AZZ Inc (AZZ) 2007 Q4 法說會逐字稿

Good morning. My name is Brandy, and I will be your conference operator today. At this time I would like to welcome everyone to the AZZ Inc. fourth quarter 2007 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 session. (OPERATOR INSTRUCTIONS). Thank you. Joe Dorame, you may begin your conference.

Good morning. Thank you for joining us today to review the financial results of AZZ Inc. for the fourth quarter and fiscal year ended February 28, 2007. As Brandy indicated my name is Joe Dorame. I am with the Lytham Partners. We are the financial relations consulting firm for AZZ Inc. With us today 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. If anyone participating on this call does not have a full text copy of the earnings release please call Lytham Partners at area code 602-889-9700, and we will immediately fulfill your request. Or you can retrieve the release off the Internet from any number of financial sites.

Before we begin we submit for the record the following statement. This conference call has been made available by the way of webcast technology on the Internet and direct dial via conference call service to all interested parties. This conference call includes statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Except for the statements of historical fact, this conference call may contain forward-looking statements that involve risks and uncertainties, some of which are detailed from time to time in documents filed by the company with the SEC.

Those risks and uncertainties include, but are not limited to, changes in customer demand and response to products and services offered by the Company including demand by the electrical power generation markets, electrical transmission and distribution markets, the industrial markets and the hotdip galvanizing markets. Prices and raw material costs, including zinc and natural gas which are used in the hotdip 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 to turn the call over to Mr. Dana Perry, Chief Financial Officer of AZZ.

Thank you. I would also like to welcome each of you for joining us for our quarter end and our fiscal year end 2007 conference call. David is traveling today but he is on the line via conference call, and will be available at the end of the presentation to help field questions and answer comments. All financial data today is presented prior to the impact of our two-for-one stock split effected by 100% stock dividend, declared by our Board on April the 5th.

The quarter revenues reached another record-setting level, increasing 58% to $79.6 million. Net income for the quarter rose 168% to $7 million. Diluted earnings per share of $1.16. For the twelve months revenues were up 39% to a record-setting level of $260.3 million while year-to-date diluted earnings per share was up 165% to $3.65 per share.

We continue to benefit from strong market conditions and expanded served markets. International opportunities continue to play an increasing role in our future growth potentials. Total incoming orders for the quarter were $99.3 million while shipments for the quarter totaled $79.6 million. Resulting in a book to ship ratio of 125% for the fourth quarter.

For fiscal 2007 orders totaled $307.2 million, while shipments totaled $260.3 million, resulting in a year-to-date book to ship ratio of 118%. Incoming orders for the fiscal year increased 57% when compared to the prior fiscal year. Our markets have strengthened over fiscal 2006, and we have been able to continue to increase pricing. We continue our efforts to achieve new business, which meets or exceeds our margin targets.

Increasing margins of previously booked projects which is now being reflected in our operating results is a positive consequence of our strict adherence to pricing and order acceptance criteria. We believe that our backlog consist primarily of jobs with margins which approximate those that we achieved in the fourth quarter and in our fiscal year. We are not at full capacity, and we do have opportunities to continue to supplement our backlog with quick turn, higher margin jobs and to build our backlog for further growth and expansion.

Backlog at the end of the quarter was $120.7 million versus $73.8 million in the prior year for an increase of 64%. We continue to work on additional significant orders outside the U.S., and we do anticipate receipt of these orders in the new fiscal year. Without these orders we do believe our backlog during the new fiscal year of 2008 would remain relatively constant based upon the size and scope of our current domestic quotation activity and announced projects. We do see improved market conditions for our power generation products.

Timing of these orders is difficult to precisely determine but anticipate we will see an increased level of bookings in our new fiscal year for this market. Based on customer requested delivery dates we estimate that approximately 86% of the current backlog is scheduled to be delivered in fiscal 2008. Galvanizing demand remains strong, and tonnage of steel galvanized shipments increased 34% on a quarter-over-quarter basis. This volume increase is spread across all of our served markets. The quarterly results did include three months contribution from the recent acquisition of the galvanizing operations of Witt Industries located in Indiana and Ohio. The acquisition accounted for 58% of our quarterly quarter-over-quarter growth in shipments. For the twelve months tonnage shipped has improved a most impressive 20% with approximately one-third attributed to our recent acquisition.

Zinc cost volatility continues, and we did see zinc fall to approximately $1.45 per pound during the quarter. But the overall demand being strong we have been able to maintain a significant portion of our previous pricing actions. On a year-to-date basis pricing has increased 54%. Our stated concern about increased cost of galvanizing and the impact this might have on customers selecting alternates, fortunately has not materialized. We continue to closely monitor U.S. industrial market indicators to determine any anticipated change or impact on our markets which remain very strong at this time.

As a Company our accomplishments have improved, and we continue to double and redouble our efforts to secure more profitable business and efficiently and effectively execute on that business. Our programs of continued emphasis on systems, procedures, sharing of best practices among our operations to further enhance operating efficiencies, combined with aggressive pricing programs that have a very positive impact on operational results for fiscal '07. We believe that these efforts and the leverage gained from additional volumes has very positively impacted our results.

As we have stated in previous discussions, our results in the fourth quarter in fiscal 2007 very favorably impacted by the realization of increased galvanizing practices, our challenge going forward is to continue to manage decreasing zinc costs.

In our electrical industrial product segment we recorded revenues for the quarter of $46.4 million, a 37% increase as compared to prior year results of $33.9. Operating income was $6.9 million, a 61% increase as compared to $4.3 million in the prior year. Operating margins improved to 15% for the quarter compared to 12.7% in the prior year's comparable period. 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.

Projects continue to be reported by the engineer and procurement construction firms. We believe that emphasis on the need for spending related to refining, LNG, clean fuel initiatives and mining systems upgrades should lead to a continuing strength in this market.

Our specialty lighting products have been and should continue to see strong results due to new products, and as well as demand related to the strength of the petroleum markets and overall strength of the industrial market. Demand for our metal clad outdoor switchgear products remains solid. Utility distribution substations, the wind energy market and the strength of the surface mining market all contributed to the strength of this product offering.

Our relay control play panels and industrial automation services financial performance has improved over the prior periods. Continued improvement in capital spending and maintaining 80% plus industrial utilization level as reported by the Federal Reserve should sustain this improved operating level for us. Quotations for major projects which utilize our high-voltage transmission products were again at very encouraging and robust levels. Our backlog and quotations reflect strong domestic and international demand. We continue to operate at record-setting levels in this product line.

Increasing demand for our products that serve the power generation market is encouraging and maintaining the build schedule of the new generation plants and the addition of scrubbers to existing facilities should positively impact our incoming order rate in future quarters. Orders in shipments on our tubular products to the petroleum market remains strong as we completed another very successful quarter.

Revenues in our galvanizing segment for the quarter were $33.2 million, an increase of 103% compared to $16.4 million recorded in our fourth quarter in fiscal '06. Our volumes of steel shipped as well as our selling prices were up when compared to the same quarter last year. Operating income was $8.3 million, an increase of 138% compared to $3.5 million in the prior year. Operating margins were 25% for the quarter as compared to $21.3 in the prior year period. Our fourth quarter includes revenues and income generated from the acquisition of Witt Galvanizing. This acquisition added three plants as we reported earlier in prior conference calls to our galvanizing operations, bringing total galvanizing facilities to 14.

We are most encouraged that we've been able to recover the escalating cost of zinc in fiscal '07. Part of the success can be attributed to the overall demand for galvanizing services. Zinc costs did reduce to $1.45 per pound during the fourth quarter. Zinc demand forecast and increased inventories lead us to believe that we could see further reductions in the cost of zinc in the near-term. Revenues for the year were significantly impacted by pricing actions required to offset escalating zinc costs when compared to last year.

Pricing action in the fourth quarter saw some moderation due to reduced zinc costs due to our first-in, first-out cost basis on zinc inventories, the higher cost of zinc purchased in the first part of the year is now beginning to be recognized. We do not believe the margins expressed in terms as a percentage of sales that were achieved in the first part of the fiscal year are sustainable. If last-in last-out cost basis had been applied operating profits would have been reduced by $900,000 for the quarter, and operating margins would have been 22.2%.

Demand for galvanizing services remains strong across all of our served markets; our results do reflect the improvement in the industrial U.S. market that has resulted in increased capital spending for expansion and maintenance. Demand in our traditional geographic markets continues to be strong. We are extremely pleased with our initial operating results and market conditions in our new Midwest U.S. territory.

While we have seen [limited] occurrences of customers moving to other corrosive protection methods, our materials has been less than we would have anticipated in the period. We continue to monitor closely to see the impact of increased cost of galvanizing on demand.

For the twelve-month period cash provided by operations was $7.7 million compared to $12.8 million in the prior year. Our working capital dramatically increased during the year, increasing by $48.5 million since our 2006 fiscal year end. The acquisition of Witt Galvanizing added $6.5 million to inventories and receivables, and the escalating cost of zinc has increased our galvanizing inventory gearing value by $6.4 million. Inventories and receivables in our electrical and industrial segment were up, as well as to support our improving business levels.

Our receivable days outstanding and inventory turns remain good; outstanding receivable days were 51 days at the end of the fiscal year as compared to 53 days at the end of fiscal '06. Year-to-date capital improvements were made in the amount of $11.4 million and depreciation and amortization for the year was $6.7 million. Our total outstanding bank debt at the end of the fiscal year was $35.2 million which included $13.5 million that was drawn down against our line of credit to finance the acquisition of Witt Galvanizing. Our current long-term to debt to equity ratio at the end of the year was 0.32 to 1 as compared to 0.16 to 1 for the same period last year.

Aggressive steps we have taken in seeking out new domestic and international marketing opportunities, improving our distribution channels, lowering our cost structure, increasing our pricing levels, improving operating efficiencies and enhanced management of our working capital reflected in our improved operating results. The improvement in volumes has advanced the gains we have made due to leverage. Our products and services are well positioned to continue to benefit from a continuing strong industrial economy, opportunities as a result of the energy legislation, expansionary spending on the petrochemical market in the beginning of a recovery in the entire generation market.

While we anticipate the current market demand will continue, the timing of the projects and release of orders will always have an impact on the quarterly recognition of bookings, revenues and earnings and will 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 aggressively manage our way through these conditions in order to build upon prior accomplishments and minimize these fluctuations. Based on evaluation of information currently available to us, we are continuing our previous issue guidance for fiscal 2008. We are pleased to project that we believe it will be another excellent year for AZZ in fiscal '08 with record-setting revenues that range between $275 to $285 million.

Net income projected to remain strong and is estimated to be the second-best net income year in 51 years history of the Company. Our diluted earnings per share is estimated to be within a range of $2.70 to $2.80 prior to the impact of the two-for-one stock split that was approved by our Board of Directors on April the 5th. This will have the impact of adjusting the range of diluted earnings per share to $1.35 to $1.40.

We appreciate your support and thank you in advance for continuation of that support. At this time we will open it to questions and answers.

(OPERATOR INSTRUCTIONS) John Franzreb, Sidoti & Co.

My first question actually revolves around the SG&A line. A big drop in the fourth quarter versus previous run rates you are kind of working at. What is going on there?

Predominately what was happening we've got cash based SARs program, stock appreciation rights program in place. And when the stock price dipped in the fourth quarter we had a reverse of accruals which dramatically affected that.

So what would it be looking like going forward?

I think we will be fairly on track with the average for the year. Again, it's going to depend a lot on the stock price, too.

Maybe another way, what was the impact in the quarter of that reversal?

I don't have that number in front of me. I will have to get that for you.

More than $1 million?

Yes.

Yes it was, -- $1.6 million (multiple speakers)

Okay, and given what we've heard for the past nine months is that -- we've heard about the price of zinc going up and that you've had a five-fold benefit but you've raised prices 54% year-to-date, so you've been able to push it through. Why should we not expect you to be able to maintain strong prices given the geographic limits of the galvanizing business and the demand profile you are currently looking at?

Well, John, as we've talked with you before our customers are aware that the escalation of our pricing was directly tied to the escalation of zinc cost. Zinc cost has moderated we naturally have to back off on that pricing now. What has been fortunate for us in the fourth quarter is we only received limited pressure to reduce our pricing as a result of that. Now zinc sale to the $1.45 range in early February, stayed there in March, stayed there first part of April and last couple of days has jumped up to $1.62 ,$1.63 range. So we feel very fortunate that we've had limited pressure to reduce our pricing as a result of that zinc cost decrease. Now that we believe is tied to the demand is still strong.

So as we look at the first quarter and the first part of the second quarter of this upcoming fiscal year we don't know how strong that will continue to be and how long we can hang onto it. But we are at least encouraged; we think we are halfway through this adjustment. It takes essentially a six-month cycle to turn through our highest zinc costs will be in the months of, on a FIFO business basis be in the month of May and June. If we can hang out where we are right now we're going to be very pleased with those results and then by late June, early July we will have corrected our costs right back down to the 1.45 range. So it is very fortunate that market demand has remained such that we've been able to hang onto as much price as we have. Very pleased with that.

We're also seeing zinc inventories continue to increase and we are concerned that the price of that zinc continues to fall, its going to cause bigger adjustments going forward, as well.

How much of your pricing is surcharges versus the fixed-price?

It is $0.11 is our surcharge now, I believe.

Yes, it is roughly $0.11. So if you've got an LME of $1.45, you've got a $0.11 surcharge then.

All right. I will go back in queue. Thank you, guys.

Ned Borland, Next Generation Equity Research.

Good morning, guys. Good quarter. I just want to talk a little bit about some of the color on the electrical and industrial businesses. You said that the industrial demand still remains strong; could you just talk about that a little bit in detail.

Yes, the U.S. economy remains strong so our general CapEx across all lines is good. But the petrochemical market that continues to be strong because of everything that's going on in the refining, LNG, clean fuel initiatives, all of those which are adding greatly to our overall demand in keeping the overall demand up. And we believe that those should continue as most of those are longer-term projects, those should continue for the next two to three years.

And on the guidance, is that really based more on what you got in backlog? Taking aside the galvanizing for a minute but does that make any assumption for quickturn business this fiscal year?

It assumes that we don't get a level anywhere close to what we had in the current fiscal year. It is very difficult to forecast that. As Dana indicated in his presentation we do have the capacity to still deal with it. We are still aggressively pursuing it and it would be very additive to what we've outlooked then.

Okay so you are basically forecasting flat quickturn in fiscal '08 versus fiscal '07 if I understand you correctly.

Quickturn is significantly less in '08 than in '07.

Less than, okay, less in '08. Can you give me a sense for what the margins are on quickturn versus the backlog business historically or what you have in backlog versus what your typical quickturn margin would be?

We finished the quarter at 15% in electrical industrial, and as I said before, 13.5 to 14 is an outstanding year for us. So the overall impact is driving that up 1 to 1.5%. So you can just see how profitable that short-term is. I don't want to get too much competition by saying exactly how profitable it is. But it definitely could drive the margins that we have forecast in the '08 timeline as it did in '07.

Okay. I will get back in queue.

Will Lyons, Westminster Security.

Good morning, guys. Congratulations on another good quarter. In your press release this morning you -- there was a remark that you expect market volatility and the cost of zinc and other commodities to be less in '07 than it has been in the past year or more. Why do you expect that?

Again, all we can draw from is what the all the gurus out there are saying and that our conversations with the zinc suppliers and all of the conferences that we go to, it appears to us that there will continue to be some adjustment through that. And as Dana indicated we are concerned that inventories zinc worldwide are increasing because of number two, more supply is coming online. And then the downturn in the automotive industry as well as the downturn in the small appliances related to the housing industry is reducing overall demand. Plus during the recent weeks China has become a net exporter instead of a net importer. So continue to increase in unexpected increases in inventory could cause that statement not to be correct. But what we have seen is based on the forecast that the production, consumption and everything else. It should be a moderating year rather than a dramatic adjustment.

I see. You also mentioned in your comments earlier on this call that pricing and galvanizing had increased 54%. Does that mean that the average job in the fourth quarter in the galvanizing segment you've got a 54% higher price than you got for the same job a year ago?

I meant for the full-year.

But that would be -- would that be what the 54% meant? One job today during '07 versus '06 there was a 54% increase?

For the full-year the average cost of the sale of a product was $0.54 greater than it was a year before.

You also mentioned earlier in your comments that your customers in the galvanizing segment had not moved to competing corrosion prevention options to the extent you expected. What are those options that you see is your direct competitors in that sense, and why do people not move to those options?

First of all, the paint is the most obvious one to go to. The cost of paint had increased also. You could convert some of our product to aluminum but aluminum has increased also. So I think at the end of the day the customers who are fully convinced that galvanizing is the best corrosion protection and the least lifetime cycle cost didn't shy away because of this adjustment. Fortunately the economy has been strong enough that our customers have been able to pass it on to their customers. So the cycle continues. And as I've said before with the increase they absorbed and the steel costs, the increase that they had to absorb in the zinc and the galvanizing process was pretty much in line if not less than what they had done. So if we hadn't had the strong economy we may have seen more going the other way. The true believers and the use of galvanizing for the sake of lifetime cycle cost didn't leave us during this cycle. We're very grateful for it.

Absolutely. Switching gears a bit are you still manufacturing some products in your Chinese joint venture?

No we are not. No, we never were manufacturing there; what we were doing is assisting them in their marketing and engineering efforts. We hoped to get to the point of manufacturing that, but we've had some issues there and we had to take a step back and reevaluate our processes. But it is our intent at some time to manufacture for the local Chinese market before export in the Southeast Asia opened.

So in fulfilling all your international jobs they are 100% fulfilled out of your U.S. manufacturing facility?

100%, and we just had an absolutely outstanding year international sales.

It sounds like it. Finally what was the Board's reasoning in doing the two-for-one split?

Naturally when you look at a micro path to the thinly trading (inaudible) as we are and liquidity is the number one concern. And that we believe that there may be some cases where some funds who have restrictions on the total share price that they can pay for a microcap as well as the trading volume, although it has been dramatically improved over the last year to 18 months would be even further enhanced by that. So it is 100% liquidity.

Okay. That's all I had. Thanks, and congratulations again.

Sam Nicholls, Quillen Security.

Two questions if I could. I was curious if there is any portion of backlog which could be at risk relating to the TXU plant cancellations?

I can till you that we had been promised a significant amount of business. It wasn't in the backlog. It is not in the backlog. We were given a letter of intent in the month of February for about 2.5, $3 million worth of business and promised another 2.5 to $3. Through that prior to the cancellations, but we had not recognized the order, we had not booked the order and there is nothing in the backlog related to it. We are disappointed by it.

Okay, great. That was very helpful. And secondly, I was wondering if you might be able to talk a little bit more about your new orders on the electrical side, if perhaps you might be able to talk about some major customers, if there is any customer concentration or types of customers or new plants versus existing.

As Dana indicated in his prepared remarks we were pleased that the business is spread across all of our productline. As we've said before, our high-voltage products that are supporting the transmission, the high-voltage electrical transmission have been excellent for this year. But still some of our others have kept up the improvement that we're seeing in the power generation market, the strength of the petrochemical market, the strength of the overall economy. So I don't think we would have an issue of customer concentration. Naturally we are not at liberty to say who our customers are, and (indiscernible) without their permission but we do not have one customer out there that would represent more than 10 to 12% of our backlog.

Very good. Thank you very much.

(OPERATOR INSTRUCTIONS) John Franzreb, Sidoti & Co.

You've kind of downplayed the connection between Gulf reconstruction efforts and the strength in galvanizing. I was wondering if you could kind of update us on your thoughts there. It seems to me from what I'm hearing that some of those projects taking a lot longer to complete than people might originally have thought. Do you think you're getting some benefit from that, or it is really just oil and gas and general economy that is driving the galvanizing?

There are still jobs that the oil and gas has had a significant impact. If you take the year-over-year (indiscernible) John we said that was 20% and we've said about one-third of that is due to the acquisition. So that gets us roughly to 14%. We think out of that 14%, 1.5% is directly related to the hurricane. Now those projects are still going on. They are still being rebuilt. But by far we are getting a lot more activity on the Gulf coast from the infrastructure spending by all of the petrochemical.

So do you think you would be in a position without spending to accelerate the reconstruction efforts or you think you have seen the peak of it?

I think we will see another year just about the same as we have this year.

And do you have a number what your international sales were at the end of the year versus domestic?

On a shipments basis, John, for the electrical industrial products, 22.8% of our revenue for the electrical and industrial products was outside of the U.S.

Okay, and looking at the backlog, 20% sequential is a strong number. I wonder if you could comment on your thoughts about that relative strength and about the gross margins of that backlog, the quality of it may be versus a year ago and maybe pricing was a little bit more aggressive. Can you talk a little did about those issues?

I don't believe we've given up anything in the backlog in terms to the potential margin generation. Given the -- I'm making the assumption that you don't have commodity price increases that aren't covered by escalation clauses or anything else but we're very pleased with it though. We've not changed our philosophy; we continue to push the envelope. Now margins by industry, the industrial still lagged, the T&D and the generation. And we continue to push that envelope; we got a lot more competition. But in total I am very pleased with it.

That's good news. Okay. Thank you very much. Good job, David.

Thank you.

Ned Borland, Next Generation Equity Research.

Just one quick one on the mix of galvanizing tonnage versus previous periods. Is it shifted dramatically towards any one end market since you've added Witt? Or I know we just talked about the oil and gas markets, but is that the only thing or are there other pieces to it?

That is the main difference in the complexion of it as far as the coals and the transmission coals and the OEM business. No, it just matches up beautifully with what our philosophy is and our customer base is. Naturally they don't have the concentration of the petrochemical like we do along the Gulf coast, but other than that it is a broad based and haven't seen any dramatic shifts from that at all. Very, very pleased.

Okay. That's all I had. Thank you.

At this time there are no further questions. Mr. Perry are there any closing remarks?

Again, we would like to thank everyone participating today, and we look forward to another excellent year for AZZ going forward. We will keep everyone posted on our results. Thank you for being with us today.

This concludes today's AZZ Inc. fourth quarter 2007 earnings conference call. You may now disconnect.