AZZ Inc (AZZ) 2005 Q1 法說會逐字稿

Good afternoon. My name is Miles and I will be your conference facilitator. At this time I would like to welcome everyone to the AZZ financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. If you would like to ask a question during this time, simply press star 1 on your telephone keypad. If you would like to withdraw your question, press star then the number 2 on your telephone keypad. Thank you. Mr. Diaz, you may begin your conference.

Thank you, Miles. And thank all of you for joining us today to review the financial results of AZZ Incorporated for the first quarter ended May 31, 2004. As the conference call operator indicated, my name is Joe Diaz. I'm with RGC Capital Markets Group, and we are the financial relations consulting firm for AZZ Incorporated. 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 of today's prepared remarks by Mr. Dingus and Mr. Perry, 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 off the Internet from numerous financial sites.

Before we begin with prepared remarks, we submit for the record the following statement: This conference call may include statements that constitute forward-looking statements made pursuant to the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. The forward-looking statements involve risks and uncertainties that are detailed from time to time in documents filed by the company with the SEC. Those risks and uncertainties include, but are not limited to, changes in customer demand 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 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 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, we'll begin this presentation with remarks from Mr. David Dingus, President, and CEO of AZZ Incorporated. David?

Thank you, Joe. And thank you for taking the time to join us for the quarterly conference call for the first quarter of fiscal year 2005. First quarter was completed on May 31, 2004.

We believe that recent market indicators suggest that our markets have stabilized and are positioned for recovery and in some areas have shown some modest improvement. Revenues, net income, and diluted earnings per share reflected strong increases for the quarter when compared to the same period last year. Incoming orders increased 17% over the same period of a year ago and compare favorably to incoming orders in the fourth quarter of fiscal 2004 for a 16% increase. Backlog at the end of the quarter was 51.9 million versus 45.7 million at May 31, 2003, a 14% increase. Despite these increases in incoming orders, backlog was down 2% from February 2004 and our book to ship ratio did drop below the 100% level to 97.

The first quarter of last year was the lowest book to ship ratio at 91% and we would hope that we would see the same booking strength in the subsequent quarters that we achieved in our last fiscal year. Despite some modest improvement in some of our markets, they remain extremely competitive and price sensitive as the capacity is still significantly in excess of demand. Most competitors continue to strive to maintain market share using price as the primary vehicle.

The operating results for the quarter were in line with our internal expectations and earning guidance we had previously issued. This is a despite a continuation of the difficult market conditions and intense competition. We have sized our operations to reflect these conditions and have continued our efforts to improve operating efficiencies and financial performance. While progress has been made, we are still searching for and seeking out additional improvement opportunities. We are particularly pleased that the first quarter results reflect the favorable leverage that can be achieved from modest increases in our revenue which led to more significant increases in income and earnings per share.

We continue to have a lot of emphasis on systems and procedures and sharing of best practices among our operations to further enhance operating efficiency. We are also continuing emphasis on liquidity and continue to see reductions in our debt and improvement in our debt to equity ratio. Our 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 market. With our previously announced operating structure in China, improved representation in the Middle East and Southeast Asia, we are better positioned to take advantage of these markets which are experiencing some growth. Efforts are also underway to improve our participation in the South and Central American markets and we continue to also seek out products that can strengthen our portfolio and increase sales to our existing customer base.

That is an overview of the first quarter. Dana will give us a review of the operating results. Dana.

Thank you, David. I would also like to welcome all of you to our first quarter conference call. At this time I will review our consolidated results for the period ending May 31, 2004.

AZZ recorded revenues for the quarter ending of 39.7 million, a 9.2% increase as compared to 36.3 million in the prior year. Net income for the quarter was 1.2 million, a 41% increase as compared to 883,000 in the prior year comparable quarter. Diluted earnings per share for the quarter was 23 cents as compared to 17 cents. Our electrical and industrial products segment generated 70% of our revenues while galvanizing services segment generated 30%.

Our backlog at the end of the first quarter was 51.9 million which compares to 45.7 in the first quarter of last fiscal year and 53.1 at the end of the last fiscal year ending 2004. We have seen a backlog stabilize above the $50 million mark for the past three quarters now. Our book to ship ratio which is one of our key statistics that we follow was 97% for the quarter. This is our fourth consecutive quarter that our book to ship ratio approximated or has been greater than a one-to-one. Incoming orders increased over the same quarter last year as well as last fiscal year's fourth quarter.

As in the past our major concern still remains our ability to sustain the book to ship ratio in our electrical and industrial product segment that we achieved over the last four quarters. As everyone is experiencing the rapid spike in steel prices around having an adverse affect on our businesses. Stabilization in metal pricing and any improvements in the industrial market should aid both segments of our business. At this time David will give us an overview of the electrical segment.

Domestic [INAUDIBLE] opportunities are limited. We continue to see an increase in our international power generation quotation activity. Primarily due to improved market coverage. While it is difficult to determine the timing, we continue to believe that the long-term worldwide demand for electrical power will improve over the current levels.

Our power distribution motor control center products have a broad application in the industrial and utility markets. The industrial application of this product is an extremely competitive marketplace. We believe that our continuing improvements in our distribution network will facilitate an increase in our participation in this market.

Our specialty lighting products saw improvement in domestic, industrial and petroleum markets and reflect the strongest quarter over quarter growth we have seen in a number of quarters. While far from being robust, we are pleased with the improved volume and the profitability for this product during the first quarter. Metal [INAUDIBLE] outdoor switch gear products with their strong utility distribution sub station base is operating at levels above prior periods due primarily to the strong backlog that we ended the year with. Inquiries remain stable and we would hope to see strong incoming order levels during the latter quarters of this fiscal year.

Our relay and control panels and industrial automation services continues to be unfavorably impacted by the low capital spending levels in the industrial markets markets and extreme pricing pressures. Manufacturing capacity utilization while showing improvement in recent months still remains below the 80% level. Utilization was 76.9% at the end of April which is up from a low of 74.3% in May of 2003. A return of the utilization levels of 1992 to 2000 which averaged 82.6% would positively impact many of our operations.

Inquiries for the high voltage transmission products particularly international projects continues at an encouraging level. Our bookings still remain below the potential for this product. We believe we will see international market opportunities develop before we will see the updating of the domestic transmission grid. Dana that will cover the operating results of the electrical and industrial products segment.

In this segment of our business AZZ recorded revenues for the quarter of 27.6 million, 14% increase as compared to prior year's results of 24.2 million. Operating income was 1.9 million, a 24% increase again as compared to $1.5 million in the prior year. Operating margins improved to 6.9% as compared to 6.4% in the comparable quarter last year.

Increased revenue was due to increased shipments in the power transmission and distribution markets as well as modest increases in shipments to the industrial market. The power generation and industrial automation markets remain at low levels. The operating margins benefited from leverage that was obtained from the modest improvement achieved in volumes.

Though market conditions remain challenging we still believe the markets have stabilized and we are positioned for recovery and improvement. Operating efficiencies, [INAUDIBLE] a third of the market, particularly international markets continues to be our focus and emphasis of our activities. The implementation of our new ERP system is on schedule and should provide numerous efficiencies once the conversion is completed in fiscal '05. At this time David will give us an overview of the galvanizing segment.

Despite the complexities brought about by the changes in the price of steel and zinc, we have seen another solid quarter in our galvanizing services segment. Large project work remains slow but we were able to minimize the impact this had on our operations due to our large customer base and multiple geographic locations. We continue to see the benefits from sizing our operations to match market conditions. We continue to report excellent operating margins for this business. Even without the benefit of a strong market, the segment continues to generate good operating performance and makes a very positive contribution to the overall operating results of the company.

The recent sharp increase in metals commodity pricing including the cost of zinc continues to impact our operations. We will see more of this impact in the second and third quarters than we incurred in the first. While the price of zinc has increased over the prior year, the high level volatility seems to have eased some. This high level combined with potential sustained high natural gas costs will require us to continue to closely monitor our operations and seek out any pricing opportunities which may present themselves as all industry participants are facing these same issues. Dana will now give us a review of the key operating statistics for the segment and cover our balance sheet items.

Revenues in the galvanizing segment for the quarter were 12.1 million, compared to a 12.1 million recorded in the first quarter in fiscal 2004. Our volumes of steel shipped were down when compared to the same quarter last year. But we have been -- we have seen some increase in our selling price on a quarter to quarter comparison. Operating income was 2.3 million compared to 2 million in the prior year quarter. Operating margins improved to 19.4% as compared to 16.5.

This segment was able to generate the same revenue for the quarter as compared to the same period in the prior year on less production due to increased prices as a result of some easing of pricing pressures in the markets that we serve. While pounds produced were lower than the previous quarter a year ago, favorable product mix, cost containments, operational efficiencies and some easing of pricing pressures led to improved operating results. It is anticipated that during the second quarter of fiscal '05 operating margins will be impacted by higher zinc costs as David has indicated. Again, any improvements in the economy or the industrial markets we serve should provide additional volumes and operating income opportunities for both segments.

That the time I will cover some of the key cash flow and balance sheet items on a comparative basis. Cash from operations was 2.5 million compared to 3.8 million in the prior year. Our receivables days outstanding remains good at 56 days compared to 58 days outstanding at the end of fiscal 2004. Inventory turns remain good which is reflected in the reduction in inventories in the amount of $1.6 million for the quarter. Inventory turns improved as a result of the increased shipments for the first quarter combined with improved management of our raw materials.

For the quarter, capital improvements were made in the amount of $2 million and depreciation and amortization was 1.4 million. That was reduced by 875,000, bringing our total outstanding bank debt to $30 million at the end of the quarter. We continue to reduce our leverage. Our current long-term debt to equity ratio at the end of the quarter stood at 0.35 to 1. As you can see, our focus continues to be on liquidity through debt reduction and my management of our working capital in the most efficient manner. I will turn the call over to David for closing comments and then open to the question and answer session.

In general, we some optimism about our market stabilization and the potential for improvement. Now, due to the fragile nature of the markets, issues such as interest rates, election and the war may cause some setback in the recovery and make it more difficult to sustain growth in particular in the industrial and the manufacturing sector which we are very reliant upon. Continued growth in capacity utilization and job creation would be very welcome news. Now, the aggressive steps we are taking in seeking out new domestic and international marketing opportunities, improving our distribution channels, lowering our cost structure, improving our operating efficiencies, enhanced management of our working capital and significant reductions in our funded debt make us well poised for a recovery.

Based upon the evaluation of information currently available to management we are continuing with our previously issued guidance for fiscal 2005 earnings to be within the range of 75 to 85 cents per diluted share and revenues to be within the range of 140 to 150 million. Included in our projected earnings is a one-time expenditure of approximately 650,000 to be expended during fiscal 2005 associated with the implementation cost of our ERP system of which 100,000, approximately 100,000 was incurred in the first quarter results. Additional -- anticipated benefits should be realized in fiscal year 2006.

We appreciate your support and thank you in advance for a continuation of that support. Again, thank you for your participation today and at this time we like to open it up for any questions.

At this time I would like to remind everyone if you would like to ask a question, please press star then the number one on your telephone keypad. Again, if you would like to ask a question at this time, please press star then the number one on your telephone keypad. And we will pause for just a moment to compile the Q&A roster. Our first question comes from the line of John Franthrub with Fidoty and Company.

My first question is the order rates. For the first time in nearly a year we saw a dip in the order rates below one. I wonder if there is one particular business that was weaker than the others, and if so, could you give us a little color as to why and is there something else going on there?

We would have been more pleased with a little stronger incoming order rate in the distribution side of the business. It traditionally is a little slower in our first quarter and we hope that continues to be true this year. If was true last year. But as you noted, we had a strong shipments quarter because we didn't incur the traditional delays from some of our customers. But in total we were pleased with the mix of incoming orders. We would have loved to have seen a little stronger in the distribution side.

Okay. So if you are pleased with the mixes does that imply that the generation side is picking up a little bit, or no?

No, but we believe we are getting our fair share of it. In other words, it was at the level we anticipated.

Okay. That is a great segue because you mentioned a little bit about the difficult pricing environment. I wonder if you could just give us a little bit of color as to the competitive landscape today, what is going on out there and what are you seeing?

We're actually seeing in some areas of our business tougher price competition than we saw a year ago which is in some ways surprising to us, John, because it runs contrary to improvement in some of the markets. But, you know, we are still running up against some that we believe are trying to backfield their properties, I mean their facilities. But we have actually been surprised in the first quarter that some of the price competition has been even greater than year ago.

Is this domestic or foreign competitors?

Primarily domestic competitors.

Really? That surprises me. One last question the increase in raw material costs and if you said this and I missed it I'm sorry but were you able to quantify how much it was in the quarter.

Approximately 1.6 million.

$1.6 million. Thanks very much, guys. Good job in a tough environment.

Thanks, John.

Your next question is from the line of Rick Federman with Federman Investment.

Good afternoon.

Afternoon.

Can you quantify at all or would you be willing to the possible new business that is in the pipeline and how do you -- or, you know, that you would be -- that you're seeing the opportunity to get? And is there very much business that is just not being signed versus going to others or just contracts aren't being let?

I -- I -- that is true. I don't think it is any higher than it normally is.

Okay.

I mean particularly with some of the large international folks, you don't see those closing very quickly and we're kind of used to that. So I think we are still seeing, you know, the continuation of pent up demand not being released and, you know, then there is some seasonality with utility buying that we have seen but I don't think there is anything remarkably unique about the first quarter as compared to the last seven quarters we have been through.

Okay. And what -- is there a noticeable improvement or some or none in the pipeline of prospective projects to bid on?

I think in our case you could say yes, there is on the international scene. But I think a lot of that is more as a result of exposure and improved coverage that we are getting as opposed to saying the international market is growing at a faster rate than what it was last year. I think with the setup that we in China, our improved representation particularly in the Middle East and Southeast Asia is giving us a look at a lot more projects than we were looking at a year and in particular two years ago.

Okay. Thank you.

Thank you.

Again, ladies and gentlemen, I would like to remind you that if you would like to ask a question please press star and then the number one on your telephone keypad. If you would like to ask a question at this time please press star then the number one on your telephone keypad. We will now go to the line of Mr. Will Lyons of Westminster Securities.

Good afternoon. Will, are you there?

I'm there. Sorry. A little bit of a glitch there.

That's okay.

Could you talk a little bit about -- metal is very important if your business. And what can you do to hedge yourselves against rising costs? Are they built into your contracts? Do you use hedge contracts on copper, et cetera, what do you do along those lines?

Traditionally we have had escalation clauses that covered copper and aluminum. I think with us as well as with most we traditionally have not had any kind of escalation clauses in there to cover the impact of steel and so those came up and caught us by surprise and in some cases we were able to go back and to get some relief from the customer but for the most part we had to absorb those. Going forward, we are having more and more success in including steel in the escalation provisions of t longer term contracts so we are covering ourselves on the selling side for steel aluminum and copper rather than going out and hedging. Now, of course, in the zinc side on the -- for the galvanizing operations we buy annual cap contracts as opposed to pure hedging on that. So essentially the way we're covering ourselves in the future is to try to do it with escalation provisions and price increases as well as we said with the zinc with the purchase of caps.

Did you have any trouble actually getting the quantities you needed of any particular metal or it was just a question of price?

It was question of price.

Thanks very much.

Thank you, Will.

Again, ladies and gentlemen, if you would like to ask a question at this time please press star then the number one on your telephone keypad. To ask a question please press star then the number one on your telephone keypad. Mr. Diaz, there are no further questions at this time. There are any closing remarks?

Thank you, all of you for joining us on today's call and the management team will look forward to talking with you again at the conclusion of the current quarter. Again, thank you for your time and have a great day.