AZZ Inc (AZZ) 2008 Q4 法說會逐字稿

Good morning. My name is Amanda, and I will be your conference operator today. At this time, I would like to welcome everyone to the AZZ Incorporated fourth-quarter 2008 financial results 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)

I would now like to turn the call over to Mr. Robert Blum of Lytham Partners. Please go ahead, sir.

Thank you, Amanda, and good morning, everyone. Thank you for joining us today to review the financial results for AZZ Incorporated for the fourth quarter of fiscal year 2008 ended February 29, 2008. As the operator indicated, my name is Robert Blum. I'm with Lytham Partners, and we are the financial relations consulting firm for AZZ Incorporated.

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 602-889-9700, and we will immediately fulfill your request; or you can retrieve the release off the Internet from a number of financial sites.

Before we begin, I would like to remind everyone 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 hot dip galvanizing market; prices and raw material costs including zinc and natural gas, which are used in the hot dip galvanizing process; changes in the economic conditions of the various markets the Company serves, foreign and domestic; customer-requested delays of shipments; acquisition opportunities; adequacy of 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. David Dingus, President and Chief Executive Officer of AZZ. David?

Thank you, Robert, and thanks to each of you for taking the time to join us today for the conference call for the fourth quarter and our fiscal year 2008, which ended on February 29.

Now for the 12-month period ended February 29, '08, when compared to the prior year, revenues increased 23%. Net income is up 28%. Earnings per share increased 24%. Backlog is up 12%. We continued to benefit from strong market conditions, favorable product mix, and expanded served markets. International opportunities continue to play an important role in our growth potential and backlog recovery.

Total incoming orders for the quarter were $64.4 million, while shipments for the quarter totaled $76.6 million, resulting in a book-to-ship ratio of 84%for the fourth quarter.

For the fiscal year, orders totaled $334.4 million, while shipments totaled $320.2 million, resulting in a year-to-date book-to-ship ratio of 104%.

The fourth-quarter backlog, while remaining strong, was down when compared to the second and third quarter as anticipated and has been forecast. Quotation activity and project opportunities continue at an excellent pace. However, the timing of the release of these orders, particularly large international orders, has been slower than desired and has had an adverse impact on our backlog.

Similar to the quarterly variances we've seen over the past two years, we again believe that this is a timing issue rather than a market correction. The domestic backlog compares favorably to our prior periods and has increased 6% since the record-setting backlog levels of the second quarter of fiscal 2008.

Our projections of anticipated backlog and backlog trends are based upon our quotation expectation activity and customer-announced release dates, which are always subject to adjustment and change. We remain optimistic that we will see backlog recovery in the first six months of our new fiscal year.

The increase in margins on previously booked projects, which is now being reflected in our operating results, is a positive consequence of our strict adherence to order acceptance criteria with specific margin contribution targets and effective execution of our business and our backlog.

We are not at full capacity, and we do have opportunities to continue to supplement our backlog with additional international opportunities, as well as domestic quick-turn higher margin jobs.

Galvanizing demand remains strong, and tonnage of steel galvanized shipments increased 18% for the fiscal year. Now, 68% of this increase is attributable to the acquisition of Witt Galvanizing. The balance of the volume increase is spread across all of our served markets.

As a Company, our accomplishments have improved, and we continue to double and redouble our efforts to secure more profitable business and effectively and efficiently execute that business.

Our continuous improvement programs combined with aggressive marketing programs have had a very positive impact on our operating results for our just-completed fiscal year. We believe that these efforts and the leverage gained from additional volume has very positively impacted our results.

Now subsequent to the year end, we completed a significant acquisition and a placement of 10-year unsecured senior notes. On April 1, 2008, the Company announced the signing of an asset purchase agreement with AAA Industries, Inc., a privately held company headquartered in Joliet, Illinois, to acquire substantially all of the assets related to AAA's galvanizing business. The acquisition, with purchase price of approximately $85 million, will be paid for in cash.

AAA operated 7 galvanizing facilities with locations in Joliet, Peoria, Dixon, and Cicero, Illinois; Hamilton, Indiana; Winsted, Minnesota; and Chelsea, Oklahoma. While the Cicero, Illinois, facility was not acquired by AZZ, it has been closed effective April 1, 2008, and the operations have been consolidated with the Joliet, Illinois, facility.

This strategic acquisition enhances the Company's growth and expansion opportunities and complements the Witt acquisition, which was completed in November of 2006, and solidifies our position as the largest after fabrication galvanizer in the US.

Fiscal 2009 revenues for the AAA Galvanizing operations are expected to exceed $50 million for the 11 months; and this acquisition will be accretive in its first year of operation.

In conjunction with this acquisition, the Company also completed a private placement of 10-year 6.24% unsecured senior notes in the amount of $100 million. The proceeds were used to facilitate this acquisition.

The completion of an excellent record-setting year, positive market outlook, financial strength, and a great group of employees results in an optimistic outlook for our future. We are keenly aware of the challenges brought about by the volatility and raw material pricing, the uncertainty of the US economy, and the competitive nature of our business environment. We do believe that we can successfully navigate through these challenging conditions as we have effectively done in the past.

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

Thank you, David. I would like also like to welcome each of you to our fourth-quarter conference call. At this time, I will review our unaudited consolidated results for the period ending February 29, 2008.

For the fourth quarter, financial results remained strong for AZZ. We recorded revenues for the quarter ending of $76.6 million as compared to $79.3 million in the prior year. Net income for the quarter was $7.3 million, which compared to $7 million in the prior year. Diluted earnings per share was $0.60 a share compared to $0.58.

Revenues for the 12-month period ending were $320.1 million, a 23% increase, as compared to $260.3 million in the prior year. Net income for the 12-month period was $27.7 million, an increase of 28% for the year, which compared to $21.6 million in the prior year. Diluted earnings per share for the year was $2.26, compared to $1.82.

Our earnings per share have been -- share calculations are stated after the effect of our two-for-one stock split in the form of a 100% stock dividend paid on May 4, 2007.

Our fourth-quarter results were as we anticipated and as we had forecast for our fiscal year and our guidance issued at the end of our third quarter. As David has stated, we continue to maintain our strong quotation activity and project opportunities for our electrical and industrial products. But our backlog has been adversely impacted by the delayed release of these orders, particularly large international orders. As we have stated in the past, we believe it's a timing issue for orders being placed, rather than a market correction.

In our galvanizing segment, continued strong demand allowed us the opportunity to maintain our galvanizing pricing. Our electrical and industrial segment generated 56% of our revenues, while our galvanizing services segment generated 44%. We anticipate that 55% of our revenues for fiscal '09 will be generated from the electrical and industrial segment and 45% generated from the galvanizing segment.

At this time, David will give us an overview of the electrical and industrial segment.

Industrial demand for our power distribution and motor control centers remains strong due to new projects and major renovations and expansions. Projects continue to be reported by the engineering procurement and construction firms, and we believe that an emphasis on the need for spending related to infrastructure, refining, LNG, ethanol, clean fuel initiatives, combined with mining systems upgrades, should lead to this continued strength of this market.

Our specialty lighting products have seen and should continue to see strong results due to new products and overall strength of the market. The demand for our metal clad outdoor switchgear products is outstanding. Utility distribution substation orders continue to improve, and the growth in the market demand is most encouraging.

Quotations which utilize our high-voltage transmission products were again at excellent levels and reflect strong domestic and international demand. We continue to operate at record-setting levels. As stated earlier, closure of the outstanding international quotes should favorably impact future backlog levels.

The power generation market is encouraging, and the maintaining of announced build schedules of new generation plants, emphasis on renewables such as wind and solar energy, and the addition of scrubbers to existing facilities should continue to positively impact our market and orders in future quarters.

Orders and shipments of our tubular products to the petroleum market were essentially flat with prior periods. Dana will now cover the operating results of this segment.

In our electrical and industrial segment for the quarter, revenues were $41.7 million as compared to the prior year results of $46.4 million. Operating income of $6.8 million as compared to $6.9 million. Operating margins were 16.3% for the quarter compared to 15% in the prior year period.

The execution of our backlog continued to strengthen, and our operating margins for the fiscal year were 16.3%, which improved by 2 points over the prior year. We continue our emphasis on booking business at specifically targeted margin levels and pursuing price increases to recover increased cost of material.

Our challenge will be to continue to expand our markets while maintaining our strong operating performance. At this time, David will cover our galvanizing segment.

Zinc cost in the last few months has been in the $1.00 to $1.15 price range. Now, with overall demand being strong, we've been able to maintain a majority of our previous pricing actions. The average cost of zinc in our kettles closely approximates the current cost of zinc. So we're [entering] a period where the cost of our FICO inventory approximates the current LME cost of zinc.

Our strategy is unchanged, and we will continue to resist downward pricing pressures. We will risk some modest market share losses to try and sustain these pricing levels. Revenue dollars will potentially be impacted in future periods if market pricing is required to be adjusted as a result of reduced zinc cost.

We continue to operate in very favorable market conditions and continue to maximize the market share growth that can be achieved by providing a superior level of service and support to our customers.

Operating efficiencies continue to improve, and the leverage obtained from increased volume are both reflected in our excellent quarterly and fiscal year results. Our results do reflect the improvement in infrastructure spending in the US market. Demand in our traditional geographic markets continues to be very strong.

We're extremely pleased with our operating results and the market conditions in the Midwestern US territory, and look forward to the accomplishment of the potential benefits that the AAA Galvanizing acquisition provides in this strategic territory.

Dana will now give us a review of the key operating statistics for galvanizing and then cover the key balance sheet items.

Revenues in our galvanizing segment for the quarter were $34.9 million, an increase of 5.1%, compared to $33.2 million recorded in our fourth quarter in fiscal '07.

Increased volumes of steel shipped as compared with the same quarter last year, as well as favorable product mix, helped us to maintain our pricing levels for the fourth quarter, which approximated the same as our third quarter.

Operating income was $8.9 million compared to $8.3 million in the prior year. Our operating margins were 25.5% compared to 25% same period last year.

Our average zinc cost that is reflected in our fourth-quarter P&L was $1.61 per pound, as compared to $1.65 per pound during the same quarter last year. Our average inventory cost at the end of the fiscal year was $1.26. As we have stated before, increased volatility in the future zinc prices could have an adverse effect on our future revenues and earnings stream.

We're pleased that we were able to announce the acquisition of AAA Galvanizing on April 1. This acquisition should add in excess of $50 million in revenues for our fiscal 2009 year, and should be accretive for our earnings per share in the first year. The addition of AAA will increase our galvanizing facilities to 20 locations.

In conjunction with the acquisition, we completed a private placement of 10-year, 6.24% unsecured senior notes in the amount of $100 million.

At this time, I will cover some of our cash flow and balance sheet items on a comparative basis. For the 12-month period, cash provided by operations was $38.9 million, which compares to $6.9 million in the prior year.

Our receivable days and inventory turns remain good. Accounts receivable days outstanding we improved to 49 days at the end of the fourth quarter as compared to 51 days at the prior year.

Year-to-date capital improvements were made in the amount of $9.99 million. Depreciation and amortization amounted to $8.2 million for the year. Our total outstanding bank debt at the end of the quarter and the end of our fiscal year was at zero, which reflects a reduction in bank debt of $35.2 million for the fiscal year.

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

We are pleased with the results of our fiscal year. The 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, and improving operating efficiencies are all reflected in our improved operating results. We set another record year both in earnings and in sales.

We continue to seek out additional products which complement our existing product offering to our electrical and industrial customers and expansion of geographic coverage for our galvanizing services segment.

The strength of our balance sheet fully supports these efforts and is evidenced by our recent acquisition of AAA. Our products and services are well positioned to continue to benefit from a strong infrastructure market, including the replacement equipment for the aging distribution substation and transmission grid. [Expansionatory] spending in the petrochemical market and the strength of the power generation market has enhanced these gains.

While we anticipate the current market demand will continue, the timing of projects and release of orders will always have an impact on our quarterly recognition of bookings, backlog, revenues, and earnings, and will result in quarter-to-quarter fluctuations which may be greater than true changes in our market demand, and our competitive position, and our competitive successes.

On January 19, 2008, the Company issued projections for fiscal '09 that revenues would be in the range of $320 million to $330 million and that fully diluted earnings per share would be in the range of $2.20 to $2.30.

Based upon the evaluation of information currently available to management and prior to the inclusion of the recent acquisition of AAA Galvanizing, our projections remain unchanged. Accounting for the favorable 11-month impact of this acquisition, we are pleased to project that our revenues for fiscal '09 will be within the record-setting range of $365 million to $380 million and that fully diluted earnings per share will be within the record-setting range of $2.28 to $2.42.

We continue to build upon the success we've been able to achieve and strive to enhance the performance of the Company. Now, our estimates to assume that we will not have any significant delays in the delivery or timing and the receipt of orders for the electrical and industrial products; and that the cost of zinc will not significantly change from the current levels of $1.00 to $1.15 during the current fiscal year.

We appreciate your support and thank you in advance for that. We would like to open it up for any questions you might have at this time.

(OPERATOR INSTRUCTIONS) John Franzreb with Sidoti & Company.

Good morning, guys. My first question is regarding the international orders that have not materialized. Could you kind of give us some clarity or color as to what you consider, A, a large size; and B, why the pushout?

John, I think our definition would be somewhere between on the order of $10 million to $20 million for a single order. If we go back to the record-setting second-quarter backlog, 35% of our backlog was in international; and it's down to about 21% now.

Now, that has been, in our opinion, for a number of reasons. In the Middle East, literally the activity has exceeded their own ability to get the orders to the stage of quotation. We have seen a little bit of slowdown in the China market. But our North and South American markets continue to produce.

So we have very specific orders out there. We are not counting on securing all of them in the first six months, but just the ones that we are forecasting will get us back to that same level of backlog, we believe.

Are you suggesting back to 35% of your total backlog being international again?

Yes.

Okay. How many orders are we talking about here, David?

Probably four to five.

Four to five.

Total potential, John. We think we will get probably three lassoed in, in the first six months.

Okay.

We are aggressively pursuing four to five orders.

All right, that's helpful. Most of these, I assume are in the oil and gas sector.

No, they are all in power generation, power transmission.

Oh really? Okay, great.

They are all power related.

Okay. One other question and will let other people ask. The acquisition of AAA, could you talk about the margins of the acquired business compared to AZZ's galvanizing business? What kind of margin opportunities are there for you?

Yes, John. In total, they are running at about 14.5%. Now, that is influenced by the fact that they have a couple of new facilities that are just in their infant stage. But if you take the more mature facilities, they're operating about 3%, 3.5% below where we traditionally operate.

So we think there is some opportunity in the near term to work on that to get it up to the level. But we would anticipate that in total it will take about two and a half to three years to get it to the same 20% level where we are operating.

So as a consequence, our overall margins in '09 will be pulled down to 18.5% to 19.5% from what we had previously forecast. So ongoing basis we think they're 3%, 3.5% below. We think that some of that we came definitely work on. But the current forecast in '09 is 14.5% for AAA.

Okay, thanks a lot, David.

You bet, John.

(OPERATOR INSTRUCTIONS) Ned Borland with Next Generation.

Good morning, guys. Just want to go into the electrical and industrial orders for a second here. You had a pretty steep drop. I'm just wondering, was there anything in, say, the lighting business or the tubular business that was missing this quarter? Because you're at $64 million for the fourth quarter; and you were at about -- trending at about an $80 million to $90 million pace in the previous couple of quarters.

We had always been hearing about these international orders, the large ones that are sort of on the come. But was there anything else that was sort of absent in this quarter versus previous quarters?

No, in fact, it was the exact opposite. As I indicated, in the fourth quarter our domestic backlog, exclusive of these large international orders, was actually up 6% and spread nicely across. Distributions substation work is excellent, our domestic high-voltage is excellent, lighting is good. So we just had very, very heavy shipments in the last six months of international and didn't replace those with new orders.

So I think that is why the trend there. But if we pulled it out and look at it, domestic and international, our domestic is growing and is at a record level.

Okay. Then just on the galvanizing margins sequentially. I think we've all been kind of conditioned to seeing those margins sort of come in a little bit. Yet you saw a sequential increase.

Is there something outside of the price to zinc relationship that you guys improved on sequentially?

No, it was just our ability to sustain the pricing, Ned. As opposed to -- I mean, some additional contribution from leverage at a couple of our larger facilities. But overall, it was just our ability to sustain pricing.

Okay. Then, I guess was there anything -- I guess with the AAA acquisition, the customer mix there, who are the types of customers? How steady is the demand coming out of those guys?

The mix differs between AAA and -- we don't have all of the details yet or I'd give it to you specifically because they have not categorized all of it. But if you just generalized, you would say it is not as intensive or not as focused in the petrochem market but would be much larger in the OEM market.

They have some very significantly large customers in all of their facilities, such as a radiator manufacturer that supplies for all of the transformers for the electrical industry. That would be just an example.

So when we finally get the mix out and share that with you in the next couple, three weeks, you will see a little higher mix of OEM business than you see in total. But again not -- it's got a same level of high volume of customers, does not have a level of customer concentration that is overly concerning to us, and we will blend nicely across four or five markets.

Again, very strong in the electrical and telecommunications market. Very strong in cellular. Very strong in transmission poles and towers. So markets that we are very used to.

Like I said, the difference will be a larger portion in OEM, whereas our traditional markets here are a little more geared towards the petrochem side.

Okay, that's great. That's all I have. Thanks.

(OPERATOR INSTRUCTIONS) Stephen Hansel with Eclectic Investment.

Good morning and congratulations for another great quarter.

Thank you.

I'm curious about two things. One, the need for being close to the customer in the galvanizing business, and what sort of holes exist in your franchise in that business now.

Then second, your feelings about international acquisitions in that or other businesses.

Okay, we believe that the AAA acquisition, combined with the Witt and the upper Midwest territory, gives us a solid a marketshare position in the 30%, 35% range that we enjoy in our traditional six-state region in the South, Southwest.

We believe there's opportunities to enhance that. There are a couple small voids in that territory that we yet need to fill in. But we're very, very pleased with what -- it's very unusual to find the private companies, as we did with Witt which had three facilities, and AAA which had seven facilities, to give us a base of 10 facilities in that part of the country. So it really solidified ourselves as the premium supplier in that territory.

So we think we are solid now in those two territories. Now there will always be the opportunity we have to link the two territories together. But that again will be down the road for some time.

As far as the international, we have looked at acquisitions. We've look at more on the utility distribution substation side than we have in any other area. We do think that it will be rather difficult for us to move into the Western European market because of the dominance of all the major players in that area.

But we believe there's opportunities in other areas of North America and in South America for us to move into. That would probably be our initial focus, to move internationally in the Americas.

Thank you very much.

(OPERATOR INSTRUCTIONS) Ned Borland with Next Generation.

Just want to get a sense for what quick-turn revenue was during fiscal '08; and if you have put any assumptions for quick turn into your guidance for fiscal '09?

I don't have what the total number is for the year. Fourth quarter was a little light, Ned, from what we have had the first three quarters. But we haven't really put anything into the guidance for any unusual quick-turn business.

Okay, thanks.

(OPERATOR INSTRUCTIONS) John Franzreb with Sidoti & Company.

Could you just talk about your confidence level that those large orders are going to book within the six months? What have you been given by the customer that gives you confidence that we're going to see those things materialize?

John, I have a very high confidence level that if they place the orders, we will get the orders.

Okay.

My guess has to come when we hit that point. We know where we are competitively. We know where we are specification-wise. We know where we are. We know the quote validity is good. The projects are good.

It is just -- when can we get them to push the button is there. But I have more confidence in our ability that we will get the order than I can project when that will be [let].

Are the orders being delayed by problems locally in the funding, is it? Is it local concerns about the economic outlook? Or is it local concerns about where they are putting whatever power generation project they are putting? Can you give us some color there, maybe?

I think that particularly in the Middle East market and in the Chinese market, they've almost got more than they can say grace over in terms of activity. It is just which one surfaces to the top as to which one that gets let on that.

In the Americas, I think it is just in the final evaluation stages, those are.

But we do know in the Middle East that the activity that is going on not only in power generation, but in the petrochem side, has just exhausted a lot of the resources of the EPCs in that area.

China, again, they have not shown any indication of slowing their projects. They just have a number that they are trying to evaluate at the same time. We have done an analysis over the last three years for that market. After we get acceptance of our quotation, it takes four to five months for it to close. So that is just their own bureaucracy and their own evaluation process to get it through.

But there is no doubt, John, it is lengthening. It has lengthened over the last year.

Okay. What about -- that would assume that you have some capacity you could probably utilize here in the US. Can anything be rolled forward to kind of help that, absorb some of that capacity?

The international backorders that we are short on will be for the next fiscal year delivery. We're pretty good shape for this year. We're working on the following year, John.

So yes, we do have some available capacity that we can continue to supplement. But the main challenge is for fiscal 2010.

Okay, thanks for that, David. I appreciate it.

Trey Snow with Priority Capital.

Good morning. I think I missed this in your opening segment. But in the galvanizing services segment, what was your volume and price contribution in the fourth quarter?

Total revenues were -- let me pull it here, I'm sorry; I've already folded that page.

$34.9 million were the revenues as compared to $33.2 million in the prior year. Operating margin at 25.5% for the quarter versus 25% in the prior year. Operating income of $8.9 million versus $8.3 million.

Right, and your revenue there was up 5% year-over-year?

Correct.

What was the contribution from volume and the contribution from price? I know you said price was flat with the third quarter, but I didn't --?

Volume is up 9.1%.

So prices were minus 4?

Prices deteriorated slightly [in the period], looks like about -- well it would be just --

About 1.5%. The difference then would be mix for the total. But pure tonnage shipped was up 9.1%.

Okay. Pricewise, as we enter your first quarter or well into it, do you feel like there's currently pressure up or down on pricing?

I think that we have had a very good month and we are looking at, in the month that we are in, of sustaining right where we are. We have a lot of narrative about it, but have not had to deliver on that narrative yet on the downward pressure.

Right. Okay. Great. Thanks for the insight.

At this time, there are no further questions. I would now like to turn the call over to Mr. David Dingus for closing remarks.

Again, we thank you for your time and appreciate your participation; and hopefully this has allowed us the opportunity to shed more light on the announcement that was out and the confidence that we have in our business going forward. We look forward to talking to you at the end of the first quarter. Have a great day and a great weekend. Thank you.

This concludes today's AZZ Incorporated fourth-quarter 2008 financial results conference call. You may now disconnect.