AZZ Inc (AZZ) 2005 Q2 法說會逐字稿

Good afternoon. At this time I would like to welcome everyone to the AZZ incorporated second quarter 2005 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. [Caller Instructions] Thank you. Mr. Ramras you may begin your conference.

Thank you all for joining us today to review the financial results of AZZ for the second quarter ended August 31, '04. As the conference call operator indicated, my name is Max Ramras, and I'm with RCG. We're the financial relations consulting firm for AZZ. Presenting on the call today from the management team will be Mr. David Dingus, who's the President and Chief Executive Officer; along with him making remarks will be Mr. Dana Perry, who is the Senior Vice President of Finance and the Chief Financial Officer. As the operator indicated, at the conclusion of today's prepared remarks we will open the call up for a question-and-answer session. If anyone participating in this call does not have a copy, a full copy, of the release that was issued this morning and is unable to retrieve it from an Internet site, please feel free to call us at RCG at 480-675-0400, and we will immediately fulfill your request. Before we begin with the prepared remarks, 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 SEC. Such statements are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995.

Those risks and uncertainties previously mentioned may include but are not limited to changes in customer demand and response to products and services offered by the company. Including demand by electrical power generation markets; electrical transmission and distribution markets, the industrial markets, and the hot dip galvanizing markets; prices and raw material costs, including zinc and natural gas which are used in the the hot dip galvanizing process; changes in economic conditions of various markets, the company serves both foreign and domestic; customer requests; 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. Having said that we'll begin the presentation with an overview of the Company's results from Mr. David Dingus, President and Chief Executive Officer of AZZ. David.

Thank you, Max, and thanks to each of you for taking the time to join us for the quarterly conference call for the second quarter of our fiscal year 2005. The second quarter was completed on August 31, 2004. We believe that recent market indicators suggest that our markets have stabilized and, in some areas, have shown some improvement. We saw a double-digit increase in our quarterly quotations, both in number of quotes and dollar value. Our book-to-ship ratio improved to 105% and compares favorably to the first quarter of the fiscal year and the fourth quarter of the prior fiscal year. Year-to-date, our book to ship ratio is 101%. Backlog improved to 53.8 million and compares favorably to the 48.5 million for the same period last year. Additionally, it is more widely dispersed across our operations than at this same time last year. Incoming orders for the quarter were $38.4 million. There does appear to be some remaining uncertainty in the industrial market sector which results in longer inquiry to order cycle times.

We continue our efforts to improve our market coverage and expansion of our served markets, which has resulted in an increase in our quotation activity. Competitive forces remain extremely aggressive, and we continue to see price deterioration in certain of our markets, particularly in the limited domestic power generation opportunities. The lack of energy legislation has continued to adversely affect our operations, but despite these factors we continue to improve upon our overall presence in the market. Most of our competitors continue to strive to maintain market share using price as the primary vehicle. The operations results for the quarter and the first six months were in line with our internal expectations and the earnings guidance we have previously issued. This is despite a continuation of the difficult market conditions and intense competition.

For the first six months, revenues have increased 8%, net income is up 15%, diluted earnings per share increased 11%, and our backlog increased 11%. Our challenges are great, but our accomplishments are improving and we continue to double and redouble our efforts to secure profitable business. We've sized our operations to reflect these market conditions and have continued our efforts to improve operating efficiencies and financial performance. While progress has been made, we are still searching for any additional improvement opportunities. We are particularly pleased that the first six months results reflect a favorable leverage that can be achieved for modest increases in our revenues which lead to more significant increases in income and earnings per share. We continue to place emphasis on systems and procedures, in sharing of best practices among our operations, to further enhance our 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.

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. We continue to also seek out products that will strengthen our portfolio and increase our sales to our existing customer base. Now, 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 six months of our current fiscal year. Dana.

Thank you, 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, 2004. AZZ recorded revenues for the quarter ending of 36.5 million, a 7.4% increase, as compared to 34 million in the prior year. Net income for the quarter was 908,000 as compared to 996,000 in the prior year. Diluted earnings per share was 16 cents as compared to last year's 19 cents per share. Revenues for the six-month period ending were 76.2 million compared to 70.4 million in the prior year. Our Electrical and Industrial Product segment generated 67% of our year-to-date revenues while the Galvanizing Services generated 33%. As David has indicated our backlog at the end of the second quarter was 53.8 million which compares to 48.5 for the second quarter of last fiscal year and to 53.1 at the end of '04. We have seen our backlog stabilize above the $50 million mark for the past four quarters now.

Book-to-ship ratio, which is one of our key statistics that we follow, was 105 to 1 for the quarter. This is our fifth consecutive quarter that our book-to-ship ration has been approximated or has been greater than a 1 to 1 ratio. Our year-to-date booked ratio is 101 to 1. Incoming orders increased over the same quarter last year as well as last fiscal year's fourth quarter. Again, our major concern still remains our ability to sustain the book-to-ship ratio in our Electrical and Industrial Products portion of our business that we achieved over the last five quarters. While our second quarter book to ship ratio showed improvement over the first quarter, several projects continued to be delayed due to some remaining economic uncertainties, the industrial markets, and the pending energy legislation. Any improvements, again, in the industrial market should aid both segments of our business. At this time David will give us an overview of the Electrical and Industrial segment.

While domestic power generation opportunities are limited, we continue to see an increase in our international power generation quotation activity, primary due to improved market coverage. While it is difficult to determine timing, we continue to believe the long-term worldwide demand for electrical power will improve over the current levels. Our power distribution and 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 and has shown little improvement. We believe that continuing improvements in our distribution network will facilitate an increase in our participation of this market. Our specialty lining products saw improvement in domestic, industrial, and petroleum markets and reflecting continuing growth. While far from being robust, we are pleased with the improved volume and the profitability for this product during the first six months of the current fiscal year. Metalclad outdoor switchgear products with their strong utility substation base is operating at levels above prior periods, due primarily to the strong backlog that we entered the year with.

Inquiries remain stable and we would hope to see strong incoming order levels continue during the latter quarters of the current fiscal year. Our relay and control panel in industrial automation services continues to be unfavorably impacted by low capital spending levels in the industrial markets and pricing pressures. Project related to wind energy have been delayed due to pending legislation, however, we are in a good position to benefit should growth occur in this market sector. Manufacturing capacity utilization, while showing improvement in recent months, still remains below the 80% level. Utilization was at 77.3% at the end of August which is up from a low of 74.3% at the end of May in 2003. Return to the utilization levels of the 1992 to 2000 period, which averaged 82.6, would positively impact many of our operations. Inquiries and bookings for our high voltage transmission products, particularly international projects, continues at an encouraging level. We believe we will see international market opportunities develop before we see the updating of the domestic transmission grid.

We continue to add new customers to our served base and international projects now account for in excess 15% of our current backlog. We are hopeful that a number of projects we are currently working on will be converted into orders prior to the end of our current fiscal year. Dana will now cover the operating results of this segment.

In this segment of our business AZZ recorded revenues for the quarter of 23.4 million, a 6% increase as compared to the prior year results of 22.1 million. Operating income was 1.3 million on a comparative basis to 1.5 million in the prior year. Operating margins for the quarter were 5.6 on a comparative basis to 6.6. Increase in revenues was due to the increased sales to the power distribution market as well as some improvement in the transmission market; which was associated with orders booked in late fiscal 2004. These increases were partially offset by further declines in our power gen business. Softness in the industrial market has continued to hamper the Company's ability to offset the downturn in the power generation projects. Continued pricing pressures on the markets in which these products are sold, as well as our inability to pass along many of the material cost increases we have incurred have adversely affected our operating profits and margins. The company continues to implement cost containments, review all strategic alternatives to lower our overall cost structure while maintaining product quality and customer service.

Though market conditions remain very challenging, we still believe our markets have stabilized and we are positioned for recovery and improvement. Operating efficiency improvements, expansions to served market, particularly the international markets, continues to be our focus and emphasis of our activities. The implementation of our Oracle ERP system is well underway and should provide numerous efficiencies once the conversion is completed in fiscal 2005. At this time David will give us an overview of our galvanizing segment.

Despite the complexities brought about by the changes in prices of steel and zinc, we had an excellent quarter in Galvanizing Services segment. The 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. Quarterly revenues for this segment were the strongest since the quarter ended August 31, 2001. We continue to see the benefits from sizing our operations to match market conditions. We've been able to recover our cost increases with pricing, and are positioned to see the excellent improvement from leverage should the market continue to strengthen. The recent sharp increases in metal commodity pricing, including the cost of zinc, continues to impact our operations. We'll see more of this impact in the third and fourth quarters than we incurred in the first six months. While the price of zinc has increased over the prior year, the high level of volatility seems to have eased. This combined with sustained high natural gas cost will require to us continue to monitor our operations and pricing opportunities which may present themselves as all industry participants are facing the same issues.

Now with several of our operations located along the Gulf Coast, we were concerned about the potential impact that hurricane Ivan could have on our operations. While operations were impacted, we sustained minimal wind damage and power losses. However, all operations are back up and running. We were very fortunate and extend to those less fortunate than ourselves our condolences in their loss of life and property. Dana will now give us a review of the key operating statistics for this segment and cover the key balance sheet items.

Revenues for our galvanizing segment for the quarter were 13.1 million as compared to 11.9 million recorded in our second quarter in fiscal 2004. Our volumes of steel shipped were up when compared to the same quarter last year while our selling price was relatively flat on a quarter-to-quarter comparison. Operating income was 2.4 million as compared to 2 million in the prior year. Operating margins improved to 18.2% compared to 16.7. Improved operating results were achieved through higher revenues as well as lower costs as a result of continued cost reductions throughout the year. While selling prices stabilized during the second quarter of the current fiscal year, the six-month average selling price increased as compared to the same period last year. It is anticipated that during the balance of fiscal '05, operating margins will again be impacted by higher cost of zinc. Revenues for this segment have historically closely followed the conditions of our general economy. Any sustained recovery of the general economy should produce improved results for this segment.

At this time I will cover some of our key cash flow and balance sheet items on a comparative basis as well. Cash provided by operations was 5.4 million as compared to 12.1 million in the prior year. Our receivable days remain good, standing at 56 days compared to 58 days at the end of our fiscal 2004 year. Inventories remain good which is reflected, again, in a reduction of our overall inventories. For the quarter, capital improvements were made in the amount of 3.5 million. Depreciation and amortization to date is 2.8 million. Debt, again, has been reduced by 2.3 million for the quarter bringing our total outstanding bank debt down to 28.6 million. We continue to reduce our leverage and our current long term debt-to-equity ratio at the end of the quarter was 0.32 to 1. As you can see, our focus continues to be on liquidity through our debt reduction and by managing our working capital in a most efficient manner. At this time I will turn the conference over to David for closing comments, then we will open up for our question-and-answer session.

In general we have some optimism about our market stabilization and potential improvement. Now, due to the fragile nature of these markets, issues such as interest rate, elections, the war, may cause some setback in the recovery and make it more difficult to sustain growth. In particular in the industrial and manufacturing sector, which we're very reliant upon. Continued growth in capacity utilization and job creation, passage of energy legislation would be very welcome news. The aggressive steps 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 a recovery.

Based upon the evaluation of information currently available to management we are continuing our previously issued guidance for fiscal year 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. Our earnings per share estimate includes a portion of the Oracle ERP system implementation project cost of approximately 650,000 which does not qualify for capitalization. Approximately 280,000 of this has been expended in the first six months of our current fiscal year. Anticipated benefits should be realized in fiscal year 2006. We appreciate your support and thank you in advance for continuation of that support. Again, thank you for your participation today and we'd like to open it up for any questions that you might have at this time.

[Caller Instructions] We will pause for just a moment to compile the Q&A roster. Your first question comes from Will Lyons with Westminster Securities.

Hi guys

Hi Will.

Your backlog reached its lows back in the May, '03 quarter. And it's been on an upward trend since then, though certainly not straight line. Yet in your 8-K today, you've kept your guidance where you had it before. I'm just wondering, you're already-- with your year-to-date half-year numbers on revenue and earnings, you were past the half-way mark for your current guidance. Are you expecting a little bit of a slowdown in the second half of the year?

No, I think it is --again we're able, Will, to take that backlog and anticipate the actual timing of its shipment, and that it's consistent with our prior assumptions. So really the improvement that we're seeing should be felt in the following fiscal year.

Oh, I see. Okay. A follow-on to that. Could you give us a little more color? Your outlook for your international markets versus the U.S.?

Yes. We continue the improve our coverage and participate more in the international marketing activity. This is not only encouraging due to the strength of some of those international markets, but many of the projects are of substantial size, and the landing of those could have a very beneficial impact upon us, Will. So we're, again, looking to expand and to grow that percentage of our backlog that is in the international sector and participate more in these markets that are behaving much better than the domestic market is.

So internationally there's less of a problem with slowdowns or delays in large capital projects than there is in North America?

I'm not going to say there's less issues with delays. There's more to choose from.

I see. Okay. Thank you very much.

Thank you, Will.

[Caller Instructions] Your next question comes from John with Sidoti & Company.

Good afternoon, gentlemen.

Afternoon, John.

My first question, David, is regarding the statement that you've seen several large projects delayed or actually said several projects delayed. Could you give us a sense of the size of these projects and when you expect them actually maybe to hit the order book?

John, I want to answer your question but I might hedge a little bit due to competitive issues. But they're all north of a million dollars, and I still hope to rein in a substantial number of them between now and February 28th.

Okay. And maybe you could work this through with me, as I look at the galvanizing business, and I'm comparing your August results to your May results; it looks to me like revenue is up 6.5% but operating income is only up 2%. Remember this is sequentials I'm looking at here. But, by my estimates, zinc prices are down about 13% during that same time frame. Can you explain to me why you haven't gotten the benefit of lower zinc prices from the end of the last quarter through this quarter?

Yeah, John, remember that zinc price has stabilized but what we're realizing in the second quarter was the peak pricing because of the first in first out. So, while we'll, in the third quarter, we'll still have some of that rolling through; the stabilization that we're getting now will start correcting in the fourth quarter. So that's the reason that our cost of zinc is a little out of sync.

Perfect, that explains it. And I guess, lastly, could you just give me the exact number for the ERP cost in the August period? I was kind of confused exactly how much hit the P&L in the quarter.

Okay. For the six months it was 280,000, and for the quarter -- I'm sorry, John, I don't have it in front of me; but I reported last quarter, you'll just have to take the difference between the two. I apologize, I don't have that in front of me.

Is I'll get back into queue for follow-up.

All right.

Sir, you do have a follow up question from John Franzreb.

Sorry, I don't mean to pester you.

That's okay.

Could you talk a little bit about the pricing pressures. You talk about limited power gen opportunities. Where is the competition coming from? Is it domestic? Is it foreign? Could you expand a little bit about the competitive environment right now?

Okay. We, naturally, see more in total on the domestic side than we do on the international side. Now, and it is definitely more intense in power generation than in any of our other markets. Now, on the large international projects that we're working on naturally, John, they attract a lot of players; but we don't see the intensity of pricing there that we see in the domestic market. So it's more the benefits of our local manufacturing in China, the benefits of improvement in our distribution network that is allowing us to remain competitive in that level. The utility side of the business, while we have see--I'm talking about on distribution side and transmission side, has seen pressure but nowhere near to the degree of power generation.

Okay. And do you expect the power distribution side of the business to remain strong for the foreseeable future or do you think that maybe you're getting a benefit right now that will not persist into next year?

John, as we look at it, we think that if there is a decrease in distribution, there'll be an increase in transmission. We think the total dollars expended in those two areas will remain constant if not increase. So if we lose a little on the distribution side, we believe we'll pick it up on the transmission side.

Great. Okay, thanks a lot, David.

Thank you, John.

We have reached the end of the allotted time for questions and answers, gentlemen, are there any closing remarks?

As always, we certainly appreciate everyone's time and consideration to participate in the quarterly calls. Should you have any questions or require any additional information don't hesitate to contact any of us at RCG or the management team at AZZ. Thanks again. We look forward to speaking with you next quarter.

Thank you for participating in today's conference call. You may now disconnect.