Jul 23, 2013
Executives
Stephen C. Anderson - Vice President of Administration, Director of Investor Relations and Secretary David C.
Silvious - Chief Financial Officer, Vice President and Treasurer James Don Brock - Chairman of The Board and Chairman of Executive Committee Benjamin G. Brock - Chief Executive Officer, President and Director
Analysts
John F. Kasprzak - BB&T Capital Markets, Research Division Richard Wesolowski - Sidoti & Company, LLC Brian D.
Brophy - Robert W. Baird & Co.
Incorporated, Research Division L. Todd Vencil - Sterne Agee & Leach Inc., Research Division Jason Ursaner - CJS Securities, Inc.
Ted Grace - Susquehanna Financial Group, LLLP, Research Division Morris Ajzenman - Griffin Securities, Inc., Research Division Eric Glover - Canaccord Genuity, Research Division Brian Gary Rafn - Morgan Dempsey Capital Management, LLC
Operator
Greetings, and welcome to the Astec Industries Second Quarter 2013 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Steve Anderson, Vice President of Administration. Thank you, sir.
You may now begin.
Stephen C. Anderson
Thank you, Jesse. Good morning, and welcome to the Astec Industries conference call for the second quarter ended June 30, 2013.
As Jesse mentioned, my name is Steve Anderson and I'm the Vice President of Administration, Secretary, Director of Investor Relations for the company. Also on today's call are Dr J.
Don Brock, our Chairman and Chief Executive Officer; Ben Brock, Vice President of our Asphalt Division; and David Silvious, 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 quarter.
Before we begin, 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. These 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. At this point, I'll turn the call over to David to summarize our financial results for the second quarter of 2013.
David C. Silvious
All right. Thanks, Steve.
We appreciate each of you who are listening in for your interest this morning. Net sales for the quarter were $248.1 million in 2013 versus $238.3 million in the second quarter of '12.
That's about 4% increase, about $9.8 million. International sales for the quarter were $85.8 million, compared to $83.9 million in the second quarter of '12.
That's a 2% increase, about $1.9 million. International sales were 34.6% of second quarter 2013 sales, compared to 35.2% of second quarter of 2012 sales.
The increase in the international sales for the second quarter of '13, compared to the second quarter of '12 occurred primarily in Africa, in the West Indies and the Middle East and in Brazil. These increases were offset by a decrease in Canada.
Domestic sales for the second quarter of '13 were $162.3 million compared to $154.4 million in the second quarter of '12. That's a 5% increase or $7.9 million.
Domestic sales were 65.4% of the second quarter of 2013, net sales compared to 64.8% for the second quarter of 2012 sales. Parts sales for the second quarter of '13 were $62.7 million compared to $60.1 million for the second quarter of 2012.
That's a 4% increase or $2.6 million. Parts sales were 25.3% of the quarterly sales in 2013 compared to 25.2% in the second quarter of 2012.
Aggregate and the Mining Group had the largest dollar increase in part sales, followed by the Asphalt Group and the other group, compared to the second quarter of 2012. The Mobile Asphalt Paving Group and the Underground Group each had small decreases.
On a year-to-date basis, net sales were $496 million, compared to $490.2 million in 2012, that's a 1% increase or $5.8 million. International sales on a year-to-date basis in '13 are $171.7 million compared to $180.8 million in '12.
That's a decrease of about 5% or $9.1 million. The decrease in international sales occurred primarily in Australia, the post-Soviet States and in South America.
These decreases were offset by increases in Europe, Africa and the West Indies. International sales were 34.6% of net sales for 2013, compared to 36.9% for 2012, all on a year-to-date basis.
Domestic sales on a year-to-date basis in '13 were $324.3 million compared to $309.4 million in 2012. That's a $14.9 million increase or 5% increase.
Domestic sales are 65.4% of 2013 total sales year-to-date, compared to 63.1% of total sales in 2012 year-to-date. Parts sales year-to-date are $130.8 million compared to $132.9 million in 2012.
That's about 2% decrease or $2.1 million. Parts sales were 26.4% of total sales for 2013 year-to-date compared to 27.1% of total sales year-to-date 2012.
Gross profit for the quarter was $55.4 million in '13, compared to $53.1 million for the second quarter of 2012. That's a $2.3 million increase or a 4% increase in gross profit dollars for the quarter.
The gross profit percentage was flat at 22.3%, about Q2 of '13 and '12. One major impact that we had during the quarter was a negative impact from the absorption variance of about $7 million, and that occurred primarily in the Asphalt Group and in the Aggregate and Mining Group.
On a year-to-date basis, gross profit was $114 million compared to $111.7 million for the year-to-date 2012. That's a 2% increase or about $2.3 million.
Gross profit percentage as a percentage of sales on a year-to-date basis is 23% compared to 22.8% on a year-to-date basis in 2012. SGA&E for the quarter is $37.8 million or 15.2% of sales compared to $38.5 million or 16.1% of sales for the second quarter of 2012, decrease of about $700,000 in dollar terms and a decrease of about 90 basis points as a percentage of sales.
The big decrease that we had there is primarily in the Research and Development expenses. For the year, SGA&E was $78.2 million or 15.8% of sales compared to $78.6 million or 16% of sales or $400,000 decrease.
Again, the big decrease there on a year-to-date basis, contributing there was Research and Development expenses. Income from operations increased to $17.6 million in the second quarter of '13 from $14.6 million in the second quarter of '12.
That's a $3 million increase or a 20% increase. On a year-to-date basis, income from operations is at $35.8 million compared to $33.1 million for the year-to-date 2012.
It's a $2.7 million increase or 8%. Sales and income by segment are attached to your press release for your reference.
Coming down the tax rate, the effective tax rate on continuing operations for the quarter is 36.6% compared to 36.9%, so only down slightly on continuing ops for the quarter. For the year, it was 33.1% compared to 37.3% for the year-to-date period in 2012.
And if you recall that, that's primarily driven by the Research and Development tax credit, which was not in effect in 2012, but was passed in the first quarter of 2013. So we're getting that credit this year in our provision that we didn't have it in there last year.
Net income from continuing operations $11.1 million for the quarter compared to $9.5 million for the second quarter of '12. That's a 17% increase.
Earnings per share for the quarter related to continuing operations is $0.48, compared to $0.41 per share in the second quarter of '12. That's a 17% increase.
And the year-to-date net income from continuing operations is $24.3 million compared to $21.5 million for the year-to-date period in 2012, $2.7 million increase or 13%. Diluted EPS for the year is $1.05 compared to diluted EPS for the 2012 period at $0.93.
That's a 13% increase. And on the bottom line, net income attributable to controlling interest is $11.1 million in the current quarter compared to the second quarter of 2012 at $10.4 million.
That's a 7% increase. And earnings per share related to those numbers is $0.48 for the second quarter of '13 compared to $0.45 for the second quarter of '12, a 7% increase.
In the year-to-date basis, net income attributable to controlling interest is $24.3 million in 2013 compared to $22.6 million in 2012, a $1.7 million increase or 7%. And the diluted EPS related to those earnings is $1.05 on a year-to-date basis in the current year, compared to $0.98 on a year-to-date basis in 2012 for a 7% increase.
Our backlog -- recall that we did sell American Augers in the fourth quarter of 2012 and therefore, we have adjusted the backlog in the prior year for the discontinued operations. So our backlog at June 30 of 2013 is $240.6 million compared to $254.8 million at the same date in the prior year.
That's a decrease of $14.2 million or 6% decrease. International backlog at June 30 '13 was $100.3 million, compared to $107.7 million at June 30 of '12.
That's a $7.4 million decrease or 7% decrease. Domestic backlog this year at June 30 was $140.3 million compared to $147.1 million at June 30 of '12, $6.8 million decrease or 5% decrease.
Again backlog by segment is in your press release. Balance sheet continues to be very strong.
Our receivables are at $102.8 million at June 30 of '13, compared to $120 million at June 30 of '12. That's a $17.2 million decrease.
However, $5.8 million of the decrease was due to American Augers at June 30. And so, the true decrease if you were to take American Augers out the prior year's balance sheet, would be $11.4 million.
The days outstanding are down from 42.5 days outstanding at June 30 of '12, down to 37.3 days outstanding at June 30 of '13. Our inventories at $318.7 million this year at June 30, compared to $322.1 million for a $3.4 million decrease, however we're moving American Augers again from the prior year number we gave you -- a, increase of $27.8 million year-over-year.
Inventory is at 2.3 turns this year compared to 2.5 turns in the prior year. We have nothing owed on our $100 million credit facility.
We have $41.2 million in cash and cash equivalents. You'll notice that we do now have on the balance sheet in the press release an investments line item, that number has become material that we're disclosing that separately on the balance sheet.
We did invest approximately $15 million of cash into some investments to get some yield on that, but you may wonder where some of the cash went. Well, it's in that line item.
Also in the second quarter, we did pay our $0.10 per share quarterly dividend. That was about $2,285,000 paid out during the quarter on that dividend.
Letters of credit are sitting at about $10.6 million. Our borrowing availability is at $89.4 million.
Second quarter 2013 capital expenditures are at $5.8 million and on a year-to-date basis, we're at $15.2 million. We are projecting about $43.6 million of capital expenditures for the year.
Depreciation is at $5.2 million for the quarter and $10.4 million on a year-to-date basis. We have budgeted about $22 million for the 2013 calendar year.
That concludes my remarks on the financial details. I'll turn it back over to Steve.
Stephen C. Anderson
Thank you, David. Don is going to provide some comments regarding our operations for the second quarter and he'll also offer some thoughts forward.
Don?
James Don Brock
During the quarter we continue to see flat revenues, as David said, was at slight 4% increase. Our earnings from continuing operations were up 17% and our earnings EPS was up 17%.
The strong dollar has negatively affected our international sales. We've experienced this year probably the wettest weather on record in the Eastern part of the country and especially in the Southeast.
Here in Tennessee, we're 47 inches about a week ago and that's 17 inches above normal. This has delayed shipments of equipment and especially delayed our customers starting their work.
Our earnings, although better in the second quarter, were negatively affected by higher health care cost, higher taxes from our Canadian subsidiary and from the GEFCO acquisition. We see our customers remaining very cautious due to the uncertainty coming out of Washington.
We find the market to be very competitive. Many customers on equipment are going from rent to rent instead of rent-to-own, and are demanding us to rent more equipment than we've seen in the past.
However, with all of these negatives, we see residential and commercial work of our customers improving slightly. Each person that I talked to, or each customer says after a long pause, it's slightly better than it was last year.
Not great, but it is improving. We have begun to ship our first large pellet plant after delay of approximately 6 weeks due to the rain.
Our prospects are very good for this product and the market seems to be growing. We are in the process of merging Astec Underground into GEFCO and creating an energy group, eliminating the Underground group as we sold off all of the equipment related to that, that we manufactured.
Looking forward to the third quarter, we see the third quarter to be slightly weaker than the second quarter, but much stronger than third quarter last year. We believe sales of our new products and models will backfill to shortfall of our conventional products and will give us -- should give us flat revenues even though the margins of these new products have not reached their desired peak that we hope to achieve.
Our backlog is essentially flat from last year. We continue as we go forward, to work on margin improvement that struggle with underabsorption due to the lack of volume in most of our plants.
Our parts business continues to grow. We see people replacing parts instead of replacing equipment.
As David said, our balance sheet remains strong and we continue to pursue acquisitions. We find them to be very competitive at this time.
We continue to prepare for [indiscernible] of myself and Norm Smith at year end. Ben Brock and Rick Doris are in the process of picking their replacements at Astec and Heatec.
They are participating in our quarterly reviews and traveling to each subsidiary. We are pleased with the progress and look forward to the continuing growth of our company under this new leadership.
With that I'll be glad to answer any questions being also on the call to answer any questions.
Operator
[Operator Instructions] Our first question is coming from the line of John Kasprzak with BB&T Capital Markets.
John F. Kasprzak - BB&T Capital Markets, Research Division
I wanted to ask you about the third quarter. I think I heard you say that revenues will be about flat, but -- and earnings will be less than Q2, but well above Q3 last year.
On flat revenues, we're obviously thinking we're going to get a margin rebound in Q3 versus Q3 last year?
James Don Brock
Jack, our biggest problem is underabsorption in the plants. We just don't have -- we've got, as you can see our inventory has build up.
We hope to probably reduce that a little bit during the third quarter. So the actual build schedule in the third quarter is probably going to be less, and it's not going to be indicative of the revenues.
We have a lot of equipment delayed due to weather -- so we'll be shipping it during the third quarter, but we won't be building as much as we built in the second quarter.
John F. Kasprzak - BB&T Capital Markets, Research Division
Okay. The tax rates bounced around a little bit, and I was wondering if David have a view on where it will be for the full year?
David C. Silvious
Yes, I think it will moderate back to our historical rate, 35.5%, 36% on a year-to-date basis.
John F. Kasprzak - BB&T Capital Markets, Research Division
Okay. And I was going to ask you about the Underground gross margin, but now you're merging it -- you say you're merging with GEFCO and creating an energy group, will that start as far as reporting like that in Q3?
James Don Brock
Year end, first quarter of next year, Jack. The margin should be fairly good in that group.
We're building larger pieces of equipment. We're out of the smallest line, building pump trailers.
We have 2 large, very large orders. One for $15 million and one for $8 million for vertical drilling rigs.
We're pretty optimistic, I guess maybe a little more optimistic than backlog indicates, but our guys up there seem to think that the drill rigs, pump trailers, the auxillary equipment that goes with them is going to be a great product line and we seem to be on the leading edge in some of the things we're doing there.
John F. Kasprzak - BB&T Capital Markets, Research Division
Okay. And for the full year, maybe -- the press release mentioned maybe we get a little pickup in Q4 as the weather is cleared and projects get going, but that's only 1 quarter out of the whole year, sales are about flat.
I mean, this year is shaping up to be about flat year up slightly for revenue. Is that probably a reasonable assumption?
James Don Brock
Yes, I think that's right, Jack. The customers seem to have good backlogs, but a lot of it is just due to weather delays.
I think they will be a little more optimistic. My discussion with most of them is a lot of them have losses last year and they're not -- probably not going to have losses this year, but they may not make much money, but they have delayed some purchases and I guess logically it tells me that they may buy a little more in the fourth quarter and in the first quarter of next year than they've been doing in the past.
It's still, it's up a little bit but not up much.
Operator
Our next question is coming from the line Rich Wesolowski of Sidoti & Company.
Richard Wesolowski - Sidoti & Company, LLC
If I recall in the Asphalt Group, you had raised product prices around year end and last call I think belayed very little inflation the purchase components. And I'm wondering if there's anything, aside from volume, that weighed on the group's June quarter margin?
David C. Silvious
Ben, I want to add to that?
Benjamin G. Brock
Well, I would say that on the sales that we've taken in the second quarter that we've given a little bit of that price increase back, we had a couple of, well, one very large order that went into this next quarter and the Q3, but the order has really kind of slowed down for us during Q2. So our hours worked -- unabsorption was up in the quarter.
Richard Wesolowski - Sidoti & Company, LLC
Okay. Is 100 basis points of company-wide gross margin expansion for 2013 still within reach or is volume included in that number?
James Don Brock
I would say that our gross margin is going to be about where it is right now -- it didn't look like -- we really saw a falloff in May and June and July, just saying slowdown and the underabsorption is what's really hurting us, Rich.
Richard Wesolowski - Sidoti & Company, LLC
Right. You mentioned the 6 week delay because of the weather with regard to the pellet shipment.
Are you still expecting to reach the performance target in 2013 or is that now moved to perhaps the March quarter?
James Don Brock
We are planning on it. I guess it's going to be close.
Benjamin G. Brock
Yes. What I would to add to that is his rain comment is really tough in South Georgia.
It's a flat piece of land and I mean, we're virtually going to be delivering Astec concrete to securing and so it will really be, I hate to say, weather-dependent, we're going to do everything we can to be able to count that in Q4.
Richard Wesolowski - Sidoti & Company, LLC
Did the customer add on to the original planned order that you're now shipping?
Benjamin G. Brock
Not yet. They're waiting on a sustainability legislation in the U.K.
I was at the conference last 1.5 week ago there was a lot of talk about that and the general feeling is that, that will get done before the end of September that's talking with utilities, representatives and pellet suppliers that are working on the contracts. Their contract is essentially done that would add the 2 lines to the current one-line plant, and once they get that supply contract signed, so they need the additional pellets for the next 2 lines.
That would be what releases us on the next 2. So we've been told by the customer to expect that by the end of September now.
Operator
Our next question is coming from the line of Mig Dobre with Robert W. Baird.
Brian D. Brophy - Robert W. Baird & Co. Incorporated, Research Division
This is Brian Brophy, in for Mig. Can you discuss what is giving you confidence that we'll see a pickup in demand in the fourth quarter as you mentioned in the release?
James Don Brock
Brian, I guess the thing -- when customers have a decent year, they will turn lucid capital expenditures and I guess I'm just going by gut feeling and talking to different ones, if they make money this year they'll probably spent a little. Their equipment is getting old and I guess that's what I'm counting on as much as anything.
They have been delayed. They got a slow start due to the weather, but it's dried out now and there are a lot of people working, and there's pockets of prosperity and different -- one of our major customers in Georgia has got so much work than he has ever had.
He's a major contractor there. Virginia has got a great program.
They did away with the gas tax and put the sales tax on it, which raised a bunch more money, but the public didn't realize he has done it. So that's got a good program in Virginia.
A number of states are looking at going to sales tax versus gas tax like Virginia, they're watching what happened there. But due to the backup in the work and the amount of work that they're doing, I guess I'm saying they're going to finish the year stronger and probably have a better attitude, which will help their buying.
Brian D. Brophy - Robert W. Baird & Co. Incorporated, Research Division
Got it. And then can you provide us some additional color on your comments for customers seeing a slight pick up in residential and commercial work?
Are we beginning to see some expansion in housing starts in your neighborhood as opposed to housing starts in existing lots?
James Don Brock
To answer question, yes, from what I'm seeing is the housing starts obviously are up. They're kind of flat in the last month or so, but the size of the houses are smaller.
They're not building as many big houses. But they are sucking up the subdivisions that were built before, and the commercial work has picked up.
It's picked up from a very low level. But any of that work is a better margin generally than the state work.
So the state work or federal work is kind of flat and what was not there is at least there on the commercial and residential. I'm on the Board of a [indiscernible] covering company and they're up like 25%.
And so the Homebuilding is certainly helping.
Brian D. Brophy - Robert W. Baird & Co. Incorporated, Research Division
Got you. And then can you give us an update regarding the timing and the amount of revenue recognition for the first 2 Asphalt plants for the Army?
Benjamin G. Brock
We're anticipating recognizing that in the third quarter. The testing I think I referenced this on the last call, this has not gone as quickly as we want it to go, but we're told that it will be finished this month and they're here.
So we think that'll happen. So we do anticipate the first 2 plants being recognized this quarter.
Brian D. Brophy - Robert W. Baird & Co. Incorporated, Research Division
Ben, can you remind us what's in backlog, what the total opportunity is and what the risks for those orders is given sequestration?
Benjamin G. Brock
Yes, we have 5 orders after these 2 that are in hand. There were -- originally, they told us there would be 8.
They say #8 is maybe a plant, maybe not, but we do have 5, but they won't release us to build the next 5 until the testing is complete on these 2, and there's a review that has to take place on that from Aberdeen. It should take anywhere from 30 to 90 days.
We've been told probably in 30-day range. We would love to be released on those 5 right now, because that would help us on underabsorption, but we're waiting on the Army right now.
We're pushing them, but the Army is tough to push. It is 5 and those are firm but we just don't have the release to build them.
Operator
The next question is coming from the line of Todd Vencil with Sterne Agee.
L. Todd Vencil - Sterne Agee & Leach Inc., Research Division
Thinking about this weather impact a little bit and where it's going. I mean, do you have a number in your mind for how much revenue you got sort of delayed on year end by the weather?
James Don Brock
My guess would be $15 million to $20 million. If you take the pellet plant, we would start shipping it earlier, but it wouldn't have been a complete shipment, but I would say $15 million to $20 million in that range.
L. Todd Vencil - Sterne Agee & Leach Inc., Research Division
Got it. And if you talk to your customers you mentioned Dr.
Brock that things are starting to dry out. Are you hearing better color from them on the fact that they've been able to get up and going now?
James Don Brock
Yes. I mean most of them.
I think July has been reasonably dry. Still a lot of rain, but they were able to work and most of them that I've talked to had pretty good late June and early July they've good weather here in the last 6 weeks.
L. Todd Vencil - Sterne Agee & Leach Inc., Research Division
Got it, and are those customers feeling like they're going to be able to make up this year what they had delayed in 2Q or some of that going to get pushed in next year?
James Don Brock
I think most of it will be made up. I mean, the comments they made to me is they better get going or they won't make it up.
But I think they have gotten -- got going. I talked to 1 yesterday and had fantastic month in June.
It's the first time he had made profit in 15 months. So he was pretty excited and they have done a huge amount of work.
A lot of them are actually running 2 shifts around at night as well as the daytime so they can catch up. There's a lot of capacity out there.
L. Todd Vencil - Sterne Agee & Leach Inc., Research Division
Got it. Thinking about -- I guess this is for David.
Thinking about that $7 million absorption variance, was this overall? I think across all the segments, but mostly Asphalt and Aggregate mining, I mean if you guys -- if you haven't had the weather delays, would there have been a negative variance there or would it have been de minimis?
David C. Silvious
I think it would have been less, but I don't think it would have gone away because there are, there's -- even without the rain delays, there's still a little bit of lack of hours that we're seeing.
L. Todd Vencil - Sterne Agee & Leach Inc., Research Division
Got it. What does that absorption variance look like in the second quarter last year?
David C. Silvious
Second quarter of last year was very small actually. It was actually close to break-even.
L. Todd Vencil - Sterne Agee & Leach Inc., Research Division
So gross margin was flat year-over-year even though, you had a $7 million -- basically $7 million negative swing in the absorption variance?
James Don Brock
Right. We've made some improvements except for the underabsorption, and the problem we have too is we've got a couple of companies that are over absorbed that are doing quite well in the Aggregate side.
But in general, Asphalt has been real slow and the aggregate companies that depend on international have been slow.
Benjamin G. Brock
This is Ben. I would add to that, that we have adjusted our hours in the Asphalt Group, but it can change fairly quickly as orders come in that are time-dependent because jobs come up with the rain.
So it also even in international where jobs get released and they wait to buy the plant to the last second, so we picked up in order Friday night in Mexico that's a quick delivery, so all of a sudden we're going to adjust our hours again. So it can turn fairly quick depending on how those jobs get released.
L. Todd Vencil - Sterne Agee & Leach Inc., Research Division
Speaking with that in a minute, you mentioned product mix issue that contributed to the Asphalt -- margin coming in below where you thought it was going to be. What was that exactly?
James Don Brock
Yes, generally going to the Tier 4 on the papers and some of the new lines that we've got we still haven't recovered our margins to the point that we would like to have. A numbers of the new products we haven't reached our margin level that we historically -- and we will get to than we historically have, we just have not got their number on the new products.
L. Todd Vencil - Sterne Agee & Leach Inc., Research Division
Got it. So as we think about the 2 big things you mentioned there in Asphalt, I mean, the product mix, I appreciate that color and then the overhead absorption I mean, how are you thinking about margins sort of coming out of this little bit of a swag there in the quarter.
How should we think about that the next couple of quarters?
James Don Brock
We see margins continue to struggle. I mean, due to the underabsorption and due to the new products.
The new products are in a more in the Mobile Group and some in the Aggregate Group where we've got the lowest margins that we've got to recover from, and the Asphalt, it's strictly volume.
Operator
our next question is coming from the line of Jason Ursaner with CJS Securities.
Jason Ursaner - CJS Securities, Inc.
Just a quick follow-up on the last question, I missed part of the beginning of the call. I apologize.
Just looking at the Asphalt segment, revenue was down a little over $8 million sequentially and it was -- gross margin was also down a little over $8 million sequentially, so basically 100% flow through. That was all volume, there's no -- I know last call you talked about legacy products, mix factor in Asphalt.
I'm just trying to figure out how much specifically of that is absorption versus potential mix in Asphalt?
Benjamin G. Brock
This is Ben, Jason. I would say, yes, mostly it is the volume we have a couple of new products 1 in particular how we recycled Asphalt plants where typically our plants would run -- the double barrel would be 50% wrap plant.
We're having new design where we can go up to 70% or 75% and we have had some cost associated with that.
Jason Ursaner - CJS Securities, Inc.
Okay. And In the Underground segment you guys had talked about a sizable project in Kazakhstan, just any update on that on the delivery schedule and how revenue recognition and margin might work that for project?
James Don Brock
It's probably going to ship in September. There is about half of that, that is basically purchased items that will not be typical margins and a about -- building on that package.
The one for Argentina, we'll be building more of the total package. But the Kazakhstan will be going out in September.
Jason Ursaner - CJS Securities, Inc.
And that wouldn't be when you recognize it also?
James Don Brock
Yes.
Jason Ursaner - CJS Securities, Inc.
Okay. And then also an underground, just an update on the GEFCO business.
It still appears to be underperforming from a demand perspective relative to where it had been at peak times just maybe what the strategy is to grow the business?
James Don Brock
We kind of screwed it up, to be truthful. They were outsourcing a huge amount of their work, the machining, the machine tools when we bought that plant were 1960s vintage.
They were outsourcing all of the material prep and we brought in all of that work and we bought new machine tools and probably we did it too quick. We're having to train people.
They are getting up to speed and the material prep seems to be working good. The programming of the new machine tools are still a work in process.
And as a result of bringing this sub work in quicker than we should have, we kind of screwed up their flow, to be truthful and we are working our way out of that and should reduce our cost substantially when we get everything up and running, but it is not -- at the end of the third quarter should be better and the fourth quarter should be better. We've got good backlogs there and we've got good prospects there.
But we rearranged the plant. It's a modern plant now, but we're just getting up to speed.
Operator
The next question is coming from the line of Ted Grace with Susquehanna Financial Group.
Ted Grace - Susquehanna Financial Group, LLLP, Research Division
Don, could you speak to the Highway Bill, we're about 14 months out from the expiration, call it 2.5-year mini Bill, just curious for what kind of insights you can share that are either, that you're picking up from the subcommittee level or the actual committee levels on both the house and the Senate side and kind of what your outlook is or expectations at this point?
James Don Brock
All of the politicians and our people talk to and I talk to recognize the need for highway spending -- not for highway spending, they all sit there and agree with you, but when you get to how you're going to pay for it, they just shut up and it's really frustrating. So we really just don't know.
I guess, Ben, you want to make any comments, but I guess we're getting to the point that the contractors are beginning to get nervous about it. There'll be something, but God only knows what it'll be.
The problem with the present administration when they talk infrastructure, you better try to figure out what part of the infrastructure they're talking about too. I mean, it's not necessarily roads and bridges.
And so I'm not giving you a very good answer, but we really, of all the times I've seen, we don't see a lot of momentum on it.
Benjamin G. Brock
This is Ben. I would agree with what he said.
I mean, I had breakfast with customers this morning that are in town. Their status have been a lot of work, kind of like what you've mentioned with Virginia earlier or what you've heard about Virginia earlier, that it may be that the states end up long-term taking this over.
But you don't have a lot of momentum for a Highway Bill. I know that the Asphalt Association out there had their mid-year meeting in Boston last week and I was up there at one of their legislative sessions and they're definitely focused in and starting to fly in.
So -- they seem to be focused earlier, but I agree with Dr. Brock in that, there's not how do you pay for an answer yet.
Ted Grace - Susquehanna Financial Group, LLLP, Research Division
Okay. So fair to interpret that as very much remains to be seen, but it sounds like certainly from your tone, you're not too optimistic that we'll get anything that's certainly bigger and risk maybe skewed to the down side, would that be a fair interpretation?
James Don Brock
I'd be surprised if it's any bigger because we don't have the funding where it is right now, as you know, raises about $35 billion, and we're at $40 billion.
Ted Grace - Susquehanna Financial Group, LLLP, Research Division
Okay. Secondly I was hoping to dig into is, could you just update us on kind of how the mining industry going within AMG, obviously the money markets are tough, cyclically speaking.
You guys have kind of different strategy and some update there would be helpful just to understand how that business is tracking versus expectations and what your thoughts are looking out for the next couple of years?
James Don Brock
I didn't get the question.
Benjamin G. Brock
Just update on mining activity -- we're doing on the mining sector.
James Don Brock
Yes. Obviously with commodity prices going down, it slowed down the mining.
We just completed our round of quarterly reviews and talking to our South African operation, gold and platinum, and a lot of those are down. Coal is up in South Africa.
As we cut down on the coal in America these other countries are picking it up. But in general most of the mining projects have slowed down.
We have a pretty good size order from Australia for a mining project and I guess what we see is we're in more the processing side of it and there is a lot of replacement equipment. There is also a pretty good cattery of equipment that gets sold just to keep the leases and where have been such a small player in the mining side of it.
We see a slight growth that for us at least and in that even in a down market. But overall, I'm saying mining is going to be down the next couple of years.
Ted Grace - Susquehanna Financial Group, LLLP, Research Division
And would that be correctly calibrated to think that, that's kind of a 20% to 30% of revenue at AMG?
Benjamin G. Brock
The mining.
James Don Brock
Yes, that's about right.
Operator
Our next question is coming from the line of Morris Ajzenman with Griffin Securities.
Morris Ajzenman - Griffin Securities, Inc., Research Division
Just a follow-up back on the Asphalt Group, I was hoping on the margins. We know that the Asphalt plants were kind of aged and you've talked about in the past weeks start to see a pickup of orders and you touched on it sort of fourth quarter.
I'm not sure what your previous answer, this was in reference to that, but gross margins in this quarter 18.8%. If you do get a pickup in the order rate for Asphalt plants, I thought you had said that gross margins might be up some, I'm not really referring to Asphalt specifically, but my presumption would be if you had a pickup in orders in Asphalt plants, why wouldn't you see a big step up in Asphalt gross margins?
James Don Brock
I guess it's product mix. We expect to get the other 2 lines of the pellet plant down in Georgia to build in the fourth quarter.
We kind of expect the Army to release those 5 other plants. So we think we're going to build the plant back up.
That's the biggest thing. And then we have a number of customers, potential orders for larger stationary plants that they're replacing over plants that they have told us they're going to do in the fourth quarter.
They don't want to shut down during the middle of the year. So we see prospects there that we feel fairly confident about getting so I guess the 3 of those items, the pellet plant, the Army plants, Army is not a great margin, but it puts on absorption, it helps our absorption in the plant, and then we've got a number of prospects that are talking about fourth quarter orders, either fourth quarter or first quarter deliveries that we're going to be running next year.
Eric Glover - Canaccord Genuity, Research Division
Alright, so and then as a follow-up again, the Asphalt group you target is a 25% gross margin for your divisions, Asphalt Group, is that realistic then to see over the next 4 quarters at some point in time or will it take a lot longer than that to get to 25%?
James Don Brock
When you consider 25% of their business is parts. It helps to offset lower margins in the equipment and 25% maybe a little rich, but 23% to 24% is probably reasonable.
Morris Ajzenman - Griffin Securities, Inc., Research Division
And one last question. Beyond the 2 lines for pellet plants, are you in discussion with other end market utilities in Europe that would have an interest in ordering these plants, anything in the discussion phase?
Benjamin G. Brock
Morris, this is Ben. We are talking to a handful of customers.
We're not talking direct to any utilities. Frankly, until the sustainability gets passed, everybody is -- they're getting quotes, but not absolutely serious until that point.
I think the financing has held up by that too. But we are talking to a handful of other customers.
Operator
Our next question is coming from the line of Brian Rafn with Morgan Dempsey.
Brian Gary Rafn - Morgan Dempsey Capital Management, LLC
Don, you spoke about the -- some original strengths, some pockets of prosperity, you mentioned Georgia and Virginia. Are you seeing that pockets of prosperity expanding geographically or is that kind of static from your estimate?
James Don Brock
I think it's expanding. Some states like Iowa are doing better.
I could feel through -- I don't know that I can through all 50 of them, but I would say that there's probably 20% better than it was a year ago. Even California is a little better.
Particularly more in Southern California than Northern. It seems to be doing better in the West than it is.
There's usually a wave that comes from the West to the East as things pick up and looking at where we're selling crushing equipment. Typically crushing equipment is a year ahead of Asphalt equipment and most of the customers that I talked to and the question say is up -- I think statistics show it's only up about 4%, but I get the feeling that when the weather clears, it's probably going to be that the aggregate side of the business is going to be, I'm talking about our customer now, probably more like 15% or 20% year-over-year.
Brian Gary Rafn - Morgan Dempsey Capital Management, LLC
Okay, give me a sense, with the underabsorption issues and that, how does that and some sluggishness, you talked about confidence, how does that translate for you guys in developing and innovating new products? Does it force you to create more new product from the standpoint of differentiating or do you kind of drawback a little because there just isn't that end market demand?
James Don Brock
We're taking a more aggressive approach to try to develop new products. If I look at the last 10 years, if we hadn't developed new products, we'd probably be doing half the volume we're doing today.
And most of the companies, what we're building today, we didn't build 10 years ago and it's a matter of survival is what it amounts to, if you don't continue to innovate, you're going to get left behind. And I look at it more for survival right now.
We did it for growth, but it's ended up being for the survival of the company. You've got to continue to build new products.
Brian Gary Rafn - Morgan Dempsey Capital Management, LLC
Yes, okay, okay. What you guys kind of give ballpark on capacity utilization, you've talked about underabsorption on the Asphalt side, what might be running on a capacity utilization across your different groups?
James Don Brock
I would say it's probably less than 70% right now.
Brian Gary Rafn - Morgan Dempsey Capital Management, LLC
Okay, and how does that translate for you guys. There seems to be manufacturing side a lot of our shortage of engineers and that, how do you guys look, kind of based on your comments with innovating for survival, how do you look at headcount and hiring and staffing?
Is that kind of flat for you guys or are you kind of episodically hiring or you're looking at headcount's point?
James Don Brock
We're basically hiring to replace retirees and we're not really at this point trying to hire to grow because we're just haven't been able to get the revenues. The growth in the last 5 years of our international certainly helped us in this downturn.
The new products helped us in the downturn. But with the international backing off and with the visibility not being too great, we're trying to remain cautious.
Brian Gary Rafn - Morgan Dempsey Capital Management, LLC
Yes, okay, you talked a little bit Don about guys maybe the Asphalt side with obsolete equipment, aged equipment. At what point is there the ability to constantly just rent, rent ongoing or at some point is there are pent up demand to replace some of that in-field obsoletes?
James Don Brock
It varies with the product. On an Asphalt plant, we certainly don't rent those, but crushing equipment, particularly track mounted equipment, they are more prone to rent to rent.
We're staying a lot of that milling machines, mobile equipment. They like to do more rent to rent or at least rent to own.
A lot of the larger customers are limited. They're people on CapEx, but they're getting the work and so they have no choice, but to rent to do the work.
It comes about from that. On the Asphalt plant side of it, the need to change depends on the need to run higher recycle to be able to be competitive.
The older plants you see I would say in a lot of areas of the country 30% or more of the plants are shutdown, but they're old or obsolete plants that may never be cranked back up, because it wouldn't be very competitive because they can't run the higher recycle.
Brian Gary Rafn - Morgan Dempsey Capital Management, LLC
Okay, and what -- relative to the Army contract, are there any other demand for Asphalt across the other branches, Marines or Airforce?
James Don Brock
No, not a lot.
Brian Gary Rafn - Morgan Dempsey Capital Management, LLC
Okay, and then you guys talked about tax rates. You got a CapEx budget for this year 2013?
James Don Brock
Yes. Yes, we do.
We mentioned that the CapEx budget for 2013 was at $43.6 million.
James Don Brock
A major part of that is building a plant in Brazil, and that's kind of a one-time item that's probably in the $20 million to $25 million range.
Operator
Our next question is coming from the line of Rich Wesolowski of Sidoti & Company.
Richard Wesolowski - Sidoti & Company, LLC
With regard to the European incentive for biomass, I was under the impression that the utilities had already secured subsidies for burning wood and Ben had mentioned they're now waiting on something else some other piece of legislation?
Benjamin G. Brock
Yes, Rich, this is Ben. They do you have the floor price that they do you have.
The sustainability part is the environmental side of it, they want to make sure that all of the I's and T's or everything is taken care of as far as where is the biomass or where is the wood coming from and are you replanting trees behind it. They have to have all of that legislation in place.
That's part of the deal and they want to make sure that that's reasonable utilities and the suppliers of the pellets before they go ahead. You're right, the floor price is there.
The utilities are happy with that. That sustainability piece has to be finished before they all walk in.
James Don Brock
I think Rich, the environmental group start pushing back on it and the Parliament over there is trying to satisfy them, but they want you to be able to have a paper trail that shows that as you cut the wood, you're going to replant the wood. So that you got that 0 carbon footprint.
Richard Wesolowski - Sidoti & Company, LLC
Right. Well from what I gather either way, they can't even sniff their larger renewables goals without the biomass, so it seems like a matter of time, but you spent a lot of time talking about the market potential for the pellet plants, would you mind reminding us lastly the ways in which Astec plants specifically stand out from the competitors' versions?
James Don Brock
I think we've got a very unique plant that we have a patents pending on and that we do indirect drying with the tube type dryer, rotary tube type dryer. As you dry particularly certain times or even hard wood, generates a lot more VOCs.
On a typical plant you have to put a, what they call an RTO where it's an active burner that would burn those VOCs up in order to incinerate them, you got to heat it to about 1,400 to 1,600 degrees Fahrenheit. We are taken the VOCs off the rotary tube dryer and pulling them back through our thermal oil heater where we are heating the oil.
So we're basically using the energy out of the VOCs to help feed the heat transfer that's in the tube dryer. So our efficiency will be about 10% better from a drying cost and it basically is a safer type of operation and the biggest hot button I guess we have that the customers like, it is a modular plant.
It's somewhat skid-mounted plant that if they run out of fiber at their, what they call the wood basket, they can pick it up and move it and not lose so much, they'll lose a concrete in the ground, but that's about it. The third thing is 1 substantial company offering a package.
Right now, they're being put together by engineering procurement groups that buy a piece here, and buy a piece there, where we furnish the entire plant.
Operator
Our final question of the day is a follow-up question coming from the line of Todd Vencil with Sterne Agee.
L. Todd Vencil - Sterne Agee & Leach Inc., Research Division
Real quick, SG&A was better we thought in the quarter and you mentioned that R&D was down again. What's the outlook for that and what kind of run rate should we be thinking about on SG&A?
David C. Silvious
We will what you got right now. We were once back on quarter one.
Benjamin G. Brock
That's right, Don. In the past, we have spent upwards of $8 million or $9 million the past couple of years in R&D.
Our run rate over the past 10 years or so was in the $4.5 million to $5 million. We're probably getting back toward that run rate, but we're still, right now, we're in the $7 million, $7.5 million range.
Operator
We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Mr.
Anderson for any concluding remarks.
Stephen C. Anderson
Thank you, Jesse. We appreciate everyone's participation on this Second 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 August 6, 2013 and archived webcast will be available for 90 days.
The transcript will be available in the Investor Relations section of the Astec Industries website for the next 7 days. All that information is contained in the news release that was sent out earlier today.
This will conclude our call. Thank you, and have a good week.
Operator
Thank you, ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time.
Thank you for your participation.