AZZ Inc (AZZ) 2011 Q4 法說會逐字稿

Good afternoon, and welcome to the AZZ Incorporated fourth quarter and fiscal year 2011 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.

Thank you, Amy. Good afternoon, and thank you for joining us today to review the financial results for AZZ Incorporated for the fourth quarter and fiscal year 2011 ended February 28, 2011. As Amy indicated, my name is Joe Dorame. I'm with Lytham Partners and we're 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 delay of shipments, acquisition opportunities, currency exchange rates, adequate financing and availability of experienced management employees to implement the Company's growth strategies.

The Company could give no assurance that such forward-looking statements will prove to be correct. AZZ assumes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise. With that having been said, I'd 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 fourth quarter and the fiscal year 2011. We are particularly pleased that the results for the quarter reflect an improvement in revenues, net income, and earnings per share when compared to the prior year. Fourth quarter was another quarter of effective execution of our opportunities and the positive impact of the acquisition of North American Galvanizing. The conditions of our markets vary. We believe the transmission, distribution and industrial markets for our Electrical and Industrial products has leveled off.

The distribution market is showing some initial signs of a moderate recovery. We have seen in recent weeks some improvement in our utility inquiries and quotations but they have not yet returned to the pre-recessionary levels. The power generation market has been relatively stable for several quarters now and generation opportunities have improved. The fourth quarter incoming order rate was the strongest quarterly rate of fiscal 2011.

This is particularly pleasing since our fourth quarter is traditionally our weakest booking quarter of the fiscal year. Additionally, the book-to-ship ratio for the fourth quarter of 107% is the strongest book-to-ship ratio we have seen since the quarter ended November 30, 2007. For our galvanizing markets, we continue to see growth and improving demand in most of our markets, the petrochemical being the exception. While the opportunities are increasing, pricing remains a challenge for both segments due to competitive forces and increased cost of commodities. We believe this will continue through most 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 incoming order rates and backlog and confirm that we have leveled off and we are seeing signs of growth. The Galvanizing Services segment achieved another outstanding quarter operationally. The markets for our northern locations showed increases while the Gulf Coast continued to be adversely impacted as we indicated before by the lower levels of petrochemical work.

We continue to demonstrate our commitment to quality and service during these market conditions and take advantage of all opportunities to maximize volume and market share while maintaining pricing. Margins for the fiscal year were down when compared to the prior year, however, we continue to operate at the higher end of our margin projections for the Galvanizing segment. Price deterioration has become more prevalent in the Electrical and Industrial segment, both domestically and internationally.

The completion of another successful quarter, the financial strength of the Company, and a great group of employees is reflected in our operating results and confidence in our future. We continue to advance with confidence as we navigate through challenging waters in this period of market uncertainty. We remain committed to our growth and expansion strategies. 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 our fiscal year 2011. Dana?

Thank you, David. And I would also like to welcome each of you to our fourth quarter conference call, and at this time I'll review our unaudited consolidated results for the period ending February 28, 2011. As outlined in our press release, revenues for the quarter ending February 28, 2011, were $100.7 million as compared to $84.9 million in the prior year. Net income and diluted earnings per share for the quarter were $9.2 million and $0.73 per share as compared to $8 million and $0.64 in the prior year. Our book-to-ship ratio for the quarter was 1.07 ending the quarter with a backlog of $108.4 million. Our backlog at the end of our previous fiscal year was $109.9 million.

Our Electrical and Industrial segment generated 43% of our revenues this year, or excuse me, for the quarter, while our Galvanizing Services segment generated 57%. In our Electrical and Industrial products segment, we recorded revenues for the quarter of $43.6 million as compared to our prior year results of $48.9 million. The decreased revenues were the results of lower demand for the industrial, petrochemical and electrical transmission and distribution markets as compared to the prior year. Operating income was $6.7 million as compared to $9.1 million and operating margins for the quarter were 15.4% as compared to 18.6% in the prior year. Margins were negatively impacted during the quarter as the result of loss of leverage due to reduced plant utilization as well as less favorable pricing due to more competitive market conditions.

Revenues in our Galvanizing segment for the quarter were $57.1 million as compared to $36 million recorded in the fourth quarter of fiscal 2010. Operating income was $14.8 million compared to $9.2 million and operating margins for the quarter were 26% as compared to 25.6% in the prior year. The acquisition of North American Galvanizing added $16.4 million to our fourth quarter revenues and $4.2 million to our operating income. As previously reported, the integration of NGA into AZZ Systems was completed at the end of our third quarter.

The overall transaction cost associated with this acquisition was approximately $1.8 million. The year-to-date reduction in our overall operating margins in this segment was the result of higher zinc cost and overhead cost that we were unable to recover through price increases. At this time, I will cover some of our key cash flow and balance sheet items on a comparative basis. For the 12-month period, cash provided by operations was $42.1 million as compared to $82.6 million in the prior year. Our decrease in our cash provided by operations was due primarily to increased working capital requirements primarily related to our Galvanizing segment.

Our accounts receivable days continued to be strong at 47 days at the end of the fourth quarter as compared to 53 days at the end of the prior year end. Year-to-date capital improvements were made in the amount of $16.4 million and depreciation and amortization was $22.2 million. The Board of Directors approved and declared our quarterly cash dividend of $0.25 per share to be paid on May 6, 2011, this quarter. During our second quarter, we utilized our existing cash balance and drew down $12 million to fund the acquisition of North American Galvanizing. We were able to pay down the $12 million draw during our third quarter leaving a zero balance against our revolving line of credit.

During our fourth quarter, we entered into a note purchase agreement and issued $125 million of unsecured ten-year private placement notes due in January 2021 at a fixed rate of 5.4%. We anticipate using the proceeds from this note offering for general corporate needs as well as for potential future acquisitions. The yearly carrying costs for interest associated with this note offering will be approximately $6.8 million or $0.34 per share. These note placements brought our total outstanding long-term debt at the end of the fourth quarter to $225 million. Our cash balance at the end of the fiscal year was $138.4 million.

Our leverage ratio, which is defined as our funded debt divided by our cash flow, at the end of our fourth quarter was 2.8 times and this compares to the ceiling per our covenant requirements on our senior credit facility at 3.25 times. We continue to believe that our balance sheet is one of our core strengths and along with our strong cash flow characteristics, combined with access to borrowing under our existing banking facilities provide us with adequate flexibility to continue to grow our Company. At this time, David will give us an overview of our two operating segments.

Overall, the power generation market has been good. Most domestic activity revolves around renewables, the upgrades of coal fired plants and new natural gas-fired plants. Internationally, the majority of the projects we're working on are hydroelectric and nuclear. The industrial and petrochemical demand for our power distribution and motor control centers remains at the lower levels that we saw for most of calendar 2009 and throughout calendar 2010. Demand for our electrical distribution substation products saw some improvement in the inquiry and quotation levels.

Utility budgetary spending levels which had been dramatically reduced appear to be improving, however, they remain below pre-recessionary levels. Our high-voltage transmission bus duct products domestic activity was limited and the international continued to be spotty. The outlook for the international work remains positive but the timing of the release of these orders is difficult to predict. Domestic business opportunities have seen more competitors and we have experienced price deterioration.

For the Galvanizing Services segment, our strategy to provide a premium level of service and quality to our customers has continued and will continue as we resist downward pricing pressures. We will continue our efforts to increase our footprint and broaden our served markets. We must achieve more price increases to offset the impact of the current LME pricing of zinc.

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

Based upon the evaluation of information currently available to management, we are maintaining our fiscal 2012 guidance for revenues to be in the range of $425 million to $450 million. Our earnings guidance is $2.70 to $3.05. Our guidance does include the increased interest expense of $0.34 per share associated with $125 million of senior private placement notes issued on January 20, 2011, which Dana discussed.

Achievement of these projections would be our 25th consecutive year of profitability. Our estimates assume that we will not have any appreciable change in our current market condition, competitive activity including pricing, or significant delays in the delivery or timing in the receipt of orders of our Electrical and Industrial products, and/or demand for our Galvanizing Services.

The strength of our balance sheet, the competence of the management team, and the strong customer acceptance of our products and service gives us the confidence to aggressively pursue additions to our products and markets despite current economic conditions. I'd like to thank you for your participation today and at this time, we would like to open it up for questions.

(Operator Instructions) Our first question comes from John Franzreb at Sidoti & Company.

Good afternoon, David, and Dana. My first question, David, is your outlook assumes, I think, the term used was no appreciable change in market conditions. Are you still assuming an improving order trend for the balance of this spring or have conditions changed somewhat in recent months?

John, the fourth quarter and even the month of March and everything else is encouraging from where we were, but it's not yet to the comfort level that we can say that we have a more favorable environment than when we established the plan and established our initial guidance. If we could see a continuation of this, yes, we do believe that maybe the backlog that we exited the year with would be a little stronger than we had anticipated initially, John.

So I think that essentially what we've seen is a little more encouraging than what we had anticipated this early in the fiscal year but it's much too soon to say whether it's going to continue. But if it would, it would be good news for us, John.

Great, great. And could you talk a little bit about the pricing environment in Galvanizing? It seems to me that maybe it's a little bit more challenging than you thought it would be or am I just misreading that?

No, I think that's right. As we talked about before, we normally, when the high market demands we've been able to price, every time the LME went up we were able to adjust our pricing to reflect that. It's a little more difficult to push that through. We are staying ahead of our FIFO costs as it's coming off the P&L and the increases there, but we aren't pricing as much in advance of that anticipated cost as we have historically, so, yes, demand is improving but the price is not moving up as quickly as we had anticipated.

We still believe we'll hit our margin numbers for this year, but that's still our challenge out there, John, and you're right. With the improvement in the activity, we thought it would be a little easier to push some of these through than we have been able to do.

Now, David, is that an end market mix or geographic mix where the business is coming from? Is that what's driving that or is there something underlying that?

I don't know, because it's spread across the northern operations as well as the southern operations. I think it's more a competitive position, John, than it is end user market conditions. In other words, we haven't had the others come in and join us to try to push the price up as much as we historically have, so I think it's more they can still shop the price on us because competition hasn't pushed as aggressively as we have.

Okay. That's it for me. I'll let somebody else ask a question.

Thank you.

The next question comes from Fred Buonocore at CJS Securities.

Hi, yes, good evening.

Good evening.

Just getting back on the Galvanizing, you talked about it having some continued sequential organic growth and year-over-year organic growth in that business. Can you talk a little bit more about where you're seeing the improvement in demand coming from, can you drill down into the specific end markets for us?

Sure. The electrical and telecommunications, being the transmission poles and all that, it continues to show strength when compared to the prior year. Our OEM markets are up compared to the prior year. Essentially all but that 15%-ish piece that's in the petrochemical, has not shown the improvement, and the general industrial, which is 30%, has been a very modest improvement, but the nice thing, Fred, it's been widespread and we're encouraged about that.

It's not just one market but by far the strongest market that we think we're going to see in the near term is from the build-out of some of the new grids from all the poles and transmission structures that are going there. And as we've talked about before, the solar fields are helping our business through this. So I think the strongest in year-over-year has been in the electrical and telecommunications, but all of it is up very nicely with the exception of petrochemical.

Okay, that's helpful. And you talked about, in your comments, expanding your footprint in Galvanizing, so that would seem to imply that there are additional opportunities to make acquisitions in that Galvanizing business. Would you, I realize you probably won't comment specifically on this, but would you say that you have a number of targets that maybe are smaller in nature, a facility or two that you might be able to pull into your organization and can you talk maybe about the geographic opportunities in Galvanizing?

I think that's a correct assessment, Fred. The bulk of what we're looking at is ones and twos that kind of fill in some territories that we have. But as I've indicated before, we're looking north of the border and south of the border, so now they still characterize that general description that you use there of the more ones and two-offs, but that is -- nothing close, of course, that we can comment on but we are aggressively pursuing that.

Great, and then just finally on the electrical products business. Can you talk, A) where utilization is relative to a year ago, and can you also talk about if you're seeing commodity related pressures there or those largely offset by contractual increases on price? Thank you.

I think the utilization levels are pretty close to where they were a year ago. I think everybody's order book is picking up a little bit but it will be three or four months before that rolls through and starts improving utilization rates which, hopefully, then will lead to a little more price recovery.

I don't think the pass-through of the commodity cost increases is as big a challenge as the overall pricing structure from a competitive position. Yes, it may impact some of the projects that are out there to be quoted, but I think we've been historically successful in passing through those commodities. So that doesn't bother, I mean we were concerned about that because of its overall inflationary impact and how it drives up the total cost of our project and does it cause our project to be delayed rather than our ability to recover it.

Got it. That's helpful. Thank you very much.

Thank you, Fred.

The next question comes from Noelle Dilts at Stifel Nicolaus.

Good afternoon, gentlemen.

Afternoon.

While we're on, kind of talking a little bit more about pricing, you cited that on the E&I side it remains competitive, but would you say it's worsening or kind of remaining flat? And then can you also characterize the pricing and the backlog versus kind of the margins you were generating this quarter?

Right. I think the first part of it, I think it's more of a continuation of the pricing deterioration that we started experiencing in the last five to six months. I don't think its gotten worse, Noelle, than that point, but it hasn't improved from that.

Now, regarding the margin that's in the backlog, it is softer than what we achieved in the fourth quarter and that's why our guidance is at 14% for the fiscal year and that we've indicated that it may get down in that 12.5% to 13% in the first part of the year and then prove through the balance. So, yes, there is some softer margin business in our backlog than the margin that we achieved in the fourth quarter, but the margin that's in the backlog is still, we believe, totally consistent with the guidance that we've issued.

Okay, great. And then on the -- when you mentioned the increased competition in the domestic market in your high-voltage bus duct business, could you give us a little more clarity there? Is that some large international players coming into the market or is that kind of where you're seeing the more competition coming from?

Yes. It's the large European competitors who have come in and it's part of their overall program to increase their presence in the electrical utility business in total or the electrical energy business, so it is not as targeted towards our high-voltage. We're more of a casualty of an overall program for some of them to fight it out for the total market share position within the utility business. So it's not anybody that, say, they traditionally have not been that aggressive in our high-voltage products that we offer but now its been pulled in as part of their overall project and they've been very price aggressive in doing that, Noelle.

Okay, thanks. And then just one last question and then a housekeeping question. In terms of your acquisition strategy, are you still favoring Electrical acquisitions over Galvanizing acquisitions trying to get the Electrical business up more toward the 60% of total revenue level? And then if so, could you just discuss some of the characteristics that you're looking for in an acquisition target?

Sure. I'll be careful with the word, Favorable, we're favoring.

Okay.

I think the potential for a large acquisition in E&I is much greater than the potential for a large acquisition in Galvanizing in the near term, right, through that. So as we look for those acquisitions in the Electrical and Industrial, as we've talked about before, how do we sell more products to the same project that we're on. In other words, if we're an accepted vendor on a power generation plant or a high-voltage substation or whatever the case may be, how do we sell more products to the same customer at that same point-of-sale?

And that's more of an add-on to our existing niche products in those particular markets. Then the second characteristic is, as we've said before, our revenue stream stops at the point of commissioning of a power plant, at the point of the commissioning of a lot of our projects. So how do we participate more in the revenue stream during its 30, 40-year life cycle and that's more geared towards the service industry that is part of that. So that's the flavor that we're looking at there, aggressively in both pieces. Those that will fold in to be extra products in our line card, as well as those that will generate a revenue stream during the life cycle of the projects that we participate in.

Okay, thank you so much. Quick question, your tax rate was a little bit lower this quarter. What do you think will be your tax rate going forward and then can you give us your total cost of zinc in the quarter and your purchase price of zinc?

Yes, it should be pretty close to, going forward, is what we just experienced and the kettle cost is roughly $0.95 versus $1.05, excuse me, usage is roughly $0.95 versus kettle cost of $1.05. So as David indicated, we've still got a little bit of room to catch up on pricing perspective to offset that cost of zinc coming at us.

Great. All right. Thanks so much, guys.

(Operator Instructions) Our next question comes from Rick Hoss at ROTH Capital Partners.

Hi. NGA Op margins, are they where they should be at this point or do you think you have a couple basis points, a couple, call it 50 or 100 basis points, left in improving the operation to bring it up to the level of the organic business?

Well, they're pretty close to the organic business now, but as we've indicated before, their cost of zinc is a little more favorable than our organic. So as they experience higher zinc costs, we have to increase our efficiency and operating, but we think we're right on track, but we're very pleased with where they are right now, Rick.

Okay, and then on the SG&A sequential, third to fourth, it doesn't look like there's a real pattern, looking at directionally and looking at the past couple of years. You were up a little bit, hardly anything meaningful but up third to fourth in 2011. How should we think about that relationship, should we think about closing, close-out costs, and maybe in a couple of the past years they were masked by something else?

I really don't know without getting into, I do know that our first quarter is always our highest, Rick, because that's when we book the annual stock-based, equity-based compensation programs and all through that. So it really should be flowing pretty consistently quarter-to-quarter, if you exit out that and in fiscal 2011 if you exit out what we spent on the NGA, so I'm not familiar, I just don't know off-hand what is driving your question. I mean, I don't know the comparative number of fourth year-over-year.

Okay, that's fine, and then the last question. When you talk about the distribution in the power gen demand for the E&I segment, can you characterize the demand from -- is some of it related to deferred maintenance or is it really driven by demand for new projects or how would you describe that?

I think it's much closer to deferred maintenance than it is new projects on the distribution side. The power generation side is new projects.

Okay, perfect. Thank you.

The next question comes from Ned Borland at Hudson Securities.

Hi, good afternoon, guys.

Good afternoon.

Just a few small ones here. I actually, just to follow-up on some of the Galvanizing margin questions. I actually was pretty encouraged by the Galvanizing margins. Fourth quarter usually is seasonally weak from a margin perspective, usually due to weather and we certainly had some in the fourth quarter. Just wondering what kind of drove the sequential improvement in margin there? Was it this just kind of the first full quarter of cost savings from NGA or was it, what were some of the issues there?

Well, we did have an impact in the fourth quarter on the, due to the weather, so had we not had that the results would have been slightly better than they were on that, through that, so, but we're able to achieve that. It's more just, again, the fact that we're seeing improved volume levels through most of our organization. We've got the assimilation settled down.

We look more like we're going to look going forward than we have looked in the past, and just, again, just continually tweaking that organization which we have a track record of doing. So I can't point to any one thing, Ned, that just says it did that other than our programs, we feel, are totally working for us.

Okay. And then on E&I, if you could just comment on maybe the size of projects you're seeing. I mean, is there any change there? You've seen kind of an uptick here in orders sequentially, just wondering if the size of orders are maybe getting a little bit bigger with all this deferred maintenance that's coming at you here?

No, I wouldn't characterize them as necessarily larger. I would characterize them, that the number of projects are improving. But overall, our project size is down a little bit on the international side from what we've seen the last two or three years and that's, again, just a particular project, that's nothing that -- reflective of our competitive position. But, no, I think what we saw in the fourth quarter and what we've seen so far in the first quarter, there's not been appreciable change in the size.

Okay. That's all I've got. Thank you.

Thank you, Ned.

The next question comes from John Franzreb with Sidoti & Company.

Yes, just regarding some of the softer margin business in E&I in the backlog and the weak pricing environment in Galvanizing, should we be on alert for a potential meaningful difference in first half fiscal 2012 earnings versus second half?

Definitely on the E&I. I don't, if we continue to have success, John, of keeping ahead of our FIFO cost on Galvanizing, which I believe we can do, on increasing that, I don't think you're going to see much fluctuation in the Galvanizing. We might see a better second half, if overall demand allows us to get a little more aggressive, but we will definitely see lower first half margins in E&I than we see in the second half. That 14% is an average, and as I indicated, we should be anticipating something in the 12.5% to 13% in the first quarter, maybe even in the second quarter, exiting at that 15.5% to 16%.

Okay, thanks a lot, David. That's helpful.

Yes, thank you.

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to David Dingus for any closing remarks.

Again, thank you for your participation today and we look forward to speaking to you at the end of the first quarter of our new fiscal year. Have a great day and a great weekend. Thank you.

The conference has now concluded. Thank you for attending today's event. You may now disconnect.