AZZ Inc (AZZ) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen, my name is Amy and I will be your conference facilitator. At this time, I would like to welcome everyone to the AZZ Incorporated first quarter fiscal year 2006 earnings 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. [OPERATOR INSTRUCTIONS] Thank you.

I will turn the conference over to Mr. Joe Dorame of the RCG Group. Sir, you may proceed.

Thank you. Good morning, everyone. We would like to thank you for taking time out of your busy schedules today to join us to review AZZ's first quarter financial results ended May 31st, 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 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 dipped galvanizing markets; prices and raw material costs, including zinc and natural gas, which are used in the hot dipped galvanizing process; changes in the economic conditions of the various markets the Company serves, foreign and domestic; customer requested delays of shipment; 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 would like to turn the all over to Mr. David Dingus, President and Chief Executive Officer of AZZ. David?

Thank you, Joe. And thanks to each of you for taking the time to join us for the conference call for the first quarter of fiscal year 2006. The first quarter was completed on May 31st, 2005. For the first quarter, revenues increased 13%, to 44.7 million. Net income is up 71%, to 2.1 million. And diluted earnings per share increased 65% to $0.38. The double-digit growth for all of these is encouraging.

We believe that the market indicators and quotation levels continues to suggest that our markets have stabilized, and in most areas have shown some improvement. We have seen a continuing trend of a higher level of international quotations, particularly in the power generation and high voltage transmission products. The total dollar value of quotations outstanding at then of the quarter did increase.

Despite a continued aggressive competitive conditions, 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 expectation. Incoming orders for the quarter were 45 million, while shipments for the quarter totaled 44.7 million. Resulting in a book-to-ship ratio of 101%. Now, our book-to-ship ratio in the first quarter of our last fiscal year was 97%.

Incoming orders increased 17% over the same period of a year ago and were 6% higher than the fourth quarter of fiscal year 2005. Competitive pricing pressures continue to inhibit our ability to further increase our volumes, and our profitability and fully recover the cost increases we have incurred over the past year.

Backlog at the end of the quarter was 65 million, versus 51.9 million in the prior year, for an increase of 25%. Bookings were particularly strong in our high voltage products, the petroleum and mining markets, when compared to the prior year period. We are pleased with the distribution of the backlog across our operations, and 82% of the backlog is currently scheduled to be delivered in fiscal year 2006.

We continue our efforts to improve our market coverage, and expand our served markets, which should result in additional bookings. Despite the improvement in our markets, competitive forces remain aggressive, due to the imbalance between supply and demand, and we continue to see pricing used as a mechanism to either maintain or increase market share, or improve capacity utilization.

Our challenges are great and 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 efficiency, lower our cost of production, increase our cost escalation recovery, and seek out new product opportunities to further enhance our strategic position and improve our financial performance. Progress has been made and we are still searching for and seeking out additional opportunities.

We believe that the excellent quarter we saw, particularly in the galvanizing operations, demonstrates a favorable impact of leverage on our operations, that has resulted as a result of the adjustments that we have done in prior periods to our cost and our operating structure. We continue to place the emphasis on systems and procedures and sharing our best practices among our operations to further enhance our operating efficiency. We are also continuing our emphasis on liquidity and further reductions of debt and improvement in our debt-to-equity ratio. Our current debt-to-equity ratio at the end of the quarter was 0.3 to 1.

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

Thank you, David. And as always, I would also like to welcome each of you to our first quarter conference call. At this time, I will do a brief review of our unaudited consolidated results for the period ended May 31, 2005.

AZZ recorded revenues for the quarter ending at 44.7 million, 12.7% increase, as compared to 39.7 million in the prior year. Net income for the quarter was 2.1 million, this compared to 1.2 million. Diluted earnings per share was $0.38 again on a comparable basis to $0.23 in the prior year. Our Electrical and Industrial Products segment generated 64% of our revenues, while our Galvanizing Services represented 36% of total revenues.

Incoming orders continue to outpace shipments, our backlog at the end of the quarter was 65 million, which compared to 51.8 million at the end of our first quarter last year. As David indicated, our book-to-ship ratio remains at 101, which is where we like to see it over one.

At this time, David will give us an overview of the Electrical and Industrial Products segment of our business.

While 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's difficult to determine timing, we continue to believe that the long-term worldwide demand for electrical power will improve over the current levels.

Industrial demand for our power distribution and motor control center products should begin to see improved demand as new projects and capital spending increase. We believe that improved sales coverage and potential new opportunities related to refining, LNG, and clean fuels will provide opportunities for growth of this segment of our business.

Our specialty lighting products should see improving demand over the balance of the fiscal year, due to new products. The operating performance of this operation remains good, and additional volumes should further enhance the contribution to the overall results of the Company.

Backlog of our metal clad outdoor switch gear products, with the strong utility distribution substation, customer base, and the improving mining customer base, is consistent with prior periods. Our relay and control panels and industrial automation services, our financial performance has improved over the prior period, but remains below our objectives. Continued improvement in capital spending should lead to additional opportunities.

Inquiries and bookings for our high voltage transmission products, particularly international products -- projects continues at an encouraging and robust level. The operating performance of this operation for fiscal year 2006, should be the strongest since our acquisition in August of 1999. Despite lower-than-anticipated spending in the domestic transmission grid, growth in our international markets should sustain the current level of business until such time as aggressive spending on the domestic grid occurs.

We are continuing our efforts to finalize a $12 to $15 million international order scheduled for fiscal 2007 delivery. As with any order of this size, customer scheduling and financing can change, which would impact the timing of the order placement. We are also working on other major orders; however, they are not as far along in the process and timing is difficult to forecast. The orders and shipments of our industrial products to the petroleum market remains strong.

Now, Dana will cover the operating results for this segment.

In our Electrical and Industrial Products segment, we recorded revenues for the quarter of 28.8 million, a 4.3% increase as compared to the prior year results of 27.6 million. Operating income was 2.1 million, on a comparative base to 1.9 million in the prior year. Operating margins in this segment were 7.1 -- 7.3, compared to 6.9% in the prior year.

As David indicated, continuing pricing pressures in the markets in which these products are sold, as well as our inability to pass along many of our material cost increases we have incurred, have adversely affected operating profits and margins. The company continues to implement cost containments and review all strategic alternatives to lower our overall cost structure while maintaining product quality and customer service.

The market conditions remain very challenging, we still believe our markets have stabilized, and are positioned for further recovery and improvement. Our operating efficiency improvements and expansion of served markets, particularly international, continue to be our focus and emphasis for our activities.

At this time, David will give an overview of our Galvanizing Services segment.

The first quarter results for Galvanizing, it was a record-setting quarter. Volume was up and we were able to end that price increases that recovered the increasing cost of zinc, and the continued high natural gas costs. The results definitely reflect the benefits from past actions to resize our operations and the significant leverage that was achieved from these increased volumes.

The increase in average cost of zinc that we anticipate for the second half of our fiscal year, will adversely impact the second half of performance. And we do not anticipate being able to achieve the outstanding performance of the first quarter. We do, however, anticipate it to be a very strong year, and an improvement over the excellent results that we saw in fiscal year 2005.

Demand has been strong across all of our served markets, particularly telecommunications transmission pole business. Our results do reflect the improvement in the industrial U.S. market that has resulted in increased capital spending for expansion and for maintenance. Now, based upon our own market intelligence, and published data, we believe that the demand in our geographic area has been stronger than in other areas of North America and contributed to the outstanding results for the first quarter.

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

Revenues in this segment of our business for the quarter were 16 million, as compared to 12.1 million recorded in the first quarter of fiscal 2005. Our volumes of steel shipped, as well as our selling prices were up when compared with the same quarter of last year. Operating income was 3.7 million, as compared to 2.3. Operating margins improved to 23.5%, compared to 19.4.

These record revenues -- or record operating results were achieved through higher revenues, as well as operating leverage achieved through improved pricing and higher volumes. Increased zinc costs negatively impacted margins for the quarter by approximately $577,000.

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 1.8 million, compared to 2.5 million in the prior year. Our receivable days outstanding and inventory turns remain good. Accounts receivable days outstanding were 56 days at the end of May 2005, as compared to 57 days at the end of our last fiscal year.

Year-to-date capital improvements were made in the amount of $1.4 million. Items included in our capital programs included $300,000 spent to date on our Oracle ERP installation. 600,000 invested in maintaining our Galvanizing Services segment. Depreciation and amortization was 1.4 million for the quarter. Total outstanding bank debt at the end of the quarter was at 29.5 million.

Again, our current long-term debt-to-equity ratio continues to improve, and stood at 0.31 to 1 at the end of the quarter. As you can see, our focus continues to be on our liquidity and managing our working capital in a most sufficient manner.

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

In general, we have some optimism about our markets, and the potential for further improvement. And due to the fragile nature of the market, it's difficult to determine if they are strong enough to absorb the pent-up cost increases that have been absorbed by manufacturers, such as ourselves. We are facing increasing pressures to increase prices to recover these cost escalations. Concerns over inflation, high energy costs, and interest costs, could potentially adversely impact some of our served marketed. Continuing strengthening of the economy and the growth in capacity utilization job creation is always very welcome news.

The aggressive steps we have taken in seeking out new domestic and international marketing opportunities, improvement of our distribution channels, lowering of our cost structures, improving operating efficiency, enhanced management of our working capital, and reductions in our funding [ph] debt are reflected in our improved results for the first quarter. We believe that we are well poised for further improvement, should market conditions continue to strengthen.

Despite the improved market demand and some improvement in first quarter pricing, we believe that we will continue to see unfavorable pricing actions due to overall excess capacity. The pricing actions that we have taken may continue to inhibit our growth; however, we believe it is the correct strategy for us to be taking.

Based upon the evaluation of information currently available to management, we are increasing our estimate of fiscal 2006 earnings to be within the rage of $1.08 to $1.18 per diluted share, and revenues to be within the range of 170 to 180 million. We had previously estimated fiscal 2006 earnings to be within the 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 estimates includes the pretax expense of completion of Oracle ERP systems implementation project cost and Sarbanes-Oxley compliance costs of 550,000. And due to the revised effective date of the change in the accounting for stock-based compensation or SFAS 123R, no expense will be recorded in FY 2006 and is not reflected in our guidance, as it will become effective for AZZ in fiscal year 2007.

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

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

Good morning, guys.

Good morning, John.

I would like to talk a little bit about the backlog, you've become more aggressive in your pricing and getting more acceptable margins. How much of your current backlog is written at maybe a lower margin level and that's kind of contributing to maybe a soft profit forecast for the coming quarters?

John, there's probably about 15% of it that is in there that are prior to our aggressive pricing changes.

And when do you think you will work through that?

By the third quarter and some of it will spill over into the first quarter of next year, but then it will be over with.

Okay, David. And I was kind of surprised about the comment about zinc prices going up in the second half of the year. I'm looking at the London Meadows Exchange prices on zinc, at least the spot market, it seems like there's been a pullback on zinc prices. Can you kind of tell me what you are seeing that maybe I'm not seeing here?

Well, I will answer it in two pieces, John. It leveled off there, and inventories increased and we were encouraged that we were going to see possibly the -- it settled down in the $0.52, $0.53 range. And then by the end of last week, it was back up to 59, and so -- and it appears to be tracking pretty closely to what's going on in copper. Now it is $0.57 today, but it is still higher than we thought. But, again, remember, as price escalates, it takes us six months to turn that. So in the last half we are going to be turning more expensive zinc than we are in the first half of the year.

Okay.

But, if it were settling -- we were encouraged there for a while when it was in the $0.52, $0.53 range, but with it moving back up and the only thing we can figure out, even despite increased inventories, it's tracking pretty much the commodities in particular, the copper.

Okay. One last question and I will let someone else chime in. You mentioned you plan to expand into new markets. Could you kind of elaborate a little bit on that?

Well, we've -- because of -- we put increased emphasis, John, on the mining market, more than we have in the past. We need to work on the international market arena and then we are trying to increase our presence in the LNG clean fuels and refining markets, where we have had a presence but not near as strong as we believe that we should have.

So all of them are -- are markets that are projected to increase above current levels and we think it is -- we've been working on this program for a year now. And hope to start seeing the results in the incoming order levels. We are already seeing the improvement in the mining side, but there's -- we need to see the improvement in the emerging LNG markets, the clean fuels market, and then any work that's done in the refining side.

Great. I'll get back into queue.

Thank you.

Our next question comes from Mario Gabelli with Gabelli Asset Management.

It's more strategic than it is details, all of which are important, though. The CEO of Delta is no longer with us. Have you taken a fresh look at the benefits of strategically of enlarging the territories in which you are doing the galvanizing? Or is that a lower priority than looking at ways to enhance what you are doing in the utility area?

Mario, we have been taking, over the last couple of years, just an opportunistic approach as things came up, but --

Well, this -- this is a blow to the head, so it came up.

Yes. And, the -- it was -- I believe there's opportunities and as I have said before, I believe the next step will be for someone to do a more substantial addition to their acquisition of galvanizing territories. They are located to the east, in and to the southeast of us, and match with what we would do as there are people who are to the north and the west of us that would be the natural piece to do it.

Does it make sense to do it versus taking your resources and adding to the electrical area. Or do you want to monetize the electrical to migrate go into a larger position galvanizing? Kind of just what's your current thinking?

Up to this point, we have not had to be -- we put more emphasis on the electrical during that side. I don't think that we have to select between one of the two right now, based upon the opportunities that are facing us.

Okay.

But that potential could happen, though.

No problem. Either -- so you are saying there's a likely next scale, consolidation going on in part because dynamics at Delta, but maybe you are not saying that, but just a -- I said I wasn't going to do it. I don't have the cash position, I saw your debt picked up a teeny bit, but what's -- I couldn't figure out from the balance sheet because you had a consolidated one. Do you have available, would you make available other than waiting for the Q --?

We filed an 8-K this morning that should have that detail.

Thanks. I'm always a step behind. That's one of my problems in life. Thank you.

The next question comes from Will Lyons with Westminster Securities.

Good morning, gentlemen.

Good morning, Will.

Congratulations on a nice quarter, finally.

Thank you.

It's going to get better, I hope.

We always hope that.

I understand that. A couple of things you mentioned, David, you mentioned in your comments, international market coverage having improved, what does that mean exactly?

Well, in -- particularly in the Middle East, Will, you have to go through local distribution and representation channels and some of ours were not as strong as they should have been, so it's to establish the local position, and the Chinese market, of course, we have to establish ourselves there, with local representation, and possible direct presence in that. So it is -- when you sell through the representation and distribution network, you are just as good as those who represented you in those countries.

In China, are you finding that the partner you have there in -- in the one particular business line, is that helping you particularly in China in your overall business?

It definitely has raised the profile of our name. There's not a direct correlation between that and helping it. I think what we are improving in our Chinese is more from our direct visits there and the people that we've assigned to that territory. Now we were hoping that that would leverage into it and I believe it eventually will, but up to this point, well, it has not done that in a significant fashion.

Okay. And finally from my side and I will get back into queue as well. Your guidance and outlook for the year looks very conservative compared to what you have achieved in the first quarter. Could you give us some of the background on your thoughts on that -- on that new guidance?

Of course, we've got pretty good visibility, Will, because of the backlog, and I still have some holes in the backlog. Now, the quotation activity says I may have the chance to fill some of those holes, but as of right now, I'm -- and we base that upon the current management, if I take the backlog and I look at the quotation activity and the time it takes to get some of these quotations closed, I believe it is prudent that I reflect the guidance according to the holes that I see in my production side.

Okay. Thanks very much.

Your next question comes from Rob Longnecker with Barrington.

Hi, guys, how are you doing?

Fine, thank you.

Just typically in your backlog, how long does it take for that to run through?

As I said, 82% of it will flow through in the current fiscal year.

Okay.

Particularly at the end of the first quarter, we would see 85, 86% of that come through. But now as we work on these large international orders, we'll see more of that spilling over -- the order I talked about in China, it would be all for 2007 deliveries. So I've started to -- we'll continue to report what percentage of that comes through, but traditionally, most of it flows through in a six to nine month time frame. Our high voltage products normally flow through in a 12 to 15 month range.

Okay.

So as that business continues to grow, we'll see a longer time for it to flow through. But as I said, right now 82% of where we are sitting, unless the customer changes delivery, will flow through in the current fiscal year.

And excuse me if you've answered some of this, I jumped on a little late. The book-to-ship ratio, it's still above 100, but it's been dropping for a couple of quarters, do you guys have any thoughts on that?

Well, I think what we hope the result will be is that, our first quarter is always our roughest one, last quarter, first quarter of last year, it was 97%. And if you look at the trend of the last three years, you'll see that the second improves, the third is the strongest, the fourth comes back down. So there's some seasonality in that and that primarily is driven by utility spending.

Right.

As when they release those orders. So we would be very encouraged if we were sitting here at the fourth quarter and said the trend this year matched the trend of last year.

And how do you see in terms of, for example, the quote trends right now as opposed to where they stood a year ago?

They are improved.

Okay. And just a quick question, I will get back in queue. What was the -- for the quarter, what was the volume growth in Galvanizing, as opposed to revenue?

Give us just a moment.

Hold on just a second.

I was just so blown away by the growth --

About 28% volume growth.

What do you guys -- I mean, that's really impressive, what do you attribute that to?

Well, as I said, it's been strong across all of our markets. It was particularly strong in the telecommunications and the transmission pole business.

Okay.

And then, as we're starting to see some improvement in the work in the petrochemical markets with us being located on the Gulf Coast, that always helps us. And strange as it may seem, we're still getting a lot of work related to the hurricanes in Florida from last year.

Okay.

And in the Gulf. So we do believe that they have been stronger in our geographic area than they have been nationally. But it's been nicely spread across all 11 of our operations and across all of our six major marketing categories.

Okay. Thank you very much.

Your next question is a follow-up question with John Franzreb of Sidoti & Company.

You kind of touched on one of them, which is the reason for the Galvanizing volume increase. But the other question I kind of had is, some of your competitors are reporting significantly improved backlogs. I don't get the sense that you think that backlogs are going to move northward meaningfully, or if they are, you are maybe not conveying it. Is there something else going on out there? Is there any reason you wouldn't think you'd see more substantial backlog improvement given what's going out there in the marketplace.

Well, John, we are particularly encouraged when you look at the improved backlog, all of the engineering and construction firms, whether it be Jacobs, Lewers [ph], Shaw, Chicago Bridge and Iron, but until those convert to requests for quotations to us, then it's hard for us to forecast the timing of that and the impact on that.

What's going on in our end markets would lead you to believe that we would start to see those increases. But until they hit our doors, as a request for quotation, I mean, we met with the customer. We know the project. We know the projected timing of them. And all of those indicators would say we should see more strength coming in our backlog than we currently have.

Good. Good. So you just think that it's kind of a timing issue, maybe not this quarter or next quarter, but in coming quarters we're going to see that backlog really start to move northward?

If the projects occur and if we are able to maintain our hit rate, based upon the pricing levels of those --

Right.

I think towards the end of this fiscal year would be when you would see those projects coming to fruition, John.

Great, thanks a lot, David.

Your next question comes from Dave Starki with Smith Barney.

Hi, guys. Just one quick question. Can you tell us how the recent drop in steel prices might affect your overall business?

Well, naturally, any stabilization or reduction would help us, because we haven't recovered that cost in the past. And I certainly hope our competitors, our customers don't expect to us reduce price when we haven't recovered it through that. So we are still way behind the eight ball in recovering the ones that incurred last year. So it's still a challenge -- it's still a challenge to recover that cost, so it's nothing we -- naturally, when we saw it starting, at least getting rid of the surcharges and we saw some minor reduction, and it was encouraging, but it has got to go a lot further, either in price or cost reduction for us to get back to where we were 18 months ago.

Okay, but this, if it continues, and we head in the same direction we are heading at this point, it's certainly one of the things that could make things better than you currently think, right?

Absolutely.

Right. Okay. Thank you.

Thank you.

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

Just an accounting question for Dana. Dana, of the 550,000 on the Oracle and Sarbanes-Oxley compliance cost, how much of that was incurred in Q1?

Probably 250, we spent quite a bit on the Oracle. We still have quite a bit on the Sarbanes-Oxley expenditures, some outside costs, so we are halfway through that.

Of the remaining 300,000, would you expect that to be evenly over the next three quarters?

Probably skewed towards the latter half of the year.

All right. That's. It thanks very much.

Next question comes from Ed Leferman with First Manhattan.

Hi, good morning.

Good morning.

I'm just curious, since you have a number of moving parts or contributors in the electrical business, what the dispersion is around the 7% margin? I mean is there a certain amount of revenues that's in there at no profit, break even or slight loss? Can you shed any light on that?

There is more variance between operations than we would traditionally see, some is as a result of the low bookings level. We had the severe pricing problem at the end of calendar year -- at the end of our fiscal year 2005, Ed, where we just had to back away for some of it, and then as we indicated earlier, we are still working through some of that backlog, and it is lower than we had expected, but we would traditionally see a much more consistent level across that, but we have a lot of fluctuation in there, and we do have a couple operations that are operating at a slight loss.

Would you say that you have as much as 10 million at very marginal profit in the first quarter or is that just that at a line?

I would say that I would have 6 to 8 million that was at very disappointing margin levels.

Okay. And some of the others, the other areas that are contributing are they, now -- were they at profit levels that you think are adequate or is there more opportunity in some -- in the stronger end of that contribution?

I think there's -- there's room for improvement in all but about 25% of the volume. I think the 25 is at the objective we would like to see it at.

Okay. Good. Thank you very much.

Thank you, Ed.

[OPERATOR INSTRUCTIONS] Your next question comes from Jerry Hefernan with Lord Abbett.

Good morning, gentlemen, and thank you very much for putting out such fine results.

Thank you, Jerry.

In regards to the Galvanizing, a further question there is that your market is doing quite well, particularly when compared to the market in its entirety. You commented in the press release that volumes were a big source of -- a big cause of the positive results here. I don't know that I fully understood what your view is for the rest of the year, though, on maintaining this volume level. I mean, do you see this -- when we talk about backlog in orders I think primarily of the electrical side. So what is your visibility on the galvanizing side?

It is about two to three months, is all we have. So if you take the -- the Galvanizing piece of the guidance, Jerry, we do not think the second half will be as strong as the first half. And what we are basing that on is we think that my comment that our geographic area was more -- it was up more than the national, we think maybe the last six months will match the national market more than our particular geographic market. So if we were to see the disparity, the favorable disparity and the favorableness in our particular markets then you could say then that the forecast was lower than what we're going to achieve.

Okay. Then let me ask you about the -- if you are presuming the second half of '06 is more in line with the overall market, how is the overall market playing out so far this year compared to what you had thought three, six months ago?

It's -- it's right on where we thought. We are actually higher than we thought we were going to be. The rest of the market is right in line with what we had anticipated.

Okay. Great. And in the operating margin that you had forecasted for the Galvanizing business, previous to this strength that you experienced for the second half of '06, is that operating margin consistent with -- have you maintained that operating margin forecast with the volume increases that you are seeing for the second half? Or after the first quarter, and understanding the work that you've done to improve your operations, do you think that perhaps you -- under the same volume, expectations, perhaps that you would want to move up that forecasted operating margin?

Jerry, if I understand correctly, the -- there was a significant contribution in the first quarter from leverage. Okay? Probably 3 to 4% of that margin that is reported in the -- we can attribute directly to the significant volume increases. If we take those out, then, you know, then you have a margin level that's much closer to what we traditionally see of 18.5 to 20%. As opposed to the -- I believe it's 23% in the first quarter.

Right.

But, again --

Correct me if I'm wrong, but you weren't -- you were thinking it would be tough getting that level this year in Galvanizing.

Yes, I did.

Because of natural gas and because of zinc.

Yes, I did, but the increased demand allowed the market to absorb price.

Very good. Very good.

That was very encouraging.

Okay. So is it fair to say then that your ability to get price has exceeded your previous expectations somewhat?

Absolutely.

Okay. Great. Again, thank you very much for the results.

Thank you, Jerry.

Your next question is a follow-up question from Rob Longnecker with Barrington.

It's already been answered. Thank you.

[OPERATOR INSTRUCTIONS] At this time, there are no further questions. I will now turn the conference back to Mr. Dorame.

Thank you. Again, we'd like to thank everyone for joining to us today to review the results for AZZ. If you require additional information on AZZ, please feel free to contact us at RCG, 480-675-0400 or AZZ at 817-810-0095, 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 conference. You may now disconnect.