AZZ Inc (AZZ) 2004 Q2 法說會逐字稿

Good day everyone and welcome to the AZZ Inc. second-quarter financial results conference call. As a reminder, today's conference is being recorded. Now for opening remarks and introductions, I would like to turn the call to Mr. Max Ramras with RCG Capital Markets Group.

Thank you, Peter. Thank you everyone for joining us today to review the fiscal 2004 second-quarter financial results of AZZ. As the conference call operator indicated, my name is Max Ramras and I'm with RCG Capital Markets Group. We are the financial relations consulting firm for AZZ. The senior management team of the company will be with us today on the call, and it is going to be led by Mr. David Dingus, President and Chief Executive Officer. Also joining David is Dana Perry, Vice President of Finance and the Chief Financial Officer. At the conclusion of today's prepared remarks, we will definitely be opening the call for a question and answer period. If anyone participating in this call does not have the full text copy of the earnings release, please feel free to call RCG at 480-675-0400 and we will immediately fulfill your request, or you can certainly retrieve the release off of the Internet from any number of financial sites.

Before we begin with prepared remarks, we submit the following statement for the record. This conference call has been made available by the way of webcast technology on the Internet and direct dial via a conference 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, as well as regulation FD. Those risks and uncertainties previously mentioned may include, but are not limited to, changes in demand, prices and raw material costs, including zinc and natural gas, which are used in the hot-dip galvanizing process; changes in the economic conditions of various markets the company serves, foreign and domestic; customer request delays of shipments, acquisition opportunities, adequacy of financing and availability of experienced management employees to implement the company's growth strategy and customer demand and response to products and services offered by the company. The company can give no assurance that such forward-looking statements will prove to be correct. Having that out of the way, we will begin the presentation with an overview from Mr. David Dingus, President and Chief Executive Officer.

Thanks, Max, and thanks to each of you for taking the time to join us for the quarterly conference call of the second quarter of our fiscal 2004. The second quarter was completed on August 31, 2003.

Our second quarter was a continuation of our difficult market 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. While this has not occurred, there does appear to be some leveling of activity and we're cautiously optimistic that these markets have bottomed out. However, even with some stabilization, it is at a level that is considerably below the available capacity and we are still seeing extreme pricing pressures as each competitor strives to maintain their market share.

Our backlog at the end of the second quarter improved to 48.5 million from the 45.7 million at the end of the first quarter. Backlog at the end of the prior fiscal year was 49.1 million. Our quarterly book-to-ship ratio was 108 percent with incoming orders of 36.8 million and shipments of 34 million. This is the first time since the quarter ended August 31 of 2001 that our incoming orders have exceeded our shipments. Year-to-date, the book-to-ship ratio is 99 percent. While we are pleased with this improvement, we would like to see a wider distribution of the backlog between our products. Our focus as a company continues to be adjusting to the difficult market conditions by reducing our cost structure and improving our operating efficiencies. Industrial recovery not only benefits our electrical and lighting products, but also our galvanizing services segment.

Now with that is an overview of our results, Dana will now give us a review of the operating results for the quarter and the first six months of the fiscal year. Dana?

Thanks, David. I would also like to welcome each of you to our second quarter conference call. At this time, I will review our unaudited consolidated results for the period ending August 31, 2003.

AZZ recorded revenues for the quarter ending of 34 million, compared to 48.8 million in the prior year. Our electrical and industrial products segment generated 66 percent of our revenues, while 34 percent were generated from our galvanizing segment. Net income for the quarter was 996,000, compared to 1.9 million in the prior year. The comparable period of one year ago was an extremely strong quarter as we were operating from a strong backlog with significant shipments into the power generation market. Diluted earnings per share was 19 cents, compared to last year's quarter of 49 cents per share. As David indicated, even though we have seen some stabilizations in our backlog, our major challenge remains our ability to sustain the book-to-ship ratio in our electrical and industrial products segment that we achieved in the second quarter. For the quarter, our galvanizing segment has seen some reduction in volumes of steel produced, but our selling price has remained stable. Our cost containment efforts continue to favorably impact the results of this segment. Again, any improvements in the industrial markets should aid both segments of our business. At this time, David will give us an overview of the electrical and industrial products segment of our business.

Our electrical products that serve the power generation market had another quarter that was down, again reflective of the dramatic changes that have occurred in this served market. We have worked through the backlog that was related to new generation projects. The power distribution and motor control center products, while benefiting from power generation markets of the past, have a broad application in the industrial and the utility markets. The industrial applications of this product is an extremely competitive marketplace, and margins tend to be less than those that we have enjoyed with shipments into the power generation market. With our specialty lighting products, they continue to move in concert with the industrial market. They continue with good profitability and excellent cash flow, even in these lower demand market conditions.

The metal clad outdoor switch gear (ph) products, with their strong utility distribution substation base, is operating at levels consistent with prior periods and we continue to see good inquiries and incoming order levels. With our relay and control panels and industrial automation business, we had another disappointing quarter. With extremely low capital spending levels in the industrial markets capacity utilization remaining in the 75 percent range, capital spending related to automation is at an extremely low level. We do not anticipate any significant improvement in these products until the manufacturing capacity utilization rate improves to above 80 percent.

Now despite recent events, our high-voltage transmission products continue to see delays in receipt to key orders. While we continue to be assured that these projects will move forward, we have essentially lost the opportunity to favorably impact our current fiscal year. Our receipt of these orders by the end of the third quarter would give us a strong start in fiscal 2005 for our full high-voltage. Dana will now cover the operating results of this segment.

In our electrical and industrial products segment, AZZ recorded revenues for the quarter of 22.1 million, which compares to the prior year results of 36.3 million. Operating income was 1.5 million on a comparative basis to 4.1 million. These results are consistent with our internal projections for the second quarter. The decrease in the revenues was due to the dramatic reduction in power generation projects and the continued delays in the (indiscernible) transmission grid and a reduction in industrial and factory automation projects. Even though there still remains uncertainty in the markets we're serving, there seems to be some stabilization. Our backlog has sustained a 46-$48 million level during the quarter, and as David indicated, our book-to-ship ratio improved to 1.08 for the quarter. Again as David stated earlier, we are pleased with the improvement in our book-to-ship ratio, but we would like to see a wider distribution between these products scattered through our backlog. At this time, David will give us an overview of our galvanizing segment.

We continue to operate in a very competitive market. For many months, we have clearly felt the impact of the severe downturn in the steel fabrication market, particularly the cellular tower market. While volume levels during the last six months are down from the same period of a year ago, there does appear to be some bottoming out in demand. Our pricing pressures continue due to the imbalance between capacity and market demand. Operating margins continue to be negatively impacted by lower revenues, selling price pressures and utility increased cost. Our utility cost had increased 27 percent over the same period last year and accounts for the largest portion of the reduction in operating margins when compared to prior periods. Despite these adverse conditions, the segment continues to generate good operating performance and makes a very positive contribution to the overall operating results of the company. While we have seen some stabilization, we do continue with the risk of further price deterioration. A recovery in the industrial economy, combined with a continuation of the favorable cost of zinc, would benefit us. We continue our very aggressive cost containment efforts to ensure that we achieve the optimal operating results. Now Dana will cover the key statistics for the segment and also our balance sheet items.

Revenues in our galvanizing segment for the quarter were 12 million, as compared to 12.5 million recorded in fiscal 2003. Our volumes of steel shipped were down when compared to the same quarter last year, but we have seen some stabilization in our selling prices on a quarter-to-quarter comparison. Operating income was 2 million, compared to 2.5 million in the prior year. Operating margins were 16.7 percent, compared to 19.9. As David indicated, our margins were negatively impacted by higher natural gas prices during the quarter. While the company entered into fixed costs contracted at the beginning of the second quarter to curtail the escalation of the prices of natural gas, the negotiated prices were still some higher than those experienced in the same period last year. The decline in revenues are the result of the stagnant recovery of the general economy which has severely impacted the steel fabrication market that we serve. Revenues from that segment from this segment have historically closely followed the trends in the general economy. Again, any improvements in the economy or the industrial markets we serve should provide additional volumes and operating income opportunities for this segment, as well as our electrical and industrial segment.

At this time, I will cover some key cash flow and balance sheet items on a comparative basis. Cash provided by operations was 12.1 million, compared to 8.3 million in the prior year. Outstanding accounts receivable was 21.3 at the end of the second quarter, a reduction of 7.5 million, as compared to 28.9 million at the end of the prior fiscal year end. Our receivable days outstanding remains good standing at 58 days, compared to 57 days at the last fiscal year end. Year-to-date, inventories were reduced by $3 million.

Capital improvements were made in the amount of approximately 1.1 million, depreciation and amortization amounted to 3.1 million for the six month period. We anticipate our capital expenditures for the fiscal year to -- that we have budgeted to be approximately $5 million, and depreciation will be approximately 6.3 for the year. Long-term debt has been reduced by some 12.5 million, bringing our total outstanding bank debt to 32.2 million at the end of our second quarter. We continue to reduce our leverage. Our current long-term debt-to-equity ratio at the end of the quarter was .4-to-1, as compared to .6-to-1 at the beginning of our last fiscal year. As you can see, our focus continues to be on liquidity through debt reduction and the measurement of our working capital in the most efficient manner. At this time, I will turn the conference call back over to David for closing comments, and then we will open for a question and answer session.

Uncertainty still remains in the economy, and in particular, the industrial manufacturing sector and transmission grid investment. The aggressive steps we've taken in lowering our cost structure, improving our operating efficiencies, enhancing our management of working capital and significant reductions in our funded debt make us well poised for any recovery. And we do not anticipate any appreciable recovery in our current fiscal year, so we continue to manage our business at these depressed levels. We truly believe that when more favorable market conditions return, we will be much stronger, more efficient and be able to report improved operating results and profitability.

Now based upon the current assessment of our market conditions and opportunities and the potential that the anticipated receipt of several significant orders will continue to be delayed, combined with the timing of the shipments of our backlog, we believe it is prudent at this time to revise our previously issued earnings guidance for fiscal 2004. Our revised earnings guidance for FY 2004 is for earnings per diluted share to be within the range of 65-75 cents and revenues to be within the range of 125 million to 135 million. This guidance is based upon no further deterioration in our markets and no significant customer rescheduling of deliveries. As always, we appreciate your support and thank you in advance for continuation of that support. Thank you for your participation today, and at this time, we would like to open it up for any questions that you may have.

(Operator Instructions). John Frenza (ph), Sidoti & Co.

My first question is regarding your last remarks. David, you said -- you referred to -- there's a deferral and the timing of some large orders. Are those orders canceled, or are you seeing them being deferred maybe into the fiscal '05 time frame?

John, deferred. We have been assured -- some of the orders we had originally anticipated receiving as early as June, but they may be delayed more. But, again, as the customer continue to assure us that they're going forward with the project.

How many projects are there?

It is about $6 million worth of backlog.

Is that part of your current backlog figure, David?

No, it is not.

Great. Secondly, when I looked at the numbers this morning, I was kind of surprised about the drop in operating profit, compared to the drop in revenue on the electrical side of the business. It was like a 12 percent sequential drop in revenue from May to August, but we had a significant drop of operating profit. Could you explain that a bit?

(indiscernible) is related to our comment of, even though we have seen a nice bookings rate and a nice backlog, it is not spread among our products as much as we would like. So consequently, you have some operations that have totally lost their leverage from lower volume. So when that happens, the others are not able to offset that. So it is an imbalance between the individual products within the electrical and industrial products that is causing that.

Which is the biggest culprit there?

The high-voltage transmission and the relay and control panel automation.

What kind of capacity utilization are you running at on the relay and control side of the business?

About 40 percent.

And do you think there is any consolidation opportunity that you may have there?

Naturally, that is something that we continue to look at. There are no plans to do that at this time, but naturally, if the outlook does not say that we are utilizing more than that, we will probably make some modifications. We will probably look more, John, to the consolidation of functions as we may possibly consolidate the fabrication function within one facility, rather than closing a facility, which would in effect, lower the breakeven of both places.

Another thing that struck me when I was looking through the numbers this morning was how strong the cash flow from operations was. What was the biggest jump there? Can you walk me through the change in the current position?

What is going on there, John, is our businesses are shrinking and we are -- we don't need the utilization of working capital we had tied up. And again as I indicated, we dropped about 7 million so far this year out of receivables, a little over 3 million out of inventories. Our businesses are beginning to be right-sized our working capital, so we won't anticipate seeing those kind of drops through the balance of the year. We need to focus more on better utilization of working capital to squeeze more out of it. The initial drops were primarily just a reduction in our business.

So that is pretty much the lower base business and just the word capital coming down with that?

Absolutely. We're going to work diligently on better utilization. We should see some more coming out of it (indiscernible) that magnitude.

David, I know you talked about this in the past and we've kind of bounced around this. What about narrowing your business focus a little bit? The tubular business, the lighting business -- how well these really fit into what you see AZZ as a consolidated business going forward? Maybe (indiscernible) opportunities maybe divest some of them -- what are your thoughts regarding that?

As we've indicated in the past, we certainly do not believe the long-term, the tubular products is the strategic fit (indiscernible) where we want to end up. And with it being a relatively insignificant percentage of our revenue base, we have indicated that we would entertain inquiries from potential buyers. We have had some conversations, but we're not to the point to say that a letter of intent has been signed or anything else along that.

With regarding of the lighting, even though it goes through a different representation network and goes through a slightly different market, we think that it makes a good contribution, John, as an offset against our project business. It is a day-to-day business, high profit, good cash flow and balance along that. Now at some point in the future, if we can find a replacement for that that would more closely align it, then naturally, we can consider that. But we think right now it is giving us good balance against project work with the day-to-day sales force.

One last question. The stock took quite a jump following the blackout, as I guess people were speculating that you'd get a quick turn on the revenue side. A lot of us who have been following companies for some time knew that probably was not the case. Are you able to discern what your revenue mix is right now on, say, power generation versus distribution versus transmission?

I don't have those updated numbers in front of me, John. We can certainly -- there is naturally the strongest piece in total is the industrial, and the second would be distribution, third would be generation and fourth would be transmission. So it is definitely the smallest piece of our operation right now. And with the long-term potential of a resolution of the investment in the grid, we would love to see that substantially change. I believe it has the opportunity to change.

I hope so. Thank you very much.

(Operator Instructions). Follow-up, John Frenza.

One last question. You talked about the CapX number jumping up -- was it to $5 million in '04 -- and you've only spent 1.1 year-to-date. What is the balance going to? Can you give me some clarity on that one?

The 5 million that we've projected was our initial budget at the beginning of the year, and as you know, we typically spend around 2.5 million each year maintenancing (ph) our galvanizing segment (Multiple Speakers) backloaded our budget for CapX this year anticipating hopefully that the electrical part of our business would pick up. We have not seen that materialize, and in reality, we probably will not spend that other 2-plus million books for the electrical side of our business through the balance of the year. In reality, we'll probably spend 2.83 (ph) million in total.

You kind of talked a little bit about the competitive environment. You said some businesses were stable, some it's difficult. Could you talk a little bit about what you see as improving pricing trends, which of your business units have seen a better price outlook than, say, three months ago?

Yes. Primarily on the distribution substation business, John, because with that being strong, you have a better balance between capacity and demand there. Downward pressures continue in the relay and control and the automation side of the business because of low demand. And of course with a limited number of power generation projects, those, while they are at depressed levels, appear to have stabilized. So we are actually in a situation where we're pleased at stabilization, and then we can start looking at improvement. But the ones that have not stabilized is primarily in the factory automation, relay and control paneling (ph).

The backlog number -- it was nice to see some stabilization there. You alluded to the fact -- I think it was -- most of it was in distribution -- is that right?

That is correct.

Okay. Where was the weakness in that, or are we seeing stabilization across the board and distribution just disproportionally (ph) put you (indiscernible). Can you give me a little color on what's going on in that backlog figure?

If we had received the $6 million in transmission orders, which I alluded to earlier, John, then it would give us much more balance in that. And then if we could get the 2-3 million more in the relay and the control panel side, then we would have said there was an outstanding quarter, in terms of the backlog that we exited the quarter with.

Okay. All right, guys, good luck.

(Operator Instructions). Gentlemen, there appear to be no additional questions at this time. I'd like to turn the conference back over to you for any additional closing remarks.

Great. Thank you very much again for your participation in today's conference call. We look forward to communicating with you if any important events pop up during the quarter, but certainly at the end of third quarter. Thanks again for your time.

That does conclude today's conference. We thank everyone again for your participation, and have a great day.