AZZ Inc (AZZ) 2005 Q4 法說會逐字稿

At this time I would like to welcome everyone to the AZZ Incorporated fiscal year end 2005 conference call. [OPERATOR INSTRUCTIONS] Mr. Dorame, you may begin your conference.

Good afternoon. We'd like to thank everyone for taking time out of your busy schedules today to join us to review AZZ's fourth quarter financial results ended February 28, 2005. With us today representing the Company are Mr. David Dingus, President and Chief Executive Officer and Mr. Dana Perry, Chief Financial Officer. Before we begin, 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 the documents filed by the Company with the SEC. Those risk-- 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 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, 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 to Mr. David Dingus, President and Chief Executive Officer of AZZ. David?

Thank you, Joe, and thank you for taking the time to join us for the conference call for our fourth quarter and fiscal year 2005. The fourth quarter and fiscal year was completed on February 28th, 2005. We believe that market indicators and quotation levels continues to suggest that our markets have stabilized and in some areas have shown some improvement. We have seen a continuing trend of a higher level of international quotations, particularly in power generation and high voltage transmission products. As I indicated in our press release, we did see some flattening in our December and January domestic electrical and industrial quotation levels and it is difficult to determine if this is a trend or seasonal. The total dollar value of quotations did increase, due primarily to larger international quotes.

Despite extreme pricing pressures and having to walk away from some opportunities due to unacceptable pricing levels, we were able to achieve an improved order level that met our minimum margin expectations. In-coming orders for the quarter were 42.6 million while shipments for the quarter totaled 37.9, resulting in a book-to-ship ratio of 112%. We were disappointed that competitive conditions have precluded us from fully recovering our cost increases, primarily in the Electrical and Industrial product segment. Our current targeted pricing levels reflect a higher level of recovery of these cost increases and we do not anticipate market conditions will allow for the full recovery of them, thus keeping downward pressure on operating margins.

For the fiscal year, in-coming orders of 164.1 million exceeded shipments of 152.4 for a year-to-date book-to-ship ratio of 108%, up from the 103% for the prior fiscal year. Backlog improved to 64.8 million and compares favorably to the 53.1 million for the same period last year or a 22% increase. We are pleased with the distribution of the backlog across our operations. We continue our efforts to improve our market coverage and expand our served markets, which has resulted in improved bookings. Competitive forces remain extremely aggressive due to the imbalance between supply and demand, and we continue to see aggressive price initiatives from our competitors. Most of our competitors appear to continue to strive to maintain market share or increase capacity utilization using price as the primary vehicle.

The operating results for the quarter in the fiscal year were above our guidance and our internal expectations due to the receipt of some quick-turn jobs, expedited shipment requests, and the strong demand for Galvanizing Services. Despite the continuation of difficult market conditions, double-digit increases in steel and other commodities, and intense competition, we are pleased to report the improvements over the prior year. For fiscal year 2005 revenues have increased 12%. Net income is up 13%. Diluted earnings per share increased 10% and our backlog improved 22%. Our challenges are great, our accomplishments are improving, and we continue to double and redouble our efforts to secure profitable business. We have sized our operations to reflect market conditions and have continued our efforts to improve operating efficiencies, lower our cost of production, improve on our financial performance. While progress has been made, we are still searching for and seeking out additional improvement opportunities.

We continue to place emphasis on systems, procedures, and sharing our best practices among our operations to further enhance operating efficiency. We are also continuing our emphasis on liquidity and continue to further reduce our debt and improve our debt-to-equity ratio. Our current debt-to-equity ratio is 0.32 to 1. 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. Now, with that as an overview of our results, Dana will now give us a review of the operating results for the quarter and the fiscal year. Dana?

Thank you, David. I would also like to welcome each of you to our fourth quarter conference call. At this time, I will review our unaudited consolidated results for the period ending February 28, 2005. AZZ recorded revenues for the quarter ending of 37.9 million, a 16.7% increase as compared to 32.5 million in the prior year. Net income for the quarter was $1.460 million as compared to 1.228 million. Diluted earnings per share was $0.26, compared to last year's $0.22. Revenues for the 12-month period ending were 152.4 million, compared to 136.2 million in the prior year. Net income for the period was 4.8 million, as compared to 4.3 million in the prior year. Diluted earnings per share was $0,87 as compared to last year's $0.79.

Year-to-date implementation costs associated with the installation of our new ERP system in compliance with Sarbanes-Oxley Act has amounted to approximately $775,000. Our Electrical and Industrial segment generated 66% of our year-to-date revenues while our Galvanizing Services segment generated 34%. In-coming orders continue to outpace shipments as David indicated. Our backlog at the end of the fourth quarter was 64.8 million, which compares to 53.1 million at the end of fiscal '04. Our book-to-ship ratio was 112% for the quarter. This is our seventh consecutive quarter that our book-to-ship ratio has approximated or has been greater than 1-to-1. Our year-to-date book to ship ratio stood at 1.08 to 1. At this time David will give us an overview of the Electrical and Industrial segment.

While our domestic power generation opportunities are limited, we continue to see an increase in our international power generation quotations. 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. We do anticipate -- we do not anticipate seeing a significant improvement in our fiscal year 2006. Industrial demand for our power distribution and motor control center products has not seen the improvement that we had anticipated. 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 opportunities for growth of this segment of our business.

Our speciality lining products saw improvement in domestic, industrial, and petroleum markets, and reflecting continuing growth. We are pleased with the improved volume and profitability for this product and increased emphasis on product development should provide future growth opportunities. Metal clad outdoor switch gear products with their strong utility distribution substation base is operating at levels significantly above prior periods. 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.

Now, the inquiries in bookings for our high-voltage transmission products, particularly international projects, continues at an encouraging and a robust level. Which, if secured, would be very favorably impact fiscal '07 and fiscal '08. We did see some good booking activity for the northeast U.S. market during the fourth quarter of our current fiscal year, our fiscal year 2005, excuse me. We should see international market opportunities develop before we will see a broad-based updating of the domestic transmission grid. Dana will now cover the operating results of our Electrical and Industrial Products segment.

This segment of our business we recorded revenues for the quarter of 24.5 million, a 13.9% increase as compared to the prior year results of 21.5. Operating income was 2.3 million, again, as compared to 1.7 million in the prior year. Operating margins improved to 9.5%, compared to 8%. The increase in revenue reflects the increase in utility spending in the transmission distribution markets of our business. As David indicated, continuing pricing pressures 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 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 well-positioned for recovery and improvement. Operating efficiencies and improvements, expansion of certain markets, particularly international markets continues to be our focus and emphasis for our activity. The implementation of our new ERP system is well underway and should provide numerous efficiencies once this conversion is completed during fiscal 2006. At this time, David will give us an overview of the Galvanizing segment.

Despite the complexities that were brought about by the changes in commodity pricing, we had another excellent quarter in our Galvanizing Services segment. We continued to see the benefits from sizing of our operations to match market conditions. And leverage is assisting us in margin maintenance, despite escalating costs, such as zinc. We are well positioned to see additional improvements from leverage should the market continue to strengthen. The cost of zinc and pine 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 statistics for this segment and cover the key balance sheet items.

Revenues in our Galvanizing Services segment for the quarter were 13.4 million, compared to 11 million recorded in the fourth quarter of fiscal 2004. Our volumes of steel shipped as well as our selling prices were up as compared to the same quarter last year. Operating income was 2.4 million, as compared to 2.3 million. Operating margins were 18%, as compared to 21.4. The improvements that we received or where the results were achieved through higher revenues and volumes. Increased zinc costs negatively impacted our margins throughout the balance of the last half of the fiscal year. For the quarter, year-over-year zinc costs were up approximately $400,000. Revenues for this segment have historically closely followed the condition of the general economy and 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. Cash provided by operations was 6.4 million as compared to 14.1 million in the prior year. Our receivable days outstanding and inventory turns remained good. Accounts receivable days outstanding were 57 days at the end of February 2 of '05, as compared to 58 days at the end of last fiscal year. Year-to-date capital improvements were made in the amount of 6.6 million. Items included in our capital programs included 1.8 million spent to date on our Oracle ERP installation and $3.5 million investment in maintaining our Galvanizing Services segment.

Appreciation and amortization amounted to 5.6 million. Debt has been further reduced by $1.5 million during the 2005 fiscal year, bringing our total outstanding bank debt to $29.4 million at the end of the fiscal year. We continue to reduce our leverage, our current long-term debt-to-equity ratio at the end of the fiscal year was 0.32 to 1. 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 back over to David for closing comments. Then we'll open our question and answer session.

In general, we have some optimism about our market stabilization and the potential improvement. Due to the fragile nature of the markets, it's difficult to determine if the markets are strong enough to absorb the pent up cost increases that have been absorbed by manufacturers such as ourselves, who are facing increasing pressure to increase prices to recover their cost escalation. The concerns of inflation and increasing interest costs could potentially adverse the impact many of our served markets. Continued strengthening of the economy, growth in the class utilization, and job creation would be very welcomed news.

The aggressive steps we've taken in seeking out new domestic and international marketing opportunities, improving our distribution channels, lowering of our cost structure, improving operating efficiencies, enhanced management of our working capital, and significant reductions in our funded debt are reflected in our improved results for FY 2005 and make us well poised for further improvements, should market conditions continue to strengthen. Despite the improved market demand, we believe that we will continue to see very competitive pricing, due to excess capacity. The pricing actions that we have taken may inhibit our growth; however, we believe it is the correct strategy for us to be taking. Based upon evaluation, the information currently available to management, we are estimating fiscal 2006 earnings to be within a range of $0.87 to $0.97 per diluted share and revenues to be within the range of 155 to 165 million. Our earnings per share estimate includes the pre-tax expense of completing Oracle ERP system implementation project costs and Sarbanes-Oxley costs of 550,000.

Additionally, fully-diluted earnings per share will be adversely impacted by approximately $0.03 per share, due to the change in the accounting for stock-based compensation as a result of the new financial accounting standard 123-R, which will become effective in our fiscal year 2006. We appreciate your support and thank you in advance for a continuation of that support. Want to thank you for this participation today and we'd like to open it up at this time for any questions you might have.

[OPERATOR INSTRUCTIONS] Your first question comes from John Franzreb with Sidoti & Company.

Hi, gentlemen.

How are you, John?

Good, good. My first question is regarding the International business. You said there's some attractive quotation activity out there, but you suggest it's a fiscal '07 or fiscal '08 event. Could you kind of give us some more color as to why is that the case and where those orders are coming from?

The largest ones, John, are coming from the Middle East and from China market, and just due to the timing and the size of these projects, by the time that we would get them in, even with our percentage of completion in accounting, most of the requests are for delivery in 2006. Calendar year 2006 and 2007, which will bring it into the following fiscal year. What it would do is give us a great entry point into the next two fiscal years, if we're able to bring those orders home, John.

These are sizable contracts?

Yes, they are.

Okay. The second thing is you mentioned about the order patterns that they were flattening in December and January and you weren't sure if it was seasonal or what that meant. What were the trends in February and March?

February saw some improvement. March was more in line with February, but it was still, we didn't see the pace of increase that we saw up until November, John.

Okay, so it's still a positive pace, but it's not a double-digit pace, I guess.

That's right. The pace at which it's improving is not as great as it was up until the November period.

Okay. Could you kind of you refresh us on how you manage your zinc purchases?

Well, we go out each December, and again, we purchase a cap, or a price not to exceed. We pay a premium of essentially one penny a share -- one penny a pound for that protection. Now, since due to the volatility in that market, John, it's a much higher cap than it traditionally has been, so we're going to have to monitor that very carefully. And it is not -- should we not need all of the zinc that we have under cap, we only have to pay the penny a pound for anything that does not deliver it, as opposed to actually formally hedging or buying in advance, and with mandatory delivery.

Okay. So in your forecast in the year ahead, the pressure caused by higher zinc prices on the operating margin, just in the Galvanizing business, can you give us a sense of magnitude of what you're forecasting? We did 18% this quarter, it was 20 or 21% a year ago. From what I recall, it's only about 16%, I think, at the lows. Are you going to go back down to that 16% op margin, or what are your expectations going forward?

If we're able to achieve the planned price increases, John, we think it's going to be in the mid-17s, to the mid-18s, but that again, is contingent upon the price increase that we have to do in order to offset the increase of zinc. And it appears that some of our competitors are following our actions. Not all have done it, but it's still too early in the process to be confident that we're going to be able to do that, but we anticipate, I would say 17.5 to 18.5, John.

Okay, and one last question. You suggested that you're being more selective in the jobs that you're picking. Would that suggest to us that you have better margin business in your backlog today than say six months ago, three months ago?

Yes, it would.

Okay. Thank you very much, guys.

Thank you, John.

[OPERATOR INSTRUCTIONS] Your next question comes from Will Lyons with Westminster Securities.

Hi, gentlemen.

Good afternoon, Will.

Congratulations a solid quarter in a difficult time.

Thank you very much.

I have a couple of questions, sort of from an accounting standpoint. It looks like just from the numbers in your press release this morning that your operating margin in EINP was the strongest it's been since the February '03 quarter; is that correct?

I know it showed improvement, I would have to pull the documents to see if that was the correct -- the last time they hit that point, but yes, we did see an improvement in them.

And do you expect that to be, well, temporary? Do you expect that to be a lower percentage for all of next year?

We expect it to be consistent with the way next year will turn out.

Oh, really? Okay. It's just that your outlook for next year, and this is to me as an outsider looking in with far less data than you have seems to me very conservative. The middle of your range is 92%, I'm sorry, $0.92, and you've reported $0.87 this year. That's only a what, a $0.07, $0.08 improvement?

Right. As I indicated, we'll be -- we were lowering this year by $0.03 just from the new 123-R, financial accounting standards. So I think to not explain away your question, but I think you need to factor that in, Will.

Okay.

But we're not showing a tremendous increase on the top line, and we think that's a result, as I indicated, that to continue to advance our efforts to improve pricing may inhibit some of our growth.

Preferring not to take lower margin transactions, because they're just not good for your bottom line.

Well, when you can't even recover -- make a profit at the gross margin level, we just don't believe we should take it.

No, of course not. The number given on the Oracle ERP system for next year is $550,000?

The 550 is Sarbanes-Oxley and Oracle.

And Oracle?

And it's essentially 400,000 Sarbanes-Oxley, 150,000 Oracle.

And that's down from a total of 775 in the current, well, fiscal year '05?

That is correct.

Right, okay. Can you give us any granularity, as they like to say in this business, planned growth in your two major sectors for the year, EINP versus Galvanizing? Your revenue?

In fiscal '05, 66% was in the Electrical and Industrial, and 34% was in Galvanizing.

Yes?

We expect that mix to be 68% in E&I and 32 in Galvanizing in '06.

I see. Okay. Right. I'm sorry, I was distracted a bit during the early part of your call, I might have missed this. You spoke in the press release about order seasonality being a possibility for the December/January, I'll call it flattening. What happened in February and March on your order inflow?

It did improve over those two levels, but as we were explaining earlier, we had a nice increase going up until the November timeframe, then we saw a flattening. And we saw some improvement in the February/March timeframe, but not at the pace it was running up until November.

I see. Okay, thanks very much.

Thank you, Will.

Your next question comes from Garland Asher with Parker Holdings Incorporated.

Yes, hi folks, hi Dana. I'd like to ask a little bit more about the Galvanizing business. If you guys are having zinc problems and you have got caps, then I would think that some of your competitors have got to be distressed more than you. Do you see any opportunities for acquisitions in your existing market, and if I remember correct, when you did your Phoenix plan, it kind of was a costly excess to begin with, but it's turned out to be one of the best investments that Aztecs made in the last decade. Do you see an opportunity to build a greenfield startup perhaps in Florida or somewhere like that?

If-- we're always on the lookout for acquisitions. There's nothing that is close enough to even talk about, but it would expand our geographically served markets, should we make an acquisition.

Okay. Any thought to a greenfield startup in an underserved market? I happen to know Florida's very under served.

There's been a number of Galvanizers that have come on since 1997, and we have a tremendous, in total, overcapacity in that industry. So, I think greenfields would be a difficult challenge for us.

Okay.

And there's been a couple of greenfield expansions in Florida in the last three or four years.

Okay. I was not aware of that, but--. All right, that's all I wanted.

There was one in Miami. I was corrected on that.

[OPERATOR INSTRUCTIONS] There is a follow-up question from John Franzreb with Sidoti & Company.

I was wondering if you could just give us some colors to what those quick turn jobs that impacted profitability in the quarter were?

They were in our non-seg bus line, and served by the Calbert market, as well as a car distribution center that's serving the industrial market also.

What's your sense that this is a one-time event as opposed to a change in buying patterns by your customers?

You mean the quick-turn jobs? I think it is not anything that you could rely upon going forward. I think we'll always have one or two a year, but I don't think it's really a signal. I think it's more of an emergency situation.

Okay, okay.

A premature failure on the part of the existing product.

Okay. Just fishing on that one.

I wish. [ Laughter ]

All right, thanks. Have a good weekend, guys.

You too, John.

[OPERATOR INSTRUCTIONS] There are no further questions. Mr. Dorame, I would like to turn the call back over to you for closing remarks.

Thanks. Again, we would like to thank everyone for joining us on the call today. If you require additional information on AZZ, please feel free to give us a call 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.

This concludes today's AZZ Incorporated fiscal year end 2005 conference call. You may now disconnect.