Astec Industries, Inc. (ASTE) Q4 2012 Earnings Report, Transcript and Summary

Greetings, and welcome to the Astec Industries Fourth Quarter 2012 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Steve Anderson, Director of Investor Relations. Please go ahead, sir.

Thank you, Stacy. Good morning and welcome to the Astec Industries Conference Call for the Fourth Quarter and Fiscal Year Ended December 31, 2012. As Stacy mentioned, my name is Steve Anderson, and I am the Director of Investor Relations for the company. Also in today's call are Dr. J. Don Brock, our Chairman and Chief Executive 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 Don 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 that these statements are intended to qualify for the Safe Harbor liability established by the Private Securities Litigation Reform Act. Any such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions. Factors that can influence our results are highlighted in today's financial news release and others are contained in our annual report and our filings with the SEC. As usual, we ask that you to familiarize yourself with those factors. So at this point, I'll turn the call over to David to summarize our financial results for the fourth quarter of 2012.

All right. Thanks, Steve, and good morning to everyone. Let me first preface my comment by saying that as we previously announced, we sold American Augers as of November 30, and as a result, we have recast the financial information presented in your press release and in the segment portion of your press release to reflect the required presentation for discontinued operations, and therefore my comments today will be in reference to the financial statements as they are presented unless otherwise noted. So let's begin with the net sales for the quarter were $227.6 million in the fourth quarter of '12, compared to $253.3 million in the fourth quarter of '11. They were down 10.1% or $25.7 million. International sales for the quarter were $98.6 million, compared to $110.4 million in the fourth quarter of last year, a 10.7% decrease or $11.8 million. The decrease in dollars for international sales were primarily in the post-Soviet states and in South America and in the Middle East, offset by increases in international sales in Mexico and Asia during the quarter. International sales were 43.3% of Q4's net sales versus 43.6% of Q4 of '11's net sales. Domestic sales for the fourth quarter of '12 were $129 million, compared to $142.9 million in the fourth quarter of '11. That's a 9.7% decrease or $13.9 million decrease. Domestic sales were 56.7% of sales in Q4 of '12, compared to 56.4% of sales in Q4 of '11. Parts sales for the fourth quarter of '12 were $58.1 million, compared to $55.4 million for the fourth quarter of '11. That's an increase of 5% or $2.7 million. Parts sales were 25.5% of the fourth quarter of '12 sales, compared to 21.9% in the fourth quarter of '11. And the segment revenues for the fourth quarter are attached to your press release. Including American Augers, sales for the fourth quarter were $242.3 million, compared to $263.2 million in the fourth quarter of '11. That would have been a 7.9% decrease or $20.8 million. Included in those sales, you also note that we have sold the Trencor product line of our Astec Underground operation, and we previously announced that as well. We sold them as of November 30, and included in sales, not in the discontinued, but in the sales revenues for the quarter is $7.7 million related to that transaction, as well. Net sales on a year-to-date basis are $936.3 million, compared to $908.6 million for the 2011 year. It's a 3% increase or $27.7 million. International sales for the year-to-date basis are $363.8 million, compared to $365.1 million. They're down just barely at 0.4% or $1.3 million. The decrease in dollars for the year in international sales occurred primarily in the South American countries, excluding Brazil, the Middle East and Africa. These were offset by increases in those sales in Australia and Mexico, in Russia and in Brazil. International sales were 38.9% of sales year-to-date for '12, compared to 40.2% of year-to-date sales for 2011. Domestic sales for 2012 were $572.5 million, compared to $543.5 million for 2011. That's an increase of $29 million or 5.3% increase. Year-to-date, domestic sales are 61.1% of total sales for '12 compared to 59.8% of total sales for 2011. Parts sales in '12 were $245.9 million, compared to $220 million for 2011. That's an increase of 11.8% or $25.9 million. Parts sales were 26.3% of the current year's total sales, compared to 24.2% of 2011's total sales. Again, sales by segment for the year are attached to your press release. Including American Augers for the year, sales would have been $989.9 million, compared to $955.7 million in 2011. It's an increase of 3.6% or $34.2 million. GEFCO sales. We bought GEFCO early in the fourth quarter of 2011. And so the GEFCO sales for 2011 as we have previously discussed were about $10.9 million for that quarter. GEFCO for this year of 2012 is $45.5 million, and that's an increase of about $34.6 million for GEFCO. Gross profit for the quarter was $48.1 million, compared to $54 million for the fourth quarter of '11. That's a decrease of $5.9 million or 10.9%. The gross profit percentage was 21.1% for the quarter, compared to 21.3% for the fourth quarter of 2011. One of the drivers of that gross profit during the quarter was the absorption variance. We had a negative change in absorption of about $3.3 million during the quarter, and that was driven primarily by both the Asphalt and the Aggregate Group. During the fourth quarter of 2011, recall that we had charges of about $2.2 million that were recognized in gross profit related to the sale of the utility product line in the Underground Group. Consolidated gross profit for the year was $206.9 million, compared to $210.5 million for 2011 are down 1.7% or $3.6 million. The percentage was 22.1% for 2012, compared to 23.2% for 2011. That's 110 basis point decrease. The big driver there was the negative change in absorption of about $11.5 million, driven again primarily by the Asphalt Group, followed by the Aggregate Group and the Mobile Group. SGA&E for the quarter was $39.8 million or 17.5% of sales, compared to $41.4 million for the fourth quarter of '11 or 16.4% of sales. That's a $1.6 million decrease in dollar terms, with an increase of 110 basis points as a percent of sales. Some of the drivers there are payroll and related or part of the increases. We had decreases in profit-sharing and a slight decrease in research and development spending. For the year, SGA&E was $156.8 million or 16.8% of sales, compared to $151 million for the year of '11, 16.6% of sales then. That's a $5.8 million increase. Some of the drivers of the increase were health insurance and payroll and some of the detractors or the items that reduced that change were -- remember that we did -- we had the ConExpo show early in 2011. We had a reduction, also, in profit-sharing expense and other expenses related to long term incentive plans. During 2011, we also had an impairment charge as we have disclosed early in 2011 of $2.2 million related to some aviation equipment. Then that shows up on a separate line item in 2011. Operating income for the quarter was $8.2 million, compared to $12.6 million in the fourth quarter of '11. That's a $4.4 million decrease or 34.9% decrease. For the year, operating income is $50.1 million, compared to $57.4 million in 2011. That's a decrease of $7.3 million or 12.7%. Income by segment is attached to your press release as well. Other income was about $621,000 for the fourth quarter, compared to $930,000 for the fourth quarter of last year, and was $2.9 million for the year, compared to $2 million last year. The primary driver of that is license fee income and investment income related to our captive insurance company. Income from continuing operations before income taxes for the quarter was $8.8 million in the fourth quarter, compared to $13.5 million in the fourth quarter of '11. It's a decrease of 34.8% or $4.7 million for the year. That same item was $52.7 million, compared to $59.1 million for 2011. That's a decrease of 10.8% or $6.4 million. The effective tax rate on continuing operations for the quarter remained relatively flat. It was 38.3% this year for the fourth quarter, compared to the fourth quarter of '11 at 38.1%. And for the year, it was 36.2% in 2012, compared to 32.7% in 2011. And the primary driver of that is the R&D tax credit, which was not approved until January of 2013, and therefore, we couldn't recognize that in 2012. Net income attributable to controlling interest from continuing operations in the fourth quarter was $5.4 million, compared to $8.3 million for the fourth quarter of '11, 35.5% decrease or $2.9 million decrease. Earnings per share for the quarter, related to net income attributable to controlling interest from continuing operations was 23% -- $0.23 in the fourth quarter, compared to $0.36 per share in the fourth quarter of '11, 36% decrease. That same item for the year was $33.4 million, compared to 2011 year-to-date income of $39.7 million. That's a $6.3 million decrease or 16% decrease. EPS related to that item was $1.45 for the year of 2012, compared to $1.73 for the year of 2011, a 16% decrease. The results of our discontinued operations, net of tax, which is American Augers, for the fourth quarter of '12 was income of $2 million, compared to a loss of about $357,000 for the fourth quarter of '11. On a year-to-date basis, net of tax, the 2012 income from discontinued operations was $3.4 million, compared to $225,000 for '11. The gain recognized on the sale of American Augers, net of tax, was $3.4 million. Our backlog at December 31, 2012, was $263.8 million, compared to $268.6 million at 12/31 of '11. It's a $4.8 million decrease or just under 2% decrease. The international backlog at 12/31 of '12 was $107.2 million, compared to $123.6 million at 12/31 of '11. That's a $16.4 million decrease or 13% decrease. The domestic backlog for this year is $156.6 million, compared to $145 million last year, for an increase of $11.6 million or 8%. Again, backlog by segment is in your press release schedule for the segments. The December 31 backlog of $263.8 million, compared to the September 30 backlog was $230.7 million. That's a $33 million increase or 14.3% increase. On our balance sheet, we have a very strong balance sheet. We continue to -- our receivables are $89 million at 12/31 of '12, compared to $102 million for December 31 of '11. That's a $13.1 million decrease. Our days outstanding are 33.5, which are slightly down from the 35.4 that we had in the prior year. Inventory is at $308.6 million this year versus $299.1 million for 12/31 of '11. That's an increase of $9.5 million or 3.2%. We're turning inventory at 2.5 turns, and last year, we were turning at slightly above that, 2.7 turns. We don't have anything owed on our $100 million credit facility, but we have $80.9 million in cash and cash equivalents at 12/31. Our letters of credit outstanding are $13.1 million, and therefore, we have borrowing availability of $86.9 million right now. Capital expenditures for the quarter were $8.7 million, and for the year-to-date period were $26 million. Without American Augers in there, it was $25.4 million. Budgeted for 2013, we're planning on spending $43.6 million, but that does include $12.1 million in there for construction in Brazil of our facility there. Depreciation for the quarter was $4.9 million, and on a year-to-date basis was $20.9 million. And without American Augers going forward, it was $18.8 million. Budgeted for 2013, we're looking at about $22 million of depreciation, and amortization for '12 was about $2 million, and we're budgeting slightly less than that at about $1.3 million going forward for 2013. Well, that concludes my prepared remarks, but we'll be around to answer any questions you may have.

Thank you, David. Don will now provide some comments regarding the fourth quarter of this year's operations and then offer some thoughts going forward. Don?

Thank you, Steve. During the fourth quarter, we completed our exit from our Underground business by selling our American Augers subsidiary to Charles Machine Works out of Perry, Oklahoma. We also sold the Trencor large trencher line to them. Earlier in the year, as David said, we sold the small utility line of drills and trenchers to Toro. We will complete our manufacturing agreement with Toro building these small trenchers during the first quarter, and we expect to complete a manufacturing agreement on the Trencor line in the second quarter of this year. We maintained the vertical oil drilling line and related mud systems, pump trailers and other equipment used in oil and gas drilling from the American Augers subsidiary and our Lam [ph] subsidiary. Our revenues for the fourth quarter, including the 2 months of American Augers that we own them, were $242.3 million versus $263.2 million in the fourth quarter 2011. Without Augers, our revenues were $227.6 million, compared to $253.3 million. Including the 11 months of American Augers sales, our annual sales for 2012 were $990 million versus $955.7 million for 2011. Revenues from continued operations were $936.3 million versus $908.6 million. With the exit of these businesses, our Loudon, Tennessee and Enid, Oklahoma facilities will be devoted strictly to oil and gas and water well manufacturing of that type of equipment. We intend to expand our equipment offering in this field so that we can furnish complete drill rig packages, including all of the surrounding equipment that goes with drilling an oil or gas well. We received our first complete system order for approximately $15 million for a drill rig going to Kazakhstan in the first quarter. Parts sales for the year grew from $233 million to $262 million, an increase of 12%. During the fourth quarter with the uncertainty created by Washington regarding taxes, spending, cuts, the sequester and other items, made our customers very reluctant to order equipment. With the many highway extensions during the first and second quarter, and finally the passage of the 27-month bill with flat funding, this was basically too little too late. You could say 2012 was a year of uncertainty. This uncertainty, somewhat paralyzed the purchases of equipment of our customers. Due to our aggressive R&D expenditures, we have benefited in the past from R&D tax credits. Congress extended the bill for R&D credits finally on 1/1/13 and made it retroactive for all of 2012. However, we cannot use this tax credit in 2012, and we'll use it in the first quarter of 2013. These credits were $1.9 million in 2010, $1.7 million in 2011 and basically in 0 in 2012. We expect the 2012 credit to be $1.2 million, which will substantially lower our taxes in the first quarter of 2013. Our net income of $40,200,000 or $1.74 a share would have been 41,400 -- $41,400,000 or $1.79 a share had we been able to take the credit in 2012, versus $39.9 million or $1.74 a share on a comparative basis. Our slippage in revenues in 2012 was primarily related to international sales, which dropped to 39% of our revenues. Our EBITDA for the year was $85.4 million, versus $80.0 million or an increase of 6.8%. Considering the uncertainty and volatility of 2012, we are pleased with our results. Our Asphalt and Mobile Groups were the most affected -- were much more affected than our other groups, and we are very pleased by the improvement in performance in our Aggregate and Mining Groups. Looking forward to the first quarter in 2013, we started the year with a backlog of $263.8 million, versus $268.6 million, a 2% decrease. However, after clarity related to taxes occurred, although it wasn't that -- not that great particularly, but at least we saw a pickup in orders, especially in the Asphalt and Mobile Groups in the early part of 2013. With the changes that we've made in our company in 2012, we have positioned the company to focus on infrastructure, mining and energy markets. We will continue to broaden our offering of equipment in these areas. We are receiving orders from many of the new products that we have developed over the last 5 years. These products should allow us to grow, while our core business remains flat. We see growth in oil drilling rigs, pump trailers, water heaters for frac-ing, pellet plants in the energy market and large pressures for the mining industry. In December, we returned $1 per share dividend to our stockholders in a onetime dividend offering. Our balance sheet is strong with no debt. We continue to see both bolt-on acquisitions, while our main objective is to grow our company organically and by acquisition. If we're unable to acquire companies at a price that will be accretive, we will look for returning cash to our stockholders through stock repurchases or dividends. We expect 2013 to be better than 2012, with less uncertainly related to highway spending, improvement in homebuilding and an expected improvement in the energy market. With our expected growth in the top line, we also see an improvement in our gross margins during 2013 and hope to return them to the levels of 2011 and before. With that, we'll answer any questions that you have.

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

Just a -- can you -- first question, the fourth quarter. Can you talk about the linearity from October to November to December, if there's any change in pace here entering the first quarter? I mean, the first month of the first quarter if improvement for orders for Asphalt and the Mobile Group. Can you talk about the linearity and then I just have one follow-up question.

Morris, I guess, we saw a kind of paralysis in the fourth quarter. The sequester, the talk in Washington, the uncertainty related to taxes, all of that seemed to stop people from buying things in the fourth quarter. We did see, in certain segments, a little improvement, but basically, overall, we were down about 10% in the fourth quarter. And I guess, it's just a lot of uncertainty that was related to what Washington was going to do and what the damage would be based on what they did. We also had -- we always have in the fourth quarter, a problem with getting man-hours to the shop due to the Thanksgiving, Christmas, New Year's holidays, but we had an unusually large numbers of shipments, both domestically and internationally that we were unable to ship because of people. A lot related to the uncertainty, just didn't want to take it. So it was a -- weather affected that somewhat, but the fourth quarter was a very weak quarter for us.

All right. Just one other question here. Talking about gross margins for the quarter, the Asphalt Group, revenues were down 12%, yet gross margins were actually up 190 basis points. On the flip side, Mobile Asphalt, revenues were down almost double the amount of the Asphalt Group, down 24%, yet gross margins were down, what, 480 basis points. So in one group, you had an increase in gross margin and a decline in revenues. The other group had an implosion of gross profits. I just want to talk about those 2 groups and how 1 was different from the others as far as the gross margins?

Yes. We put a lot out of emphasis. We've seen our margins deteriorate this year. It's been a very competitive market and really, just in many cases, the lack of volume. Astec, particularly in the Asphalt Group, has made a lot of effort in improving their gross margins, and they have continued during the first quarter to see an improvement. And that's, I guess, driven by a lot more focus on our manufacturing and trying to get a little more for our product. In the Mobile side of it, we were really hurt last year by the Tier 4 introduction of the Tier 4 engines, totally redesigned all models of machines that we had at Roadtec. And we also had a major competitor that was able -- an international competitor that was able to ship in Tier 3 engines or Tier 3 products. They were able to stockpile a lot of engines ahead of time, where a domestic manufacturer like us was unable to do that. And due to that, we were at a very price disadvantage over them. And the third competitor in that market seemed to want to match them, so it really hurt our margins last year. So part of it was just the new models, part of it was the pricing. We have -- and are turning that around. More and more they're having to bring in the Tier 4s now. And secondly, we've been -- as we've gotten to building the Tier 4 models, got jigs and fixtures made for them, our man-hours are going back down to a more reasonable level. So we see that, that problem being fixed during this year in the Mobile side. Overall, I'd say, we're expecting our margins in 2013 to be improved, at least, 100 basis points and maybe more than that. And particularly in the Mobile, we expect quite a bit improvement there.

Our next question comes from Mig Dobre with Robert W. Baird. Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division: I guess, my first question is on the Asphalt Group. I'm trying to understand a little bit what's going on with the backlog there. Have you seen any orders in the quarter for pellet plants?

We have a $21 million order that could expand to $52 million order. It is for a plant that we'll be shipping pellets to -- primarily to England. They have not, at this point, passed that law, the customer went ahead and gave us their order for one line on that plant, and as soon as the Parliament passes that law, they will add 2 more lines to it. We have a couple of other potential orders that should happen in the first quarter for plants in the $40 million -- $40 million to $45 million range. So in that backlog, you will see be in this year on the call, you will see that the $21 million is in that backlog. We have also seen a slight pick up, I guess, in Asphalt plant business. People have been very cautious to spend over the last 4 years. And as I spend time with the customers, they are not very bullish, but they are more bullish than they have been. They do seem to see a slight pick up in work, and there is a certain amount of pent-up demand, and we're seeing quite a bit of talk of replacing existing equipment with more modern equipment that are on more recycle and basically reduce their cost. So I wouldn't say I'm not real bullish, but we see probably a 10% to 15% pick up in the domestic market, just in our basic business, and particularly, for Asphalt plant. Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division: So I'm sorry, but I want to be clear on this. You're saying that the backlog in the quarter includes a $21 million order for the pellet plant?

That's correct. Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division: And that if the British Parliament passes that particular incentive, we're talking about another $20-some million potential order that could come whenever that happens, but you're saying in addition to that, we could be talking a couple of other orders in a $40 million to $45 million range?

That's correct. You're going to get more than we can bill if you keep going there, but we could probably see $80 million to $100 million in pellet plants this year, if everything worked like it should. Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division: And when you're -- when we're looking at the Asphalt Group numbers again, I do recall that you had some orders from the U.S. Army, and I'm wondering how those played through in the quarter. And I'm also wondering if you also have some of that business in backlog or in orders in the quarter as well.

We have about -- been this year, what, how many dollars or there's 8 orders and we billed 2 of them.

That's right. We've had 2. They still haven't taken delivery. They're testing at Aberdeen. It seems like it takes forever. But we have 2 plants that will go probably, in the second quarter based on how fast they are working. And then we have the other plants that are in our backlog right now. Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division: So all 8 are in the backlog and 2 that will delivered potentially second quarter impacting revenue then?

That's correct. Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division: Okay, excellent. My last question, I guess, would be on R&D. Can you give us a sense for what the R&D spend was in 2012 for the whole year? And where you see R&D in 2013?

David is looking.

It's in the $7 million range.

Yes, $7 million range. And we typically run on average, if you look back over to, say, 5 to 7 years, we run on average of $4 million to $5 million R&D spend. We've been running in the $8 million to $9 million range over the past couple of years. That has come down slightly in '12, and that will be reflected in the R&D credit and -- so that's, that's where it is. Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division: And your expectations for '13?

It's going to be back down more in the $5 million to $6 million range.

Yes, I would expect that.

Our next question comes from Ted Grace with Susquehanna.

Don, I just wanted to come back to kind of the framework you provided on 2013 revenue guidance. If I heard you correctly, kind of the core business flat and the growth coming from the new products?

Right.

It sounds like if I heard you correctly, the domestic side of Asphalt should be up 10% to 15%. We typically thought about that business being probably 70% to 75% domestic. So can you just walk through the other businesses and could you just give us how we should think about the organic growth in the other segments?

We expect Aggregate to probably be flat. We expect Mobile -- Mobile and Asphalt really go together, and they're -- that's 45% of our volume, and I think those will be up about 15%. The international side of those businesses, I think, from 0% to 5%. It's internationally, has slowed down some. The major growth in new products, it will be in the pellet plants. And that again waits -- everything is hinged just about on the Parliament in the U.K. passing that big tax credit for burning wood pellets. I guess being a $40 million plant, $40-something million, they plan to go on regardless, I guess, of the utility.

Yes, that's correct.

The utility is saying, they're going on regardless they're going to convert to burning wood. The utilities in Britain have got a problem in that they've either got to put scrubbers on the plant to continue to burn coal or switch to wood. So some of those are driven by the tax credit, some of them are going to change anyway. And I think their supply contract is with one that's definitely going on, and we should know about that order in the next 2 to 3 weeks.

Okay, then when we think about Underground and other -- how do you, perhaps kind of provide similar framework. And more from an organic growth perspective because obviously you've got some M&A activity that's skewing the numbers?

In the oil and gas side of it, that market is kind of slow at this point. There is a general consensus that it's going to kick back up this -- towards in March or April. We haven't seen that much yet. We still have most of our prospects for the drill rigs and the bigger complete packages are international on that. Domestically, there seems to be a consensus that there's going to be a lot of drilling and oil well servicing business going on. But domestically, it's kind of somewhat slowed from what we've seen. And most of our prospects that we see for the big drill rigs are going to be international.

Okay, so I guess, just trying to think about the revenue commentary also from the perspective of parts and new equipment. I'm assuming that -- was your -- the commentary for 10% to 15% growth domestically in Asphalt and Mobile Asphalt Paving, is that on the OEM side or is that total? And would you think that parts is a drag on relative growth in 2013?

We see parts continuing to grow, and that's primarily driven by our efforts to really put more parts, put more feet on the ground and really make more effort towards parts. But we see an overall growth, probably, if you take all everything, consider probably 15% in parts would be about the same.

Okay, and then the last question before I get back in queue. Just in terms of thinking about the impact of the dollar on your business, especially in the pellet business, where it seems like a strong dollar could be a headwind. How should we think about that?

I don't see where the dollar is right now affecting us that much. It varies with, anything I say can -- if you pick a certain country, in South Africa, it's hurting us; in Australia, it’s helping us. The dollar is weak compared to the Australian dollar. In Europe, it's somewhat hurting us. The euro was still strong, but overall, our best markets are Canada, Mexico, Australia for most of this equipment and in those markets, it's not bothering us.

But the pellet plants, if I'm not mistaken, is mostly a European-centric product or am I off base with that?

It will be a U.S. -- it's going to be used in the U.S., but shipping what it makes to Europe. And those contracts that our customers have are -- they basically are fixed price contracts with an escalator. So that -- our customers may -- I think with the contracts they got, they're pretty safe. But as far as we are concerned. All these plants that we're building and the pellet plants will be operated in Georgia and North Carolina, in the Southeast here.

Our next question comes from Jason Ursaner with CJS Securities.

Just first question is a follow-up on the Mobile segment, because it really has become a pretty significant drag on profitability. You said the table to work through -- the timetable to work through that inventory of the machines, the Tier 3 is sometime this year? I guess, can you be any more specific on that?

I don't know how many more our competitor in Germany has got, but we are seeing a slight improvement in pricing, and we're seeing a pretty good improvement from what we can do about it and our manufacturing. We're seeing the man-hours go back down to the levels like they were. And again, it was just all new machines, all new designs, and we had to get the jigs and fixtures and the people familiar with it. So we're seeing a recovery in our manufacturing cost and somewhat recovery in the sales price. But I think you'll see the first quarter looking better there and the second quarter looking even better.

Okay, and besides the competitive pricing with the Tier 3, Tier 4, can you also talk about whether you think there's some mismatch out there between the project demand and the available capacity, just given all the machines that were put in place into that Mobile segment from the Recovery Act stimulus spending because it was so focused on paving?

No, I don't -- from what I'm seeing, I was with a group of customers yesterday down in Alabama and Mississippi, the one area that the Mobile is quite different from the other parts of the business is, one of the customers said the paving machine, the Shuttle Buggy and the paver is the most critical piece of equipment in their entire fleet. And they were basically talking, this particular customer in Mississippi, trades machines with us every 3,000 hours. And the other customer that was with us said, "Why in the world do you do that?" And he said, "Because it's such a critical component. We -- that machine has got to run or it's going back up 20 trucks and an asphalt plant and everything else." So we see them continuing to stay with modern machinery in the Mobile side. And that it -- we have a deal with a number with our customers that trade in 3,000 to 5,000 hours. Now that gives us the opportunity to have to sell the used equipment, too. But generally, there's a pretty good market for that, particularly at that lower hour. And so, I see a continuation in that business being okay.

Okay, and just a follow-up on the gross margin question in Asphalt. You mentioned manufacturing efficiency and pricing. Just what level of price increases have you gotten this year? And on the other side of it, how are your major raw materials cost trending year-over-year? Are you sort of getting a benefit on both sides there from a gross margin perspective?

We have seen increases of 3% to 4%. I think on the cost side of it, probably, Ben, do you want to answer that one?

Well, what we've seen on the asphalt plant side is that the costs are staying about level. It's not -- there are some areas up and some down, but it's balancing out at that level.

We haven't seen steel go up like we anticipated. The overall market for steel has gotten very soft and they haven't been able to push through prices that would stick so.

So you're capturing most of the pricing increase?

Yes.

Okay. And then the wood pellet systems, besides the $21 million order that's in backlog, do you also have anything with a 10-ton prototype? Is that also in backlog or kind of spoken for at this point?

We do have a signed order for that, but we don't have any money. So it is in backlog and we're still waiting, but it is in our backlog.

Okay, and just generally on the wood pellet systems, what's the gross margin probably going to look like on these first few orders? And how much did you have to give on the pricing side to sort of walk in those first couple?

We haven't given on the pricing side of it. We would expect the gross margin in the 25% range. That may be you want to disagree or agree.

That's our target.

Is it a target for once you get sort of going with them or really on those first couple of orders?

Anytime we do a first, it's probably going to be a little bit lower, but we are -- we do meet every week on it to make sure where we are. We've got it just now, getting into our shop. We're probably about 5% to 8% finished, so we're -- but we're meeting every week. And we're doing our best to stay at a margin level, that's where we want it, normal margins. A target would be 25% long range, but I think it'd be a stretch to say, we're going to be that or above on the first one.

Okay. I appreciate being closer to 20% on the first one. It's -- I think it's -- they have managed that better than any new project. We'll, we did more R&D on that product than anything we've ever built, so we think we're good on that so.

Our next question comes from Jack Kasprzak with BB&T Capital Markets. John F. Kasprzak - BB&T Capital Markets, Research Division: I wanted to ask, just generally, about an area of your business demand that we haven't seen much from for the last 4 or 5 years, and that's private development activity, where it looks like housing is on the mend and perhaps non-res will follow housing as it usually does. I mean, are you getting a sense out there that private sector development could be picking up in 2013 into 2014. Because you guys really haven't had much benefit really, any probably for a number of years now.

Jack, I am seeing that. I was with 2 different groups of customers yesterday, and they both said, they at least had some backlog this year. And their comments was, it all small jobs, which is exactly what you're talking about. They're seeing that come back. Not great, not gangbusters, but it's up from 0, so to speak. And they feel their margins on that's better than it is on the state and highway work. The other thing, as that comes back, they're a little -- less aggressive on bidding on highway work, which will help their margins. One of the contractors commented to me yesterday, he lost a job, $600,000 job by $3,700, but he said, it didn't bother because I had some money in it. He said, I've been bitten the last year with no money in it. And he said, at least, my competitors are raising their price and I'm raising mine. So the effect of the residential and the commercial coming back somewhat really has some legs on how it helps their profitability, but I am seeing that. We're still a long way from the 1.4 million to 1.5 million starts in homebuilding, which is average. But it's sure a lot better than 400,000. So yes to answer your question. The other unusual thing we're seeing that I have never seen in the past, is a lot of the subdivisions that were built, getting ready to build houses to put a 2,200 square foot house on it, have been bought up and they're downsizing the lots and putting more of a 1,500 or 1,600 square foot house on it that's $150,000 to $180,000 price range. And as a result, where you would normally see a lot of vacant land sit around waiting on development, a lot of that has been picked up, and they're starting to restart looking at new subdivisions. And which is a very positive thing for our customers, which normally after a downturn like this, you'd see a couple more year lag on that. John F. Kasprzak - BB&T Capital Markets, Research Division: Well, it looks like the inventory of houses is in general been whittled down pretty far already. So perhaps we're starting to see the need to do some of that development activity. As you say, we're coming off such a low level, that it will be fits and starts, I guess, and a while before we feel it. But maybe it's more of a situation where you build momentum for -- into 2014, '14 is probably a -- if this pace continues, probably a better year for that than '13, would you say?

I think you're dead on it. And I think, the rest of the story, the highway spending, the sequester is not going to affect that. It'll have a slight negative effect. $35 billion of the $40 billion to $41 billion that they're going to be spending is from the trust fund. It's not touched. The sequester will affect the other $5 billion by maybe 8%, but it's relatively flat is about what it amount to. So highway spending is about flat. Any improvements in these areas we're talking about will be positive for our customers. The other thing that I'd point out is, we are seeing the states -- basically a number of states raising additional revenues, Kansas, Indiana, various ones are raising additional highway revenues that is helpful. So while I don't see a boom, I do see a positive increase.

Our next question is from Brian Rafn with Sparta Capital.

Don, talk a little bit about -- we saw -- we finally got an extension. You mentioned a 3-year bill, it was flat funding off of SAFETEA-LU and TEA-21. At some point, there was some talk, there's been a big -- if you want infrastructure, we were going to get a $600 billion program. Army Corps of Engineers has said, they do that annual grading on infrastructure, it's always Ds and Fs. What is your sense kind of going out the next 5-years plus? Are we ever going to get that type of substantial focus? Or are we going to kind of continue to stumble along with these kind of flat funding programs?

Unfortunately, my opinion is, we're going to continue to stumble along. We were. Norman, Ben and I were all at the National Asphalt Pavement Association meeting a week before last, and they had a couple of lobbyists there. And their opinion is, the only way that you're going to get any improvement in highway spending is going to be including in some big bill of some kind where it's a grand program that's going to include a lot of other stuff. I've met with -- at a meeting last week with our Senator Corker from Tennessee here, and Bob basically said the same thing. He -- when I stood up to ask questions, he said, "Are you going to ask me about dedicated truck lanes?" And I said, "No, I'm just asking you about when you're going to give us some more revenues for it?" And he said, "Everybody in the country and in Washington agree we need more highway spending, and we needed to fix our infrastructure", but he said there's nobody willing to touch the gas tax and raise the revenues. The one bright spot I see that is helping this, there seems to be a slip of the hand where many of the states, Virginia is looking at dropping the gas tax, but putting a sales tax on gasoline that would increase the revenues. And if you play that slip of the hand with the federal money, it would go from -- you're going to have a 5-year bill instead of being $240 billion, it would go at about $360 billion. And they could argue they hadn't raised the tax. Something like that might happen. But it seems to at a state level, they are looking at more switching to sales tax on gasoline instead of just a price per gallon. But without that, I guess we're running our business based on it being flat for the next few years for roads and bridges.

Yes, okay, okay. Are you seeing it on the Mobile side? Are you seeing any differences, I guess 2 questions, one, is there any difference between the sentiment or credit financing between some of your regional players versus the big national heavy civil design and build players? And then two, from that standpoint, with these kind of 2012 being fairly poor, do you see any latent pent-up demand, exhausted material or exhausted equipment, broken equipment, and would that be a positive going forward on the Mobile side?

Yes, one of the customers I was with yesterday was telling about a couple of pavers. And they've got 1,400 hours on their machines -- or 14,000, excuse me, which is pretty darn high for that type of machine versus the other one that's trading every 3,000 hours. So there is a certain pent-up demand in regard to the big players versus the small ones. The small ones have generally got -- the family-owned companies have got cash, and they buy for cash, it's not a big deal. The major players, the large ones, are keeping all of their money for looking at acquisitions, and they're squeezing the heck out of CapEx, and as a result, RPOs are very important to them, rent-to-own deals and 36-month lease purchase deals. So we're doing a lot of that stuff just because that's what you got to do with the big guys.

Yes, okay. You talked a little bit about these guys that trade in at 3,000 to 5,000 hours, has that been a business that's been expanding? Is that picking up some interest in -- is that a regional type or is that a national? Are there areas in the country where you tend to have road builders do more of that?

I think, it's a trend that we see coming more and more. It's hard to get mechanics. And the old way of doing it is you would run 15,000 to 20,000 hours. And one of the guys I was with us yesterday, they had spent $55,000 on a paver and was about to spend another $55,000. When you trade at 3,000 to 5,000 hours, they don't spend anything. And the problem is, I guess, it's a change in -- there's not mechanics available. Secondly, the price of rebuilding and the reliability is not as good. So we see a shift to that with a lot of these major players just not having their own shops and the ability to rebuild, and going more to staying with more modern new equipment. The other advantage too is the new equipment. We have today on our paving machines, basically, satellite control, where we can basically troubleshoot a paver or a milling machine anywhere in the US. We can basically, via satellite, we can dial into and see where the problem is. Actually make changes on the way the machine operates. So it is the modernization of electronics today is allowing you to do things where you don't need the mechanics.

Okay, all right. You talked a little bit about commodity cost. Anything -- how do you see headcount for Astec going forward and then what are you seeing in kind of wage and salary payroll inflation and then maybe health care benefits?

Typically, we're seeing about a 3% increase in wages and in benefits. Healthcare is a wild card, God only knows what that's going to do. But we saw the worst increase probably right after the Obama bill came out. Insurance companies were basically, getting theirs ahead of time, so to speak. But it's a continuing -- that's one uncontrolled problem that we have. But in wages, we see probably 3%.

Okay. Fair enough. You talked a little bit about the wood pellets plants, Don and you said again, it levers a lot on the U.K. How is that, given the voracity of Obama with his nonfossil fuel and his wind and turbine and solar, how is wood pellets viewed in the U.S. energy portfolio from the standpoint of the current administration?

It's a renewable fuel, basically. It's looked upon as being carbon-neutral. And it is a baseload fuel, where wind and solar is not. I mean, if it's not raining or wind not blowing, you're not generating any power. So it's a definite substitute for coal. The problems in the U.S. is strictly economic. $150 wood pellets, which is what they're shipping out on the East Coast to Europe for $150 and $160 is about equivalent to $8.50 a thousand of natural gas. We're at $4 a thousand here. So it won't compete with natural gas. In Europe, natural gas is $12.50 a thousand. Coal in Europe is more in the $200 range, it's $100 here. Wood pellets, basically, will compete with coal and gas over there, but they won't compete here, energy. The only way you would drive wood in the U.S., is if you don't have natural gas. In areas where they don't, they burn wood. It is cheaper, and if you can't burn gas or coal then it's the next cheapest fuel. But if you can get either one of those, you're not going to burn wood.

Yes, okay, okay, fair enough. When you look across all of your different manufacturing lines, what are you guys kind of running shift labor, and then maybe any pockets of capacity constraint and kind of what are you doing on overtime pay?

We typically do a lot of overtime the first 2 quarters of the year just to keep from adding too many people. We have about 4,000 employees. We don't like to lay them off. So we will -- we will work -- overtime is not that expensive to a point. You don't have the additional fringes for the overtime. But we are working -- probably in every company, full first shifts, probably high second shifts. We have more capacity to up the second and the third shifts. It's hard to get people to work on those shifts. The only place that we have problems with labor, skilled labor in Milwaukee, in Yankton, in Eugene, Oregon, skilled machinist and people like that. The unemployment may be high, but the unemployment is very low on skilled people.

Yes, okay. And then one final one, what are you seeing on the M&A side? Niche kind of bolt-on acquisitions, multiples of EBITDA. How fertile is that area?

There's not that many left out there. If we can compete, most of the ones that we acquire, we've got a certain amount of courtship with them and we know them. There is not that many available right now. It's difficult for us to compete with a private equity outfit. It's got a different objective than ours. We see probably more opportunity for us to organically grow and make bolt-on acquisitions as they become available, but most of the acquisitions we make, they come to us.

How do you see -- the how do you see the organic product development? Or what it's kind of been the last 3 or 4 years? And what do you see kind of going moving forward? Your product development, would you say, are newer iterations or are you doing anything with a real turnkey new design in different areas?

We're doing iterations or improvements in all of our equipment, and it really differentiates us. We see a lot of opportunity there. The new products, probably the biggest major new things would be the complete oil drilling packages, where we've got a revolutionary new type of design there, and we see a lot of opportunity to furnish all the equipment that goes with it. The wood pellet plants are major facilities, and we see a lot of opportunity there. We see opportunity of growing in the process type of the energy business at our Heatec operation. We're selling the heaters for gas platforms and can expand that. So there is probably high for the -- type of it would be in new or total systems products versus just niche improvements.

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Okay, thank you. We appreciate your participation on this fourth quarter 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 call will be available through March 12 and an archived webcast will be available for 90 days. The transcript will be available under the Investor Relations section of the Astec Industry's website within the next 7 days. All of that information is contained in the news release that was sent out earlier today. So thank you. This concludes our call. Have a good week.

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