AZZ Inc (AZZ) 2004 Q3 法說會逐字稿

Welcome to the AZZ Inc. third quarter conference call. Today's conference is being recorded. For opening remarks and introductions I would like to turn the conference over to Joe Diaz with RCG Capital Markets Group. Mr. Diaz, please go ahead.

Thank all of you for joining us today to review the financial results on AZZ Inc. for the third quarter and the nine months period ended November 30, 2003.

As the conference call operator indicated, my name is Joe Diaz. I'm with RCG Capital Markets Group. We're the financial relations consulting firm for AZZ Inc.

With us today representing the Company are Mr. David Dingus, President and Chief Executive Officer, and Mr. Dana Perry, Vice President of Finance and Chief Financial Officer. At the conclusion a repair remarks today we will open the call for a question and answer session.

If anyone participating on this call does not have a full text copy of the earnings release, please call RCG at 480-675-0400 and we will immediately fulfill your request or you can retrieve the release from the Internet from numerous financial sites.

Before we begin with prepared remarks from the AZZ management team, we submit for the record the following statement. 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 Securities and Exchange Commission. Such statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and Regulation FD.

Those risks and uncertainties previously mentioned may include, but are not limited to -- changes in demand; changes in raw material 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 shipments; acquisition opportunities; adequacy of financing; and availability of experienced management and 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.

With that having been said, we will begin this presentation with remarks from Mr. David Dingus, President and Chief Executive Officer of AZZ Inc. David?

Thank you for taking the time to join us for the quarterly conference call for the third quarter of fiscal year 2004. The third quarter was completed on November 30, 2003.

Consistent with what we recorded at the end of the second quarter, we believe that recent market indicators suggest that our markets have stabilized and are positioned for a recovery. Our book to ship ratio exceeded 100 percent during the last two quarters. Prior to the last two most recent quarters, the last time we achieved a book to ship ratio in excess of 100 percent was in August of 2001. Our bookings and shipments still remain below those levels which were achieved during the power generation high-growth market.

Despite some modest improvement in our markets, they remain extremely competitive as the capacity expansion that occurred in the strong power generation market has resulted in much more capacity than can be absorbed by current market demand. We're still seeing intense pricing pressures as each competitor strives to maintain market share.

We continue our concentration on operating efficiency improvements, cost reductions and liquidity. Our long-term debt to equity ratio improved to 0.37 to 1 and compares favorably to the 0.64 to 1 for the same period last year.

Aggressive pursuit of all domestic and international marketing opportunities has been and will continue to be an integral part of our focus as we continue to strive to expand our served markets.

Our backlog at the end of the third quarter improved to 52.5 billion from the 48.5 at the end of the second quarter. And backlog at the end of the prior fiscal year was 49.1 million.

Our quarterly book to ship ratio was 112 percent, with incoming orders of 37.3 million and shipments of 33.3 million. Year-to-date, the book to ship ratio was 103 percent. While we are pleased with this improvement, we would like to see a wider distribution between our products. We believe that this will happen when spending is released in the transmission grid and when the industrial sector of the economy supports stronger capital spending programs. An industrial recovery not only benefits our electrical and lighting products, but also our galvanizing services segment.

Our focus as a Company continues to be adjusting to current market conditions by striving for additional reductions in our cost structure and improving our operating efficiencies.

With that as an overview of our results, Dana will now give us a review of the operating results for the quarter and for the first nine months of the fiscal year.

Thank you, David. I would also like to welcome each of you to our third quarter conference call. At this time I will review our unaudited consolidated results for the period ending November 30th.

AZZ recorded revenues for the quarter ending of 33.3 million, compared to 45.1 million in the prior year. Our Electrical and Industrial Products Segment generated 65 percent of our revenues, while the Galvanizing Segment generated 35 percent. Net income for the quarter was 1.2 million, compared to 2 million in the prior year. Our diluted earnings per share was 21 cents versus 37 cents in the same quarter of the prior year.

As David indicated, economic indicators continue to show positive signs. The industrial output and capacity utilization both rose in November. Our book to ship ratio has been in excess of 100 percent for the last two quarters. While this is very positive, as David indicated, we would like to see increases in our backlogs to be more evenly distributed across our product lines. Our major concern remains our ability to sustain the book to ship ratio in our Electrical and Industrial Products that we achieved in the second and third quarter.

For the quarter, our Galvanizing Segment has seen an increase in volume of steel produced, while our selling price has taken a slight dip due to a shift in product mix. Our cost containment efforts continues 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 business has essentially worked through the majority of the backlog that was related to new power generation projects. The current distribution in motor control center products, while benefiting from power generation in the past, have a broad application in the industrial and the utility market. The industrial applications of this product is an extremely competitive marketplace and margins tend to be less than those units sold to power generation. We believe that continuing improvements in our distribution network will facilitate an increase in our participation of this market segment.

With our specialty lighting products they continue to move in concert with the industrial market. Good profitability and excellent cash flows continued, even into these lower demand market conditions. We have intensified our commitment to new product development and expansion into new international markets. While it is not anticipated that this will have a short-term impact on our operating results, it is a critical element in restoring growth to this product offering.

Metal-clad outdoor switchgear products with their strong utility distribution substation base is operating at levels consistent with prior periods. And we continue to see excellent inquiry and incoming order levels and a very strong backlog.

With our relay and control panels in the industrial automation business we had another disappointing quarter, with extremely low capital spending levels in the industrial markets, and with manufacturing capacity utilization, while showing some improvement in recent months, still remains below the 80 percent level. The utilization was at 75.7 percent at the end of November.

Now receipt of orders for our high voltage transmission products continues to encounter delays. While we continue to be assured that these projects will move forward, we've essentially lost the opportunity to favorably impact the current fiscal year. We're still hopeful that these new orders can be booked in time to favorably impact the early periods of our new fiscal year, which begins on March 1 of 2004.

Dana will now cover the operating results of this segment.

In our Electrical and Industrial Products Segment AZZ recorded revenues for the quarter of 21.1 million compared to prior year results of 33.2 million. Operating income was 1.6 million compared to 3.4 million in the prior year. These results on a quarter over quarter basis were better than we had anticipated for the third quarter.

As we expressed and experience in our second quarter, the decrease in revenues for the third quarter as compared to the same quarter in the prior year was due to the dramatic reduction in power generation projects, continued delays in upgrades to the transmission grid and a reduction in the industrial and factory automation projects. There seems to be some stabilization, though. Our backlogs has sustained a level over $50 million during the quarter, and as David indicated our book to ship ratio improved to 112 percent for the quarter. As I stated earlier, while we are pleased with the improvement of our book to ship ratio we would like to see a wider distribution between our products.

At this time David will give us an overview of our Galvanizing Segment.

This segment continues to operate in a very competitive market. While volume levels during the last nine months are down from the same period of a year ago, our most recent quarter reflects a modest increase when compared to the same period of a year ago. We're cautiously optimistic that this is a sign that our markets have bottomed out, and we are beginning to see some improvement in demand.

Margins for the quarter were improved when compared to the same period of a year ago. However, margins for the nine months are below the same period last year, due primarily to higher natural gas costs.

Even without the benefit of a strong market this segment continues to generate good operating performance and makes a very positive contribution to the overall operating results of the Company.

Now the recent sharp increase in metal commodity pricing, including the cost of zinc, is of concern to us. This increase will have an adverse impact on our operating results unless we are able to pass this cost increase along in our pricing, which should be made possible with the continuation of an overall market improvement. It is difficult to determine at this time what the overall market reaction will be to the increased cost to zinc. This is a critical factor and impacts all participants in the hot-dip galvanizing business.

Dana will give us the review of the key operating statistics of this segment and cover the key balance sheet items for AZZ.

Revenues in the Galvanizing Services for the quarter were 12.2 million compared to 11.9 million recorded in fiscal 2003. Our volumes of steel shipped were up when compared to the same quarter last year. As I stated earlier, we have seen a slight reduction in our selling price on a quarter-to-quarter comparison, primarily due to a product mix shift.

Operating income was 2.3 million compared to 2 million in the prior year and operating margins were 18.8 percent compared to 17.2 in the same quarter last year.

Revenues improved for the quarter as a result of a slight improvement in the transmission and cellular pole (ph) market that we participate in. Operating income and margins benefited from higher revenues and a lower cost structure, which consisted of favorable zinc and improvement in productivity. Again, any improvements in the economy or the industrial markets we serve should provide additional volumes and operating income opportunities.

At this time I will cover some of our key cash flow and balance sheet items on a comparative basis.

Cash provided by operations was 13 million compared to 16.3 million for the same period last year.

Outstanding accounts receivables was 23.9 million at the end of the third quarter, a reduction of 4.8 million compared to 28.9 million at the end of our prior fiscal year. Our receivable days outstanding remains good, standing at 58 days compared to 57 days at last year's last fiscal year-end. Year-to-date inventories have been reduced by approximately $2.5 million.

Year-to-date capital improvements were made in the amount of approximately $2 million and depreciation and amortization amounted to 4.4 million.

Long-term debt has been reduced by 13.8 million this fiscal year, bringing our total outstanding bank debt to 30.8 million at the end of the third quarter. We continue to reduce our leverage and our current long-term debt to equity ratio at the end of the quarter was 0.37 to 1 as compared to 0.64 to 1 at the end of the fiscal year. 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.

At this time I will turn the conference call over to David for closing comments and then we will open for questions and answer session.

Despite recent positive economic indicators, uncertainty still remains in the economy and in particular the industrial manufacturing sector which we are very reliant upon. The aggressive steps that we have taken in seeking out new domestic and international marketing opportunities, improving our distribution channels, lowering our cost structure, improving operating efficiencies, enhanced management of our working capital and significant reductions in our funded debt make us well poised for any recovery.

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 a more favorable market condition returns we will be a much stronger, more efficient company, and believe that we will be able to report improved operating results.

Based upon the current assessment of our current market conditions and opportunities and the timing of shipments of our backlog, combined with the fact that the third quarter results were better than we had anticipated, we are revising upward our previously issued earnings and revenue guidance for fiscal year 2004. Our revised earnings guidance for 2004 is for earnings per diluted share to be within a range of 72 to 78 cents and revenues to be within the range of 135 to 140 million. Previous guidance for earnings per share was to be within a range of 65 to 75 cents. Now this guidance is based upon no significant deterioration in our markets, and no significant customer rescheduling of deliveries due to site conditions and adverse weather conditions.

Now, we appreciate your support and thank you in advance for continuation of that support. We again thank you for your participation today. And at this time we would like to open it up for any questions that you might have.

(OPERATOR INSTRUCTIONS) John Franzreb, Sidoti & Co.

It seems to me you have been drilling down the point that you want wider distribution of your product shipments. I wonder if you could kind of give us some better clarity on that. What business unit are doing significantly well, what are doing -- are lagging significantly, not only in the quarter but over, say, the last six months and maybe going forward over the next three?

The ones that we are extremely pleased with are the ones that support the distribution side of the utility business. The ones that are behind and that we would like to see an improvement on are primarily in the high-voltage transmission grid, factory automation and the industrial application of motor control centers and power distribution centers. So if I could summarize, it would be those that support the industrial manufacturing sectors, as opposed to those that support utilities sector.

So the utility business is doing far better than the industrial side of the market?

With the exception of the transmission grid, yes.

What kind of lead time will you get in a recovery on the industrial side of the market? Is it the same kind of selling environment there, that you would probably get orders now for delivery four to six months from now?

Yes, that is consistent. Again, with the exception of the transmission grid, which normally leads to a six to twelve-month cycle. There, of course, we're on the percentage of completion, so we get the benefit earlier on that also.

Now, David, help me with this -- given that you have so much visibility in your business and the backlog, why the wide swing in some of the earnings guidance? Last quarter you had pulled it down. You're pulling it back this quarter. Nine months ago I think you were at 75 to 85. What's the biggest variants that is going on right now in your operating environment that's accounting for these wide swings and what you think the proper profile looks like?

I just think we've done a little better job in our cost structure than we thought we could. I think we're seeing more benefits from operating efficiency improvements, some changes we've made in product flows, some shifting between factories of product production and just our emphasis on driving every dollar out that we can out of our cost structure. I think we just did a little better than we thought we would.

Fair enough, good job. One last question. You touched on product development. Could you give us some examples of what you think are your best opportunities out there?

In that I was referring specifically to our lighting products. Traditionally we had been able to go out into the marketplace and see the need that the customer had and come back and do a development of a lighting product that would go to market very quickly and be very profitable. I think that we have not been as aggressive in that in the last couple of years as we should have been. And we're aggressively looking for ways of doing that, as well as finding a broader international application to our products than we currently have.

Thank you. I'll get back into queue.

Richard Friery (ph), Adlephi Management.

I was wondering if you could just tell me a little bit about the good fortune you have had in passing price increases through in the past and what makes you optimistic that you can do it again?

Are you referring to my comments on the galvanizing side related to --?

The metal commodity prices.

Right, well it's a cost increase that the entire industry faces. I'm cautiously optimistic because we've seen a slight increase in market demand and the knowledge -- you know, it's not only zinc. If you look at copper, since July it has gone from 77 cents to $1.09. So it's an industry-wide factor, so it's not something that just AZZ is trying to do, but the entire industry is trying to do. And to fully recover what we anticipate the cost will be, we're looking at the need of a price increase of about 2.5 to 3 percent, which sounds reasonable to me, but again, we don't know -- it is still a very competitive marketplace and the competition and the customer may prevent us from doing that.

Have you or any of your competitors that you know of been engaged in any hedging that will give you an advantage on the metal prices?

I'm not sure if any are in hedging out there. Of course, we always exercise the price capping negotiation, and we always do that on a calendar year basis. But we're not aware of particular hedging that's done with our industry.

Thank you.

(OPERATOR INSTRUCTIONS) Will Lyons (ph), Westminster.

I was wondering if you could give us some further insights into your strategic thinking with the agreement with Jiangsu Changjiang. It seems obvious there that that is a huge market internally just in China for your kind of products, but it's also a great export market if they can produce at prices substantially below -- or cost substantially below what you're doing now. What were the factors, what was the thinking there?

I think you hit on the two main factors, is how do we participate in the Chinese market and we believe that the best way to do that is with a local manufacture and a partner there. But we were just as interested in expanding our marketshare in the Asia-Pacific region, and we believe that the lower cost production base, not only from the cost of manufacturing, but from the cost of transport, may give us a leg up against some of our competition and participation in that market.

Which markets are you going to be supplying out of China?

The Asia-Pacific market.

Just Asia-Pacific?

Yes, at this time.

Okay, thanks.

(OPERATOR INSTRUCTIONS) There appear to be no further questions. I would like to turn the conference back to Joe Diaz at this time.

With that, we'd like to thank all of you for participating on today's call and we will look forward to talking with you again at the conclusion of the current quarter. Thank you and have a great day.

Once again, this does conclude today's conference call. We would like to thank you for your participation. You may now disconnect at this time.