Steve Anderson - VP, Director of IR Ben Brock - President and CEO Rick Dorris - EVP and COO David Silvious - CFO.

Stanley Elliott - Stifel Mig Dobre - Robert W Baird Schon Williams - BB&T Capital Markets Morris Ajzenman - Griffin Securities William Bremer - Maxim Group Mike Shlisky - Seaport Global Nick Coppola - Thompson Research Group Brian Sponheimer - Gabelli & Company Ryan Hamilton - Morgan Dempsey Capital Management.

Greetings and welcome to the Astec Industries Second Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr.

Steve Anderson, Vice President, Director of Investor Relations. Thank you, you may begin..

Thank you, Rob. Good morning and welcome to the Astec Industries' conference call for the second quarter that ended June 30, 2016.

As Rob mentioned, I'm Steve Anderson, and also on today's call are Ben Brock, our President and Chief Executive Officer; Rick Dorris, Executive Vice President and Chief Operating Officer; and David Silvious, our Chief Financial Officer.

In just a moment, I’ll turn the call over to David to summarize our financial results and then to Ben to review our business activity during the second quarter.

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

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

David?.

All right. Thanks, Steve. Thanks to each of you for being with us this morning. Net sales for quarter were $294.4 million compared to $268 million in the second quarter of last year, an increase of 9.9% or $26.4 million increase in sales.

International sales were $52.2 million this quarter compared to $72.4 million last year in Q2, a decrease of 28.9% or $21.2 million. International sales represented 17.7% of Q2 ‘16 sales compared to 27.4% of Q2 ’15 sales.

The decrease in international sales compared to the second quarter of last year primarily in Europe, Canada, Russia and Africa and Australia. And those decreases were offset by smaller increases in South America and Japan.

Domestic sales for the second quarter were $242.2 million compared to $194.6 million Q2 last year, the 24.5% increase or $47.6 million increase. Domestic sales were 82.3% of Q2 ’16 sales compared to 72.6% of Q2 ’15 sales.

Part sales for the second quarter were $63.8 million compared to $67.4 million in Q2 last year that's 5.3% decrease or $3.6 million degrees. Part sales were 21.7% of quarterly sales this quarter compared to 25.2% in Q2 of ‘15. For the quarter, part sales increased in the infrastructure group and decreased in the aggregate mining and the energy groups.

Foreign exchange translation impact on sales was $3.4 million that is to say that if rates this year were equal to last year's rates, part sales would have been $3.4 million higher. On a year-to-date basis, sales were $573.1 million compared to $556.8 million for the first half last year at 2.9% increase or $16.3 million increase.

International sales were $96.7 million compared to $151.1 million first half last year, a decrease of 36% or $54.4 million. The decrease year-over-year occurred Canada, Australia, Africa, the Middle East, Europe and in the post-Soviet States and Russia. Those were offset by smaller increases in Japan and China.

International sales were 16.9% of our first half sales this year compared to 27.1% in the first half of ‘15. For the year, international sales decreased across all of our reporting groups.

Domestic sales were $476.4 million in the first half of this year compared to $405.7 million in the first half last year, a $70.7 million increase or 17.4% increase. Domestic sales were $83.1% of total sales in the first half compared to 72.9% in the first half last year.

Part sales were $137.9 million compared to $140.5 million in the first half last year that’s decrease of 1.8% or $2.6 million. Part sales year-to-date were 24.1% of total sales compared to 25.2% of year-to-date total sales in 2015.

Foreign exchange translation on the year-to-date sales figures had a negative impact of $7.5 million again that is rates for the same in this year versus last year, sales would have been $7.5 million higher.

Gross profit for the quarter was $73.4 million compared to $62.2 million in the second quarter of ’15, an 18.2% increase or $11.2 million increase. That made gross profit percentage 25% for the second quarter of ‘16 versus 23.2% for the second quarter of ’15.

One of the factors impacting the gross profit was the absorption variance for the second quarter of ’16, which was actually just about $100,000 dollars over absorbed whereas last year in the second quarter we were $2.4 million under absorbed so that a $2.5 million improvement in efficiency in the shop.

Consolidated gross profit for the year was $145.4 million compared to $128.3 million last year for the first half that's an increase of $17.1 million or 13.3% increase in gross profit dollars. The gross profit percentage was 25.4% this year compared to 23% for the first half of last year.

The year-to-date 2016 absorption variance, we were under absorbed $1.4 million for the first half compared to last year's first half where we under absorbed $4.5 million that’s a $3.1 million positive change in the absorption variance year over year.

SGA&E for the quarter was $45 million or 15.3% of sales compared to $43.3 million or 16.2% of sales in the second quarter of ‘15 that’s a $1.7 million increase and a decrease of 90 basis points as a percent of sales.

The factors impacting SGA&E quarter over quarter were primarily payroll and related expenses that was increased $2.9 million, our exhibit expense was up $1.1 million, health and insurance expense was actually down $1.5 million and IT and related consulting expenses was down about $1 million.

For the year, SGA&E was $88.8 million or 15.5% of sales compared to $87.1 million last year or 15.6% of sales that’s an increase of $1.7 million year over year and a decrease of 10 basis points as a percent of sales.

Factors impacting those numbers in the year over year payroll and related about $3.4 million increase exhibit expense was about $1.8 million increase. Health insurance was down about $2.9 million, and IT and related consulting expenses were down $1.5 million.

Operating income then in the second quarter is $28.5 million compared to $18.9 million in the second quarter of ’15, a $9.6 million increase or 50.8% increase in operating income quarter over quarter. Other income in Q2 was $327,000 versus $420,000 in Q2 of ‘15 and was $900,000 for the first half compared to $2.4 million for the first half of ’15.

The primary source as a reminder is license fee income and investment income by our captive insurance company but do recall that the prior year year-to-date number does include approximately $1.2 million of key main life insurance proceeds.

The effective tax rate for the quarter is 36.2% compared to 37.9% for Q2 ’15 and 36.8% on a year-to-date basis versus 37.4% in the year-to-date basis in ‘15.

The things that impacted the tax rate for both the quarter and the year-to-date were the losses in our foreign jurisdictions for which we can't recognize a benefit and we had some higher state income tax expense and at certain of our domestic subsidiaries.

Net income attributable to controlling interest was $18.2 million for the quarter compared to $11.8 million in the second quarter of ‘15 that’s $6.4 million increase or 54.2% increase. Diluted EPS for the quarter was $0.79 compared to $0.51 for the second quarter of ‘15 that’s $0.28 increase or 54.9% increase in EPS quarter over quarter.

Year-to-date net income attributable to controlling interest $35.9 million compared to $26.9 million for the year-to-date ‘15 period that’s a $9 million increase or 33.5% increase and that was resulted in diluted EPS for the first half of ‘16 of $1.55 compared to $1.16 for the first half of 2015, a $0.39 increase or 33.6% increase.

EBITDA for the second quarter was $34.6 million compared to $25.3 million for the Q2 of ’15, a $9.3 million increase or 36.8% increase and for the year EBITDA was $68.9 million this year compared to $55.4 million for the first half of last year, the $13.5 million increase or 24.4% increase in first-half EBITDA.

Our backlog at June 30 is $364.5 million compared to $229.5 million in June 30 last year that’s an increase of $135 million or 58.8%. International backlog was $54.5 million this year compared to $57.5 million at June 30, a decrease of $3 million or 5.2%.

Domestic backlog was $310 million this year compared $172 million June 30 last year that’s $138 million increase or 80.2% increase. The foreign currency translation impact on the backlog compared to June 30 last year again it relates for the same, it was a decrease of $3.6 million. So, current year backlog would have been $3.6 million higher.

Our balance sheet continues to be very strong, our receivables were sitting in $127.5 million compared to $118.2 million at June 30 last year, an increase of $9.3 million. Our days outstanding 38.9 compared to 40.2 at June 30 last year.

Inventories at $379.5 compared to $382.8 million at June 30 last year, a decrease $3.3 million and our terms remained relatively flat at 2 terms compared to 2.1 last year. We have nothing on our domestic credit facility it’s - of $100 million and we have $68.5 million in cash and cash equivalents on our balance sheet.

Letters of credit outstanding is $17.2 million that’s leaves us a borrowing availability on that credit line of $82.8 million. We do have $10.6 million in debt in Brazil right now that’s used to finance the company's buildings, building and furniture and fixtures and inventory. That's where the interest expense are primarily derived from.

Capital expenditure for the quarter was $6.5 million and capital expenditures for the first half were $11.3 million. We’re still forecasting around $30 million of capital expenditures for the year.

Our depreciation is at $5.2 million for the quarter and $10.3 million for the year and for 2016, the full year we're forecasting about $22.5 million of depreciation. So that concludes my prepared remarks, I will turn it back over to Steve..

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

Ben?.

Thank you, Steve. Thanks to everyone for being in our call today. As we commented in our earnings release this morning, we were pleased with our second quarter results.

While the headwinds of lower oil and natural gas prices, the global mining slowdown and the strong US dollar persisted and challenged us and two of our three financial reporting during the quarter.

We were able to secure and ship orders as a result of the passage of federal highway bill in United States which allowed us to earn a good result in the quarter in our traditional business areas. We were also able to recognize $18 million in pellet plant revenue during the quarter.

As David mentioned, our earnings per share were $0.79 per share versus $0.51 per share in the second quarter of ‘15, which was an increase of 54.9% and our second quarter sales were $294.4 million versus $268 million, an increase of 9.8%.

Year-to-date sales of $573.1 million versus $556.8 million for an increase of 2.9% and again as David mentioned our EBITDA year-to-date was $68.9 million versus $55.4 million.

EBITDA was up again in this quarter as our companies maintained stronger gross margin versus last year and our product mix included more special project work than last quarter, so we were pleased with our team's efforts to keep gross margins in range with last quarter's gross margins.

Higher capacity utilization rate in the infrastructure group and some of our aggregate group companies once again helped us on our gross margin. Our backlog at June 30, 2016 was $364.4 million, which was up 58.8% versus last year.

Our backlog remains strong mainly as a result of $122.5 million pellet plant order that we announced during the first quarter. The pellet plant backlog is in the infrastructure group backlog. Our infrastructure group also continued to do order intake during the quarter mainly as a result of federal highway bill in the United States.

Our aggregate mining group backlog was down due to the global mining industry being slow and delayed code investments in the United States. We have seen improved code activities since 1st of July in this group and we believe the highway bill will help this group break this year.

Our energy group backlog was done primarily due to price of oil and natural gas as well as customer capital expenditures in those industries. Domestic backlog was up about 80% year over year and international backlog was down 5%.

At the end of last quarter, our international sales were down 44.2% year over year which was near our trend for the full year of 2015, so we did experience some slight improvement in our international percentage basis. The strong US dollar remains a significant headwind for our export efforts.

International backlog remains down primarily due to the strength of US dollars of oil and natural gas prices and the global mining slowdown. Our Astec do Brasil facility continues to experience everything in Brazil with regards to slow economic times and the political environment is not helping it out at all.

We continue to work for orders in surrounding countries to help build this facility.

We continue to hear from our infrastructure customers in the United States that they’re experiencing good business level, we also continue to pursue new business with new products in the United States and we are maintaining our international effort despite the challenges presented to us by the strong US dollar and depressed mining industries in key markets.

We are keeping our long view with regards to international and we do see a strong US dollar of oil prices in the mining conditions remaining in place for the balance of this year at the least. Our lower backlog in international is a direct result of this headwind.

Our higher backlog in domestic was primarily due to the passage of long term federal highway bill in the US, good private sector work levels for our infrastructure customers and the pellet plant order we announced during the first quarter.

Changing subjects to the Hazlehurst, Georgia pellet plant that the original pellet plant that we shift that we have discussed on several calls. As a continual reminder it’s a new product that we chose to finance at the time as a result we will recognize the revenue for this plant as we are okay.

This will have an effect on our cash and inventory bill that’s paid in full, the order for all three lines was $60 million and we expect the final payment in 2017. As a reminder, the interest rate on the note is 6%.

We were pleased to report that $122.5 million pellet plant during the first quarter and as a reminder it’s an add-on the $30 million order that we recognized during the first quarter with Highland Pellets bringing in a total project order amount to $152.5 million.

As we mentioned in the last call, our plan is to recognize the $122.5 million order as follows. During the second quarter we recognized $18 million, during the third quarter we would anticipate recognizing about $20 million, during the fourth quarter of about $35 million.

The balance of the order which is around the $45 to $50 million will be recognized in 2017 as site work, installation and start-up are completed. Updating our current pellet plant code activity, we do have ongoing code activity for new projects and we believe that we will have new larger order late this year.

We believe that that order will be in the range of $80 million. As a reminder, these deals are long and complicated to get across the line, while we are optimistic that a new project will happen by the end of this year, it would always be longer than anticipate.

With regards to international sales overall given the well-documented challenge globally, with regards to the US dollar strength, global mining and global economic environment overall, we believe that we will remain challenged for at least the rest of this year with regards to sales internationally.

We remain committed to grow international sales of over long-term and we’ll continue to maintain our sales and service coverage around the globe.

On the energy side, we remain extremely challenged in our drilling and pumping equipment sales activity for oil and gas and we mentioned on our last call that we were going to move on street broom equipment line production to the most effective facility in Enid, Oklahoma.

The line will be its Roadtec brand name and will be sold in service for Roadtec. Demand for our brooms has been strong as we have released new models in the last year. We’re happy to report that the first brooms have come off the production line and are successfully operating customers in the field.

We have partly offset sales challenges in heaters for and oil and gas industries with sales to food processing and chemical plants. We have also continued to see reasonable sales of wood chippers and wood grinders. Our concrete plans are built in the energy group and coding activity and is good for these plants.

We have also have our first ready mix concrete plan set up on our yard at CEI in Albuquerque, New Mexico in testing phase bringing us two of the nine planned concrete models. We have named this new plant the fusion plant.

We remain optimistic on our outlook in the energy group in the long-term, however growing an unexpected change in majority of the markets we serve will be challenged in this group overall in 2016.

Looking ahead at the third quarter of 2016 and the balance of the year we are encouraged by our backlog, our domestic sales outlook and our strong infrastructure group sales activity.

Our new product development continues in all groups in addition to our new fusion plant, we have our previously unannounced LTV 1100 material transfer vehicle build up Roadtec in field testing now.

Designed and built here in Chattanooga, this machine will complement our industry-leading shovel ready line with a smaller easier to move material transfer vehicle. Regarding new products, next year is the ConExpo year, we spend around $4 million on the prior ConExpo and expect to be in that range for the upcoming ConExpo.

We’re also working on new products for this show with which was slightly increase our R&D for the balance of this year and into the first quarter of ‘17. Changing subjects to our outlook for the next quarter and the balance of the year. We believe that our third quarter of 2016 will be better than our third quarter of 2015.

Our current revenue outlook for the balance of 2016 is up 5% to 8% versus last year with improved bottom line performance. As a reminder our revenues are up 2.9% year-to-date versus last year and our profit is up 33.6%.

While our infrastructure group is performing very well, we are conscious on our outlook for the aggregate mining group and energy group with the main headlines for these groups being very real and persistent.

As mentioned in earlier comments, for our last earnings release to now orders have been good in infrastructure group since early December last year mainly due to the highway bill in the United States. Orders are not strong internationally, mainly due to strong US dollar and mining slowdown.

Energy reporters are soft products targeted at the oil and gas industry, aggregate mining group orders are soft for products targeted at the mining industry.

Product sponsor activity for us remain [indiscernible] for equipment sales both asphalt plants and mobile equipment, concrete plant coding activity with pellet plant coating activity and wood chippers and grinders coating and sales activity.

Year-to-date part sales were down by 1.8% versus last year and were 24.1% of total sales versus 25.2% of sales in 2015. We remain committed to improving our part sales volume in the long-term along with working to increase competitive part sales.

We continue to see results of our lean effort helping us be a better company, we continue to focus on our gross margins as well. These efforts played a part in our gross margins during the quarter. Looking to the whole of 2016, we are optimistic that we will end the year ahead of 2015.

The majority of our customers in United States are experiencing a stable private market and we are focused on selling existing and new products. Given the headwinds we are facing, we are working to manage the businesses taking those headwinds to the market conditions where our business warrants.

To that end, we did have staff and/or work hours reductions at the most effective divisions during the second quarter. The mission on our last call and our goal is to add at least one company to our asset family during 2016, so long as the company was build at cultural and strategic fit within the industries we serve.

As most of you know we are pleased to announce on July 7, 2016 that we signed an agreement to purchase Power Flame Incorporated for $43 million subject to final due diligence and any adjustments if necessary. Power Flame is located in Parsons, Kansas, they have been in business for over 50 years with [indiscernible] for the last 77 years.

Power Flame engineers sales and services burners for many industries including industrial and commercial uses. They are profitable and successful business that we believe will add in the range of $40 million in revenues in 2017. They are a market share and technology leader in each segment that they serve.

Our Heatec and CEI subsidiaries saw approximately 200 burners per year from them for their thermal hot oil heaters and we are now a large customer for them as they build thousands of burners per year. They specialize in burners from 400,000 BTUs to 25 million BTUs that have build burners as large as 100 million BTU.

Our Astec subsidiary builds burners for asphalt plant from 20 million BTUs 20 million to 150 million BTUs. So we believe we have a good opportunity for technology transfer between divisions particularly on the control side. We believe that Power Flame has very good technology for lower mission burners that we can learn at Astec.

We believe we can help Power Flame with our corporate purchasing agreement and benchmarking with our other companies. We are extremely pleased that Bill Wiener will remain with the company as President.

Power Flame will retain its name and location they will join our energy group after the transaction is completed, which we are targeting for this third quarter. In our full year revenue of 5% to 8% versus last year, we have included the anticipated revenue addition from Power Flame this year.

One last thing on Power Flame I’d like to say is make it [indiscernible] arrangement in place. They’ve built a great company with great team members and we are very fortunate to have successful industry leader like Power Flame join our company. Acquisitions remain a key piece of our growth strategy along with organic growth.

We are still diligently working on potential acquisitions. That ends my comments on the quarter and what’s in front of us, thank you again for taking the time to be in our call and for your support as we move ahead. I will now turn it back over to Steve Anderson..

Thank you, Ben. Rob if you would open the queue for questions, we'll be glad to take those now..

[Operator Instructions] Our first question comes from the line of Stanley Elliott with Stifel..

Hey guys good morning congratulations and thank you for taking the call.

Quick question, could you help us with the orders, when you are looking at the infrastructure business, how much of that business is book and ship in the quarter and may be - or otherwise could you help us frame that how long the typical lag is for between booking and sales?.

This is Ben, Stanely thanks for the comments on the quarter. On the infrastructure group depending on the division, our backlogs are pretty strong, so some of those orders on asphalt plants potentially could ship in 2017 now.

It’s very active, we thought we would see a little bit of a slowdown in the summer when the bill came and we start getting orders because customers could be working and they’re definitely working, I have seen a lot of customers during the quarter but the activity has remained fairly good during the summer.

We got a large order last night on our asphalt plant. So, I would say that on the mobile definitely could be in this quarter late third-quarter to early fourth quarter on the asphalt plant would be shipping first quarter next year..

Help us from a historical standpoint, once you have the highway bill or once we see on a multi-year bill, in my memory serves that you see really good trends for probably 2 to 3 years from the signing of a highway bill, is that - am I correct in that assessment or maybe if you can help me out with that?.

You are correct, and when you look at the funding ‘16 through ‘20 and it depends on who is writing that number down but in general it is about $1 billion a year change from ‘16 to ‘17 and about little over maybe close to $2 billion from ‘17 to ’18. So the funding increases there and it's in place which is nice.

And it helps our customers slightly spending on money on larger CapEx and we’re seeing it..

Last one from me, on that 80 million potential wood pellet order, would there be opportunity for additional add-on, additional lines from that or does that seem to be pretty square?.

I think that one is pretty square, but I would say we’re talking to probably as many as ten people with five of them being pretty serious. So, it's not the only one and that’s we think can happen in the next 12 months or so. And we can deliver the whole 80 of that next one next year if it came soon enough.

But it had to be pretty close to the end of the year for us to do that..

Thank you. Our next question comes from Mig Dobre with Robert W Baird. Please proceed with your question..

Good morning everyone and I guess I agree with the gentleman prior this was a pretty nice quarter with very good margins.

I guess, my question Ben is I'm trying to flush out a little more as to what's going in your infrastructure segment and I'm looking at your orders of call it $99 million and these orders seem to be a little bit below what we've seen in the past six months in terms of core infrastructure orders, so excluding the wood pellet plant and a little more in line with order pace that we've seen in 2015 before the passage highway bill.

So I guess I'm trying to understand here what's really going in the market and how you guys are thinking about the demand going forward in terms of not only just seasonal slowdown or acceleration but really the sustainability of the bump in demand that we've seen after the highway bill passage?.

Thanks Mig, this is Ben. Demand in the coating activity I can just say is very strong and the plant that we got last night was a very large plant, it’s asphalt plant and we, you know, it's pretty consistent and we have more customers coming in this week on asphalt plant.

So, and then on a analysis side, David has looked at a little bit at the backlog, he may have a comment on it but we have – I feel really good about infrastructure side, the Roadtec backlog is very strong but they may be picking up just a little bit of market share, we are transitioning there on the distribution side from west US to the east to a dealer model, which is really what that product should be sold through.

And so we've been able to sign some tier 1 dealers in the Northwest and California that we’re very excited about.

So, well it’s more in California and the Rocky Mountains not in the Northwest, I'm sorry, we had another dealer that we signed on that aggregate on size in the Northwest I'm sorry about that but feeling really good about that got a tier 1 dear dealer in Wisconsin, so I think for Roadtec the future is very bright..

Yes Mig, this is David, just to give you a couple of numbers. On the backlog in the infrastructure group, if you take out all the pelletizer business out of that particular group, and compare it to the prior year, we are talking about an increase of backlog of $81 million and that is about 175% increase without any pelletizer business.

And I think as we have described back in the highway bill was in the process of being passed that we thought there would be an initial surge and then a bit of a low and then picking back up. And again, there is seasonality built into where we are right now as well..

Right. And I appreciate your comments, David.

I guess, the nature of my question was really more along the lines of, I understand that your backlog is up, but it seems to me like the backlog was really up because of what happened in the fourth quarter and the first quarter, rather than what happened this quarter and I don't mean to be splitting hairs here, but I’m trying to understand through demand versus seasonality, but I guess you answered that.

In terms of the back half of the year, can you kind of help us think through the way revenues would flow and I appreciate the wood pellet detail, but should we expect revenues basically to be flat to up sequentially from the first half in infrastructure?.

In infrastructure, it will be flattish. The third quarter is always the tough quarter, because people work in and we will have equipment build that will creep in the fourth quarter and the fourth quarter will be better than the third on the infrastructure side.

And that will hold true, probably through all our groups and it always seems like we’re in, I hate to say, hand to hand combat here in the third, but I mean, the third always feels like that, like it’s a grant, but we do have the backlog coming into it and so I think it will be a better third than last year.

I mean, we only made $0.10 a share last year in the third quarter and the year prior, we only made $0.08. So from $0.08 to $0.10, it’s probably -- on a percentage basis, it still didn’t make us feel very good and so we have an opportunity to be better in the third this year..

Sure.

And then maybe my last question, David is, this one is for you, in terms of again in infrastructure, is that kind of your revenue outlook or best guess for the back half of the year, how should we think about gross margin here, given your absorption dynamics and also maybe if you can comment on raw material cost impact in the back half?.

On the gross margin for the back half, I think you’re going to see in that infrastructure group, it will be relatively flat..

Flat year-over-year or sequentially?.

Sequentially. They are operating at pretty good efficiency in that group right now and so taking more cost out of that process would be a challenge. Again, product mix has a lot to do with it, but as far as the gross margin goes, I’d they are going to be pretty good going forward on the gross margin compared to where they’re now..

And material costs?.

Well, I believe I will talk about that here, but this is Ben. The material costs, steel is the one that's the big one that everybody is watching.

We’ve just been -- in the last three weeks, we've been to every single division physically in the North American side and the steel mills would like to raise steel 12% to 15% on us right now, but we’re hedged, we’re in pretty good shape through the end of the third and then we’re keeping a close eye on it and we’ll see if we want to lock in in August, but we will have to adjust prices for what we see.

We don't think it will be that high, but we think there will be some increase coming out, at the same time, we're doing a pretty good job on the purchase side on the other items, so we’re in good shape for the moment with keeping an eye on August..

Appreciate it guys. Thanks..

The next question comes from Schon Williams with BB&T Capital Markets. Please proceed with your question..

Hi, good morning.

Just wanted to talk quickly on the financing for Power Flame, was most of that put on the revolver or you’re going to take part of it out of cash or?.

It will be all cash. We had 68 million in the quarter, so it will be all cash..

And margins on that business, are they equivalent to the corporate rates or energy segment?.

Yes..

All right.

And then I wanted to talk about the timing of the second Highland shipment, it is 18 million this quarter, and it was kind of slightly below the guidance last quarter of 20 million, just wanted to just get a sense of how are things kind of ramping up, and I don't know if that's maybe related to the expansion that's going on in Chattanooga right now, can you just talk about kind of, as we get into kind of full ramp up mode on pellets through the rest of the year, I mean do you feel pretty comfortable with the schedule that you put out there?.

We do, Schon. This is Ben. Part of it is percentage completion at site two, so we were in good shape on. So it could be that we are, it’s around 20 million. We've got weather, it depends on it, rains at times at Arkansas or not, that can slow us down, but in talking with our guys last week, we’re starting to say that's in pretty good shape outside.

So we feel good about the schedule as it stands right now..

All right, that's helpful.

And then energy had a particularly good top line this quarter, I mean sequentially, you don't see these kind of pickups going into the spring, I mean, you do get to see more pickup, but this was quite robust, I'm just wondering can you give a little bit more color maybe, was there anything specific driving that and are those levels sustainable going forward?.

Schon, this is Rick Dorris. Heatec had a good second quarter, heaters has had a good year so far and that continued in the second quarter and GEFCO, we started building from -- or doing some fabrication for some of the other divisions at GEFCO, so that helps them a little bit and CEI was about flat with last year, year-to-date..

In CEI, I thought there were some expectation that maybe that would be picking up here?.

We do expect it to pick up for the second half..

Okay.

And that would be cement plants?.

Yes. Concrete plants. Yes..

Okay. All right.

And then maybe just one last one if I may, just any thoughts on, I know you mentioned R&D picking up at some point, I'm just wondering maybe like the SG&A levels as we go into the back half and do you feel pretty comfortable with the $44 million, $45 million level or is there any kind of pluses or minuses we should be thinking of in the back half?.

I think we’re in a good space from SG&A. If anything, I would hope we would come in with a little bit of a downside surprise on that, but we’re working hard to hold that steady and with the volume that we’re running, there are additional costs, so we really target the percentage, we’d love to be at 15..

Okay, great guys and congrats on the quarter..

Our next question comes from Morris Ajzenman with Griffin Securities. Please proceed with your question..

Good morning, guys.

First question, aggregate and mining, both on the revenue and on the backlog, can you give us some more granularity and kind of breaking the plot as best as you can, aggregate from the mining group? And then secondly, a similar question, the energy group, if you can break apart, energy from concrete, Heatec, et cetera, if you could kind of give us some sort of more granularity within each of those two divisions?.

Sure. Morris, this is Ben. Mining in the group typically might be 15% of the group and where we are struggling is in South Africa, our Osborn Group is profitable.

And then Brazil, as I mentioned on the call, is looking like a pretty tall mountain that we’re going to be there when it turns around and it's an investment we've got to size down and actually we’re slightly profitable in part of the quarter.

So, and we’re looking for other products that we can build on that facility, maybe not even just for Brazil, like we shift an asphalt plant to Argentina, we’ve got a few others quoted for out there, for around Brazil.

So the Telsmith group’s sales in combining mining a little bit as well, and they had a really soft first half and they’ve picked up, they have more work now, so it feels a lot better there.

On the energy side, right now, the concrete is, we’ve got the two plants going there right now, that will go to a customer late this month or first week -- first couple of weeks of August, which is a fairly large order, around $7 million altogether, so that will show up.

That alone we can help in the second half, they would meet that criteria immediately on concrete plans, but they have got pretty good work otherwise, and they’ve picked up a few asphalt type orders and asphalt rubber blending type prospects.

So right now, I’d say concrete is not significant next year, for CEI, $10 million to $20 million range would be pretty achievable. I know that’s a wild range, but they are coming in new to the industry and Fusion plants that are referenced in my comments is a smaller ready mix plant.

It’s a fairly simple process with newer style controls and those retail in the neighborhood of $450,000. So we are not talking it's going to take a lot of units to move that needle for the company, but present it would be good man-hours and a lot of work. I hope that answers your question. That's kind of where we’re on it..

Just as a follow-on back with the aggregate and mining, can you give us a little more impression on the aggregate side of the business, where we were in the quarter and how it looks going forward?.

On the portable and track mounted side, it’s stayed steady, flat, but still steady and the project work, the larger quarry work has lagged what we were hoping it would be quicker that like we said in the last call, we now think and in my comments today, back half of the year for the, or probably near the end of the year for the highway bill to help that group and so -- it's just come out again a little slower with the highway bill than we would like, that, get quoting activity there now, since the 1st July, that doesn't, we haven’t earned the orders yet, but at least we've got more quoting activity.

Actually, we’ve had some more details on it, but it feels a little better now and this is 25 days to go..

Last question, I don't think it had any major impact for you, but BREXIT at the end of June, have you seen any fallouts or any rebounds or any impacts at all from that?.

No, we haven't seen any impact at all. We’re keeping an eye on the labor side and for our Telestack Group in Northern Ireland, which is in the UK. So for the moment and we talked with them within the last couple of weeks about it and it was not an over concern about anything for them.

So the other concern for us when that happened was the pellet business of course, because that’s, most of the driver for that business right now is the UK, talking with our customers, that are doing business there, they do not think that will affect what they are doing..

Thank you..

Our next question comes from William Bremer with Maxim Group. Please proceed with your question..

Good morning, Ben, David and Stephen.

Just want to get a sense on overall pricing, I'm not sure if you gave a little commentary on that as of yet now, and couple that with your capacity utilization of your brands, is it necessary, given what we’re seeing in steel to start adding up the price or is it based upon capacity utilization that you are able to possibly increase prices here?.

Bill, I'm sorry, this is Ben. We mentioned just a bit ago that we’re watching steel for sure, and we may need to think about pricing in August or early September, but sure we’ll be watching that hard. All of our purchasing managers are red alert watching that because that's a big thing for us. Utilization is good.

Overall, it's up a little, we were seeing, 70, 75. I have to kind of say, we’re probably in the 75 range now as a company overall with infrastructure running 80 plus, aggregate and mining running in the 70, 75 range, depending on the group and energy at around 65. It's interesting.

We’ve been very fortunate, but you can feel as good as you can feel in Chattanooga, Tennessee with our infrastructure group companies here, Astec, Heatec and Roadtec, you can feel maybe not as good, if you go to GEFCO, [indiscernible] which is flat to down a little.

So, but we’ve been able to backfill some of the man-hours through the shop and the quality of work that they’re doing is very good.

So that's encouraging, but we're definitely watching steel prices and I would say, we’ve had, we talked about last call, having just a little bit of pricing power, I think I’ve talked about putting your thumb and index finger almost touching and that was it.

I think you can probably still have them together, but you could probably take them out about a millimeter. So we see a very competitive market, we faced international competition with where the euro is from Germany, they are pretty aggressive..

My next question is based upon just demands.

Are there certain regions or states that you’re surprised of in terms of their underlying demand for your products?.

Without giving too much away competitively, I would say we have activity coast to coast and we have pretty strong activity in the Southeast United States. That could partially because our coverage is typically better closer to home, just because we started here, but we have good activity coast to coast..

And northern, so upfront in Canada, what are you seeing there at this time?.

We have pretty good activity up there for quoting and I don't know if they are getting comfortable with the currency where it is, that’s more east and west, quiet in Alberta, that clearly depends on oil sands, but we do have generally pretty good activity right now in Canada. Hopefully, the sales will follow, but the activity is good..

Okay, thank you, gentlemen..

Our next question comes from Mike Shlisky with Seaport Global. Please proceed with your question..

Good morning guys. Nice quarter.

Ben, your commentary, assuming it was not positive around the oil and gas industry and that segment in general, but could you really tell us if you’re seeing conditions improve or perhaps worsen over the last two months and so last year?.

I think they are about the same. We have quoted some equipment, which is encouraging, because in the first part of the year, I'm not sure we’re, I asked Rick, what’s the comment, he’s closer..

Yeah. The quoting activity has picked up some, but mainly in the Waterville part of their business, that part of their business has ticked up in the last couple of months and there is a little more activity there. Oil was still down, but a little better than it was..

Okay, got it.

I also wanted to follow up on the last question earlier about your capacity utilization, so it looks like here, you are running about 80% of your infrastructure, [indiscernible] 100% and whether you had to add on additional capacity at some point, given the pretty strong orders you’re seeing?.

Yeah. This is Ben, Mike. I would not anticipate 100%. They’re just always going to be some inefficiencies and when we do for on the shop, 100% is probably, it would be a great goal, but probably unrealistic.

I think in our best ever, we’ve probably been 90% and I think depending on the division in the infrastructure group, we might be getting closer to that, we are adding on at Astec, Inc. Now, let's say they’re probably pushing that number.

We’re adding on for drums, the drums for the asphalt that do the drawing on the aggregate and the drawing of the wood that they were building will handle the big drums for the drawing of the wood and it's also set up to build drums for asphalt plants and that's our bottleneck and we think between that and a couple of things we've done on our division, we can handle the demand that's coming out at the moment on the asphalt plant..

Okay.

And just on the same asphalt plant, a lot of what you have mentioned that your order activity is sort of very nicely post the building pattern that you did in December, they will be kind of followed by some kind of low eventually and I thought I was wondering, I thought it was going to be somewhere around Q2, which is just great, but did what happened in Q2 which was actually very, very low or is that still yet to come or is it just not going to happen based on what's been going on recently in the asphalt market..

Well, I think the quoting activity rolled a little bit that quote, the order kind of stayed fairly consistent on the point, which was obviously a nice surprise. If you’re going to be wrong after, would it be wrong, yes. But the quoting activity slowed as the summer came, but we’ve just been unfortunate [indiscernible] ready to do something.

And that's been great. Now, the challenge of that is to the point earlier is, we’ve had some people take on lighter to stay with this, which has been -- which is doing great, but at some point, so far, I think there has been one deal that I’m aware of that we last see the delivery since December that they had to get in on, they had to start..

Yes.

I think that was the other question I had for this particular segment was, is there the opportunity, is there a chance that some of your customers just will be able to wait as long as you’ve got, of course, you are one of the market leaders of course, but is there a chance that you might have some backlog at some point if you are keeping on coming in and the demand is actually stronger than you initially thought?.

I don't think anybody of you can’t find out our backlog that’s on hand, but we might not get orders or in order to, because they’ve got a project that they didn't anticipate getting that they need to point out for really quick, like a 8 to 10-week delivery and we are getting a lot of it here.

That potentially can happen if DOTs come out with quick and make light work for the end of the year, that could happen.

That being said, we’ll do all we can to see if we can get there, we’ll call everybody to see if we get there, we wouldn't just lay down, but that’s possible, because we are also not -- a lot of customer on delivery, we just can't do that..

Of course, sure. Got it. Maybe if I can squeeze in one last one here on the pellet front, you’ve got some new ones you mentioned, one was in the $80 million range, that’s -- I assume that that’s a smaller pellet than what you’ve currently got in the backlog.

I guess maybe you can update us on the pricing and margin outlooks on what you’re quoting, is it similar to the $120 million now or is it better or worse?.

That's a smaller plant.

That is the plant that’s going to, I keep going between my head [indiscernible] and we have all the install, so that's a big difference in the number between Hazlehurst [indiscernible] that big spread is installation freight, all the electrical that a lot of stuff that Hazlehurst would put forth, but we, this one is a two line plant where we have all in, everything, side work and everything if I remember what -- I think I’m remembering it right.

So that’s more than just the arm. In fact, it also has wood yard in it, which is more equivalent to [indiscernible]..

Okay, sure. Got it. I will leave it there. Thanks, guys..

Our next question comes from Nick Coppola with Thompson Research Group. Please proceed with your question..

Hi, good morning.

For wood pellets, can you just talk more about kind of at a high-level, your expectations for demand there, so beyond that next order that you just -- order you’re looking at, maybe in to 2017, what are your thoughts around demand?.

This is Ben, with whom we are talking with, 1 to 1.5 of these plants in ’17 is our goal and what we’re working for and we would love to have it sooner than later. So it can balance demand and keep openings for asphalt plants. Our goal would be in the $100 million to $125 million range of revenue in ‘17 with pellet plants..

Okay, that's helpful.

And then can you just talk more about Power Flame and how that fits into your portfolio of businesses from a strategic perspective?.

This is Ben and they are a company that we’ve known for a long time, I've known them, we purchased from them when I was a CEO, when I was 26 and I’m 45 now.

So I've known them a long time, known their culture and then when you look at strategically what they bring, being in burners for that long and rebuild burners, we can trade ideas on the burners, we can get more familiar with the industries they serve and there are places where their burners go on and things that we potentially could see for other industrial applications for our growth.

Some of the industries they go into that might tie in to some of the energy group companies or into the bio industries, they give us visibility into those industries that we don't have, being in all the things that they are in.

We can help them we think with purchasing and benchmarking because they have a broader view of other companies that are doing similar things and I think between the two companies on the burners, so as mentioned earlier in my comments, our mission to being able to collaborate on that and some of the industries that they are in internationally, they do quite a bit of business in China and Russia and some of those industries, we can get a look into for some of our industrial equipment as well.

We’re not necessarily, wouldn’t get too excited about the competitors to our customers and the burner business and that type of thing, but around what does go into might have some interest to us from the industrial side for growth in the energy group..

Okay, that's very helpful. Thanks for taking my questions..

Our next question comes from Brian Sponheimer with Gabelli & Company. Please proceed with your question..

Hi, good morning guys. Thanks for fitting me in after 11 o clock here.

Just on the original plant that you financed, what remains for you to get paid on the 60 million?.

Quite a bit. .

Well, so they are working out their banking relationship -- their banking plan, ideas, because just getting the financing.

So what we got to do is we've got to complete the retrofit and inflation of one particular line, all three lines up and running, which two of them are at their current design, which is the final design so that first line needs to be retrofitted and once that occurs, all three up and running according to spec and then the banks are all in.

So it's a matter of timing more than anything..

Okay.

So of the original 60, you mentioned 20 million in the quarter, so 40 million remains, is that still?.

Totally different project..

Yeah.

The 18 that we recognize in the quarter was on the Highland Pellets project and so there is almost all the 60 that do, I mean, we still have financed with Hazlehurst and more color on that, all three lines have run pellets at deduction, what we needed to do is be able to burn wood exclusively on each line and we would get a roll on that on our burners.

So we’re replacing the burners and so the testing, proving that the lines will do, we said on times per hour is fine. The other two has the new burners on it and they are running. You got to get the third burner.

I think you get financing on that plant without it and that's the rest of the story and I want to make sure everybody understands, we’re not examining, because there is no risk, we have met that and we are in good shape, but as far as how much money do we still have to collect, we have collected a little interest, we were just thinking about internally, it is about 60 million plus the interest..

And just on the Highland plant, that's just the times of the construction there?.

That's right. Yes..

And that's financing to employees and it’s just a matter of completing the various terms of the contract..

Thank you very much..

Our next question comes from Ryan Hamilton with Morgan Dempsey Capital Management. Please proceed with your question..

Good morning, guys. Most of my questions have already been answered.

I just like to touch real quick on the infrastructure group, could you talk a little bit about what you’re seeing as far as your customers adding capacity or are they just filling orders as needed?.

It is a mixture, Ryan. This is Ben. We’ve had some customers adding plants to their fleet, and -- but we also had consolidation of plants for bigger plants. So we sold some mega plants, what I call mega plants that would do 500 tons an hour plus and have 6 to 9 storage pellets on them.

There has been quite a few mega plants sold this year, but the used market is strong and so we've seen as we’ve traded and sold and helped brokers and plants, they are not staying on the market very long either.

And then we’ve had some people that were not in the business get in the business and so we’ve seen a couple of plant orders that have shifted this year and have gone to customers that were not in the plant business, but they were in the laydown business, they already, they had papers to pay that fall.

So it's a fairly active market for three of those reasons..

Sure. Thanks for the color.

And then I was kind of wondering if you could talk about, it's been so long since we've had such a straightforward highway bill and for how many extensions over the last eight or so years, is this happening as you would expect it to happen or are there things that are coming up that you say, well, this is different or unique?.

No, I think it's been about what we expected with the exception of being fairly consistent on the buying side, even though the quoting was down.

It may be that we’re still down on the orders side, it just seems like it's more consistent through the summer and around mid-year, there was a mid-year asphalt association meeting a few weeks ago that we were able to spend a day and a half down and generally had the future very, very good..

Okay, great. Well, thanks again and great quarter..

Ladies and gentlemen, we’ve reached the end of our question-and-answer session. And I’d like to turn the call back to Mr. Steve Anderson for closing comments..

All right. Thank you, Rob and everyone. We appreciate your participation in the 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 available through August 9 and an archived webcast will be available for 90 days.

A transcript will be available under the Investor Relations section of the Astec Industry’s website within the next seven days. All of that information is contained in the news release that we sent out earlier today. As Rob said, this concludes our call. So thank you and have a good week..

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