AZZ Inc (AZZ) 2010 Q3 法說會逐字稿

Good morning and welcome to the AZZ Incorporated third-quarter 2010 financial results conference call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Joe Dorame. Please go ahead, sir.

Thank you, Ryan. Good morning. Thank you for joining us today to review the financial results for AZZ Incorporated for the third quarter of fiscal year 2010 ended November 30, 2009. My name is Joe Dorame. I am 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.

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 markets; prices in raw material costs, including zinc and natural gas, which are used in the hot-dip galvanizing process; changes in the economic conditions of the various markets the Company serves, foreign and domestic; customer-requested delays of shipments; acquisition opportunities; currency exchange rates; adequate financing; and availability of experienced management employees to implement the Company's growth strategies.

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, Joe, and thanks to each of you for taking the time to join us for the conference call for the third quarter of fiscal 2010. Domestic and international quotation activity has leveled off when compared to the first and second quarters of fiscal '10. The current quotation level does support a higher in coming order level than we are currently experiencing. However, our customers continue to delay purchase decisions, resulting in lower incoming order levels. We believe these delays have resulted from the current reduction in demand for oil and gas and electrical power, the uncertainty in the worldwide economy and financial markets, as well as an increasing uncertainty as to the impact of potential regulatory changes that could have on our customers' businesses.

These conditions have impacted our domestic market more than our served international markets. Our international quotation activity remains strong, however, order release has slowed somewhat in these areas also.

It is difficult to forecast timing of improved incoming orders. Based upon quotation levels and customer feedback combined with the fact that our fourth quarter is traditionally our weakest bookings quarter, we do not anticipate an increased order rate and a recovery of our backlog during the balance of our current fiscal year. Additionally, we do not believe that we will see an improving backlog in the first quarter of our new fiscal year. We will continue to closely monitor our quotation activity and customer feedback, which hopefully will allow us in future quarters to better forecast an increase in our incoming order rate and our backlog.

We will continue our efforts to effectively and efficiently secure and execute on the available business opportunities that we do have. Based upon current customer requested delivery dates and our production schedules, 36% of our backlog is expected to ship in the current fiscal year. Of the backlog of $131.8 million, 44% is to be delivered outside of the US.

Demand for our galvanizing services continues to be below the record-setting pace of last year. Despite this lower demand, we had another outstanding margin performance quarter. We will continue our efforts to implement our strategic plans for the segment designed to broaden our customer base and expand our geographic presence. These actions should help us offset some of the economic weaknesses in particular market areas.

Competitive pricing actions continue to be mixed in both segments with some competitors deciding to maintain production in employment levels regardless of price and others deciding to follow a more disciplined approach. For the most part within our served markets, the industry has resisted massive price discounting despite reduced demand.

As a Company, our accomplishments have continued as we double and redouble our efforts to better position the Company for a market recovery and continue to effectively and efficiently execute on the business that we do have.

The completion of another strong operating quarter, the financial strength of the Company, and a great group of employees is reflected in our operating results and the confidence in our future. We do believe that we are structured for sustainability as we continue to navigate through challenging waters in this period of extreme economic and regulatory uncertainty and continue the execution of our strategy.

Now with that as an overview of our results, Dana will now give us a review of the operating results for the third quarter and the first nine months of fiscal '10. Dana.

Thank you, David, and I would also like to welcome each of you to our third-quarter conference call. An at this time, I will review our unaudited consolidated results for the period ending November 30, 2009.

For the third quarter, financial results remained strong during the adverse economic times, as AZZ recorded revenues for the quarter of $81.5 million as compared to $108.9 million in the prior year. Net income for the quarter was $8.7 million as compared to $10.8 million and diluted earnings per share was $0.70 as compared to $0.88 in the prior year.

The book to ship ratio for the quarter was 91% compared to 89% at the end of our August, 2009 quarter and 74% at the end of our May quarter with an ending backlog for the quarter of $131.8 million. Our backlog at the end of the August 2009 quarter was $139.4 million. While our quotation activity levels remain strong, we have not seen a significant corresponding increase in our incoming order rates.

Our Electrical and Industrial segment generated 57% of our revenues for the year while our galvanizing segment generated 43%. We anticipate that 58% of our revenues for fiscal 2010 will come from our Electrical and Industrial Products segment and the remaining coming from our Galvanizing segment. In our Electrical and Industrial Products segment, we recorded revenues for the quarter of $43.6 million as compared to $62 million. Decreased revenues for the quarter were the result of lower order intake during our first and second quarter of the current fiscal year.

Operating income was $9.1 million as compared to $10.4 million and operating margins were 20.9% for the quarter compared to 16.8% in the prior year period. while operating margins improved for the year are tripled to the leveraged gained from our improved operating efficiencies and favorable commodity pricing. Revenues in our Galvanizing segment for the quarter were $37.9 million as compared to $46.9 million recorded in our third quarter of fiscal 2009.

Our third-quarter revenues were negatively impacted by the reduction in volumes of steel processed in the amount of 11% and a reduction in selling price in the amount of 9%. Operating income was $10.5 million compared to $13.1 million in the prior year. Operating margins for the quarter were 27.8% as compared to 28% in the prior year. As we have indicated before, results from this segment have followed closely the condition of the industrial sector of the general economy.

At this time I will cover some of the key cash flow and balance sheet items on a comparative basis. For the nine-month period, cash provided by operations was $65.5 million as compared to $21.4 million in the prior year. Accounts receivable days outstanding remained good at 52 days at the end of the third quarter as compared to 51 days at the end of our last fiscal year.

Year-to-date capital improvements were made in the amount of $10.2 million and depreciation and amortization amounted to $13 million.

Our total outstanding bank debt at the end of the quarter remained at $100 million and our cash balance was $98.4 million. The strength of our balance sheet, strong cash position, combined with access to borrowing under our existing banking arrangements should facilitate the execution of our business strategies going forward.

At this time, David will give us an overview of our two operating segments.

The industrial and petrochemical demand for our power distribution and motor control centers has significantly slowed when compared to fiscal '09. Timing of new projects and release of orders related to energy infrastructure, rebuilds, expansion, and upgrades remains an issue and is impacting incoming order rates. Concerns over the uncertainty of the anticipated regulatory and legislative changes have in our opinion lowered order rates.

Demand for our metal clad outdoor switchgear products did see some reduction in the third quarter. We await the announcement of calendar 2010 budgetary spending levels of our utility customers. Most of the spending that has driven demand for our products has been for replacement rather than expansion. So we would anticipate that the upcoming budget would follow that trend and spending would continue for the upgrade of the distribution substation market.

Our high-voltage transmission bus duct products activity reflects good international demand. Pricing continues to be a concern, but that concern has moderated when compared to pricing of levels of six months ago, particularly in China. We have remained consistent in our pricing.

The outlook for power generation market remains strong and while some schedules are shifting, overall we believe the market is relatively stable. Domestic emphasis on renewables such as wind and solar and environmental upgrades should continue to positively impact our market opportunities. Our specialty lighting and tubular product sales were down due to reduced petroleum and industrial demand.

For the galvanizing services segment, our strategy to provide a premium level of servicing and quality to our customers has continued and will continue as we resist downward pricing pressures. Revenue dollars will be impacted in future periods if market pricing is required to be adjusted further as a result of reduced demand.

A significant portion of our business is reflective of the GEP and as well as the infrastructure build-out. We are striving to maintain our market share without sacrificing price, a strategy that has worked well in the first nine months of the fiscal year and we intend to follow in subsequent quarters.

We have instituted price increases designed to offset the increasing cost of zinc. Competition has been slow to follow our lead, but we assume that they will feel the need to keep pace due to the increasing cost of zinc. There remains concern over the impact of economic conditions. Renewable energy projects could provide some additional growth opportunities. We will continue to look for opportunities for further expansion.

In summary, this strong margin performance of the third quarter and the first nine months is most encouraging. Our primary concern as we've shared with you and discussed previously is the incoming order rate and the impact it is having on revenues and operating income in the current fiscal year and what the continuing impact will be in fiscal '11.

Our products and services are extremely well positioned to benefit from any market improvements and/or increased infrastructure spending. Our lead times are shorter and should provide for more expeditious benefits of any improved market conditions. The timing of the projects and release of orders will always have an impact on the quarterly recognition of bookings, backlog, revenues, and earnings, and will result in quarter-to-quarter fluctuations which may be greater than through changes in market demand and our true competitive position and successes.

Based upon the evaluation of information available to management, we are revising our previously issued revenue guidance for fiscal 2010, but maintaining our issued earnings guidance. Our earnings are estimated to be within the range of $3.00 to $3.10 per diluted share and revenues to be within the range of $355 million to $365 million. The previous estimates were for earnings to be within a range of $3.00 to $3.10 and revenues to be in a range of $3.70 to $3.80.

Achievement of these projections would be our 23rd consecutive year of profitability and the second best year in the history of the Company. Our estimates assume that we will not have any appreciable change in our current market conditions, competitive activity or significant delays in the delivery or timing in the receipt of orders of our Electrical and Industrial Products and demand for our Galvanizing Services.

Again, thank you for your participation today and we would like to open it up for any questions you might have at this time.

(Operator Instructions) John Franzreb, Sidoti & Co.

Good morning, David, Dana, and Joe. David, I just want to make sure I heard this correctly. Did you say that you do not expect the orders in backlog to improve by the first quarter of fiscal 2011?

Based upon what we see right now, John, that is correct.

Okay and that is pushed back what you said from last quarter. What has changed from last quarter to this quarter in your assessment of the turnaround?

Again, it's just a continuation of -- we thought that we were getting the signals from the customer that they were starting to ease up in the release of the orders. They have not done that and until such time as we see that, John, we just don't believe that we should forecast an improvement. Quotation activity is still there, as I indicated. It is greater. It will support a greater incoming order rate than we are currently experiencing but just based upon what we are seeing as a continuation of customers delaying a decision. I think it is going to take us beyond the first quarter to really start seeing an improving rate.

Now given the mix in the backlog so much now it's historically high as far as your foreign shipments. Does that kind of suggest that the US utility and gas and oil market is severely depressed for you? Is that how it's playing out?

That's exactly how it's playing out. While we are having a strong year internationally, it has not fundamentally changed from our structure of 25% to 30%, John. So that 44% that we are seeing is a reduction -- is a result of the reduction of the domestic more than a big increase in the international.

Okay, that helps. Now on the Galvanizing side, two points. One, you said that the way the margins played out it was almost exactly how you implied last quarter on the replacement value of the zinc. It kind of came in exactly the way you are talking about that 28.5%, 29% range. You indicated that you've raised pricing in the galvanizing side but competitors are slow to follow. Could you talk a little bit about that color behind that -- and is that a regional problem or is it across the board?

John, we just did that in the last four weeks or so. It normally takes the competition about eight weeks to follow us. So we haven't seen them come up yet, but we're not overly concerned about them not coming up. We believe that we're going to start to see some movement but we naturally have taken the lead but it may be early into the first quarter before competition overall market responds to that.

We think the same pressure is on them that is on us because zinc is trading in that $1.15 to $1.20 range and everybody is looking down the barrel of that -- has to do it. So while I am commenting on that, it's relatively new but that is not unusual, John.

So have volumes stabilized at a low level or they continue to weaken?

No, they have stabilized.

Okay, so the margin pressure you're going to get is kind of replacement value of the zinc in pricing so we should expect a little bit weaker margin going forward on galvanizing?

That is correct.

Okay. And just circling back to the electrical side, the 22% or so that we are booking now, you're still thinking that that's going to dip down to the 19% to 20% level? And I guess that would be fairly soon then based on the incoming order book.

That's true, that's true.

Thanks a lot.

Ned Borland, Next Generation Equity Research.

Most of my questions have been answered, but just back to the Electrical and Industrial margins, I guess if we are going to look at this low order level going for the next six months, can you sustain margins at least at this level going forward in Electrical and Industrial?

Ned, as we've talked about before, we're getting right at that point where we are starting to lose that fixed cost leverage and we are not down enough to where we'd massively correct that. So no, we don't think we can sustain right where it is, but I don't think it's a dramatic change that we are looking at going forward in that.

We still had a couple orders where we are benefiting from the lower commodity costs which we've talked about before, which has added about 1.5 points through that. But the leverage point will start hurting us as we get into the first -- fourth quarter and the first quarter of next year.

Okay. And then on some of the international demand it looks like visibility is a little better there. Historically you've been pretty good at handicapping the number of projects and when they might start hitting. It doesn't sound like some of them will hit over the next six months, but how far into 2011 before you start to really feel the recovery or release of some of those projects?

I think they're going to stay pretty much as we thought. We are still waiting to see how maybe some of the north -- the Canadian market is going to unfold. We think that our China and our Middle East market would be pretty consistent with where we have been.

We had a very good year this year in the Canadian market. There are projects out there; we just don't know the timing of those. So on our China and our Middle East business we feel pretty good about the timing of those. The one that we don't have as good a beading on is the Canadian market.

Okay. And then switching to Galvanizing, with your comments about it takes competitors about eight weeks to follow you on pricing, are we looking at sort of a two-quarter pinch here on the margins? And to what degree? Or are we looking back at sort of the historical levels that you guys have operated at or something maybe a little bit higher, given the consolidation?

No, I think if I could clarify that a little bit, Ned; we are going to push forward. If they respond in that normal time frame, then our price increases will stick. If it goes beyond that, we have either got to back off or we start losing more volume.

But if you are in that normal period the market waits to see what everybody is going to do. So I don't think -- we're going to see some pressure on it as we have trended through this year, but I don't think it's going to be dramatic.

Okay, thank you.

Fred Buonocore, CJS Securities.

Good morning, gentlemen. First question just a housekeeping item. I'm sorry if I missed this in your prepared remarks, but are you going to be announcing fiscal '11 guidance at some point soon?

The current plan is to issue a press release next Friday before the market opens. We do not plan a conference call on that. But just as we did last year, Fred, we will issue a press release probably next Friday before the market opens, which will detail what our projections are for fiscal '11.

Got it, thank you. Then you mentioned that you are starting to see stabilization in the competitive pricing environment internationally, particularly for some large China projects. Just want to get some thoughts behind how you are seeing that.

Have there been lettings recently that you have been bidding on that has given you a sense that the big guys aren't really pricing ridiculously?

Right. My point was there we have still got a lot of pricing pressure but nowhere the severity of what we talked about six months ago when some of our large competitors just dove at a ridiculous level. So we have had several orders. We secured a China order in the third quarter at our desired pricing level, so I think some reasonableness has returned to it. Like I said, there's still pressure on everyone but we are able normally to sell our price premium if it's within a certain range.

So we haven't seen a continuation of that just devastating pricing level that some of our competitors took about six months ago. They appear to have come back up much more closely to our desired levels. We stayed consistent through the entire time frame. So the last three -- I would say the last three quotation orders where the information has been led, we've been very competitive and the competition has increased their pricing more closely to what ours is.

That's good to hear. Have some of these projects like the one that you'll procured in Q3 been relatively smaller than what you have seen before or are generally similar in size?

It was a nice sized order. It was in that $5 million to $10 million range, Fred, but it wasn't the great big ones where they took a dive like they did before. So it's more the traditional order size rather than the very large things that caused disruption earlier in the year.

Okay. That's good to hear. Then overall on the international market you had indicated that while things were not as currently dismal as they are in the US market or slow, in other words, you have started to see a little bit of weakness or slow down as this -- can you elaborate on that a little bit?

Well, just an extreme example would be Dubai. There is naturally more cautiousness because international financial markets have impacted them. But it's not to the point of order cancellation or we believe they're going to take it off the books. It's just a slower process than it was, Fred.

Got it, that makes sense. And then your cash balance continues to build and puts you in a nice position for acquisitions. Are there some attractive candidates out there particularly on the Galvanizing side that would fill in some regions for you throughout the US?

Yes, there are attractive opportunities. Now this is just -- just the uncertainty that you have with customers. You have the uncertainty of people trying to figure out if this is the right time to sell or not. So everyone is just kind of sitting on the sidelines. We know of several opportunities which we would like to [seize upon] but we do not have a willing seller yet at this point.

Okay and then finally, if backlog continues to deteriorate and that book to bill remains under 1 for, say, beyond your fiscal Q1 and maybe through at least the first half of your fiscal year '11, will you have to implement some more drastic cost reduction measures or is that something you think you will be able to avoid even with the lower levels of orders?

Well, you know, we've reduced our headcount about 10% during this process. We don't think we have to do a major restructuring, Fred. We are going to have to continue to adjust our direct labor force and some of our more variable positions. But we don't think it is a structural change that we are going to have to take based upon the forecasts that we are looking at.

Okay. Very good. Thank you and have a nice weekend.

Brent Thielman, D. A. Davidson.

Yes, good morning. Just a question, David. I think you mentioned in your opening remarks that you were seeing I think at the international side some slowing in terms of quotation activity. Do you think that is just a timing issue? Maybe expand a little bit more on that.

As I mentioned before, I think some slowing in the Middle East is more financial related. I think some of the slowing in the Canadian market is more economic related. So -- but we are not -- I don't think it puts a lot of uncertainty in those. I think it is just the timing may slip, whereas on the domestic side, it puts tremendous uncertainty as to whether the project is going to go forward.

Sure, and then on the Galvanizing business you indicated seeing some stabilization at least in terms of volumes and obviously you've taken some metrics to sort of expand your markets there. Any particular areas where we are seeing some more positive signals that the Galvanizing business addresses?

The only positive potential that is out there that hasn't materialized yet is the very favorable impact the solar market could have on us. You know, there's a lot of quotation activity for the solar power, which is a tremendous use -- a very high-volume user of galvanized steel. If some of those projects would really kick in, that would be a real nice boost to us.

Okay. And sorry, just bouncing around back to the E&I business, you indicated obviously and provided some good color on the backlog in orders over the next couple of quarters. Should we assume that book to bill is going to remain below 1 at least in Q4 and Q1?

I definitely believe it will be an 4. It may get close to one and one in the first, but again, I am not expecting a building of backlog to occur in that window.

Okay, and last question for me going back and looking at -- obviously the margin performance in the Electrical and Industrial is terrific -- but going back and looking at some of the 2004, 2005 timeframe, where you were in the single digits in terms of operating margins, do you remain confident you can sort of stay at the double-digit margin level even with the type of declines that you are seeing in terms of volumes in your backlog?

At this time we believe that we will be solidly in the double digits.

Okay, all right, thanks a lot, guys.

A follow-up from John Franzreb, Sidoti & Co.

David, you mentioned that you haven't seen any indications of utility spending on distribution. What is the timing of you getting those kind of orders normally?

John, I wanted to say -- we are still seeing the spending. It's just not as aggressive as it was. The utility companies over the last three years have been quite aggressive in the replacement and the upgrade of the distribution substation market.

Now the budget [naturally] for utility companies become under a little more under pressure so we saw in the third quarter some reduced inquiry levels for that. We are very anxious to see what the 2010 budgets are going to be related to that.

Now again with most of that being driven from the replacement in the upgrade market rather than being driven by demand and expansion, we believe that we are still going to have significant opportunities but they may not be as great (technical difficulty) experienced.

And when do you usually hear about those budget releases?

We already know what has been submitted and it will be released over the next two months.

Okay, when you look at next year how it plays out, what do you think the market is going to come back first for you? Would you think the utility market or the oil and gas market? What are your thoughts there?

I would think that the utility market would because it didn't go down as far. Okay? Now, logically you would think the industrial and petrochemical would come back faster, but it has become even more unpredictable the last 90 days in it than either before. Because the economics are there. All through the process we know the projects are still there, but we're just kind of gun shy on that market, John. So traditionally that should come back first. Okay?

But I think we may see some increased spending on the power gen side and on the transmission side before we see it in the industrial.

Okay, and one last question. On the zinc pricing, are you using a fixed price or a surcharge mechanism? Because I remember in years past you went to a surcharge at one point. How are you addressing the pricing this time around?

Since we don't -- there are several forecasts out there that the market -- the price is going to continue to increase. We are doing what we traditionally do, which is to do the surcharge. And then once it levels at a point, John, then we will convert that into the fixed base. But right now since we're adjusting to a changing price, we are doing it with the surcharge method.

And it's based at lead at what -- I'm sorry, zinc at what point?

Right now we are pricing as if it is at $1.15. Some say it is going to go back up but most forecasts still have it for the full year at $0.95. So we think the market should settle there are over -- we will still have some months where we've paid this higher rate. It may go up. Some are forecasting it to get into the high $1.20s before it settles back down. But overall, we think the average for calendar year 2010 will be about $0.95.

But that's why we are doing it the surcharge method because there's different forecasts that are out there. Inventories have increased, so you have a price movement that is not going in the same -- traditionally the price goes up as the inventory goes down. The price is going up and the inventory is going up. So I think there is probably a correction coming.

I don't know, David, we've seen that before though, haven't we?

We certainly have.

Okay, thanks a lot.

[Tim O'Toole], Delta Management.

Hi, guys. The first question actually I'm going to just follow up on and integrate I guess on the Galvanizing side off of the last question. So you have been -- I don't know about aggressive but and assertive let's just say in terms of the surcharge mechanisms and I think you surcharge also for natural gas, although that's a much smaller piece of it. Is that correct?

Most places we have rolled that into the base also.

You do, Okay.

You are correct historically we did. All right. But then when we see a trend where it is leveling out, then we will roll that into the base as the customer prefers a base number without surcharges.

Right, yes, just for kind of the visibility of it, if you will. I guess -- so the question is if you are being assertive and the competition largely hasn't followed yet, you kind of characterized it as it may take some number of weeks or a few months for that to cause accelerated or an incremental decrease, if you will, in volumes through the galvanizing plants.

So I guess thus far since you have implemented kind of the price changes, have you -- do you think that volume is starting to find other homes or has that been fairly -- has it held up reasonably well given that backdrop?

It has held up reasonably well. I think even though the customer base doesn't like it, I think they understand the logic of why we are doing it and everything else. They still resist as far as they can and you normally don't lose the volume and they will go out and test it against with someone else and it goes through the process. So we haven't seen any. No one is happy about it, but we haven't seen any real thing that really concerns us at this point.

Given the consolidation of the market, which you have obviously had a hand in, are you seeing kind of this time around versus what might've happened let's say five to seven years ago -- are you seeing the competition --? I mean, is anyone or this can be regional too, but are you seeing many instances of people trying to keep the kettles loaded or are people kind of broadly rational? Or again, is it pockets and you are seeing some pockets of people kind of chasing the volume against price?

Naturally there's pockets, but overall we are pleased that the market has behaved better than anytime in the last 10 years.

Okay, and you guys have probably helped that whole process.

We accept the responsibility of the market leadership and that includes market leadership on price.

Okay. And then kind of also I mean got a similar line of questioning I guess conceptually. On the domestic E&I side, are you seeing -- I guess there's a couple things that I'm trying to get through my mind here at least broadly conceptually. Are you seeing people chase volume there or is pricing holding up well so far, it's just a matter of order not coming through and maybe the competition is rational enough to say, hey, the volume is not there irrespective of what we do on the next order on price?

I think if you just set an average order size there is relatively rational behavior, but every large order domestically and internationally, everybody comes after, and that's where you see the erratic behavior.

Okay, that's actually -- that's good color, actually. That's probably helpful. And it sounded like China was a little bit better. Are you kind of in the Middle East, are you seeing a little more price competition for -- or maybe it just falls into that same category that you just alluded to, large orders, you'll still see people chasing with a sharper pencil but moderate sized orders, it's less so?

That is exactly the scenario. The larger the order, the more competitive the price.

Okay, all right, great, that's good. I guess historically you have looked at the Galvanizing business as -- back to Galvanizing -- as being sort of operating margins quiescent, if you will, operating margins of 18 to 20-something, 22, 21%, 22% let's say. And obviously with some of the inventory timing differential I guess we are still riding much nicer optics on the operating margins.

Given the consolidation that has gone on in the kind of what we just talked about, the more rational market, would you expect that the level that even to a bit softer market the level that the market settles into is higher than that historic range you've talked about in the past? In other words, better than 20%? Or would you expect over -- if kind of soft volumes persist that we do continue to migrate down maybe back towards those historic norms.

We don't have a model that goes back to that 18% to 22%. Now you could always have a surprise change but based upon what we have seen and the behavior and what we believe is happening, we believe that it is much closer to a 24% to 26% number as opposed to 18% to 22% number.

Okay, great. That's helpful. I guess what broadband -- what would you put around on the E&I side -- I guess some of that depends on mix and international mix, etc., etc. but kind of along with that, we've seen some raw materials heading north again and steel I guess came up, came off a little bit, and now that may be heading north again as well. I don't know how -- whether that's -- I don't know what to expect on steel actually. It's been a little bit erratic.

But are you -- do you continue to be able to pass through raw materials given that order rates are a little bit softer on the E&I side? And I guess what norm, what normal band would you put around operating margins there?

Well, I think in general yes, we have been able to continue to pass that on. But as I commented on, the lower volume, we have such a significant fixed cost structure there with our Project Management engineering, that volume impact can drive that to the mid to high teens.

Okay, all right, so there's two distinct issues, though. One is passing on raws and one is getting absorption. Your customers won't necessarily pay for absorption at lower volumes, but if you can get the raws passed before that absorption within your own plant, then you are actually -- the market is still healthy I guess is the question there. Okay, that's great. I guess that's it for me. Thank you.

(Operator Instructions). It appears we have no further questions. This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. David Dingus for any closing remarks.

Again, thank you for taking the time to join us today. We will, as we indicated be issuing our initial guidance for our next fiscal year a week from today and then we'll be following up with you in our next quarterly conference call. Again, thank you for your time and your support and we look forward to those future conversations.

That does conclude today's teleconference. Thank you for participating. You may now disconnect.