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Edited Transcript of ASTE earnings conference call or presentation 23-Apr-19 2:00pm GMT

Q1 2019 Astec Industries Inc Earnings Call

CHATTANOOGA Apr 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Astec Industries Inc earnings conference call or presentation Tuesday, April 23, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David C. Silvious

Astec Industries, Inc. - CFO, VP & Treasurer

* Stephen C. Anderson

Astec Industries, Inc. - VP of Administration, Director of IR, Compliance Officer & Corporate Secretary

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Conference Call Participants

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* Brian C. Sponheimer

G. Research, LLC - Research Analyst

* Lawrence Tighe De Maria

William Blair & Company L.L.C., Research Division - Co-Group Head of Global Industrial Infrastructure

* Mircea Dobre

Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst

* Stanley Stoker Elliott

Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst

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Presentation

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Operator [1]

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Greetings, welcome to Astec Industries First Quarter 2019 Earnings Call. (Operator Instructions) Please note that this conference is being recorded. I'll now turn the conference over to your host, Steve Anderson, Vice President and Director of Investor Relations. Mr. Anderson, you may begin.

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Stephen C. Anderson, Astec Industries, Inc. - VP of Administration, Director of IR, Compliance Officer & Corporate Secretary [2]

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All right. Thank you, Rob. Good morning, and welcome to the Astec Industries' conference call for the first quarter that ended March 31, 2019. As Rob said, I'm Steve Anderson. And also on today's call is David Silvious, our Chief Financial Officer. Unfortunately, Rick Dorris, our Interim CEO, is unable to be on the call today as he is attending his father's funeral, so our thoughts and prayers are with Rick and the Dorris family in their time of loss.

I'm going to step in to provide the high-level overview of results this quarter. And David will discuss the financial results in more detail afterwards. But before I do that, I will 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 factors that could influence our results are highlighted in today's financial news release and others are contained in our annual report and our filings with the Securities and Exchange Commission.

While though we have a unique set of circumstances for this call, I would like to give you a broad overview of some of the drivers that shaked our financial results. Our performance for the quarter did not meet our expectations, however, we have continued to take steps to support our long-term goals of increasing operational efficiency, reducing cost and improving profitability. As you've seen our sales were flat year-over-year. And March is typically a strong month, but that was not the case this year. Unusually harsh weather has been a factor in the United States. A lot of the equipment that we manufacture is used in the field and can't operate -- excuse me, in excessively muddy conditions. As an example, the North Carolina Department of Transportation has given contractors time extensions beyond the contemplated standard specifications in a January 2019 memorandum they provided for a 180-day extension to the overall contract time and applied to many highway-related projects.

Rent fleet utilizations in the market were low as well. Some estimates indicate utilization rates to be as low as 56%. Even though we do not rent directly, many of the dealers we sell to, do rent. Their rentals often turn into sales and sales into restocking orders. Additionally 2018 was a strong year, which provides tough comps.

Many dealers have larger inventories than in the past years and with interest rates climbing their desire or ability to increase capital expenditures can be impacted. In our gross margin, underabsorption was a factor. A number of the factories we have lost days of production due to severe weather. At Kolberg-Pioneer in South Dakota, we had 4 days of excused absences due to flooding around the manufacturing facility, which limited production to 30% to 40% on those days. At Johnson Crushers in Eugene, Oregon, we had a weather-related power outage for 2 days, and at both Telsmith in Mequon, Wisconsin and Carlson Paving in Tacoma, Washington, we lost 4 days due to snow. Unrelated to weather and as previously noted, we built quite a bit of inventory in our Mobile Asphalt Paving equipment division and we are still digesting some of that. For the most part, our input cost has stabilized, coil prices have actually come down some, while plate has stabilized at elevated levels. We use about 25% coil and 75% plate, so net costs are down just very slightly. As noted in prior calls, we initiated price increases throughout last year to keep up with inflation.

In the selling, general and administrative expense category, our investment in our strategic purchasing initiative continued. As we have shared before, this is an investment and we will begin to see the benefits in the latter part of this year into 2020 and beyond. We are pleased as this initiative continues to meet our expectations. The Bauma trade show, which is held every 3 years in Munich, Germany took place in March. And that typically equates to a spend for us of between $2 million and $2.5 million though this is spread over a couple of quarters. I can tell you the show was well attended this year. We had good traffic in the booth, and on display we had our new batch plant design for the international markets, and a paver manufactured by Carlson Paving. All in all, our team felt this was a very good show. The investment in our international sales network added approximately $500,000 of expense in the quarter and contributed to the year-over-year variance.

For backlog in orders, the drop in these categories was fairly sudden in March across the board and concentrated in North America. This is highly unusual given the number of products we offer in the industries we serve. The big question is whether this is a lull or a dip, and that is to be determined. Our customers are still confident and have work, quoting activity is active despite orders being slow to materialize. And although, we never take this lightly, we are adjusting man hours with some of our companies and looking at headcount as well. We are reacting to the near term conditions, while maintaining flexibility for the long term.

So in summary, despite the negatives, we continue to have a number of positives. We are focused on our core product lines versus the ancillary product that was a distraction over the last couple of years. Our strategic purchasing initiative is continuing to progress nicely and is in line with our expectations. The expansion of our international sales network is moving forward and will be a benefit in the future. And oil prices seemed to have stabilized in the $60 a barrel range and that helps our prospects for equipments sold into the energy-related products. So I think it would be helpful at this time for David to provide some detail on these topics and share some financial information for the quarter. David?

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David C. Silvious, Astec Industries, Inc. - CFO, VP & Treasurer [3]

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All right. Thank you, Steve, and thank each of you for joining us this morning. I'll now walk through the financial results for the quarter.

Net sales of $325.8 million in this quarter, were essentially flat with Q1 of 2018. Our sales for the quarter were approximately $10 million to $15 million short of our guidance of 3% to 6% growth over the first quarter of 2018.

As Steve mentioned, weather-related issues primarily in March, we believe impacted our revenues and our order intake and that in turn impacted our gross margins and our earnings per share as we will discuss.

Driving some of those sales in the first quarter, international sales were up and the increase in international sales Q1 '19 versus Q1 '18 occurred primarily in Canada and Australia and Japan and Asia. Those increases were offset by decreases in Russia, Africa and Brazil. And for the quarter, international sales increased in the Infrastructure Group and the Energy Group and decreased in the Agg and Mining Group.

Domestic sales for the quarter increased in the Energy Group and decreased in the Infrastructure Group and the Agg and Mining Group.

Part sales were $92.6 million in the quarter compared to $88.1 million in Q1 of '18, that's an increase of 5.1% or $4.5 million. And for the quarter, parts sales increased in each of the groups. ForEx had a negative impact of $3.4 million on sales quarter-over-quarter.

Moving to gross profit, our gross profit percentage was 23.5% this quarter compared to 24% for the first quarter of '18. The absorption variance, as Steve mentioned, in Q1 of '19 was $7.3 million underabsorbed compared to Q1 of '18 underabsorbed variance of $4.5 million. That's a negative change in the absorption variance of $2.8 million.

As adjusted for prior year, pellet-related expenses, the consolidated gross margin for Q1 '19 again was 23.5% compared to 24.8% as adjusted in Q1 of 2018. That made the as adjusted gross margin for the Infrastructure Group 24.4% for Q1 of '18.

For the quarter, SGA&E was up, as Steve mentioned, at 17.9% of sales compared to 16% of sales in the first quarter of 2018. That's an increase of $6.2 million. The main drivers of that were consulting fees of about $2.6 million, R&D was another $600,000, again the Bauma exhibit that Steve mentioned about $1 million of that hit in this quarter. And we had legal, professional and accounting fees were up across those categories by $1 million compared to the prior year. We expect a run rate on SGA&E to remain elevated in Q2, hope to decrease to a more normalized level in the second half of the year for each of those 2 quarters in the second half.

The effective tax rate for the quarter was 21% compared to 23% for the same quarter last year, and we expect the full year rate this year to be in the 22% to 23% range.

Our earnings for the year were $14.3 million compared to $20.3 million for the same period last year, a decrease of $6 million. Income for diluted share at the end was $0.63 compared to $0.87 last year. As adjusted, the prior year's earnings per share was $0.96 per share compared to the $0.63 in Q1 of '19.

EBITDA for the first quarter of '19 was $24.9 million, or 7.7% of sales compared to EBITDA of $33.2 million in Q1 of '18 or 10.2% of sales. As adjusted, the prior year EBITDA was $35.9 million or 11% of sales in Q1 of '18. The backlog, international backlog at March 31 of '19 was $74.7 million compared to $103.8 million at March 31 of '18. Domestic backlog was $161.8 million at March 31 of '19 compared to $341.1 million at March 31 of '18. But as adjusted, recall that, that $341.1 million of backlog in the prior year had pellet plants in it, so as adjusted, the total backlog at March 31, 2018 was $380 million -- $308.3 million and that resulted in a decrease of 37.8% in the March 31, 2019 backlog. Recall that all of that backlog difference is all domestic, and it's all in the Infrastructure Group. ForEx had a negative $4.9 million impact on backlogs year-over-year.

Moving to the balance sheet. The days outstanding were 37.1 at the end of March this year compared to 41.7 at the end of March in 2018. And we saw 2.6 inventory turns through March of this year compared to 2.4 turns through March of 2018. At March 31 of this year, we owed $55.8 million on our $150 million domestic credit facility, and we had $28.6 million in cash and cash equivalents as of March 31, 2019, primarily overseas or supporting our captive insurance company.

Letters of credit were at $9.5 million giving us a borrowing availability of $84.7 million at March 31 of this year. CapEx for the first quarter was $5.8 million, and for the full year of 2019 we're forecasting around $25 million. Depreciation for the first quarter of '19 is $5.4 million, and for 2019 we're forecasting $23.5 million of depreciation.

While we are more cautious in our outlook for the second quarter and the remainder of the year due to the unexpected change in our backlog in late Q1 of this year, our customers continue to be optimistic about their businesses. We are encouraged that they have good backlogs and are busy. Further, we have seen some positive developments in orders after quarter end. Our sales and operations planning programs are having an impact on our demand scheduling, which should help us optimize our inventory levels and release cash tied up in inventory over time. We also anticipate our strategic purchasing initiatives, to begin to positively impact our gross margins in the second half of 2019, and we expect to see our SG&A expenses decrease in the second half of 2019.

For the second quarter, we are projecting our top line revenues to be down approximately 5% to 15% from the second quarter 2018 adjusted revenues of $347 million. We expect gross margins in the second quarter in the 22% to 23% range yielding operating margins of 3.5% to 5.5% and earnings per share in the $0.40 to $0.50 per share range for the second quarter. For the full year, we believe revenues will be flat to up 3% compared to the 2018 adjusted revenues of $1.246 billion. The gross margins in the 23% to 24% range and operating margins in the 5% to 7% range, and earnings per share for the full year of 2019 of $2.25 to $2.55.

I'll now turn the call back over to Rob, and we will be glad to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is coming from the line of Mig Dobre with Robert W. Baird.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [2]

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My condolences to Rick and his family.

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Stephen C. Anderson, Astec Industries, Inc. - VP of Administration, Director of IR, Compliance Officer & Corporate Secretary [3]

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Thank you, Mig.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [4]

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There's quite a bit to get through here, and I might jump back in the queue and come back as I certainly don't want to take up all the time upfront, but I sort of want to start with a big picture question. I understand the weather disruptions. You're not the only company to have experienced them. What is not so clear to me is, you reported your quarter -- your fourth quarter on March 1st. You had pretty good perspective I think on January and February. And obviously the adjustment that we're seeing to guidance here is very much material. The orders themselves and backlog are, I would call them unusually weak.

What I'm not clear on is at what point in time did you start to get better visibility in terms of where demand was? Because, again, on March 1st, you provided your initial guidance, right? So I'm presuming that it was at a point in time in March that things started changing. It seems to me like given the magnitude as to what's happening here, we are talking about more than just the weather. So If we could maybe try to separate the weather issues versus some of the other things that might be impacting the business, I think, that would be really helpful because we are trying to understand if there are share shifts here and you have a share loss issue, if there is something else going on cyclically with the market. It's hard for I think anybody to sort of believe that what we are talking about here is just weather-driven volatility. So I'd love to get your thoughts on that.

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David C. Silvious, Astec Industries, Inc. - CFO, VP & Treasurer [5]

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Mig, this is David. On the revenue side, obviously the shortfall is, we've called out some weather and again Steve mentioned that, is this a lull, is it a dip? That's yet to be determined, so cyclicality, it's hard to address. We are hearing from the market, from our customers, that they have backlogs of work, and that they're busy, and they expect a decent 2019 in their own businesses. The weather impacts some of our customers because they have rental fleets, and again, rental underutilization would cause them to be sitting on large inventories of rental equipment and not converting that rental equipment to revenues for them and in turn placing orders with us. So we see some of that also going on in the business.

And we think it's a late year with the weather that customers are just now getting around to, especially on the east side of the country, getting around to being able to really get out on in the field and do a lot of work. It's just been -- it's been sudden and to just address the timing of it, we had a forecast and that's what we went to the market with and we were confident in that forecast based on -- and we build that from the ground up based on every subsidiary, we've got people in touch with the market and with the customers. And frankly, it just slowed down suddenly and decisively in March. At the end of February, it's a challenge because anywhere from 60% to 80% of our earnings could come in the last month of any quarter, and 60% to 70% of the revenue. So it's a little bit of a challenge forecasting that and knowing at the end of the second quarter where we are going to be. But that being said, it was a slowdown in March, and obviously, you'll see the impact of that.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [6]

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Do you get a sense from your salespeople, the folks on the front lines as to what might be the culprit here other than the weather though? And I ask because the way I think about the business for instance, correct me if I'm wrong, but I think of, say the material guys, the likes of a Vulcan as being the OpEx portion of highway construction, you're the CapEx portion of it. And we have gone through some good years after getting the Highway Bill in 2015, right? I mean '16 was good, '17 was good, '18 was pretty decent, and I'm wondering if what we are talking about here is the realization on part of your customers that whatever equipment needed to be replaced has been replaced, there has been investment in. Now we are just kind of dealing with a normal cyclical type downturn. I mean you've been doing this a while, so you have seen this before. I'm just wondering if this is what's happening here or if there is another nuance that I might be missing.

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Stephen C. Anderson, Astec Industries, Inc. - VP of Administration, Director of IR, Compliance Officer & Corporate Secretary [7]

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Mig, this is Steve. For the drop to have occurred so suddenly, we don't think it's anything more of a macro nature. I mean the domestic markets are strong and again our customers are busy and that's what -- you don't always want to hang your hat on weather-related, but it has caused a delay and pushed the season back some. So we are not seeing anything macro or hearing it from our sales personnel that would indicate that there is apprehension in the markets, and we have been to the Bauma trade show, and we had a good show there. Different organizations that we participate in, events are well attended. Tends to be some optimism the past few years, contractors have the ability to perform well and clean up the balance sheets and had some room on their lines and things like that. They've been profitable. So if it had begun over a multi-month period where there was some downturn, it would lend more credence to apprehension of what's to come, but again, to David's point, it was fairly quick.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [8]

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Okay. Then my last question before I go into queue. You talked a little bit about, in the press release you hinted at potentially some recovery in orders. Is that what you're seeing? I understand Bauma obviously helps as a trade show. But, excluding Bauma are you seeing better trends now that weather gets a little bit better into Q2? And I ask because -- and I do want to talk about guidance in my follow-ups, but obviously the guidance that we had structured assumes a pretty decent back half of this year, right? So something has to get better.

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David C. Silvious, Astec Industries, Inc. - CFO, VP & Treasurer [9]

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Mig, this is David. Yes, we see the incoming intel from the field, from our sales folks and our folks that are in touch with customers that they're definitely contemplating orders. There are lot of folks that are in need of equipment that are -- have expressed that to us. It's just they're not pulling the trigger for one reason or the other. And so what we can see is the weather side, but as you said, is there something more secular in the market, little more, little larger, and we just don't see it. That's not the evidence that we are seeing. That's not to say that it's not something like that, but that's not the evidence that we are seeing.

We are hearing discussion from our group presidents and the presidents of our subsidiaries that it is a later season, and so the back half of the year, we expect to make up some of that ground obviously from the guidance. But in Q2, with the backlog where it is, the customers may not be -- may not have some apprehension, but certainly, we would have some apprehension in putting anything too heavy out there. It's just we are feeling our way through this and we expect and see a lot of order activity, but we think that those will convert to orders at some point. We are just not sure of timing.

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Stephen C. Anderson, Astec Industries, Inc. - VP of Administration, Director of IR, Compliance Officer & Corporate Secretary [10]

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Right, they're quoting activity.

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David C. Silvious, Astec Industries, Inc. - CFO, VP & Treasurer [11]

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Yes.

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Operator [12]

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The next question is from the line of Stanley Elliott with Stifel.

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Stanley Stoker Elliott, Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst [13]

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So sorry to hear about Rick's dad. When we talk about the business, was it noticeably weaker on the asphalt side versus the concrete side? Or -- because it sounds like the Energy business was hanging in there pretty well. Just trying to kind of parse out typically, I think of asphalt being kind of earlier to come to the market then concrete being a little bit later. But just trying to get a little more color there if we could, please.

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David C. Silvious, Astec Industries, Inc. - CFO, VP & Treasurer [14]

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This is David. I can say that it was more on the roadbuilding side that, that was where some of the weakness was, along with some of the aggregates. So I think, those and typically, some of it was concentrated where customers have -- where our customers are dealers and have rental fleets. And so that's where some of that intel is coming from, but yes, it was more on the asphalt side rather than the concrete side. The concrete side hung in there pretty well.

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Stanley Stoker Elliott, Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst [15]

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Have you all changed anything at the dealership level in terms of bringing in new dealers or anything like that, that you could kind of share with us?

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Stephen C. Anderson, Astec Industries, Inc. - VP of Administration, Director of IR, Compliance Officer & Corporate Secretary [16]

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No. I think it is -- this is Steve, Stanley, no, it's -- we had dealer distribution through our aggregate mining companies for several years. That's very well established. We've been putting on dealers in the mobile asphalt paving area and have been getting good dealerships there to go through. And in certain products in our energy group for sell-through dealers as well and those are established also. So there are no major changes in the way that we are going through the dealer distribution network.

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Stanley Stoker Elliott, Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst [17]

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Okay. And then you mentioned pricing pressure. I mean is there anything you could help us with in terms of product categories or anything on the regional side that might kind of give us a little more color there?

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Stephen C. Anderson, Astec Industries, Inc. - VP of Administration, Director of IR, Compliance Officer & Corporate Secretary [18]

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I just think what we're seeing is just a lot of companies are hungry for growth and every deal is competitive. So it will continue to be that way, it's been that way in the past, but got certain competitors that seem more focused on market share right now versus price on any specific deal. But it's just competitors are out there trying to fill their shops up as well.

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Stanley Stoker Elliott, Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst [19]

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And do you get a sense that this is really more of a delay in orders or did your customers -- you've decided to kind of, I don't know if -- change allegiance is not the right word, but did you feel like you're losing out on more deals now? Or do you think that the whole market just seems kind of punk right now?

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Stephen C. Anderson, Astec Industries, Inc. - VP of Administration, Director of IR, Compliance Officer & Corporate Secretary [20]

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We feel like we're holding our own. If there was no quoting activity or the contractors weren't saying they were busy, it would be of even greater concern but with the fact that they are busy and interested in new quotes, we certainly anticipate this being a lull versus a dip. But as we said, we are adjusting hours and prepared to adjust otherwise if it becomes extended.

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Operator [21]

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Next question is from the line of Larry De Maria with William Blair.

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Lawrence Tighe De Maria, William Blair & Company L.L.C., Research Division - Co-Group Head of Global Industrial Infrastructure [22]

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I guess you guys talked about no apprehension in the market, but also, as that was just brought up, mentioned all segments experienced some pricing pressure. And then obviously March fell off. So it seems to be some bigger issues out there. So could we discuss maybe even further into pricing, who is being more competitive and how competitive it really is? And how pervasive across the portfolio? And then maybe what was net pricing in the quarter and how do we think about net pricing for the year? I assume that was changed.

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Stephen C. Anderson, Astec Industries, Inc. - VP of Administration, Director of IR, Compliance Officer & Corporate Secretary [23]

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Yes. I think again Larry, we are seeing pricing just -- we have got competitors across the board, the barrier to entry into these type of businesses is fairly high. So you have established competitors out there. Can't name one specifically that's out there being overly aggressive. I mean they are all long-term players, but steel has pulled back on coil just a little bit. That may provide a little bit of room, but plate prices have stabilized at a relatively high level. So if oil prices were to move from $60 a barrel to $70 then there could be some further inflation in steel prices as that's typically a driver. So again, feel like the quotes that we are putting out there, that our batting average is holding, and it's -- just every deal you just have to sharpen your pencil on.

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Lawrence Tighe De Maria, William Blair & Company L.L.C., Research Division - Co-Group Head of Global Industrial Infrastructure [24]

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So, would -- you and Wirtgen, obviously everybody has been concerned about what does that ultimately lead to in the industry, and the competitive nature for a company like you guys. Would that be one area of concern that's playing out?

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Stephen C. Anderson, Astec Industries, Inc. - VP of Administration, Director of IR, Compliance Officer & Corporate Secretary [25]

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Wirtgen has been an aggressive competitor for years and that's still the case. So that's present in the market, but it is not different from what we have experienced in the past.

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Lawrence Tighe De Maria, William Blair & Company L.L.C., Research Division - Co-Group Head of Global Industrial Infrastructure [26]

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And then you guys mentioned consulting fees, I think, $2.8 million. That seems high. Is that out of the ordinary? Or what is that specifically related to?

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David C. Silvious, Astec Industries, Inc. - CFO, VP & Treasurer [27]

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Yes, that's definitely out of the ordinary. That relates primarily to our strategic sourcing initiatives and our sales and operations planning initiatives that are going on. You may recall, we've had an outside consultant helping us build those initiatives out, and we expect those projects to be complete sometime in the middle of summer, to about end of June, end of July more than likely. So that's why we expect SG&A to drop for the latter half of the year.

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Lawrence Tighe De Maria, William Blair & Company L.L.C., Research Division - Co-Group Head of Global Industrial Infrastructure [28]

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Okay. Remind us the level of the drop in SG&A? Maybe the annualized run rate?

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David C. Silvious, Astec Industries, Inc. - CFO, VP & Treasurer [29]

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Yes. So the annualized run rate should be probably in the $54 million per quarter. We are running at $58 million right now. Obviously that would mean that it would be significantly lower. In the latter half of the year, we expect it to be more in line with our traditional say 16% to 17% of revenues, which it is not right now, it's higher than that. So we expect it to drop substantially there toward -- in the latter half of the year.

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Operator [30]

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Our next question is from the line of Brian Sponheimer with Gabelli & Company.

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Brian C. Sponheimer, G. Research, LLC - Research Analyst [31]

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Just a kind of a bigger picture question as it relates to ordering activity. How much if anything that you hear from your customers is related to a FAST Act that hasn't been effectively termed out for another 5 years yet? How much do you guys need another infrastructure bill?

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Stephen C. Anderson, Astec Industries, Inc. - VP of Administration, Director of IR, Compliance Officer & Corporate Secretary [32]

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Brian, this is Steve. We don't hear the order intake being affected by the FAST Act, right now. You're right in that it is a factor, typically surfaces close to a year before the expiration, so it is not -- we are not quite there yet. There has been a lot of talk in Washington about bipartisan support for an infrastructure bill. I know the Speaker of the House, Pelosi, was in an article earlier this month saying we're ready to talk infrastructure with President Trump and mentioned in that article that about 75% of the conversation she has had with the President included infrastructure policy. So don't know if they will stay on target, but they expect at least to have some discussions heading into May, which is positive at this point in the year and this far out. So as we get closer to the date, the tenure of the bill is important and having at least a 4, 5, 6 year bill gives our customers visibility where they're comfortable in spending money on larger ticket items that are a 20-year asset that has a cost of $4 to $5, $6 million. So we are not hearing the FAST Act being an issue right now, but certainly tracking it.

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Operator [33]

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The next question is a follow-up from the line of Mig Dobre with Robert W. Baird.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [34]

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So, if I may, I think, I'm going to try to go by segment here for my questions. I'll start with infrastructure. Just high level sort of thinking here, your backlog is about $81 million. How do you think about the amount of dollars that you need in the backlog relative to next quarter or next 6 months or at the potential sales? I mean, in theory you would need a fair amount in backlog given how you're doing production planning, right? I mean what's the normal percentage?

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Stephen C. Anderson, Astec Industries, Inc. - VP of Administration, Director of IR, Compliance Officer & Corporate Secretary [35]

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Mig, this is Steve, and David can jump in as well, but the backlog velocity for the shot depends on what's in front of it. If we -- if there's not much in front of it, you can get a plan out in about 3 weeks. But -- so it's hard to put an exact number on it plus is it a full plan or what have you. But Dave, if you have a number that's more specific.

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David C. Silvious, Astec Industries, Inc. - CFO, VP & Treasurer [36]

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No. I mean that's a difficult group to forecast that sort of number in because Roadtec right now has an unusual circumstance of having probably more inventory than they would normally have. As Steve mentioned, we have built some and still working through that. So the backlog could be fulfilled very quickly out of Roadtec, and of course, they're a high- volume shop. And as we go through our S&OP program, our backlog should naturally drop over time relative to history because of better planning, more streamlined and lean manufacturing through the shop. So it's difficult to say. I mean as we have said in the past our backlogs generally turn in a quarter to a quarter and a half, and our expectation historically with the quarter's worth of sales or so in a backlog for any of our groups, but that's not necessarily the trend going forward.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [37]

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Okay. That's helpful. But then looking at it this way, in 2Q '18 you did $158 million worth of revenue, you have done $155 million in Q1, your backlog is at $81 million, should we be thinking here then 2Q revenue, 2Q '19 revenue in infrastructure something around $80 million to $90 million? Is that how you're thinking about it, with maybe some recovery as the year progresses?

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David C. Silvious, Astec Industries, Inc. - CFO, VP & Treasurer [38]

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Yes. We don't give the guidance down to that level. At the group level, certainly we are sharing the consolidated with you and can -- for the year, we have disclosed that we are looking to be flat to up 3%, but we just haven't talked about it in that detail.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [39]

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Okay. Well, I mean this seems to be, at least to me in my model when I'm looking at it, this is one of the big pain points, right? I mean your backlog in infrastructure is really the lowest now that it's been since 2009. So that has some immediate repercussions, which I guess they're reflected into your guidance, but it seems that 2Q infrastructure revenues will be down pretty materially. And my question is, if that's the case, how do we need to think about this segment's gross margin? Because gross margin hung in here pretty well. You're up 30 basis points year-over-year in Q1, but with the volume pressure, that you're going to get in Q2, I'm presuming, we have a different story. Can you hold gross margin flat year-over-year on this kind of volume decline? I mean, I guess, I suspect the answer is no, but I'm wondering how you would advise us to think about it.

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David C. Silvious, Astec Industries, Inc. - CFO, VP & Treasurer [40]

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I think it would be a challenge to hold it flat unless the moves that we are making right now to better utilize those facilities to -- and then at a couple of those facilities to get more volume through the shop, to reduce the manufacturing costs that are incurred as we produce. And if we sell, get the backlog built back up and turn it over, especially at a place like Roadtec where we could sell a significant amount of equipment right out of the inventory, of course, that would in turn limit the hours through the shop and you might have some absorption issues that would impact the margin, but we would be selling out of the inventory, which would give you a little higher volume on the top line. I mean it's -- that's the challenge is to balance that out and as we have said, we are making moves right now and are watching it very closely. We are -- we meet weekly and discuss our forecast and our volumes and our costs and we are mindful of how long it takes for changes to have an impact on the financials. So I think to your point, we are making those changes as we go along and we expect to -- that the margin is going to have pressure on it though.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [41]

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Well, again, when I'm plugging in your guidance, I'm struggling frankly, to get to your EPS guidance for the second quarter without making some pretty generous assumptions about what gross margins in infrastructure are going to be in this really weak Q2, from a volume standpoint. That's why I'm wondering if there's something that you're aware of specifically in terms of cost actions or whatnot that might be benefiting the margin here. And I don't know if you can provide additional clarity, but I'm having a hard time with my model essentially.

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Stephen C. Anderson, Astec Industries, Inc. - VP of Administration, Director of IR, Compliance Officer & Corporate Secretary [42]

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Yes, some of the quoting activity we are seeing is in that area. So that could be a factor as well.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [43]

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Okay. Let me move to Aggregate and Mining. Is there a way to maybe separate what's happening with the mining portion of your business versus aggregates? I think I heard you say that it was aggregates that saw more pressure rather than mining. I don't know if there is a difference that you can call out between the 2 more than what you already said.

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Stephen C. Anderson, Astec Industries, Inc. - VP of Administration, Director of IR, Compliance Officer & Corporate Secretary [44]

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Mig, this is Steve. In our Aggregate and Mining Group the vast majority of that's aggregates and the majority of that's domestic aggregates, so our true mining exposure is in the single digit, if you look at it from a company-wide standpoint. We have had some increases in mining from low levels, but Australia, South Africa have seen some benefits there, but it doesn't move the overall needle that much, so most of what we are referring to is domestic aggregates.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [45]

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Has this been impacted by the weather as well? Or was the weather primarily an asphalt comment?

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Stephen C. Anderson, Astec Industries, Inc. - VP of Administration, Director of IR, Compliance Officer & Corporate Secretary [46]

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Well the Aggregate and Mining has been impacted. Again, we go through dealer distribution for those products. We have a lot of track-mounted units, and they're out in the field and out in the mud and the dirt in the pit, so we haven't gotten feedback that, that's been an issue.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [47]

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And where are you seeing demand trending from this Q1? I mean, are things improving sequentially? Bauma too, I mean, I think of Bauma primarily as a show benefiting infrastructure. But maybe I'm wrong, maybe that benefits your aggregate business too.

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Stephen C. Anderson, Astec Industries, Inc. - VP of Administration, Director of IR, Compliance Officer & Corporate Secretary [48]

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There is some tie between the 2 groups. Obviously a lot of aggregates going into infrastructure projects, but we have had some strong years in the aggregate and mining group for the past couple of years. So they have some good comps. But, again, as the -- when the rental markets are slow that flows through.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [49]

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When you think about your full year growth guidance, the 0% to 3%, and you think about aggregate and mining versus infrastructure compared to that guidance, how would you sort of rank the 2?

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Stephen C. Anderson, Astec Industries, Inc. - VP of Administration, Director of IR, Compliance Officer & Corporate Secretary [50]

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All right. I don't know that we have given anything with detail between the 2, but we would expect both to contribute.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [51]

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Okay. From a margin standpoint here, margin was a little weaker than what we were anticipating, but again, the volumes were looking a little different as well. So as you look at this gross margin of 24% in Q1, directionally how should we be thinking about margin into the maybe weaker Q2, and then the rest of the year? Any help there?

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David C. Silvious, Astec Industries, Inc. - CFO, VP & Treasurer [52]

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Overall, we have said that 22% to 23% gross margin in the second quarter is where we think we are going to wind up, but then higher than that for the full year, 23% to 24%. We think that as we make adjustments, if we have to make more adjustments relative to volume and those take effect that absorption will get better. And as we -- our strategic sourcing has its impacts in the second half of the year as we are buying materials, we will be able to recognize the savings on our sourcing and we also believe that in our S&OP we're going to be more efficient through the shops. We're not going to build any stuff that we don't need, we're not going to be buying stuff that we don't need. We will have a very strong demand forecast, strong demand, but a strong forecast that will tell us what our demand is to drive these shops and that's going to make us more efficient. We're going to plan better, and carry costs into future quarters that we need and not guessing at that based on a guess of the demand schedule. So I think all of those things are going to start to take route in the second half and help us drive that margin back up to the 23%, 24% gross margin range for the full year.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [53]

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Okay. Moving on to energy, maybe this is perhaps a good time for you to remind us what your true energy exposure is in this segment because obviously there is a bunch of other stuff here like the chippers and concrete, and so on. And I guess, my question is, how much of what we have seen in Q1 order weakness is related maybe to the dip in oil prices? As oil is recovering, can this segment do much better going forward order wise? How do you think about it?

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Stephen C. Anderson, Astec Industries, Inc. - VP of Administration, Director of IR, Compliance Officer & Corporate Secretary [54]

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Mig, this is Steve, in the Energy Group, you're right, it's a very diversified group. Peterson Pacific with the wood chippers is in there. The most direct oil and gas exposure that we have would be with our line of GEFCO products, the double pumpers that are used to clean out existing wells for improved flow. Their heritage product is a water well drilling equipment and that's been doing well. This group overall has been at lower level, so it has some room to improve at greater percentages, but the true oil and gas exposure that we have would be in the low single-digit range.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [55]

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So oil price is not much of a factor, but maybe some of the other stuff is impacted by weather and some of the things that we already talked about right?

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Stephen C. Anderson, Astec Industries, Inc. - VP of Administration, Director of IR, Compliance Officer & Corporate Secretary [56]

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Correct. The drill rigs going out in the field to drill, I mean that's definitely an impact there. And then the pumpers and the wood chippers especially are out in those kind of conditions.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [57]

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Okay. And then I'm almost done, I promise. Looking, again, at your second quarter guidance, I am beating a dead horse here, but you've got a pretty wide range in terms of your expected revenue decline. And, again, we are not -- we're only talking about, what, a few weeks until you close the quarter. Can you sort of help us understand what would get you from one end to the other of that range? Like what needs to happen in one case versus the other? Maybe the best case scenario where you're only down 5, what needs to happen in order for you to only be down 5?

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Stephen C. Anderson, Astec Industries, Inc. - VP of Administration, Director of IR, Compliance Officer & Corporate Secretary [58]

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The quoting activity that we are seeing materializing into orders is the big answer there. And then the season for the work that needs to be done actually beginning to flow. So again, we had a later season by several weeks here due to the weather and we would need for things to kick back up, get that -- you look overall and with customers being busy, parts sales are up, which shows you that material's going through the product. Our parts sales for the quarter were $92 million in the quarter this year versus $88 million. So we had little over 5% increase there. And new equipment's being used that are running through the parts, so that's encouraging as well.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [59]

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Okay. And then lastly, do you think -- final question, do you think that if you're coming in at down 15% for Q2, do you think that the 0%, so the low end of your full year growth guidance, do you think that's feasible, that's achievable based on what you know of the end markets right now?

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Stephen C. Anderson, Astec Industries, Inc. - VP of Administration, Director of IR, Compliance Officer & Corporate Secretary [60]

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It's possible, but product mix obviously has a lot to do with it and there are just a number of factors there. So we know the range is a little bit wider than we would normally put out there, but we've seen through the first quarter that's just some unique circumstances.

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Operator [61]

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At this time, I'll turn the floor back to Steve Anderson for closing remarks.

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Stephen C. Anderson, Astec Industries, Inc. - VP of Administration, Director of IR, Compliance Officer & Corporate Secretary [62]

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Thank you, Rob. We appreciate your participation on the conference call for the first quarter. We thank you for your interest in Astec. As our news release indicates today's call has been recorded. A replay of the conference call will be available through May 7, 2019, and an archived webcast will be available for 90 days. A transcript will be available under the Investor Relations section of the Astec Industries website within the next 7 days. All of that information is contained in the news release that was sent out earlier today. So this will conclude our call. Thank you all. Have a good week.

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Operator [63]

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Thank you. Today's call has been concluded, you may now disconnect your lines at this time. Thank you for your participation.