. .

Good morning. .

Good morning..

You guys mentioned, there has been a lot of talk about the federal highway bill and rightly so you guys mentioned in the press release, you’ve seen [inaudible] highway projects to their own new funding mechanisms start to show up in the form of new project proposals.

Can you talk about that, talk about what some of those state funding mechanisms are, where they are showing up, what kind of impact they are having?.

Sure Todd, this is Ben. In South Dakota there was gas tax increase, it was about I think $0.10 a gallon. Pennsylvania has done funding increases through their taxes. Virginia went to a sales tax setup. So that’s a few of the examples and we’ve just seen our customers having more work in those areas. Now as a result we can navigate slow in Virginia.

The economy wasn’t doing as well and then it kind of came back and so now things are a little better there. But you know strong states, I mean there is several strong states right now and I was with a customer yesterday that from Kentucky and they got pretty good levels of work right now. So there is good activity for our customers right now. .

So first of all for the state of Virginia, let me apologize for being slow about that.

But beyond that, I mean at what point can these sort of state initiatives and states taking their destiny in their own hands really make up for the fact for your customers of a lack of federal visibility or can it at all?.

Todd, I think we are probably a couple of highway bill cycles away from something like that and where the state bills take over for the federal funds. I mean the private side is helping them too, so there is two sides of that equation.

We have about 50% of the hot mix coming from the private side work on average, now this is in an average year and then 50% coming from government, and you are just talking hot mix tons there and that’s just a rule of thumb. Sometimes that is true or not but that’s kind of rule of thumb.

But the government work represents 90% of the hope still today, because if it’s a three, four, five, six, bill that just gives them the comfort level to go with the large CapEx expenditure like an asphalt plant or big crushing plant. .

That does make sense. .

I just don’t see the states taking over to the level that the federal coverage would provide them. If they had a good federal bill, I would give them the mental feeling and the coverage to pull the trigger on the big projects. .

All right, that’s useful thanks. And then switching gears to just the financial side, obviously stronger dollar as well as sort of weaker international mining conditions are going to impact your results. But to what extent did just straight translation per unit in the quarter if at all of foreign currency to dollars. .

Yes, and we did that measure, and for the quarter it’s about $4.5 million on the revenue line. .

Okay.

Do you have a similar number for the backlog?.

For the backlog it hurt us about $4 million as well. .

Got it. Thank you for that. And just you may have mentioned this, but just to sort of frame it up you talked about the lien journey for a while. I know that’s a big part of a lot of things you guys are trying to do.

Where do you feel like you stand on that and where does that go from here?.

I think if remembering that we were slow to that, pretty slow. I mean the last few years is when we really started to focus on it. If a score of 100 it would be the end of the journey, which I don’t know if we are ever at the end of the lien journey based on where we are today.

But if the 100 was that, I still think we are not – I don’t know I guess half way to 60%. I mean we’ve got a lot still that we can do to improve our factories and our office operations. It’s just in the factory so.

So that’s just without having done a lot of, that’s a gut feel from being in the plants and talking with our guys and looking at our rankings and the things we are working on..

If you were at a 100 today you think you’d be at 25% gross margins or higher or lower..

I think we would be in the 25% plus range..

Got it, okay thanks a lot. .

Thank you..

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

Hey guys. Can you run through your groups and just give us examples where you feel you have either lost market share or gained market share in any one category over the past handful of years again..

Morris, this is Ben, we’ve got over 220 product lines but by group I would tell you that we have in the most cases held on to market share and a few cases we have gained market and where we have slight market share, loss would be in the, probably in the highway pavers but not that much.

We’ve gained enough that was – we’ve lost a little but we haven’t really lost a lot and part of that is there has been a lot of rent to own in the last selling season, but again Roadtec’s doing pretty well through the first half so it’s hard to get too critical on low-tech on that.

But if there was one place where I would say we had lost any and it wouldn’t be much that would probably be where it is. Everywhere else we’ve done a fine job all along the market share. .

Thanks. .

Thank you. Our next question comes from the line of Brian Rafn with Morgan Dempsey Capital Management. Please go ahead with your questions. .

Good morning guys. .

Good morning..

Good morning. .

Let me ask you a question for Ben. We’ve been beating this highway bill to death and I’ll beat it a little more. If you follow the ASC, the Society of Civil Engineers infrastructure report cards, I think the last one was 2013.

I’ve been watching them for decades and I actually see some categories now in infrastructure that are rated F, and when you go up to Washington Ben, do you get a sense of that they understand the gravity. I mean we used to be able to put guys into space and build navy ships and now we can’t even pass budgets. .

It’s frustrating, walking around up there to be honest.

I would say that there are those that get it and understand it, but you know sometimes you try to hold your patience, but one of the meeting I just – I said – well, I shouldn’t say what I said to them, but I just said it’s easy to sit here in DC where you fix the roads for the tourist and I know what district they are from and how good the contractor was in that district.

And I said it’s easy to fly back and forth in between those areas where you got great, great contractor and great roads and then back to DC I said, but I’ve been to 16 states in the first half of the year and I could tell you it’s falling apart and I just don’t know that they get that.

Now I do think that the majority of them understand they need to do something. I do think they’ve got the messages. I think our associations have done a great job of giving them those states Brian, I really do. I think most of them get it. That was a one off and I’m sorry I was emotional about that, but they, I do think they know and they need to do it.

.

Okay, all right, fair enough. You talked a little bit about some of the regional. Here is Wisconsin we rebuilt four interchanges out of Milwaukee. You can’t drive five miles, I’ll bet you’ll get a detour sign.

There are some states like Texas, Wisconsin, Indiana that through private, public partnerships in that have had some pretty strong state DOT activity and I’m wondering if ex the gas tax stuff that you talked about in Virginia, Pennsylvania, South Dakota lately have you seen regional strength with road builders buying from states over the past few years that may have had stronger state DOT funding that say other states.

.

Yes I would say that Texas would be one of those states, Florida would be one of those states. Oklahoma has been okay for some of our customers. So those would be the ones that would come to mind just talking here on the phone..

Okay. Okay, you talked a little bit about kind of the wood pellet plants.

When you are looking at down the road, two, three, four years exploratory conversations, potential quoting; how many customers? Would you be having dozens on conversations or what’s kind of the scale of the level of interest being a new venture for you guys?.

At this point I would say it is not dozens, but dozen, 12 to 15 right now..

Okay, all right. Let me ask if you looked across all of your subsidiaries, what would you get a sense of kind of your capacity utilization rates and if and when it will turn, things will turn around, where you go from absorption issues to issues of overtime and you don’t have enough.

What might be your work line sales revenue capacity with all the operating assets you have deployed today?.

It depends of where that business comes into Brian, by division, but I would say probably in the $1.5 billion to $1.7 billion range. We could handle a lot of work up to that.

That being said, I’d tell you our utilization would sound better than that right now, but we are not working three shifts in every place, so maybe we could add shifts and add people, and our ability to get people is fairly good in most locations. We have some where the unemployment is still really low.

But by and large I think we could get good people to be able to go up, in the 1.5 range pretty quickly. .

Yes, okay. Well let’s go to worst case scenario, and say that we stumbled through and we don’t get a highway bill this year.

At what point do you see either with a big national road builders or the regional’s, where you are seeing where you are seeing things just break down and at some point they are going to have to start looking at actually making some purchases or do you not see the purchases and it just shows up in more increasing and accelerating part sales. .

Brian, I think we might have seen a little bit of that through the buying season this year, because it was a little more, just a little more stable. Weren’t much but you – but it feels a little more stable and there is people still looking on the plant side right now.

So I would think we might be seeing that on a small scale right now, because the plants have been running a little more in the last years, so I think we maybe seeing that just a little bit. I don’t know that that wouldn’t be a end of ’16, the ’16, ’17 type buying season event more than a this year event. .

Yes okay.

And then final, if you look across the entire Astec company, where is your ERP system rollout? Do you still have other subsidiaries that still are yet to install that or is it finished within a the next couple of years?.

I think we’ll always probably have, I think that larger divisions, let me backup, the larger divisions by and large are pretty close to all having new systems that will be good for a decade or more and then some of the smaller divisions may do them, but they will be much smaller in price too, because there’s less users.

So we are also having everybody chose two or two systems so we are getting more continuity across the board and we are getting better putting them in and that helps us, we are getting more best practices, sharing. So I think we are going to be seeing that come down probably after next year pretty significantly. .

Okay, and then on the energy side, the oil rig construction or the pumper trucks, how much surplus equipment, used equipment is floating around where you’d have to see a sustained increase for months or quarters or years relative to holding spot prices higher in oil and gas or would you see that kind of recover fairly quickly. .

This is Rick Dorris. There is defiantly some surplus equipment available right now, reinvent pumpers, it would probably take several months of sustained increases in the prices to try to use up some of that inventory but after that I think we’d have good change of selling some new equipment in those areas. .

Right, thanks guys. I appreciate it..

Thank you..

Thank you..

Thank you. Ladies and gentlemen if there are no further questions at this time. I would like to turn the floor back over to management to closing comments. End of Q&A.

Thank you, Adam. We appreciate everyone's participation on our second quarter conference call. 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 able through August 4, 2015 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 seven days. All of that information is contained in the news release that was sent out earlier today. So this concludes our call. Thank you all. Have a good week..

Thank you ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your line at this time. Thank you for your participation and have a wonderful day..