Stephen Anderson - VP, Director of IR and CS David Silvious - VP, CFO and Treasurer Benjamin Brock - President and CEO Rick Dorris - EVP and COO.

Mike Shlisky - Seaport Global Securities Mig Dobre - Robert W. Baird & Company Stanley Elliott - Stifel Jon Fisher - Dougherty & Company Brian Rafn - Morgan Dempsey.

Greetings, and welcome to the Fourth Quarter 2017 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, Steve Anderson..

Thank you, Diana. Good morning and welcome to the Astec Industries' conference call for the fourth quarter and fiscal year that ended December 31, 2017. As Diana mentioned, my name is Steve Anderson and I'm the Vice President of Administration and Director of Investor Relations for the company.

Also on today's call are 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 fourth 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. So at this point, I’ll turn the call over to David to summarize our financial results for the fourth quarter and the full year 2017.

David?.

All right, thanks, Steve, good morning everyone, thanks for dialing in. Net sales for the quarter were $312.4 million compared to $326.6 million in Q4 of ’16, a decrease of 4.3% or $14.2 million decrease in net sales.

International sales were $67 million in the quarter compared to $61.6 million in Q4 of 2016, an increase of 8.7% or $5.4 million increase in International sales and those increases were primarily in the geographic regions of Canada and Australasia and Africa and Brazil and those increases in those areas were offset by decreases in Mexico, in Japan, in South America, excluding Brazil in Europe and Central America.

For the quarter, international sales in the energy group, the infrastructure group and decreased in the aggregate in mining group. International sales represented 21.4% of Q4s net sales compared to 18.9% of Q4 '16 net sales.

Domestic sales were $245.4 million in Q4 of '17 compared to $265 million in the same quarter last year, a decrease of 7.4% or $19.6 million decrease in domestic sales. Domestic sales represented 78.6% of Q4 '17 sales compared to 81.1% of Q4 '16 net sales.

For the quarter domestic sales increased in the Aggregate and Mining Group and the Energy group and decreased in the Infrastructure Group. Part sales were $69.3 million in the quarter compared to $62.5 million in Q4 of ‘16, a $6.8 million increase or 10.9% increase.

Part sales were 22.2% of quarterly net sales this year compared to 19.1% of Q4 '16 net sales. For the quarter, part sales increased in the Aggregate and Mining Group and in the Energy Group and remained flat in the infrastructure group.

Foreign exchange translation had a positive impact on sales for the quarter-over-quarter of about a million and a half dollar that is it’s right for the same in Q4 is in Q4 last year sales would have been $1.5 million lower. For the quarter, pellet plant revenues were $5.6 million compared to $70.6 million in Q4 of '16.

Recall that these sales are classified as domestic sales and also the request that in the infrastructure group. Net sales on a year-to-date basis were, $1,184.7 million compared to $1,147.4 million in 2016, an increase of 3.3% year-over-year or $37.3 million increase year-over-year.

For the year, international sales were $252.4 million compared to $206.2 million for the year last year, an increase of 22.5% or $46.2 million increase in international sales, those increases occurred primarily in Canada, in Russia, Australasia and in Brazil and those increases were offset by decreases in South America excluding Brazil and Japan Mexico and Central America.

International sales represented 21.3% of year-to-date net sales compared to 18% of year-to-date '16 net sales. For the year, international sales increased in all of our reporting groups. Domestic sales for the year were $932.3 million compared to $941.3 million in 2016, a decrease of 9.5% or $9 million decrease.

Year-to-date 2017 domestic sales were 78.7% of total sales compared 82% of total sales for the 2016 year. Part sales for 2017 were $283.4 million compared to $263.5 million in 2016 a 7.6% increase from $19.9 million increase in part sales. Part sales for the year of 2017 were 23.9% of total sales compared 23.0% of total sales in 2016.

Foreign exchange translation had a positive impact on sales for the full year of 2017 of $2.9 million and that is if rates for the same this year as last year, sales would have been $2.9 million lower.

For the year, pellet plant revenues were $8 million compared to $135.2 million in 2016 and again, these sales are classified as domestic sales and also in the infrastructure group.

Consolidated gross profit for the quarter was $62.8 million compared to $64.5 million in Q4 of '16 a decrease of 2.6% or $1.7 million decrease in gross profit in dollars terms. The gross profit percentage then was 20.1% for the quarter compared to 19.7% for Q4 '16.

The absorption variance for the fourth quarter of '17 was $3.8 million under absorbed overhead compared to $9 million under absorbed overhead in Q4 '16, a positive change in the absorption variance of $5.2 million.

Consolidated gross profit for the year was $243.1 million compared to $265.3 million for the year of '16, a decrease of 8.4% or $22.2 million decrease. That yielded a gross profit percentage for the year of '17 of 20.5% compared to gross profit percentage of 23.1% for the full-year '16.

The year-to-date '17 absorption variance was $1.3 million under absorbed, compared to $16.5 million of under absorbed overhead and $16, a $15.2 million positive change in absorption for the year-over-year SGA&E for the quarter was $44.8 million or 14.3% of sales compared to $45.4 million or 13.9% of sales for the fourth quarter of '16, a decrease of $600,000 and in dollar terms an increase of 40 basis points as a percentage of sales.

The primary driver there was a reduced research and development cost and offset slightly by increase in payroll and benefits related expenses. For the year SGA&E was $187.6 million or 15.8% of sales compared to $178.1 million or 15.5% of sales for the full year of '16 an increase of $9.5 million or an increase 30 basis points as a percent of sales.

Primary drivers there were -- recall that we had ConExpo earlier in 2017 for $4.4 million and that was also added to by payroll and benefits related costs that were up year-over-year. Operating income was $18 million for the quarter compared to $19.1 million for the fourth quarter of '16 a decrease of 5.8% or $1.1 million decrease.

And for the year, operating income was $55.5 million compared to $87.2 million in 2016 a decrease of 36.4% or $31.7 million decrease in operating income.

Other income was $700,000 for the quarter compared to $63,000 in Q4 '16 and $2.7 million in the full-year of '17, $1.5 million in 2016 and recall that the primary source of that other income is licensed fee income and also investment income at our captive insurance company.

The effective tax rate for the quarter was 41.1% compared 34.2% for the same quarter last year and while our tax rate for the quarter did include the benefit of approximately $1.1 million from the tax reform legislation, so obviously higher than our historical average and significantly higher than last year’s Q4 rate and items that caused our rate to be elevated compared to last year included a smaller research and development tax credit in the current year, higher state tax expenses in the current year and we had increased tax expense on intercompany sales that were deferred in prior years that were recaptured in the current year and consolidation.

For the year, our tax rate was 34.3% compared 36.9% for the full year of 2016.

The tax rate for the year is lower than the prior year due primarily to the impact of the domestic production activity deduction or DPAD, and the research and development tax credits and those were similar amounts in 2017 compared to ‘16 but they did have a higher percentage impact due to lower taxable income in the current year as well as the aforementioned benefit from tax reform.

On a go-forward basis, we believe our annual effective tax rate will be in the 25% to 26% range and we will update this forecast for you on our Q1 call as we get through our first quarter tax provision process.

Net income attributable to controlling interest was $10.9 million for the quarter compared to $12.4 million for Q4 '16, a 12.1% decrease from $1.5 million decrease. Diluted earnings for the quarter than were $0.47 compared to $0.53 in Q4 of '16 and 11.3% decrease or $0.06 per share decrease.

On a year-to-date basis, net income was $37.8 million compared to $55.2 million in for the full year of '16, a decrease of 31.5% or $17.4 million decrease. And therefore for the year, earnings per share were $1.63 per diluted share compared to $2.38 per diluted share in 2016, a decrease of 31.5% or $0.75 per diluted share.

As we previously announced, the company initiated significant design upgrades to its customers Georgia and Arkansas with pellet plants to meet full production rates and that obviously negatively impacted our earnings per share in the third quarter and for the year by approximately $0.59 per share.

EBITDA for the quarter was $25 million compared to $25.6 million for the fourth quarter last year, a decrease of 2.3% or $600,000 and for the year EBITDA was $82.7 million compared to $112.7 million for the full-year of '16, a decrease of 26.6% or $30 million decrease in the EBITDA year-over-year.

Our backlog was down $411.5 million at December 31of '17 compared $361.8 million at December 31 '16 and prior year adjusted for RexCon, recall that we acquired RexCon in October of 2017 and so we’ve adjusted all the prior year numbers in the backlog to reflect that. The increase in our backlog December versus December is $49.7 million or 13.7%.

Our international backlog is up to $75.6 million compared to $62.7 million at December of last year an increase of $12.9 million or 20.6%. Our domestic backlog is $335.9 million and last year was $299.1 million at December, that’s an increase of $36.8 million or 12.3% increase.

Excluding pellet plant backlogs, our 12/31/17 backlog was $341.4 million, an increase of $57.3 million or 20.2% compared to 12/31/16 and there was a press release called out an increase of 22.9% however that was an incorrect percentage, the actual percentage is 20.2% on that calculation, so I apologize for that number.

Sequentially, the December 31 backlog is $411.5 million compared to our September 30, of '17 backlog of $386.5 million, a $25 million increase in backlog sequentially or 6.5% increase sequentially.

And at year end ,we typically announced our January backlog and that is $448 million at January of 2018 compared to $394.2 million in January of '17 a 13.6% increase in the January backlog.

The foreign currency translation impact on the backlog year-over-year is $2.3 million increase that is the backlog would have been $2.3 million lower at prior year rates. Although the balance sheet still remains very strong, our receivables are $120 million compared to $110.7 million in the prior year an increase of $9.3 million.

Our days outstanding there are 34.3 days compared to 30.5 days at 12/31/'16. Our inventories of $391.4 million at 12/30/17 and that compares to $360.4 million in December '16, a $31 million increase in inventory, and that yielded 2.4 inventory turns in 2017 compared to 2.3 turns in 2016.

We have nothing on our $100 million domestic credit facility, and we have $62.3 million of cash and cash equivalents. On the balance sheet are letters of credit are at $9.8 million outstanding at the end of December, yielding a borrowing availability of $90.2 million.

We do have $4 million of debt currently in Brazil and that is used to finance the company’s building fixture and inventory. Capital expenditures for the quarter were $5.6 million and capital expenditures for the year were $20 million. For 2018, we are forecasting around $35 million of CapEx.

Depreciation for the quarter was $5.4 million and $21.3 million for the full-year 2017. And for 2018, we are forecasting somewhere in the range of $23.5 million dollars of depreciation. That concludes my prepared remarks on the financial details. And I will turn it back over to Steve Anderson..

Thank you, David. Ben will provide comments regarding the fourth quarter of this year's operations will offer some thoughts going forward.

Ben?.

Thank you, Steve, and thank you everyone for joining us on our call today. Before going into my comments on our earnings release, I do want to take a minute to say thank you to our entire team at Astec for their efforts in 2017.

We did end the year with a 1.185 billion in sales, and although the sales were only up slightly that did get us another record and an EBITDA of $82.7 million with strong backlogs at the end of December and January as David mentioned. It did take a total team effort in '17.

And in my opinion, 2017 became a year of transition for us, as we released an extraordinary amount of new products at the ConExpo show in March of 2017 and worked through installation and startup issues for our customers that our two large pellet plants that we delivered.

Innovation and customer service are important values to us as a company and the two transitional issues just referenced are normal for us historically; albeit at a much lower level historically as well.

New products normally carry lower margins as we build there in the first few times and a large number of them in the first half of 2017 was a challenge to our gross margin. These margins have recovered and will be in line with our normal margins in 2018.

Our investments related to the installation and start up of the wood pellet plant for front and center for us during the year as well and we are making good progress on these plants.

Moving back to our earnings release, as we commented in the release this morning, we were pleased that our fourth-quarter results were in line with our anticipated result that we mentioned in our last call.

As for the year as a whole, our transitional issues held our EBITDA to $82.7 million or 6.98% of sales, which in my opinion was a fairly good result given all the new products introduced and with pellet plant charges during the year. For reference, our ex-pellet charges EBITDA in 2017 would have been $103.7 million or 8.75% of sales.

In addition, if we added back our previously stated new product margin effect in the first half of last year, which was a stated effect of approximately 100 basis points, we would have had a total EBITDA in 2017 approximately 110 million or proximally 9.3% of sales.

This indicates will perform close to our 2016 results in our core business areas and 2016 was one of our stronger years. That being said, our actual 2017 results include our transitional issues and what does essentially behind us, we are focused on opportunity to have a very good 2018.

As David mentioned our backlog at December 31 was 411.5 million and our backlog at January 31 was 448 million.

Our infrastructure group continued good order intake during the quarter, mainly as a result of good economic conditions and the federal Highway Bill in the United States, our aggregate mining group also saw an increase backlog for the same reasons.

Our energy group backlog was up as we experienced good order intake and the group of products targeted at the construction and industrial customers in their groups. We also experienced increased quoting activity for oil and gas drilling products.

Our domestic and international backlogs were both up year-over-year, our increase in domestic backlog overall was primarily due to the current long-term federal highway bill, new state and local government infrastructure funding mechanisms, and good private sector work levels for our infrastructure customers.

Our international backlog increase was a result of improved economic conditions and some larger scale infrastructure projects in Europe, Russia, Canada, and Australasia. We’ve also seen increased quoting activity in Africa. Our Astec Brazil facility continues to experience a slight increase in quoting activity in Brazil.

As you may recall, we’ve made the decision to maintain our international sales and service organization despite the significant challenge presented to us in the last few years by the strong U.S. dollar and with regards to exporting our equipment from the United States.

The decision to do so asserted to prove to be the right one and has paid off an increase international orders and backlog at the end of 2017. We see a long-term opportunity to grow our equipment parts and service sales in international markets. To that end, we have hired Michael Morris as our new managing director of international regional offices.

Michael comes to us with a successful track record of increasing international construction equipment sales. He will drive our efforts to increase sales of our equipment parts and service internationally through a global regional office network.

Having offices in the regions we're serving worldwide will get us even closer to our customers and help us as we work with them in an even better way and their time zones and in their languages as much as possible.

Our region office strategy is reflective of successful international sales models in our industry although tailored to meet our operational model of decentralization. We excited to have Michael on board and for our future growth in this area.

We do not expect the expense to execute this strategy to be extreme as we will roll our existing international sales and service personnel into our new region office vision as we create each office over time. We expect to open one to two offices in 2018 and these regions are to be determined.

Changing subject to wood pellet plants 2017 was an extremely challenging year to us with regards these plants as we took significant charges related to getting the two plants we have delivered and installed and up to speed and production for our customers.

As an update on our progress on the wood pallet plants we are making good progress and believe that our announced charges during 2017 are adequate to cover our commitments to our customers. Updating our current pallet plant productivity we do have ongoing productivity for new projects.

However, as previously announced we’re not going to sign a new pallet plant order until we have finished at both of the sites that the charges were announced for doing last year. Given our progress at the two pellet plant sites we still believe we’ll be in position to add an order in time to deliver complete with pallet plant and 2019.

As a reminder if we do get in order for another with pallet plant we’ll only do so as a supplier of equipment in accordance with our traditional equipment parts and service offerings.

Changing subject to the Energy Group, we experienced good sales activity during the fourth quarter for products targeted at infrastructure, oil, chemical and food industries which contributed to the 35.2% increase in backlog in the group. Sales in wood chippers and grinders also remain consistent during the quarter.

Our concrete plants are built in Energy Group and quoting activity is good for these plants. The World of Concrete Show was held in January our RexCon and CEI subsidiaries enjoyed great customer traffic through their displays and both have secured orders as a result of being at the show.

Our RexCon and SEI teams are working together on our strategy to meet our goal to become the largest supplier concrete plant in the United States. We are currently number two. As you can tell by these developments we’re optimistic on our outlook in the Energy Group.

Our new product development does continue in all groups, however at a more typical rate versus the high rates of R&D in 2016 and 2017. Innovation is one of our core values and in addition to our industry-leading service, our brand promise to our customers.

Looking ahead to the first quarter 2018 we believe our first quarter 2018 revenue will be slightly higher than Q4, 2017 and with regards to earnings in the first quarter 2018 we expect earnings per share to be slightly better in our first quarter 2016 earnings per share.

Our current outlook for the full year of 2018 as core revenues up 7% to 12% versus last year with a much improved net income for the year, we expect to be paid on the pallet plant in Georgia in December which would add 60 million to the sales number that as a reminder the sale will be a breakeven marginalized.

Despite the gains we believe we will show in 2018, and we still have opportunities to be an even better company for customers, our focus is producing even higher quality products and we already do for customers while focusing on operational excellence internally.

To that end we have hired Jim Joyner [ph] as our Vice President of Global Operational Excellence. Jim has a proven track record of working with global manufacturing companies to increase quality and productivity.

He has been working with us as a part-time consultant at two of our subsidiaries since the end of last summer and we're excited to have him join our team. He will work with all of our subsidiaries to maximize quality and productivity in a systematic manner.

We have seen our vendor partners, especially those with products that contain steel, working to increase prices. We have also seen still supply vendors pushing for the same. We will work to offset these pressures in many ways including operational efforts with the addition of Jim to our team.

From our last earnings release to now, orders had been study and infrastructure group improving in the Aggregate Mining Group and improving in the Energy Group, orders have been internationally. Bright spots for activity or hot mix asphalt equipment sales, asphalt plants and mobile equipment and a type equipment for asphalt.

Concrete plant productivity, sore mediation, plant quoting activity, wood chippers and grinders, aggregate crushing and screening equipment quoting activity and international quote activity. Year to-date part sales were up 7% versus last year and were 23.9% of total sales versus 23% last year or in 2016.

For the whole of 2018 we are optimistic on outlook and we believe all of our reported groups have their opportunity to be up on sales and net income for the year. Acquisitions remain a key piece of our growth strategy along with organic growth. To that end we continue to work on potential additions to the Astec family of companies.

Given our current financial position overall we have the ability to execute a larger than historically normal acquisition however we will only do so if the acquisition is strategically aligned with the industries we serve.

And as my comments on the quarter and what we see in front of us, thank you again for taking the time to be on our call and for your support to move ahead. I’ll now turn it back over to Steve Anderson.

Thank you, Ben. Diana, we can open up the lines for questions now. We glad to entertain them..

[Operator Instructions] Our first question comes from the line of Mike Shlisky from Seaport Global Securities. Please proceed with your question..

Good morning, guys..

I wanted to follow-up with the gross margin question.

I guess are you still okay with your 25% gross margin target for the year? And is that more of a end of the year goal and during the start of the year? Is that goal an area you can reach on a full-year basis in 2019 and beyond?.

Hi, Mike. This is Ben. We’d say it our goal to be a 25% exiting 2018. There’ll be a little pressure on that with the pricing pressure we’re see in mainly as a result of steel pricing, but still has opportunity to do that. That’s one of the reasons that we had Jim Joiner to the team.

We’ve done it a nice job to this point on our lean effort that we start off Cheney do that is one of the reasons give me that we added Jim Joyner to the team.

We done a nice job to this point on our lean effort, and I think that's helped us a little bit on maintaining some market shares that we want to take it to the next level and Jim’s got a great history of doing that at many places around the world and we’re excited to have him on the team that still a definite target force coming out of 2018 and then really too early to call in 2019 that we would -- certainly that will be our goal..

Okay. Got it. I also want to ask about some of the Fast Act [Indiscernible] you’ve seen so far. At this point of the year we’re entering the halfway point that sort of mid point through 2018 here. So it’s only two years left after this year.

At some point do you think the order activity that kind of really that might slow down or is that not going to happen for quite some time in your opinion?.

In my opinion I guess, it maybe a two-part answer. The first part is we just had the National Asphalt Pavement Association Annual Meeting a few weeks ago and extremely well attended one of the highest attended in many years which is an indicator of how good things are for our customers.

I personally visited with the 31 different companies worth of contractors over that time and while at the meeting in everyone feels very good about 2018, didn't talk anybody that they didn’t feel good about 2018 and okay about 2019. But anytime we see at the end of a Highway Bill could be a slowdown in infrastructure equipment purchasing.

The second part of that answer is who knows with the Trump plan end up being – if you read it or if you see any of the analysis on it, its probably on the one hand the most creative effort in the last couple of decades to fund infrastructure to high level based on the backside really no great way to pay for it.

So I know they came out with the proposal of a gas tax at $0.25 which would be $0.05 a year – for five years which we absolutely think is the best way to do it until you can get to vehicle miles traveled way of paying for it. I think there’s a big jury out on that anything he gets would help us.

And I think certainly if I want to do something how to get there is different, but that’s probably little longer answer than you want it, but I guess timing wise, there's probably another couple left on the equipment side.

Lot of this money is hit, its flowing, but also in addition to that you got the state and local initiatives that have happened over the last few years and that's really provided funding out there and private side is still staying strong corner by we talk to out there. I talked to him. So I would say probably couple of years on the equipment side..

That's great color. Kind of a quick follow-up on that, Ben. If you have is this big bill that's kind of --in everyone cite in Washington D.C.

are you most recent quotes - more recent talks will resume talks with customers, are there quotes done, is their pen in hand or they kind of waiting to he sign as soon as that bill gets signed by the President? Or are your current quotes more sort of kind of long term view about their ability to buy equipment from the Fast Act or their current business situation, regardless of what President Trump wants to do?.

I didn’t get the feel that everybody was banking on Trump bill and most orders have been steady, good activity particularly in the mobile side is a rotate division, Carlson very strong. So I don't think that they're working on the Trump – with Trump in mind as their execution right now..

Got it. Excellent. I will pass along. I appreciate it..

Thank you..

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

Yes. Thank you. Good morning, guys..

Good morning..

So you’re not providing revenue outlook for 2018 and can appreciate why, but what I’m looking at you’re exiting the year with pretty nice order growth call it 15% or thereabouts. You've got your backlog if I exclude wood pallet plants is up about 20. So orders are pretty decent, backlog is pretty decent.

As we look into 2018 is there any reason to think that we would see a slowdown from the current levels? Is there any anything that you either scene in the market or you’re hearing from customers, any color?.

Hi, Mig. This is Ben. I don't see it. I think we do have opportunity like I said in the comments to be up 7% to 12% over this year's number..

So, I must have missed that. I’m sorry about that..

Yes. And on top of that with no margin is the – the wood pallet plant, the 60 million of it, Hazlehurst, on the core side 7% to 12% off on top of this year's number I think is very possible..

All right. Okay. That make sense. Then I’ve struggled with this throughout 2017 trying to get a good grip on what your gross margins were excluding the noise that you called out. You basically had issues with the wood pallet, but then you also had some all these new product investments that you don’t necessarily expect to repeat.

So, if we look on kind of apples-to-apples space, what would the gross margins have been for the full year 2017 excluding these items?.

Good morning, Mig. This is David. The impact of the ballet charge on the gross margins was about $21 million, that's that $0.59 per share that we discussed. And so ex that it would be about 22% and probably more in the range of about 22.5% when you exclude the impact of the first half of new products running through the shops..

Great. That's really helpful. So the baseline here is call it 22.5 as we start modeling 2018.

Your expecting growth, core growth in 2018 on top of that I guess the question would be you backed away from the 25% gross margin target, I understand that but given what's happening with your input costs in your utilization what’s kind of a normal incremental gross margin pull-through that we should be thinking for these revenues for the full year?.

That's a good question. Mig, its Ben. I think I guess maybe the answer, maybe not directly answering the question. Maybe what the target for us would be even with what’s coming us on the increases that you reference that. I do think we're getting just a little bit more on the pricing side as well.

We don’t have total pricing power but we are doing a little bit better. And I think we're going to have to offset to steer with some operational improvements that having Jim part time. We've started to see that a little bit and the two divisions that he helped us with just part time. So, and those were pretty quick gains where they were made.

So, we still think coming through the end of the year, our target we do exit the year in the 25% range. That will still affect us and could have keep it slightly below that. It could, although we are generally protected through the first half on steel.

So, through our buying agreements we did about 75% of our steel would be in buying agreements and 25% would be in a power for opportunity purchases. And I think its a little longer answer than you probably wanted. But if you look at our inventory being up a little bit, we did some opportunity purchases in raw, so that was up a little bit.

And then, that behind the scenes on the finished goods piece was our Roadtec division went live on our new ERP system in the 1st of January. And we built up a little ahead for Roadtec on inventory just in case a little bit of a security blinking on that. And they're working their way through that pretty rapidly.

But probably more answer than anyone and I guess I'm sorry if I rambled..

No, it's great. It's actually a little less than what I want. Because I got another question. If I'm thinking about growth margin then, you're saying that I've got materials locked in through with the first half of the year but I expect margin to ramp as the year progresses.

It would imply to me that your steel cost are actually going to be up in the back half of the year even more than what you're experiencing in the front half.

So, how do you do that?.

I think if you believe in numbers that they're throwing at us and I think it'd be hard to argue against you.

It's just and I know the tear up thing is kind of the question mark that's the cloud on the horizon but I guess personally in our history I don't want to say it there's no way that steel is going to be everything we point to in the second half. But I think we've got, I don’t think it's going to be as big as everybody things, personally.

Our experience is it's always a huge number that everybody talks about. That being said, there is some allocation work going on in the background with the steel mills.

So, they're anticipating higher price come in but we're going to work like mild off setting and I just I think between the things that we're going to try to offset it and it not being as big as they thing, they always think it's going to be a whole lot more than it actually ends up being.

I think we stood out a pretty decent shot at being where we think we could be by the end of the year..

Got it. And then last question from me. Just making shy we have our expectation straight for 1Q '18. I'm trying to make sure that I understand your earnings guidance, you're saying you're going to be up versus 1Q '16. Obviously your tax rate is going to be down a lot and how do we where do we start on gross margin for the year.

Is it 23$, is it more than 23%?.

Yes. I mean, we're exiting the year the core gross margin around that 22.5%. So, I think they will be -- we're going to have to make incrementally slight improvements each quarter for we're going to exit this year at 25%. So, I think you can look for something in that range..

And your comment was against 1Q '16, not 1Q '17 for earnings?.

That's correct, it's correct, yes..

Great. Thank you guys, I'll get back in the queue..

Thank you..

Our next question comes from the line of Stanley Elliott from Stifel. Please proceed with your question..

Hey guys, good morning. Thank you for taking my questions. On the 7% to 12%, does that include the 60 million from the wood pellets or not.

Just to make sure I’m?.

It does not, Stanley. I'm sorry, this is Ben. In my mind, I've just still got that there's no margin in it. So, I threw it on top of the end. That would be on top of the 7% to 12%..

Okay.

Are you guys seeing anything else, you've mentioned steel cost, anything else from the supply chain about their ability to ramp with you guys and get you the products that you want and need and kind of in a timely fashion?.

This is Ben, good question. We talked about that through our first quarter reviews in the first couple of weeks of the year with all of our companies and so far we feel like we're okay. Not 100%, but high percentages of everybody being able to keep up and stay with what we're needing, anyway..

And in the shift on the to more of a regional platform for the international sales, was that did you guys feel like you're missing out on sales or maybe the coverage wasn’t quite which you were hoping for.

Is it cost savings kind of help us if you could and make us a little more color at that place?.

Sure. This is Ben. I think as we kept our coverage in place and as things have come back, our market intelligence is a little bit better. We do think we got an opportunity to add sales at maybe we're missing with more service support closer to people and in their language and in their time zone.

We do a pretty good job of supporting that globally and we do have service representatives all over the world but we do see the opportunity to grow sales through that.

And not huge R&D increase and though we can do this within our typical R&D spend, slight adjustments to the equipment we have for the markets that they're in, will help us sell more as well.

So, it's kind of a two prong effort having the region offices more knowledge on exactly what we need to be selling in because we've been almost trying to force our product filled for the U.S. and to some of these markets, slight adjustments can get us more volume. Having more than intelligence and with customers will help us grow sales.

Cost wise, again we don’t think that's going to be, there'll be a little bit more expense but not extreme because we do have people on the ground already but we see a few key positions in each region help us with the products and some of the marketing and then as we grow sales, we add on the service side and more regional sales guys as the need comes up.

The other thing that'll help us do is target better on our dealers have almost all of our divisions going through the stores, if not all of them, some are a little unique and may not overlap but that gives us better sales coverage globally and likely more dealers in more regions..

Perfect, guys. Thank you and best of luck..

Alright, thank you..

Our next question comes from the line of Jon Fisher from Dougherty & Company. Please proceed with your question..

Thank you. Good morning, everyone..

Good morning..

Very good Q4. I just -- question on SG&A trends on the last three quarters you've been right around that mid-40s number. That is you're expecting sales growth core business 7% to 12% in '18.

From an SG&A standpoint, is kind of that mid-40s rate about the right rate, was R&D probably be on a little step-down year-over-year or should we expect what kind of increase year-over-year should we expect from an SG&A standpoint?.

Hey, good morning. This is David. I believe you're going to see SG&A grow slightly. I think we try to target that 15% to 16% range for SG&A and E and with R&D down we're going to see some increases in other selling costs as activity picks up. So, I think you can target that 15% to 16% range.

But we are trying as you can see trying to hold SG&A pretty steady but it does tend to increase with sales..

Okay, thank you.

And then the CapEx increase year-over-year, if you could just kind of highlight what that's being targeted, since that's just from a math standpoint and pretty meaningful year-over-year increase?.

Sure. Hello Jon, this is Ben. A good piece of that is at our Carlson division; we are growing our capacity there. We considered the options of moving some of the products from there but the screeds they go behind the paver are really as much an art as a science.

And we didn’t want to leave the expertise that we have from there and also we had pretty nice environment with the government there to be able to add on their relatively easy. I mean, I don’t think it's ever easy but so we made a decision to invest in Tacoma.

And we also on the other rest of the CapEx is generally equipment for the shops and what I would say is we do have a return on investment calculations there we require for all of these CapEx's. So, get multiple prices from each vendor and what's the return over time for them on fresh spreadsheets. So, we're that's where the main pieces are coming in.

Some of that although we have a full number in there, some of that could change with Jim join or coming on board, we may redirect somehow but that the number itself would not change. And we also have a history of not spending everything we capital spend, within in our budget on CapEx.

But this year we'll have a better chance to getting into that number with the addition at Carlson..

Okay, thank you. And then on RexCon, great acquisition, I was just wondering if you could break out what the contribution was during Q4 and just how strong that business is from an '18 outlook standpoint with some Astec kind of behind the business and being able to open up some opportunities for them that maybe they weren’t able to assess before..

Okay, thanks. I'll speak a little, Jon, and then David will come in and tell me if I’m wrong. But they did a great job of filling everything they could, right before we bought them. So, their typical month we would see in the range of $8 million to $10 million but are or a typical quarter. They were more in the range of three to four.

So, they struggle through the last part of the year. Well, the concrete was a good show for them. Their sales picked up, so we're really excited about that.

One story I would tell you about their opportunity for crossover in selling is the world of concrete we probably over to sent it on when I was there, Norm Smith is been with us forever and was there; and Rick Dorris our CEO was there.

All at different times that it was interesting how many of our existing Astec customers we met at the RexCon booth and even to the point on one kind of track out the MidWest, say the norm. You guys getting the bottom bare company. There's only two companies we only get one price from, RexCon and Astec. And I thought that was interesting.

First of all somebody admit to have. It was great. But since we usually have more competitors or other deals than none. So, but so I think we 60% to 70% of our customers in asphalt lands have some type of concrete operation and we're starting to see that come through.

The other thing we've seen is we do have a vendor finance program with DLL or delaying LinkedIn. I'm probably saying that to --..

Delay to London..

Yes. And we've already seen them grab a couple of concrete plant deals as a result of having that vendor finance option that they might not have gotten in the past.

So, we're excited about it and also excited about using their facility which we think we have capacity in and see our facility, we think we have a little capacity in to design some new products or even post some of the products that RexCon has. It'll compete with other manufacturers; give us chance to grow our market share.

I mean, we our goal is to be number one there. I think we can get there, we're working on the plan to get there. But we definitely have the capacity to get there..

Okay, thank you. And then just one last question. You cited Europe as a weak spot in Q4, from an international standpoint.

I was just wondering if that had anything to do with to your acquiring working group and any change in behaviour there or if there was something completely unrelated to that?.

That is primarily it was a strong comp in the prior year and it was just a quarter-over-quarter change that we called out. I think Ben have some commentary on European orders..

Well, it's just our code activity is pretty nice and we actually got our first, actually that might be our second asphalt plant sale into Italy, of all places.

Which is a tough place for anybody outside if they really get an order in with manufacturers in country? So, we're cautiously optimistic and our pellet Astec group is getting good volume out in U.K. and a good number. Those orders are going into Europe, so I think to David's point I think we're okay there..

Okay.

And then, just one last, just no comparative dynamic your position on dealers acquisition of working group, hasn’t really changed your kind of neutral to positive from a up business competition standpoint?.

That's correct..

Okay. Thank you, very much..

Benjamin. Thank you..

Our next question comes from the line of Brian Rafn from Morgan Dempsey. Please proceed with your question..

Good morning, guys..

Good morning..

Good morning..

Let me ask, Ben, you always give a really nice kind of strategic over view from the on the infrastructure side. If we get some of this rhetoric relative to an infrastructure plan from Trump or if we get a long term infrastructure banks.

Does that layer orders in over the top of the current run rate or you think it adds to the runway beyond 2019?.

I personally believe that adds to the runway. I think it'll take people the time to figure out exactly whatever that bill means and I think it'll add to the runway. Although, the runway maybe, there may be a little bit overlap and where that could come in is part of that proposal is speeding up the approval process.

And one of the things that they do is they take the EPA out of the water way piece in the U.S. core, and the engineers takes over. That's a little bit bigger deal unless people think because the core will move quicker. And that could be a pretty good thing to get the bigger projects going. So, the maintenance will go quickly.

The midland inlay work but again I think there could be a little bit overlap but I don’t think, it just extends the runway two to three years..

Yes, on three years..

Sorry, go ahead..

Yes, three years. Awesome..

It depends on the number two, I mean it's not going to be 1.5 trillion, I mean the government spend and his proposal was only a 200 billion and then there was a lot of crazy ways to and encourage states to do things. So, where this ends up that what he proposed to be very different but anything would be great..

Yes. Let me ask you again another strategic question. If you have kind of the same administration in there, do you think the next the next big six year at beyond the last deck, we had I think a 10 year spread between the we get the past deck that. I mean, there were something like 36 or 37 extensions.

You see this administration maybe getting the next highway act in the 2020 done a little quicker than the last?.

I would, if they can maintain control of all three, the house, the Senate and the White House. If they can maintain control, I do think they will get it done but well that's I don’t know if I had dissect and roll that many numbers..

Yes, no I got you. I bet it..

Okay, they think they would if they have control..

Yes, okay. You talked a little bit about RexCon and CEI on the contrary side going from number two to number one.

What size magnitude of sales jump with that be to get that number one position?.

Encouragingly, we think it's only about $5 million to $10 million; that's how close it is..

Okay, you're right.

And would you be more capacity constrained at CEI versus RexCon or the opposite?.

Probably more at CEI at this stage. RexCon does do a little more outsourcing, and that'll continue to bring some of that in. But there's room with some organization maybe from some flow work at RexCon to get more volume through..

Okay. You talked a little bit about the parts initiative on the international site. I didn’t get the break out.

What is the mix between domestic and international parts?.

We --..

We don’t break that out..

You don’t break that up..

Right. We don’t have not broken that out in the past, so..

Okay. Let me ask you, Ben, from the standpoint in the parts. Given the fact that you're selling a lot more new in field favors and screeds and some of the equipment.

Are you on plan or you're satisfied with the level of parts you're seeing because obviously when the infield fleets are new or you're not going to have as much repair, what's kind of your sense and what you saw on part sales in 2017?.

Brian, I guess at 7%, which is double our growth rate on overall sales; I guess that was -- I thought that was pretty good. But that being said, some of our division still have a good opportunity to fit feet on the ground and set them apart and I think personally I think cant concrete one of those areas.

So, we I think we still have opportunity to grow part sales and even with what should come with the new -- with all the -- with the new equipment that’s out there today. So hard not be active with 7% up, but think we can do better..

Okay. Right. With everybody in and out, 401k bonuses and the stock and there’s been a lot of talk. You guys – what is your sense in your SG&A payroll healthcare costs.

Is that for 2018? Is that low to mid single digit growth is or anything special in there?.

No. There won’t by anything special in there. You know our compensation plans are tied to performance. And so as performance increases that will be a part of the increase in SG&A as that ramps, but obviously that's one of the reasons the payroll and benefit related costs are down this year compared to the prior year is the comp as the incentive plans.

But there we don’t see anything extraordinary in SG&A. So I would expect as you’ve said there are some mid single-digit growth in those cost..

Okay. Thanks Dave.

From the standpoint if you look across 20 companies where might you guys be going into 2018 capacity utilization? Where might you have some bottleneck? What kind of shifts are you running? Where’s the over time? And are you running two or three shifts in one area – you one in another area, just kind of overall across the company?.

Brian, this is Ben. We’re not very different than last quarter on that about 80% in the infrastructure group on utilization 70%, 75% aggregate mining and really the lower run rates there would be in South Africa and Brazil, although they're getting better. I mean, mining is getting better for us.

And then energy, 65%, 70% you know kind of GEFCO and as we mentioned CEI there. GEFCO there with oil and gas getting busier, fourth quarter coming along quite well. But still average altogether is 70%, 75% pressure points would be asphalt plants and in our payment equipment. Despite inventory they have, they have.

I mean because every now and then somebody will come in and want something specific. So those will be the two. If we have pressure points there and then also on our track-mounted crushing, screening equipment there's pressure there,.

Okay. What do you guys talk little bit about a more opportunistic or maybe more positive kind of mid-quote activity in order rates on oil and gas.

Are there any specific products that are leading there?.

Yes. The pumper trailers are pushing that and those are the units that clean up the [Indiscernible] and drilling and those typically retail are sell for anywhere from 1.2 million to 1.8 million..

Okay. All right. And then I didn’t hear the 35 million CapEx that you guys talked about.

Where was that going?.

The biggest portion of that will be Carlson and Washington, two things, we’ve done very well in our [Indiscernible] market share that goes behind not just rotate papers but all different brands of papers and there is small paper line has really taken off and so its a pleasure to see that.

And then haven’t even really attack any international with that. So this at this growth their facility will allow them release international targeted favor to help grow market share just even outside of the U.S. but its been very good for them last couple of years..

Okay. I would ask one more. When you look at the kind of the sales cycle between your initial bid quote and the next you're actually getting a sale conversion.

Is that speed that all change or is it about the same so has been?.

Quote were still pretty close to same time. It depends – the [Indiscernible] on that would be somebody picks up a quick job and they are in panic almost said that wrong thing has to pay, but they get in a panic and hopefully at that point you’re hoping you got something in stock. Generally other that its about the same time frame..

All right, guys. Good luck in 2018. Thanks..

Thanks..

Ladies and gentlemen, we have reach the end of the question and answer session. I would now like to turn the call back over to Steve Anderson for closing remarks..

Thank you, Diana. We appreciate your participation on this fourth quarter conference call. Thank you for your interest in Astec. As our news release indicates today’s conference call and thank you for your interest in Astec. As our news release indicates, today’s conference call has been recorded.

A replay of the conference will be available through March 6, 2018 and archive webcast 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 was sent out earlier today.

So again this concludes our call. Thank you all. Have a good week..

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