AZZ Inc (AZZ) 2005 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is Tina and I will be your conference facilitator. At this time I would like to welcome everyone to the AZZ Inc. third-quarter '05 earnings conference call. (OPERATOR INSTRUCTIONS) Mr. Dormey (ph), you may begin your conference.

Good afternoon. We'd like to thank everyone for taking time out of your busy schedules to join us today to review AZZ's third-quarter financial results ended November 30, 2004. With us today representing the Company are Mr. David Dingus, President and Chief Executive Officer, and Mr. Dana Perry, Chief Financial Officer.

Before we began we submit for the record this conference call has been made available by the way of webcast technology on the Internet and direct dial via conference call service to all interested parties.

This conference call includes statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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. 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 product 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 hot-dip galvanizing process; changes in the economic conditions of various markets the Company serves, foreign and domestic; customer requested delays of shipments; acquisition opportunities; adequate financing; and availability of experienced management employees to implement the Company's growth strategy. The Company can give no assurance that such forward-looking statements will prove to be correct.

With that having been said I'd like to turn the call over the Mr. David Dingus, President and Chief Executive Officer of AZZ. David?

Good afternoon and thank you for taking the time to join us for the quarterly conference call for the third quarter of our fiscal year 2005. The third quarter was completed on November 30th of 2004.

We believe that recent market indicators and quotation levels suggest that our markets have stabilized and in some areas have shown some improvement. Despite continued pricing pressures, we were able to achieve an improved order level with orders that met our minimum margin objectives. Incoming orders for the quarter were 44.6 million, while shipments for the quarter totaled 38.3, resulting in a book-to-ship ratio of 116 percent.

Despite the improvement in quotation and bookings activity, we remain disappointed that competitive conditions have precluded us from recovering our cost increases, primarily in the Electrical and Industrial Products Segment. For the nine months, incoming orders of 121.4 million exceeded shipments of 114.5 for a year-to-date book-to-ship ratio of 106 percent. Backlog improved to 60.1 million and compares favorably to the 52.5 million for the same period last year. Additionally, it is more widely dispersed across our operations than at this time last year. We continue our efforts to improve our market coverage and expand our served markets, which has resulted in improved domestic and international quotation activity.

Competitive forces remain extremely aggressive due to the imbalance between supply and demand and we continue to see aggressive price initiatives from our competition. Most of our competitors appear to continue to strive to maintain market share using price as the primary vehicle.

The operating results for the quarter and for the first nine months were in line with our internal expectations and earnings guidance we had previously issued. This is despite a continuation of the difficult market conditions, double-digit increases in steel and other commodities and intense competition. For the nine months revenues have increased 10 percent, net income is up 10 percent, diluted earnings per share increased 7 percent, and our backlog has improved 15 percent.

Our challenges are great and 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're still searching for and seeking out additional improvements opportunities. We continue to place emphasis on systems and procedures and sharing of the best practices of our operations to further enhance operating efficiency. We are also continuing our 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 markets. We continue to also seek out products that can strengthen our portfolio and increase sales to our existing customer base.

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

Thank you, David. As usual, I would 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 30, 2004.

AZZ recorded revenues for the quarter ending of 38.3 million, a 14.9 percent increase as compared to 33.3 million in the prior year. Net income for the quarter was 1,912,000 as compared to 1,866,000 recorded in the same time frame in the prior year as well. Diluted earnings per share was 22 cents as compared to last year's 21 cents per share.

Revenues for the nine-month period ending were 114.5 million as compared to 103.7 million. Net income for the nine-month period was 3.4 million, again as compared to 3 million in the prior year. Diluted earnings per share were 61 cents compared to 67 cents recorded at the same time frame last year.

Year-to-date implementation costs associated with the installation of our new ERP system has amounted to approximately $505,000. Our Electrical and Industrial Products Segment generated approximately 66 percent of our year-to-date revenues, while the Galvanizing Services Segment has generated approximately 34 percent.

Incoming orders continue to outpace shipments. Our backlog at the end of the third quarter, as David indicated, was 60.1 million, which compares very favorably to the 52.5 million for the third quarter last fiscal year and 53.1 million at the end of fiscal 2004. Our book-to-ship ratio again was 116 percent for the quarter. This is the sixth consecutive quarter that our book-to-ship ratio approximated or has been greater than a 1-to-1 ratio. Our year-to-date book-to-ship ratio was 106-to-1. At this time David will give us an overview of the Electrical and Industrial Products Segment.

While domestic power generation 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 timing, we continue to believe that 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 electric market. The industrial application of this product is an extremely competitive marketplace and has shown limited improvement. We believe that continuing improvements in our distribution network, improvements in our sales coverage, and potential new opportunities related to LNG and clean fuels will provide for opportunities for growth of this segment of our business.

Our specialty lighting products saw improvement of domestic industrial and the petrochemical markets, reflecting continuing growth. While this growth is far from being robust, we are pleased with the improved volume and profitability for this product during the first nine months of the fiscal year.

Our metal-clad outdoor switchgear products with their strong utility distribution substation base is operating at levels above prior periods and inquiries remain stable.

Our relay and control panel and industrial automation services continues to be unfavorably impacted by low capital spending levels in the industrial market and extreme pricing pressures.

The US manufacturing capacity utilization, while showing improvement in recent months, still remains below the 80 percent level. Utilization was at 77.7 percent at the end of the quarter, 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 percent, would positively impact most of our operations.

Inquiries and bookings for our high-voltage transmission products, particularly international projects, continues at an encouraging level. We believe that we will see international market opportunities develop before we see the updating of the domestic transmission grid.

Dana will now cover the operating results of this segment.

In our Electrical and Industrial Products Segment we recorded revenues for the quarter of 25 million, an 18.3 percent increase as compared to the prior-year results of 21.1 million. Operating income was 1.7 million, again compared to 1.6 million in the prior year. Operating margins in this segment were 6.9 percent as compared to 7.7 percent.

The increase in revenues reflects the increase in utility spending in the transmission and distribution market. The additional spending in the distribution market results from the need to replace aging infrastructure equipment, improve the reliability and efficiency of delivery of electrical power to industrial and residential users. Increased revenues in the transmission and distribution markets have been partially offset by the continue lower demand from the power generation market dating back to 2002, as well as a slow recovery of the industrial market. Continuing pricing pressures, as David indicated, on the markets in which these products are sold to, as well as our inability to pass along many of the material cost increases we have incurred, have adversely affected 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.

While market conditions remain very challenging, we still believe our markets have stabilized and are positioned for recovery and improvement. Operating efficiency improvements, expansions of served markets, particularly international markets, continues to be our focus and emphasis of our activities. The implementation of our new ERP system is well underway, and should provide numerous efficiencies once the conversion is completed in mid-fiscal 2006.

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

Despite the complexities brought about by the changes in the prices of steel, zinc and natural gas, we had another excellent quarter in our Galvanizing Services Segment. We continue to see the benefits from sizing of our operations to match market conditions. We've been able to recover the majority of our cost increases with pricing, and are positioned to see excellent improvement from leverage should the market continue to strengthen.

The increases in metal commodity pricing, including the cost of zinc, continues to impact our operations. We will see more of this impact in the fourth quarter than we've seen in the first nine months. Recent weeks have seen the return of higher zinc costs and increased volatility. Some are even projecting higher cost levels through the balance of calendar 2005. This combined with sustained high natural gas costs will require us to continue to closely monitor our operations and all pricing or surcharge opportunities which may present themselves as all industry participants are facing the same issues.

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

Revenues in our Galvanizing Segment for the quarter were 13.3 million on a comparative basis to 12.2 million recorded in the same quarter of fiscal 2004. The volumes of steel shipped were up when compared with the same quarter last year, while our selling price was relatively flat. Operating income was 2.4 million compared to 2.3 million. Operating margins were 18.1 percent as compared to 18.8 percent.

The improved operating results were achieved through higher revenues as well as lower costs as a result of continued cost reductions throughout the year. Increased zinc costs will make it challenging for this segment to sustain the first nine months margin performance through the balance of the fiscal year. Revenues for this segment have historically closely followed the condition of the general economy and any sustained recovery of the general economy should reduce produce improved results for this segment.

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

Cash provided by operations year-to-date was 8.7 million as compared to 13 million in the prior year. Receivable days outstanding and inventory turns remain good. Accounts receivable days outstanding were 57 days at the end of November '04 as compared to 58 days at the end of our last fiscal year.

Year-to-date capital improvements were made in the amount of 5.4 million. Items included in our capital programs included 1.6 million that we have spent to date on our Oracle ERP installation and $3 million invested in maintaining our Galvanizing Services Segment.

Depreciation and amortization has amounted to 4.3 million.

Debt has been reduced by 3.1 million, bringing our total outstanding bank debt to 27.7 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 stands at 0.30-to-1. As you can see, our focus continues to be on our liquidity through debt reduction by managing our working capital in the most efficient manner.

At this time I will return the conference called over to David for closing comments and we will open to our question-and-answer session.

In general we have some optimism about our market stabilization and potential improvement. Due to the fragile nature of the markets, it's difficult to determine if the markets can absorb the pent-up cost increases that we have absorbed, and we are facing increasing pressure to increase prices to recover these costs escalations. Continuing strengthening of the economy, growth in capacity utilization, and job creation would be very welcome news. 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 a recovery.

Based upon the evaluation of information currently available to management, we are continuing our previously-issued guidance for FY 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 Oracle ERP system implementation project costs of approximately 650,000 which does not qualify for capitalization. Approximately 225,000 was expended in this quarter and 505,000 of this amount has been expended in the first nine months of our current fiscal year. Anticipated benefits should be realized in Fiscal year '06.

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

(OPERATOR INSTRUCTIONS) John Franzreb, Sidoti & Co.

David, you said that you expect to see increased international opportunities emerge before an updating of the grid, if I wrote this down properly. Could you elaborate on that statement?

Yes. We think that based upon the quotation activity that is going on that we will see orders out of the Asian and Middle East market before we will see anything of significance out of the US domestic market. We are still -- until we can get some legislation that says how you recover the cost, John, we just don't think it is going to break loose that tremendous pent-up demand that is there. We're going to be more reliant upon international orders in the near-term, near-term being the next 1 to 2 years, before I believe we see the placing of orders to improve the infrastructure related to the domestic transmission grid.

How much of this demand pull is coming from your joint venture in China?

Probably 40 to 50 percent of what we're looking at is related to the Chinese market.

And if you were going to peg a domestic versus foreign revenue breakdown at the end of next year, what would it look like?

For transmission?

For electrical overall. How about company-wide? We'll make it the big pie.

75/25. 75 domestic, 25 international.

I noticed the spike in the zinc prices -- by my back of the envelope estimate it looks like it's up 20 percent since the beginning of November. What's behind that jump in the price of zinc?

You have had a decrease in the inventory levels. And some of the people who follow that are advocating that zinc, even though it increased, did not increase at the same percentage level that aluminum, copper, nickel and steel did. And now it's getting the attention. And then of course you do have the impact of the use in the Asian market. Now since 56 percent of the zinc goes into the galvanizing -- not only the steel fabrication that we do but into the coiled steel -- any increase in the industrial economy is going to raise it up. So you've had a reduction in inventory, no new supplies coming online, and then you have the commodity traders who are saying, "this one didn't escalate at the same level as the others did in the past year."

So is this catch-up effect more speculators or there is real demand pull behind it?

There is real demand pull. There's reduced inventory, but more increase in the speculation activity.

One last question about the competitive landscape. Is this mostly domestic competitors or is it from overseas competitors as you go up against international job opportunities?

I think it's tougher domestically than it is international. It's certainly present there. But I may be saying that simply because of the mix of our business is much more heavy, and some of them we only participate on the domestic side. But when you get into the international market, you're getting into some more of our specialized products which you don't see quite as much of the pressure as you do with some of our industrial and electrical equipment for the US domestic market.

Thank you very much, David.

(OPERATOR INSTRUCTIONS) Will Lyons, Westminster Securities. Mr. Lyons, your line is open. I'm sorry, he has disconnected from the conference. Rick Fetterman, Fetterman Investments.

Good afternoon. I wonder, has there been any notable business either in reconstruction in Florida or any conversation about any new construction in Asia as a result of the disasters in those two parts of the world?

The business that we have gotten out of the Florida market was already in the planning cycle prior to the hurricane. In fact, we actually had some orders which that were slowed down because of that. So we haven't seen anything. And we don't know what anything of any significance that would favorably impact us from the Asian crisis.

Thank you.

We have no further questions at this time. Mr. Dormey (ph), you have any closing remarks?

Yes. Again, we would like to thank everyone for joining us today on the call. If you acquire require additional information on AZZ, please feel free to contact us at RCG at area code 480-675-0400 and we will provide whatever information you might need. We look forward to speaking with you again at the conclusion of the next quarter. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may all disconnect.