AZZ Inc (AZZ) 2007 Q2 法說會逐字稿

Good morning. My name is [Wes] and I will be your conference operator today. At this time, I would like to welcome everyone to the AZZ Incorporated second quarter 2007 earnings conference call.

[OPERATOR INSTRUCTIONS]. I would like to turn the conference over to Mr. Joe Dorame.

Good morning. Thank you for joining us to review the financial results of AZZ Incorporated for the second quarter of fiscal year 2007, ended August 31, 2006. As Wes indicated, my name is Joe Dorame. I'm with Lytham Partners. We are the financial resulting consulting firm for AZZ. With us on the call, representing the company are Mr. David Dingus, President and Chief Executive Officer, and Mr. Dana Perry, Chief Financial Officer. At the conclusion of today's prepared remarks, we will open the call for a Q&A session.

Before we begin, we submit for the record, this conference call has been made available via the way of Webcast technology on the internet and direct dial via conference call service to all interested parties. This conference call contains 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 power generation markets, electrical transmission and distribution markets, the industrial markets, and the hot dip galvanizing markets. Prices of 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. We undertake no obligation to affirm, publicly update, or revise any forward-looking statements, whether as a result of information, future events, or otherwise. With that having been said, I would like the turn the call 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 second quarter of fiscal 2007. The quarter ended on August 31 of 2006.

For the second quarter, revenues reached a record-setting level, increasing 31% to $62.9 million. Net income is up 286% to $5.3 million and diluted earnings of $0.90 are also record-setting levels. For the six months, sales were $115.3 million with year-to-date earnings of $1.60. In general, the indicators are that we continue to benefit from strong market conditions.

Incoming orders in quotations were nicely balanced across our primary served markets and product lines. International opportunities continue to play an increasing role in our growth potential. Total incoming orders for the quarter were $69.5 million, while shipments for the quarter totalled $62.9 million, resulting in a book to ship ratio of 110% for the second quarter.

For the first six months of fiscal '07, orders totalled $140.2 million while shipments totalled $115.3 million, resulting in a year-to-date book to ship ratio of 122%. Incoming orders for the first six months increased 34% when compared to the same period of a year ago. Our markets have strengthened over fiscal 2006, and we have been able to continue to increase pricing. The increases in our markets have still not absorbed capacity, particularly for our utility car generation, utility distribution products, and some of our industrial and electrical products, continue to see lower than desired pricing, but real progress and improvement has been made during the quarter. The increase in margins of previously booked projects, which is now being reflected in our operating results as a positive consequence of our strict adherence to pricing and order acceptance, which meets our margin targets.

We believe our backlog consists primarily of jobs with margins which approximate those that we achieved in the second quarter and the first half of our fiscal year. We are not at full capacity and we do have some production voids in the third and fourth quarter due to the timing of the receipt of orders. This gives us the opportunity to continue to respond to quick turns and immediate-need projects of our customers, which has been a positive contributor to our year-to-date success and we trust will continue for the balance of the fiscal year.

Backlog at the end of the quarter was $98.7 million versus $76.6 million in the prior year period, or an increase of 29%. As we've indicated, the backlog was favorably impacted by good bookings quarter across our served markets and products. The second quarter bookings remain strong despite not having a significant international order, that was achieved in the first quarter of our fiscal year. While we continue to work on significant orders outside North America, we do not anticipate the receipt of these orders in the current fiscal year. We believe that our backlog over the balance of the fiscal year will we remain relatively constant, based upon the size and scope of our current quotation activity and announced project timing. We see some improved conditions for our power generation products and anticipate we'll be quoting on these by the end of the current fiscal year.

Based upon the customer requested delivery dates, we estimate that approximately 65% of the backlog is scheduled to be delivered in FY '07. Galvanizing demand remains very strong and tonnage of steel shipments increased 16% on a quarter over quarter basis. This volume increase is spread across all of our served markets. We are seeing work related to the Gulf Coast rebuilding and repair program and anticipate that this is potential for additional work.

For the first six months, tonnage shipped has improved a most impressive 11%. Cost volatility has decreased and we've seen a relatively stable market in the $1.45 to $1.55 range over the past 60 days, despite continued decreases in zinc inventory. Decreased demand continues to be a worldwide basis, with overall demand remaining strong, we've been able to achieve our pricing targets. On a year-to-date basis, pricing has increased some 38%, while we've seen some customers opt for alternative methods of corrosion protection, it has to date been less than we had feared. As a Company, our accomplishments are improved and we continue to double and redouble our efforts to secure more profitable business and effectively and efficiently execute on that secured business.

Our programs and continual emphasis on systems and procedures, and sharing the best practices among our operations to further enhance operating efficiency combined with aggressive pricing programs has had a very positive impact on our operating results for the second quarter and for the first six months of fiscal 2007. We believe that these efforts and the leverage gained from additional volumes positively impacted the results. As we've stated in previous discussions of our results, the second quarter and the first six months of our fiscal year were very favorably impacted by the realizing of increased galvanizing prices.

The first and second quarter price increases will cover the increased costs, which we realized in the subsequent quarters. Our evaluation of current pricing and current zinc costs indicates that when these increased costs are fully realized, our operating margins for this segment should be in the excellent historic range of 18 to 22%. With that as an overview of our results, Dana will give us a review of the operating results for the second quarter and the first six months. 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, 2006.

We recorded revenues for the quarter ending at $62.9 million, a 31.4% increase as compared to 47.8 in the prior year. Net income for the quarter was $5.3 million, an increase of 286%, which compared to $1.4 million in the prior year. Diluted earnings per share was $0.90 as compared to last year's $0.24. Revenues for the six-month period ending were $115.3 million, a 24.6% increase as compared to $92.6 in the prior year.

Net income for the six-month period was $9.4 million, a 169% increase as compared to $3.5 million in the prior year. Dilutive earnings per share was $1.60 as compared to last year's $0.63 for the six-month period. Our second quarter continued to see strong market demand for Electrical and Industrial products as well as our Galvanizing Services. New orders were strong and balanced across our power generation, transmission, and distribution as well as our industrial products. Our galvanizing services segment, our second quarter continued to be favorably impacted by positive market conditions and excellent price realization required to offset the increasing cost of zinc in our galvanizing segment.

Our electrical and industrial product segment generated 59% of our revenues, while our galvanizing services segment generated 41%. We anticipate this same percentage breakdown for the balance of fiscal 2007. As David indicated, the backlog at the end of our second quarter was $98.7 million, which compares favorably to the $76.6 million for the same period last year. Our book to ship ratio for the quarter was 1.10 to 1, the continued strength of our markets has allowed us to increase our incoming order rate and continue our aggressive price programs designed to achieve improved margin levels. At this time, David will give us an overview of the electrical and Industrial segment.

Industrial demand for our power and motor control centers remains strong due to new projects, major renovations and expansions and industrial capacity utilization levels remaining above the 80% level. Additional projects continue to be reported by the engineering procurement and construction firms, and while many have not yet been released for quote, we are encouraged by these announcements and anxiously await the opportunity to quote and pursue this business.

We believe that emphasis on the need for spending related to refining, LNG, clean fuel initiatives, and mining systems upgrades should lead to additional opportunity. Our specialty lighting products have seen and should continue to see improved demand due to new products and higher demand related through the strength of the petroleum market, repair and replenishment of lighting for the offshore and the onshore equipment and facilities, and overall strength of the industrial market. Operating results of our metal clad outdoor switch gear products remains solid. Utility distribution substation, incoming orders if the first quarter were below our expectations, however the second quarter showed renewed strength for the utility substation market, the wind generation market, and the mining market. This product is maintaining a strength and is anticipated to make a strong contribution to our results in fiscal 2007.

Our relay and control panel and industrial automation services financial performance has significantly improved over the prior period. Continued improvement in capital spending and maintaining an 80% plus industry utilization rate as reported by the Federal Reserve should sustain this improved operating level. Quotations for major products which use high voltage transmission products were again at a very encouraging and robust level. Our backlog and quotations reflect strong domestic and international demand. We continue to operate at record-setting levels of this product. Orders and shipment of our tubular products to the petroleum market remains strong, and we completed another very successful quarter. Dana will now cover the operating results of the Electrical and Industrial product segment.

In our Electrical and Industrial product segment, we recorded revenues of $36.5 million, a 13.2% increase, compared to the prior year's results of $32.3 million. Operating income was $5.2 million, a 126% increased compared to $2.3 million in the prior year. Operating margins improved to 14.1% for the quarter compared to 7.44.

The increased revenues were generated from continued strong market demand, primarily from our high voltage transmission and petroleum markets, and improved market conditions from the tire generation market, which has been stagnant for several years. Improved operating margins resulted from leverage obtained through increased revenues and improved market conditions, which allowed for more aggressive pricing to recover a portion of the material cost increases for raw materials that have incurred over the past two years. We continue our emphasis on booking business at specific targeted margin levels and pursuing price increases to recover the increased cost of material.

At this time, David will give us an overview of our galvanizing segment.

We are most encouraged that we've been able to recover the cost of escalated zinc. This was a concern that we expressed to you in the fourth quarter of fiscal 2006 and again in the first quarter of fiscal 2007. Part of this success can be contributed to the decreased volatility in zinc costs that we've seen over the past 60 days, making it easier for our customers forecast the cost of galvanizing services. Decreasing inventories lead us to believe that we will not see significant downturn in the cost of zinc in the near term.

Demand remains strong across our served markets. Our results do reflect the improvement in the industrial US market that has resulted in increased capital spending for expansion and maintenance. Work related to the hurricanes also positively contributed to our quarterly volume. Based upon our own market intelligence, we believe that the demand in our geographic areas continues to be stronger than in other areas of North America and contributed to the excellent results for the quarter. Most areas are reporting improved business levels, but somewhat below the percentage increases that we have seen. We believe that this extends far beyond just the work associated with the hurricane.

While we've seen limited occurrences of customers going to other corrosion protection methods or materials, it has been less than we have feared. We continue to monitor closely to see the impact of the increased cost of galvanizing on our overall demand. Dana will now give us a review of the operating statistics for this segment.

Revenues in our galvanizing segment for the quarter were $26.4 million, an increase of 69% compared to $15.6 million recorded in the second quarter of fiscal 2006.

Our volumes of steel shipped as well as our selling prices were up when compared to the same quarter last year. Operating income was $8.5 million, an increase of 221% compared to $2.7 million in the prior year, and operating margins improved to 32.3% as compared to 17%. Our comparatively higher operating results were achieved through increased revenues as well as operating leverage achieved through improved pricing and higher volumes. While we have been favorably impacted by the rebuild associated with hurricanes over of the last year, the largest portion of our improvement is spread across all of our served markets, which are showing strong demand.

Revenues for the second quarter were significantly impacted by pricing actions required to offset escalating zinc costs. Due to our first-in, first-out cost basis of zinc inventories, the higher cost of zinc purchased in the first half of the year will not be recognized until subsequent quarters, so we do not believe the margins expressed in terms of percentage of sales are sustainable for the balance of the year.

If last-in, last-out cost basis had been applied, operating profits would have been reduced by $3.4 million for the quarter and operating margins would have been 20%. At this time, I'll cover some of our key cash flow and balance sheet items on a comparative basis. For the six-month period, cash provided by operations was $8.5 million as compared to $6 million in the comparable period in the prior year.

Our receivable days outstanding and inventory turns remain good. Accounts receivable days at 51 days at the end of the August quarter as compared to 54 days at our year-end. Year-to-date capital improvements have been made in the amount of $4.1 million and depreciation and amortization for the first six months was $3.1 million. Our total outstanding bank debt at the end of the quarter was $15.5 million.

Our current long-term debt to equity ratio at the end of the quarter was 0.16 to 1 as compared to 0.26 to 1 the same period last year. At this time, I'll turn the conference back over to David for closing comments and then we'll open for questions and answers.

The aggressive steps that we've taken in seeking out new domestic and international market opportunities, improving our distribution channels, lowering our cost structure, increasing our pricing, improving our operating efficiencies, enhanced management of working capital, and significant reductions in our funded debt are reflected in the improved operating results. The improvement in volumes has advanced the gains that we have made due to the leverage.

Our products and services are well-positioned to continue to benefit from a continuing strong, industrial economy. Opportunities as a result of energy legislation, expansionary spending in the petrochem market, and the repair and renovation of the storm-damaged Gulf Coast infrastructure, while we anticipate the current market demand will continue, the timing of projects and release of orders will always have an impact on the quarterly recognition of bookings, revenues, and earnings and result in quarter to quarter fluctuations which may be greater than true changes in market demand and competitive successes.

We will continue our efforts to continually manage our way through these conditions, in order to build upon prior accomplishments and minimize these fluctuations. Based upon an evaluation of information currently available to Management, we are increasing our estimates of FY '07 earnings to be within the range of $2.65 to $2.75 per diluted share and revenues to be within the range of $240 to $250 million. At this time, we anticipate that we will continue to see improved yearly results this fiscal year when compared to the prior fiscal year.

However, we do not anticipate that we will continue to see the same rate of improvement on a quarter over quarter basis that we saw in the first two quarters of this fiscal year. Again, we appreciate your support and thank you in advance for a continuation of that support. We appreciate your participation today and at this time, we would open it up for any questions that you might have.

[OPERATOR INSTRUCTIONS] John Franzreb, Sidoti & Company.

Good morning, Dana and David.

Good morning, John.

My first question, I would like you to review your zinc buying and costing. How does that process work for you on a year-to-date basis. Can you work through the mechanics of that for us?

Traditionally, John, once a year we go and negotiate with our primary suppliers and annual cap, which means a price not to exceed. They do charge us a slight premium for that and then they go out and hedge against that market. At the time that we negotiated our cap for the current fiscal year, there was even more volatility in zinc than we had, than we currently have right now. So the price in effect -- not to exceed at this time is $1.90. We will renegotiate that again January 1 of next year and hopefully with less volatility we'll be able to lower that. We've not hit the max yet, but as I've indicated, the stability we've seen in the last 60 days, it's ranged in that 1.45 to $1.55.

It makes it so much easier for our customers to anticipate when their galvanizing costs will be. As of right now, we've not hit a cap, we're floating with the market and paying a slight premium over the LNP.

So flowing with the market, it's currently $1.54. If I heard Dan correctly, he said on a LIFO basis, the outmargin would be 20%. I guess that suggests you have a lot of lead purchased at significantly below that $1.54 range, right?

No.

Okay, why am I wrong?

If we restate on a basis -- I'm sorry, John. Yes, we still have the first part of the year, which is below that. My apologies.

So, you do?

Yes, I apologize.

It takes us about six months to turn those zinc inventory, John, so we're just now getting into that higher priced zinc going into our third quarter.

Okay.

That's going to start those margins to come back down and bring us back down to that 20% level by year-end.

Down as low as 20% by year-end? ?

20 to 22% range.

I was impressed by the revenue bump up. My understanding was that the galvanizing business didn't have much visibility. That would suggest the electrical products business does have some good visibility going on there. Am I right to assume that the outlook is improving these orders that ? Is that what's going on there?

Just to go back, I think when you're looking at 11% increase in tonnage produced, that's a pretty significant increase in galvanizing demand. I would challenge your comment just a little bit on that. But, yes, we are seeing improving demand in our electrical and industrial products, because, again, that's reflected in our backlog as we're going forward. So in some cases, a lot of these projects, which have been previously announced that now have been put on the street have been quoted and have been secured. But we haven't seen anything that indicated that that would be a slowing rate for either our galvanizing demand or for our Electrical and Industrial products.

One last question and I'll let somebody else ask a question. You said that you're experiencing growth in your galvanizing business outside the reconstruction efforts in the region. What areas of growth would that be in your area that is not occurring in other parts of the country?

Just simply, the concentration of the petrochem market in the New Orleans Gulf Coast area all the way from Houston all the way around from our operations in Mississippi and Alabama, they're all benefiting from expansion, expansion due to LNG, expansion due to clean fuels, everything. That's well outpacing the demands associated with the hurricanes, which is most encouraging, because those are long-lived sustainable projects.

Okay. Great, thank you very much.

Your next question comes from Will Lyons, Westminster Securities.

Congratulations on a great quarter.

Thank you.

Your margin, as I think you have referred to, have been really strong in the last three quarters and have grown, or expanded each quarter. And I gather that you attribute a lot of that to pricing power you've had. Is that correct?

Yes. What else has happened, or is that pretty much what you attribute those stronger margins to? We are really benefiting this fiscal year from all the steps we have taken to lower our cost structure in the past couple of years. When we've lowered that overall structure and significantly reduced our break even point, leverage kicks in so much sooner, Will, than it used to. So we're getting that leverage benefit, we're getting the pricing benefit. We've still have not fully recovered 100% of the cost increases we've incurred in steel and copper.

We're making significant progress on that, whereas on the galvanizing, we feel we have fully recovered our zinc cost. On the Electrical and Industrial side, we're still pushing the envelope. And the stronger market allowed us to be a little more selective on the incoming orders. With the reduction in our break even point and the improved leverage point, we just got a little more selective and just a little more disciplined in our order cycle, just to not take anything that was below that minimum level, we believe it was necessary to be a contribution to our operations.

Well, I think you've always stuck to your guns in terms of that, haven't you?

Yes, we have.

One thing I noticed in the press release this morning was a reference to a small charge related to an acquisition. Are there any particular segments that you're focusing on, or just sort of very opportunistic, whatever fits and is priced attractively?

That write-off was complementary to our existing businesses. We are aggressively pursuing both, Will.

And are -- okay, on the acquisitions front, is that purely domestic?

Yes, it is.

In the international side, I think we can say for the better part of the past year, you've talked each quarter about international becoming increasingly important. Are the major markets there the Middle East and China?

That is correct. And we are making, we believe, progress in the South American market, but our targeted areas have been China and southeast Asia, the Middle East, and South America. And we're pleased with the progress that we're making in each of those markets.

That is across your product line equally, or are you finding particularly markets interested in certain of your products?

It's much easier for us to make international progress when it relates to traditionally power generation and power transmission. However, the growth in the mining market has allowed us to open up that, so we would say it's the application of our products in the mining industry and the power generation industry and in the power transmission industry.

Not lighting, for example.

Yes, not to -- we are not as far along in our international expansion on lighting. We've always had a good presence in the petroleum countries that use light, but there are opportunities there we are exploiting. We haven't had the same degree of success that we've had in others, in the petrochemical industry but we're working on those.

The joint venture one of your subs has in China, how's that going?

Without question, it's been less successful than we had hoped. So we're refining our approach there. We still believe the concept is correct. We're still seeking out ways to not revive that one, to seek out on alternative one that would accomplish the same thing. We were disappointed in that. We still believe in the concept of it and need to broaden the scope a little bit and come back at it with a little more aggressiveness than we've had the last year.

It's a difficult market, obviously. Do you see cultural differences, your products don't quite fit the market, where do you see the difficulties?

I think the difficulty arises -- we've seen a remount of privatization with some of the people that were original partners who were at the time government agencies and have now moved to private. So as they adjust themselves to privatization, it naturally puts a different slant on how we come at this. Product application is outstanding.

The acceptance and the knowledge that the local market has of our product and our brand names is excellent. So the difficulty, the timing of when we're trying to go in coinciding with their privatization, their own structuring of their own strategic planning, how they want to be, and right now most of them, 100% of their production is consumed by the Chinese market and sometime we think that that will change, so we want to be party to help guiding where that production goes.

Well, considering the ongoing problems they have with their electrical grid, you guys should be looking forward to the next decade in China.

We are.

Okay. Well, thanks. Congratulations again.

Thanks, appreciate it.

Your next question comes from Sam Nicholls of Quillen Securities.

Good morning. My first question relates to your book to ship ratio. You said you expect your backlog to remain fairly constant for the rest of the year. Now I understand your book to ship can gyrate from quarter to quarter because get one large order skewing results, but your book to ship did fall versus last quarter and I'm curious if you would expect it to remain fairly constant throughout the balance of the year, whether this possibility could fall?

As we've pointed out, the second quarter was below the first quarter, but what I was trying to point out there, the first quarter had a very significant international order in it. So if we balance those out and we're still seeing the improvement on a year-over-year basis, so we are encouraged whenever we can continue to grow the to line and still book it at a faster pace than we are shipping.

We were very pleased with the order rate in the second quarter and I do acknowledge it was less than the first, but that was why I was quick to point out I don't anticipate the receipt of another large international order in this current fiscal year. However, we continue to work on ones that are at least the size of our greater than those we've already achieved.

Yes, that's why I wanted to point out that one large order can skew results. I was wondering if you might be able to share with us on the electrical side, possibly, a breakout between orders from utilities versus industrial?

We traditionally report those by market issue other than just purely utility or anything else, but we anticipate for this year our Electrical and Industrial products, 10% will go into the power generation market, 43% in the industrial and electrical market, and 47% in the T&D. You can naturally interpret from that that the bulk of the power generation we're doing now is for the utilities rather than the independent power producers and the bulk of the T&D of course is for utilities. You could say on a shipment basis, 57% will be utility related, and 43% will be industrial-related.

also on the electrical side, I'm curious what types of products have been seeing the most demand over the past couple of quarters, whether up to break that out by low, medium, and high voltage, or T&D versus generation, etc.?

If we exit out the large order in the first quarter, which was our high voltage transmission product, it's been nicely spread across all.

Okay.

That was the encouraging thing. Now, what we're seeing in the power generation is something that we'd been waiting for for some time and that is the program of utilities upgrade and our base load plants for traditional our business has been more towards the peaking road. We're encouraged about that. But other than that large international order in the first quarter, we've seen a very nice increase across all of them.

Interesting. Okay. My last question, I'm curious if you've received any new business assistance from Chevron, in particular, in the gulf or whether there's RFPs floating out there, especially with respect to hazardous duty lighting? Or maybe on the steel galvanizing side, as well.

While we don't specifically name customers, we've seen very strong demand in hazardous lighting in the gulf coast and very strong demand from refiners such as Chevron in the gulf coast.

Okay. Excellent, thank you very much. Great quarter.

Our next question comes from Zahid Siddique of Gabelli and Company

Hi, good morning. Congratulations on a strong quarter. A couple of questions. First, could you break down the 69% increase in sales within steel by pricing and volume?

Yes. You're talking about galvanizing for the six months?

For galvanizing.

Yes. On a year-to-date basis, 69% increase is made of 16% in volume and 43% in price -- 53% in price, I'm sorry.

That is for Q2, not for the --

All right, for the full year, it is a total increase of 49% is made up of 11% in volume and 38% in price.

Okay, great. The second question I have is, I remember in Q1 you mentioned that you expected the galvanizing margins to be around 17, 18% if you came out at 31, 32% That is a pretty significant deviation from your expectation. Why were you so far -- it's positive, but you were still very far away from your expectations.

A clarification point, I said last quarter we expected to exit the year at a running rate of 17 to 19%. I didn't -- if that was interrupted as being a forecast for the second quarter, it was not. And that was not a forecast for the entire year.

Okay, so now you're moving to 20% for the year --

No, not for the year, for the running rate we'll exit the year at, on a pure match as if we were on LIFO.

Okay.

The year will be stronger than the 20% but the running rate that we will have in the fourth quarter and that we exit the year will be in that traditional 20% range. Somewhere between 18 and 22 for the total year -- I mean, for the running rate of that fourth quarter.

Okay. Is that the number we can put in for next year as well, or is that too early for you to tell?

If we were to issue guidance, we would tell you that that's where we traditionally operated the first four years and we don't see anything at this time that would cause us to say that there's been a major restructuring of our business. So if that is a yes, than, okay.

Okay, thanks a lot.

You bet, you bet.

[OPERATOR INSTRUCTIONS] Jaime Lester, Soundpost Partners.

Hey, guys. Congratulations.

Thank you.

What's the -- is the corporate expense of $5.1 million, is that the right run rate going forward?

You have, of course, in that the volatility of the expenses driven by the share price. So if that's why we tried the segment out, how much of that was related to that. But if we go outside of that, that's pretty much of a good run rate going forward.

If the share price stays where it is, is that right, or does the share price have to increase?

The share price would have the increase to be at that run rate.

So the if share price stays where it is, what's the run rate of SG&A?

You could say I would X out that additional $1.5 million was what was incurred previously for share appreciation and appreciation.

Okay. So $1.5 million was actually --

For the six months.

For the six months. But that was -- and how much was that in the second quarter?

I don't have that in front of me.

The largest portion of it was in the second quarter, I don't have the exact number.

But that amount was driven by appreciation of the stock as opposed to the incentive awards and stock you'll be giving out on an ongoing basis?

That's correct.

So you haven't assumed that, you've assumed a more normalized 3.5 million for the back half of the year, per quarter?

Well -- If you make an assumption of the price shares as a reflection of an earnings improvement, there's some anticipation that we would get some more movement than what we had the second quarter. But, yes, we do have to try to forecast that in our guidance. It's a tough one to do.

Yeah, I'm with you. So where in between the 3.5 and 5 per quarter is how you're thinking about it going forward.

I think that'd be very fair.

And then you said, did I hear you correctly you thought the revenue split for the back half of the year would be roughly the same as the second quarter?

Yeah, roughly the same. We think by the time we ball that through, we'll finish the year at a 60/40 split.

So if I take that and I take your revenue number, I'm going to give or take $60 million of galvanizing revenues and give or take $80 million of electrical for the back half of the year, and if I use your 20% defiance on galvanizing, that gives me about $12 million of operating earnings from that segment. and then backing into your net number, I guess, it implies something like -- and I'm assuming these are a lot of numbers, but if you back into the operating margins, that electrical segment, it's actually much lower than you did in the second quarter, which I think is not what you said.

So I guess, what is the give? If you're going to do a 14% margin on $80 million of revenues and then you're going to do 20% margin on 60% of revenues, that's going to be higher than the earnings guidance you gave. Plus the tax rate is changing?

On a year-to-date basis, our electrical and industrial margins have averaged 13.6% and galvanizing has averaged 31.8. Again, we're going to be exiting the year at 20% run rate and galvanizing, not achieving 20% for the balance of the year. If you put in the mix of our products, everything that's out there and based upon the guidance that we issued, you'll have electrical and industrial margins of 12.5% for the fiscal year and a galvanizing services margins of 25.5%.

Okay. So I guess since it did average about 13.5 for the first half of the year, you're anticipating that the margins will average roughly 11.5 for the second half of the year in electrical.

That's right. It's the mix of the products within electrical rather than a structural change of the electrical products.

And what exactly is having an impact on that mix, just so I can better understand the products there.

Just a timing of shipments of backlog.

Okay, okay. And the tax rate going forward?

37%.

Okay, great. Thanks a lot, guys.

[OPERATOR INSTRUCTIONS] Your next question comes from John Franzreb, Sidoti and Company.

In years past, there's discussions about selling the tubular business, is that end market doing reasonably well? Has there been any consideration to monetizing that business?

As we've said, once we restructured it, it's operated at a positive contribution since that period of time. We've also acknowledged that it is not part of our core business as such. But until we have not had anyone approach us and express a desire to acquire. We are not marketing it. We believe it positively contributes to it, but you could develop a scenario where it would be a candidate for a conversation should someone desire to own it at a level that is beneficial to the shareholders.

And regarding acquisitions, are the mom and pop operations in your region, are they more likely to sell at the current zinc prices or less likely? Can you talk about what the geographic profile is for galvanizing acquisitions?

As we've indicated to you and to the others before, we have a pretty strong concentration -- penetration of our existing markets. And we still want to move outside of our current geography if we can ever find that opportunity.

There's no doubt that the cash impact of the increased increased zinc cost makes it easier to get an audience. It doesn't make it easier to get a deal, but it makes it easier to get an audience to talk to them. We don't think that will impractical pricing, because everybody has been through the cycles. But we would like to see it shake some opportunities loose.

Okay.

Which it hasn't to date.

Fair enough. One last question, what's the cash position at the end of the quarter, and any change in the CapEx budgets going forward?

CapEx budget is going to remain around 6 to $6.5 million and cash position was $2.8 million. Thank you very much, guys.

[OPERATOR INSTRUCTIONS] At this time, I'm showing no further questions. I'll turn it back to Mr. Dingus for any closing remarks.

Again, we thank you for your participation today. Hopefully it's shed more light on our operating results and our go-forward opportunities and we continue to work and to expand our business and we look forward to talking with you again in 90 days and appreciate your support and your cooperation. Thanks again.

Ladies and gentlemen, that concludes the AZZ Incorporated second quarter 2007 earnings conference call. We appreciate your time. You may now disconnect.