AZZ Inc (AZZ) 2003 Q4 法說會逐字稿

Please stand by. Good day everyone and welcome to the AZZ, Incorporated fourth quarter conference call. As a reminder, today's conference is being recorded. Now for opening remarks and introductions I would like to turn the conference over to Mr. Joe Dormay with RGC Capital Markets Group. Please go ahead.

Thank you. We would like to thank everyone for taking time out of your busy schedules to join us today to review AZZ Incorporated's financial results for the fourth quarter and fiscal 2003. With us today representing the company are Mr. David Dingus, president and chief executive officer and Mr. Dana Perry, chief financial officer. Before we begin, we submit for the record the following disclaimer. This conference call has been made available by the way of web cast technology on the Internet and direct dial via aconference call service to all interested parties. Except for the statements of historical fact, this conference call may contain forward-looking statements that involve risks and uncertainties, some of which are detailed from time to time in documents filed by the company with the SEC. Such statements are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Those risks and uncertainties include, but are not limited to, changes in customer demands and response to products and services offered by the company, including demand by the electrical power generation markets, electrical transmission and distribution markets, the industrial markets and the hot dip galvanizing markets. Prices and raw materials costs including zinc and natural gas which are used in the hot dip galvanizing process, changes in the economic conditions of the various markets the company serves, foreign and domestic, customer requested delays of shipment, acquisition opportunities, adequate financing and availability of experienced management employees to implement the company's growth strategy. The company can give no assurance that such forward-looking statements will prove to be correct. With that having been said I'd like to turn the call over to Mr. David Dingus, president and chief executive officer of AZZ. David?

Thank you, Joe and thanks to each of you for taking the time to join us for the quarterly conference call. For the fourth quarter of our fiscal year 2003. Fourth quarter was completed on February 28th, 2003, our fiscal year year-end. The operating results for the quarter and year were consistent with our internal targets. Our fourth quarter was a continuation of our difficult marketing conditions. Concentration on operating efficiency improvements, cost reductions, liquidity and aggressive pursuit of all domestic and international marketing opportunities has been and will continue to be our focus. We had hoped by now that we would have seen a consistent and predictable improvement in the industrial markets we serve, thus enhancing our ability to improve our book to ship ratio and operating results. The lack of growth in the industrial manufacturing sector of the economy has inhibited our ability to find significant offsets to the downturn in the power generation markets. Our quarterly book to ship ratio was 73 percent, with incoming orders of 29 million and shipments of 39.8 million. Now for the fiscal year our incoming orders totaled 147.1 million, giving us a yearly book to ship ratio of 80.2 percent. Now, in the fourth quarter we normally see some seasonal negative impact on incoming orders from investor owned utilities as are they are awaiting approval of their budgets. The fourth quarter and fiscal year were favorably impacted by the strong operating performance of our galvanizing services segment. The favorable zinc cost, lower natural gas cost and positive results from our cost containment efforts led to this improvement. Now for the fiscal year, revenues increased 20 percent, to 183.4 million, and net income increased 10 percent, to 8.6 million. Our focus as a company continues to be adjusting to the current difficult marketing conditions, by concentrating on our cost structure and operating efficiencies. An industrial recovery, not only benefits our electrical and lighting products, but also our galvanizing services segment. In fiscal year 2003, revenues generated by the industrial sector was 45 percent of our total revenues. That will increase to 54 percent in the projected revenues of fiscal 2004. Backlog at the end of the year was 49.1 million. That compares to 59.9 at the end of the third quarter, and 85.3 at the end of the prior fiscal year. Now, we are replacing longer lead time work with shorter order to ship cycle business, which does account for some of the deterioration in our backlog. Now while book to ship ratio is below our expectations we'll continue to monitor and report these results on a quarterly basis. Now, the strong cash flow performance of fiscal 2003 provided the funds to retire 30 percent of our debt. This 19 million dollar reduction has improved our debt to equity ratio and reduced our debt to 44.5 million. Now, with that as an overview of our results, Dana will now give us a review of the operating results for the quarter and the fiscal year. Dana?

Thank you, David. Now I would also like to welcome each of you to our fourth quarter conference call. At this time I will review our unaudited consolidated results for the period ending February 28, 2003. AZZ recorded revenues for the quarter ending of 39.8 million, compared to 50.5 million in the prior year. Net income for the quarter was 1.4 million, again compared to 1.8 million. Diluted earnings per share was 27 cents for the quarter as compared to 33 cents in the same quarter a year ago. AZZ recorded revenues for the fiscal year ended of 183 million compared to 153 million in the prior year. Year-to-date net income was 8.6 million, compared to 7.8 million. Diluted earnings per share was $1.63 as compared to last year's $1.50 per share. As we communicated in previous conference calls and press releases. we no longer amortize goodwill as per FAS 142. This has favorably impacted our quarterly and year-to-date earnings per share by approximately five cents and 18 cents per diluted share respectively. As David indicated, our major concerns remain our book to ship ratio in our electrical and product segment. Galvanizing segment continues to see stabilization in volumes and pricing and continues to be favorably impacted by cost containment and other costs reductinos. Again any improvements in the industrial market should aid both segments of our business. Year-to-date net income as percent of sales was 4.7 percent compared to 5.1 percent in the prior year. The electrical and industrial products portion of our business generated 74 percent of our revenues and 26 percent came from our galvanizing [inaudible] Segment. At this time David will give us an overview of our electrical and industrial product segment.

Now, this product segment is made up of our highly engineered specialty products to the industrial, power generation, T and D, or transmission and distribution markets. For this segment we had total revenues of 134.9 million. 36 percent of our revenues came from the power generation market, 34 from T and D, and 30 from the industrial. For fiscal year 2004, we anticipate that we'll generate 22 percent from power generation, 42 percent from T and D, and 36 percent from the industrial market. Now, our bus [inaudible] Products which are heavily involved in new power generation projects had a good shipments quarter as they continued to ship orders that were placed during more robust market conditions. The power distribution and motor control center products have for the past few years benefited from power generation. And the downturn has had an adverse effect on market conditions and our backlogs. As this product line has industrial and utility power distribution applications, we're pursuing every opportunity to offset the unfavorable impact of downturn of power gen. Industrial application of this product is an extremely competitive marketplace and margins tend to be less than those few that sold to the power generation market. Our specialty lighting products continues to move in concert with the industrial market. But good profitability and excellent cash flows continued even in these lower demand market conditions. Now, our switch gear operations with their strong utility distribution substation base is operating at improved levels and we continue to see good inquiry and incoming order levels. We anticipate that we will have another year with similar results as we had in the past fiscal year. Market share improvements have, and will continue to help the operating results of this product line. Our relay and control panels and industrial automation business had another disappointing quarter. With extremely low capital spending levels in the industrial market and capacity utilization in the 75 percent range, we do not anticipate improvement in these products until the capacity utilization rate improves to the 80 percent or above level. During fiscal 2003 we consolidated our two relay and control panel operations, which had the impact of lowering our fixed cost base and improving our overall efficiency. There were one time costs associated with this move, and it did unfavorably impact our fiscal year 2003 by a net of 400,000 or seven cents per diluted share. Dana will now cover the results for this segment

In our electrical and industrial product segment, we recorded revenues for the quarter of 28.3 million compared to the prior year resultsof 39.3 million. Operating income was 2.7 million, as compared to 4.8 million in the prior year quarter. These results were consistent with our internal projections for the fourth quarter. Even though there still remains uncertainty in the markets we serve, there seems to be some stabilization on the transmission and distribution sides of our business. Industrial markets we serve remain at depressed levels. Again our major concern in this segment is our book to ship ratio. At this time David will give us a quick overview of our galvanizing segment

We continue to operate in a very competitive market. Now, according to the American galvanizing association data, the tons of steel that are galvanized has remained flat for the past two years, and calendar year 2002 was 12 percent below the peak year of 1999. Our year over year revenues fell two percent to 48.5 million. Excuse me. We are extremely pleased with the operating margins of this business for the fiscal year due to the favorable cost of zinc and operating efficiency improvements. We're cautiously optimistic we will not see additional pricing pressures and will be able to enjoy a favorable benefit from the continuation of these costs. A recovery in the industrial economy combined with favorable costs of critical items such as zinc and natural gas could benefit us further. We continue our very aggressive cost containment efforts to ensure that we achieve optimal results. Now, the benefits that we have from having multiple locations and multiple served markets has favorably impacted our operating results and provided us with the opportunity to offset some of the softness in some of our served markets. Dana will now cover the operating statistics for this segment and some of our key balance sheet data.

Revenues in our galvanizing segment for the quarter were 11.5 million, compared to 11.2 million, recorded in fiscal 2002 quarter. Our volumes of steel being processed and our margins improved when compared with last year, while our selling price per pound was slightly down. Operating income was two million compared to 1.6 million in the prior year. Margins in this segment were 17.1 percent compared to 14.3 in prior year quarter. Despite some continued pricing pressure, lower zinc and natural gas combined with cost reductions and cost containment allowed us to see improvement in our operating results. Again any improvements in the economy or the industrial markets we serve should provide additional volumes and operating income opportunities for us. At this time I will cover some of our key cash flow and balance sheet items on a comparative basis. Cash flow or EBITDA for the year was 24.4 million, compared to 21.3 million last year. Cash provided by operations for the year was 22.6 million, on a comparative basis to 14.1 million in the prior year. Our outstanding accounts receivable was 29.4 million at the end of fiscal 2004, a reduction of 3.6 million as compared to our 32.9 million outstanding at the end of the prior year. Our receivable days outstanding continued to improve, standing at 57 days compared to 60 days at last year-end. For year-end inventories our year-end inventories were reduced by 4.7 million as well. Capital improvements were made during the course of the year in the amount of 4.3 million. Depreciation and amortization for the year amounted to 7.1 million. We anticipate our capital expenditures for the coming fiscal year to be approximately five million. And our depreciation and amortization will be approximately 6.3 million. We remain in full compliance with all of our bank covenants. Long-term debt has been reduced by 19 million through the end of the year bringing our total outstanding bank debt to 44..5 million at year-end. We continue to reduce our leverage. Our current long-term debt to equity ratio at the end of the fiscal year was .60 to 1 as compared to point 98 to 1 at the end of the prior fiscal year. In order to maintain our liquidity in the current business environments that we're in, we amended our bank agreement with our syndication of banks to reflect the following. One, our debt amortization was reduced from 10 million per year to 5.5 million. Two, our maturity on our long-term note was extended from November 1, 2005 to November 1, 2006. And three, the maturity on our revolving line of credit was extended from November 1, 2004 to November 1, 2005. As you can see our focus continues to be on liquidity through debt reduction and by managing our working capital in the most efficient manner possible. At this time I'll turn the conference call over to David for closing comments then we'll open to the question and answer session.

Now, due to the uncertainty that still remains in the economy and in particular the industrial manufacturing sector, we see little opportunity in the next fiscal year to offset the significant downturn in the power generation market. Taking these factors into consideration, we are currently projecting the results of fiscal 2004 to be down from the year just completed. Our revenue guidance for fiscal 2004 is for revenues of 145 to 155 million, and fully diluted earnings per share of 95 cents to $1.05. We remain focused on improving our operating efficiencies, lowering our cost structure, improving our market share, expanding our served markets, improving our working capital management and lowering our debt. We truly feel that when more favorable market conditions return, we'll be a much stronger, much more efficient company and be able to report improved operating results. We thank you for your past support and thank you in advance for continuation of that support. We appreciate your participation today and at this time we'll be happy to open it up for any questions that you might have.

Thank you very much, sir. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit 1 on your touchtone telephone. If you're using a speaker phone please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us and we'll take as many questions as time permits. Once again, please press star 1 on your touch tone telephone to ask a question and we'll pause for just one moment to assemble our roster. Our first question today will come from John [Fransreb] with Sidoti & Co.

I'd first like to touch on the debt position. You closed in your remarks how you renegotiated some of the covenants. Based on your outlook for the year ahead, where do you anticipate long-term debt finishing at the end of fiscal 2004?

John, the budgets reflect probably paying down 10 to 12 million this fiscal year.

: 10 to 12 million

So we'll be somewhere in the 34 to 36 million is our projection for year-end.

So that safely assumes you'll be cash flow positive basically?

That's correct, amortization will be 6.2 million and the balance of it will be revolving debt.

Dana, I didn't hear an inventory number when you gave it out. Do you have that in front of you?

I don't have total inventory.

While you're talking about that, perhaps, David, could you touch on what's going on in the switch gear business, you talked about market share improvements. Could you elaborate a little bit about that?

John, when we purchased Central Electric, one of our basic strategies was to use our national representation network and expand their opportunities across a greater customer base. So by taking a whole package of products to the utility sector, we've seen them move more out of their traditional market share territory. So it's territory expansion.

And that market in the utility distribution is still growing?

It appears to be sustaining itself at the same level as last year, John.

Okay so it's bottomed at the worst case scenario?

That's correct.

Now, when you're putting together the forecasts for the year ahead, are you presuming a turn around in the backlog number any time in the next fiscal year?

Not -- we anticipate an improvement over where we are now, but not returning to the 85 million dollar number that we once enjoyed. We'll probably see again because remember what we're booking is three to six-month order cycle and the power gen is the 12 to 18 months. So what we won't see the return of anything like we had at the end of 2002, but we do anticipate some improvement in this fiscal year, yes.

Fair enough. Now, you also said that your shorter lead time products were making up for some of the lost backlog in the mix here. What are your sort of lead time products that are kind of working as an offset.

If we look at the power distribution centers and motor control centers, those delivery dates to the industrial market run five to six months. Those same products into the power gen market run 12 to 14 months. So we're taking the same product into a different market and the demands on that market are much shorter lead times than you traditionally have in that. The same thing in some of our bus [inaudible] products going into an industrial application, those order cycles are much shorter than that. And of course switch gear is normally four to five months. So we're seeing the bulk of our business shift into that four to six months range and whereas the 85 million had a substantial portion that was delivered over a 12 to 18 month cycle.

Got it. I guess one last question. Switching gears to the galvanizing business. Did you allude to the fact that calendar, if I heard you correctly, calendar '02 tonnage on a national basis was down 12 percent. What was your tonnage numbers like for the quarter? Because it seemed like the revenues have held up and you said that your pricing was still difficult. So I'm guessing the offset is that you're doing more in tonnage. Is that what's going on in that business? And also to add on to that, I would have thought natural gas prices would have been higher in the fourth quarter this year compared to a year ago. Why was that not the case?

On the first part, the tonnage was slightly higher and as Dana alluded to, a slightly lower selling price. We prefer not to give out the actual tonnage that we process for competitive reasons. But we have maintained our market share of the total galvanized steel per the American Galvanizing Association and my 12 percent for 2002 was as compared to 1999 which was the last good year that we had. And 2001 and 2002 have been just about the same level, which is 12 percent below that.

Okay.

And on the natural gas, we -- now as we have a large portion of that under contract. Now, with the recent spiking, we think we'll have a negligible impact in the months of March and April. But the projections for the natural gas returning to a more reasonable level and our renegotiation for 2004, we believe it will not have the impact on us that it had a couple of years ago.

When does your contract for natural gas run out?

they're on a plant by plant basis and they have varying dates but most of them will come up in the May/June time frame.

Thanks a lot. I'll let somebody else in.

One thing you asked on inventory. Total inventory for the year was at the end of the year was approximately 18.6 million.

18.6. Thanks a lot, Dana.

Thank you, John.

As a reminder if you have a question or would like to make a comment press star 1 at this time. Moving on we'll hear from John [Hegrains] from Baldwin Anthony.

Good afternoon. Most of my questions have been answered. I was curious in today's world of more transparency and that sort of thing if in the future you might want to give more than a three line income statement and the same on the balance sheet.

Okay.

John [Hegrains] ;Do you have any comment on that?

You're talking about what is attached to the press release?

Yes.

We'll certainly take a look at that.

Thanks

)) Operator: Next we'll hear from Ed [Lefferman] from First Manhattan.

Good afternoon. First of all, I think you continue to do a terrific job. I think despite the stock market, I think the trading of your stock I just want, as a shareholder, want to tell you I think your focus on cash flow and you continue to do the right things. I'm sorry you don't get the recognition I think you really deserve. I'm just wondering what, for the full year, the operating income breakdown was. I don't know that you provided that. But if you could, I'd like that number. For the electrical and the galvanizing.

Operating income for the galvanizing segment for the year was 8.9 million versus 7.2 in the prior year. Electrical and industrial products was 14.9 versus 14.6.

And with the electrical business, would there be, what kind of disparity would there be versus the revenue breakdown that you provided? Would it be somewhat comparable or would it be a big difference in the percentages?

Comparative basis year to year?

No, just for this past year. You said power was 36 percent, et cetera.

Well, electrical industrial products generated 74 percent of revenues and galvanizing was 26.

I meant the breakdown of the profit.

It will just take a moment.

It's calculated based off the numbers I just gave you of operating income.

You gave a breakdown of the electrical distribution power, T and D and industrial. I was wondering if the profitability -

Of those three -

Differed much from the revenue breakdown?

I think it's about three percent higher but I'll have to check that.

For power?

No, galvanizing was probably about -

He's asking -- we'll work on that and get back to you on that.

Okay, fine. My only other question is that with the stock declining where it is, are we, do we have a concern again about listing on the New York stock exchange? Or where do we stand with that?

Well, you know, when we had the problem before it was because the market cap and the equity were both hit below the 50 million level. And of course our equity is well above that number despite the market cap. So, unless there's a rule change we don't anticipate any problem there.

So they look at the equity as opposed to just the market value?

When it came through before they said if you've got both of them going below the 50 million number, then you have to give an 18 month workout plan. Of course we came out of it much more quickly than that. So based upon that same criteria that they were asking before, our equity is well above that number, despite the market cap being [inaudible].

Right. Gotcha. Thanks very much.

Thank you.

We'll next hear from Sam [Robotski] with SER Asset Management.

Yeah, gentlemen, I'm not sure if I heard this properly. You may have addressed it, but I'm not sure, it wasn't clear. Your 95 cents to a dollar five, do you expect those numbers to be stronger earnings in the second half than the first half? And do you expect the stronger improvement in the galvanizing versus the electrical and contributing to the 95 cents to dollar five?

First of all, the galvanizing of course will be a greater percent of the total than this past year and yes we do anticipate a stronger part of the end of the year. That is correct.

: So and that's based on the visibility of the market or I mean do you see the second half improving over the first half? That's what you see right now?

Some slight improvement. But more impacted by the full impact of cost reductions that we're still implementing.

: Okay. Thank you very much.

Thank you.

And as a final reminder today if you'd like to ask a question or make a comment, please press star 1 at this time. And there are no additional questions at this time. Gentlemen, I'd like to turn it back over to you for any additional or closing remarks.

Again, we appreciate everyone's participation and again thank you for the past support and thank you in advance for your continuing support and we'll continue to update you quarterly as to where we stand with those issues related to our book to ship ratio and our backlog and look forward to talking to you in the quarter. Thank you.

That does conclude today's conference we do thank everyone for your participation today and have a great day. (Call concluded at 4:50 p.m.)--- 0