AZZ Inc (AZZ) 2012 Q1 法說會逐字稿

Good afternoon and welcome to the AZZ incorporated first-quarter fiscal year 2012 financial results conference call. All participants will be in a listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity for you to ask questions. Please note that today's event is being recorded. We would now like to turn the conference call over to Mr. Joe Dorame, Mr. Dorame, please go ahead.

Thank you, Jamie. Good afternoon, and thank you for joining us today to review the financial results for AZZ Incorporated for the first quarter, of fiscal year 2012, ended May 31, 2011. As Jamie indicated, my name is Joe Dorame, I am with Lytham Partners, and we are the Investor 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 and raw material costs, including zinc and natural gas, which are used in the hot dip galvanizing process, changes in economic conditions at 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. 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 first quarter of fiscal 2012. We are very pleased that the results for the quarter reflected double-digit improvement in revenues, net income, earnings per share and incoming orders, when compared to the same period as last year.

The conditions of our markets vary. We believe the transmission, distribution, and industrial markets for our electrical and industrial products have leveled off. The distribution market is showing some signs of a moderate recovery. Power generation market has been relatively stable for several quarters, and generation opportunities continue to improve. While overall quotation and opportunities have increased, we have not seen corresponding improvements in pricing. This has, and will continue to impact our backlog growth, as we continue to adhere to our margin targets for new business.

We continue to strive to book incoming orders which meet our margin criteria, while some competitors continue to price at extremely low levels. While it has slowed our backlog growth, we are pleased that we have been able to maintain this strategy and still see modest growth in our backlog and maintain a positive book-to-ship ratio. Traditionally, price improvements lag initial market recovery for a couple of quarters, so we may yet see price improvement in the balance of the current fiscal year. The book-to-ship ratio for the first quarter is 106%.

For our galvanizing markets, we continue to see growth and improving demand in most of our markets, the petrochemical market being an exception. The galvanizing services segment achieved another outstanding quarterly operating performance. The markets for our northern operations showed increases, while the Gulf Coast operations continue to be adversely impacted by 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, market share while maintaining our pricing strategies.

Margins for the fiscal year were down when compared with prior year; however, we continue to operate at the higher end of our margin projections. The completion of another successful quarter, the financial strength of our Company and a great group of employees is reflected in our operating results, and the confidence that we have in our future. Now, with that as an overview of our results, Dana will now give us a review of the operating results in the balance sheet for the first quarter of fiscal year 2012. Dana?

Thank you, David, and I would also like to welcome each of you to our first-quarter conference call. At this time, I will review our unaudited, consolidated results for the period ending May 31, 2011. As outlined in our press release, revenues for the quarter ending May 31 were $114.3 million, as compared to $77.5 million in the prior year. Net income and diluted earnings per share for the quarter were $9.5 million, and $0.75 as compared to $6.4 million and $0.51 in the prior year. Our book-to-ship ratio for the quarter was 106%, ending the quarter with the backlog of $114.7 million, which compares to our backlog at the end of our previous fiscal year end, at $108.4 million.

Our electrical industrial segment generated 42% of our revenues for the quarter, while our galvanizing services generated the balance, or 58%. And, our electrical industrial products segment, we reported revenues for the quarter of $48.3 million as compared to prior-year results of $37.2 million. The increased revenues were the result of increased order intake during our third and fourth quarters of fiscal 2011, as well as an influx of quick turn jobs that we booked and shipped during the quarter.

Operating income was $7.4 million, as compared to $6.6 million, and our operating margins were 15.4% for the quarter, compared to 17.8% in the prior-year period. Operating margins were adversely impacted by shipment of lower margin projects, as compared to the same quarter last year. The lower margins are reflected in our more competitive market environment conditions, that we are experiencing. Revenues in our galvanizing segment for the quarter were $66.1 million, as compared to $40.3 million recorded in our first quarter of fiscal 2011. Operating income was $17.1 million, compared to $11.5 million, operating margins for the quarter were 25.9% compared to 28.5% in the prior year period. The acquisition of North American Galvanizing added $18.3 million to our first-quarter revenues, and $3.8 million to our operating income. The reduction in our overall operating margins in this segment was the result of higher zinc costs 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 three-month period, cash provided by operations was $9.7 million, compared to $4.2 million in the prior year. Our accounts receivable days outstanding remained good at 48 days at the end of the first quarter, as compared to 47 days at the end of our prior year-end. Year-to-date capital improvements were made in the amount of $4.7 million, and depreciation and amortization amounted to $5.8 million for the quarter.

The Board of Directors again approved and declared, our quarterly cash dividend of $0.25 per share, to be paid on July 29. Our total outstanding long-term debt at the end of the first quarter was $225 million, and our cash balance at the end of the quarter was $140.4 million. Our leverage ratio, which is defined as our funded debt divided by our cash flow at the end of the first quarter was 2.5 times, which is comparable to the ceiling on our covenant requirements of 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 borrowings under existing banking agreements, provides us with adequate flexibility to continue our growth strategies for our Company. At this time, David will give us an overview of our two operating segments.

As I indicated earlier, overall, the power generation market has been good. Most domestic activity does revolve around renewables, upgrades of coal fired plant and new, natural gas-fired plants. Internationally, most of our work is centered around hydro and nuclear power plants. The industrial and petrochemical demand for our powered distribution center and motor control centers remains at the lower levels that we saw the most of the calendar 2009 and 2010. Demand for our electrical distribution substation products saw an 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. Utility budgets still reflect what I would call as nervousness, as to the strength of the economic recovery. Our high-voltage transmission bus duct products, domestic activity was limited, and the international remained spotty. The outlook for international work remains positive, but the timing and release of these orders is always difficult to predict. Domestic business opportunities continued to see foreign competition, and we have experienced price deterioration. For the galvanizing services segment, we will continue our efforts to increase our footprint and broaden our served markets.

In summary, our products and services are extremely well-positioned to benefit from market improvements. Our lead times are shorter and shouldn't provide for more expeditious benefits of improving market conditions. The timing of projects and 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's success. Based upon the evaluation of information currently available to management, we are revising upward our fiscal year 2012 guidance for revenues to be in the range of $450 million to $475 million.

Our earnings guidance is revised upward and anticipated to be within the range of $2.90 to $3.10 per diluted share. The previously-issued guidance was for revenues to be in the range of $425 million to $450 million and a fully diluted earnings per share would be in the range of $2.70 to $3.05. Our guidance does include the increased interest expense of $0.34 per share, associated with the $125 million of senior private placement notes that we issued on January 20th of 2011. 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 conditions, competitive activity, including pricing, or significant delays in the delivery or timing of the receipt of orders, of our electrical or industrial products and demand for our galvanizing services. The strength of our balance sheet, the competence of the management team and a strong customer acceptance of our products and services gives us the confidence to aggressively pursue additions, both to our products and to our markets. We thank you for your participation at this time. I'd like to open it up for any questions you might have.

At this time we will begin the question-and-answer session. (Operator Instructions). Our first question comes from John Franzreb, from Sidoti & Company.

Good afternoon, everyone. My first question is really regarding the pricing. You mentioned a number of times in your prepared remarks, I am curious if we should expect some margin compression still in the electrical side of the business, or have we kind of stabilized on the margin side, and based on recent incoming orders, we should look for better margins in coming quarters in that business?

I think we will struggle a little bit more in the second quarter on those margins, John, for the business that we took six to nine months ago. But I think that the third and fourth quarter were more closely aligned with our actual results in the first quarter, so I think what we're seeing going into backlog is consistent with our guidance. We've still got one more rough quarter to get through, with working through some of those that we had more compression on. We think we stabilized in the galvanizing side, and we've been able to continue to get enough price to match the higher cost of sales of the zinc coming off of our P&L.

Okay. And regarding galvanizing, zinc is down roughly 10% from its highs. Will you be able to capture some of that lower zinc pricing, or is the environment still too difficult for you to -- actually, you're kind of stuck at this 26% level?

I think we are stuck at that 26% level, because even though the LME has come down, what's going to come off of our balance sheet in the second quarter will be a little bit higher than what we had in the first quarter. We averaged $0.99 in the first quarter, we're going to average about $1.04 in the second quarter. So, the pricing activity is still going to catch up from back when the price of zinc was in the $1.10, $1.15 range. But we have the confidence that the volume is picking up enough, that we can continue to push through enough price to keep those margins at that 26% range. They may come down just a little bit in the near term, but for the full year, we still think we're in pretty good shape.

Okay, great, and one last question. Regarding the acquisition environment, can you give an update about the candidates, are you finding it a little tougher than maybe you originally thought in January? Any kind of color would be helpful.

Okay, we are naturally looking at the things that are on the auction market as well as companies that are not for sale. I think -- we've seen some very attractive companies through this process. I still think the expectation of value, of the seller, is pretty high. And so we will have to see if that corrects as it comes forward. We are encouraged though, with the amount of companies that we have taken a look at, now, that doesn't mean we have anything close enough through this process, but we have had an opportunity to take a look at more companies than we ever had in the history of the Company. So we are progressing, John, nothing is near a point through that process, I think the problem on some of the ones that are being offered, primarily, that are currently owned by private equity, the expectation of value is still pretty rich.

Okay. Thanks a lot, Dave, I appreciate it.

Thank you, John.

Our next question comes from Rick Hoss from ROTH Partners.

Hi, good afternoon.

Hi.

The general hesitation from the utilities, can you dive into that a little bit deeper, and maybe explain what are the origins associated with that, what are people talking about, what are they concerned about?

Again, it comes back to, Rick, are they going to be able to get rate recovery? And that's economic growth-driven. Their nervousness, as we understand it, from talking with them is that with this, they started out the calendar year in a little more robust fashion than they've been in the last couple of months. They haven't taken projects off, haven't reduce their budget, but they are not releasing those orders quite as aggressively as they were in those months, and it's just, if the economy does hit a speed bump, will that then slow some of their planned rate recovery, and therefore they go back into a more conservative mode on their budgetary spending. It's not to that point yet, that's why I described it more as a nervousness rather than a change through that. But it all dives down to what is the overall strength of the economic recovery, and what's their ability to get rate recovery, on an overall basis. Not necessarily just related to the projects we are working on.

Okay, so it's not necessarily rooted in, say, regulatory concerns and uncertainty, it's more just general macro type of issues.

I think so. I really think so.

Okay and then secondly, the impact of Japan, I know you're someone fuel-agnostic, but you do still participate in some of the nuclear markets. Can you describe on what the puts and takes there are?

I think that there will be some delays, as in the US growth of nuclear power as a result of the Japanese experience. From all indications, the Southern Company continues to go forward with their planned product expansion, and so I think that everybody is taking a wait-and-see attitude on what their success is, and how the NRC cooperates with that. All indications, that some of the other projects which permits have been requested may have slowed down a little, but those that were in motion are continuing to be in motion.

Okay, thank you.

Thank you.

(Operator Instructions). Our next question comes from Fred Buonocore from CJS Securities.

Yes, good evening.

First question about backlog trajectory. This is, I guess your second quarter consecutively of pretty decent backlog growth, and I guess it's your backlog level since, I guess in two years. We are pushing a couple of years. Realizing we are still at pretty low levels. Do you expect to see continued steps up in backlog through the year, and do you still expect us to finish out the year at a higher backlog and how material -- how much do think it can go up over the course of the year?

As I indicated, the market has gone up more than our backlog has.

Sure.

And some of the competition backlog growth has been significant. But we have adhered more towards pushing the pricing as we always do, because that's our character. And that's the way we operate through this. So unless we start to see some price recovery, I think you're going to see modest increases in our backlog. I don't think you're going to see anything that would -- I think you used the word trajectory, I don't think that that is going to happen in this current fiscal year. But if we can continue on this route of being at least one to one, somewhere between one to one to 110%, of the book-to-ship ratio, I think we would be very pleased with where we are, because it's allowing us to maintain our pricing and margin strategy, but still edging that backlog up. We would naturally wish it was going up more aggressively than that, but we're still hanging onto that balanced approach.

Makes sense. Secondly, you referenced some quick turn projects. Can you give us a little bit more color on those, and if that's something that you think may be more of a trend or something we should see as recurring going forward?

Well, those are always very difficult to address. Most of them traditionally have been weather-related or something, and some of the ones that we've done now have just been more emergency breakdown type things. There is no doubt that we put more marketing effort behind it, more sales effort behind it, and expanded our abilities in that category, but again, I think our business will continue to be good, it was unusually good in the first quarter. I don't think we will see that in the second quarter. But we certainly positioned to take advantage of it. So it's not anything that is a predictable trend, I wish I could say it was because of delayed spending, we are starting to get emergency work, but now it's just emergency, primarily on the power generation side.

Do you think any of that has to do with the fact that maintenance has been deferred for a long time in many cases? And now we're starting to reach a critical point where equipment is just breaking down?

That is my conclusion, Fred. I don't have anything to document that.

Right, right, got it. And then finally, can you give us a little bit more color on what you're seeing on the petrochemical side, both in the electrical and in galvanizing? If you're at least starting to get any sort of feeling that orders may pick up there at some point soon?

On the galvanizing side, there are some projects that we are starting to quote on, and that are starting to be produced by our customers, that are related primarily to maintenance projects in the refining market.

Yes.

So, we are a little bit more optimistic about our third-quarter revenues from petrochemical market on the galvanizing side. The opportunities are present in the pipeline side and for our electrical products, but pricing has been very, very aggressive in that market, and we've not been as successful in participating in those. But there are still limited opportunities. I would still describe them as quite limited, on the domestic side that we participate in.

Great, thank you very much.

Thank you, Fred.

Your next question comes from Noelle Dilts from Stifel Nicolaus.

Hi, good afternoon, and thanks for taking my call. Just back on the quick turn business, can you give us any sense of what you think maybe the benefit from that type of business was in the quarter?

In the first quarter, no, we don't typically disclose that. We don't want any more competition than we already have through that. But it definitely moved the margins from the 14% to the 15% -- to where we ended up.

Okay, great.

Without it we would have been much closer to that forecasted 14% range. So you can kind of back into the number Noelle, if you wanted to.

Okay, perfect, thanks a lot. And then back on the backlog growth in fiscal 2012, previously you had expressed maybe a bit more confidence that you might win a big international award in this fiscal year. Are you getting the sense now that that would be pushed out maybe more until 2013? I guess my question is, are you a bit less constructive on that front?

I think our international incoming orders in the second quarter will be better than in the first quarter. But I don't think they're going to include anything that we would put in that double -- in excess of $10 million major categories like we've had in prior years. We continue to quote on major opportunities, but it is still just difficult to project those. So I'm not, at least in the next two quarters, expecting anything of that magnitude to hit us, but we continue to work on them. And there's a number of projects that are of notable size.

Okay, great. On the NGA operating margin, it seemed low in the quarter at 20.8%, kind of pulling down the overall galvanizing margins. Was something -- I guess, what is causing the differential between the core galvanizing margin and the NGA margins?

As we've talked about on previous calls, we started up the first quarters that we owned them, and the margins were pretty comparable with what we were experiencing in our legacy plants. But we had the benefit, when we did the opening balance sheet of NGA, zinc just happened to be at $0.80 at that level. So you had inexpensive zinc coming at us in the initial ownership of North America. Now that zinc has gotten more expensive, it has returned back to the level that we had originally in our plan, and we have just got to continue to work on the customer base, our quality and our service level, and our operating parameters to get them up to where we are. But we are not discouraged by where it is, and in fact, we had the favorable benefit of the lower zinc cost in the initial ownership, and I hopefully said it in the prior quarters, we still have work to do, but it still turned out to be just a tremendous acquisition for us.

Okay. And then my final question is, previously looking at the E&I margin, and the pressures you had seen there on the operating margin, you had this pricing issue with the lower-margin work in the backlog, and then also some capacity utilization issues, has there been any change really on the-- would you say -- I guess could you give me a sense of the dynamics there if anything, if capacity utilization is improving a bit but pricing is becoming more difficult, and that's what's driving this margin staying at roughly the same level for the past three quarters.

I think everyone's utilization level is up marginally. It's not up enough to give everybody the comfort level to start pushing price, the way that we are trying to. But again, that normally lags -- as I indicated earlier, two to three quarters from when the market starts turning up, so we still need the higher capacity utilization rates, so people have the confidence to be more aggressive on pricing. There are just too many examples of you either get this order or you do without. And that creates and translates into pricing pressures. So I don't think the dynamics have changed all. And as I indicated, what pushed our margins up in the first quarter was this unplanned quick turn business.

Okay.

We will continue to rely on that if we're going to push above that 14% level in our current fiscal year.

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

Thank you.

Our next question comes from Brent Thielman from D.A. Davidson.

Hi, good afternoon.

Good afternoon.

On the galvanizing business, you've been clear about the discrepancy for demand in the two regions, in North versus Gulf, and I'm wondering any indications of some of your stronger end markets in the North, I guess has either been easing or for that matter, accelerating, in terms of demand?

I think we've seen some leveling, Brent, I don't think we've seen any receding But we've been able to add new customers that continues to lend growth to the region, but we have seen the leveling in our bridge and highway work, we have seen a leveling in some of our other markets, but we've seen a pick up in the electrical and telecommunications, and we've seen a pickup in the OEM. So in balance, we are still showing improvement over, and where there's not a particular market that we are looking at, that has begun to concern us that it's turning down.

Sure, and then in your operations in the Gulf, are they at least beginning to experience volume growth in this last quarter?

Not in the last quarter. We believe that they will start to see it in the third quarter.

Q3, okay. And then just on SG&A, I guess a bit higher than I was looking for. Anything in there, and what we should be thinking about for a run rate going forward?

Remember, our first quarter is always our highest. That's where that equity-based compensation is always booked in the first quarter. So I think you would see that come down for the balance and be more like the trend that -- I guess last year, did have the NGA, but we are still projecting the first quarter to be the highest of our fiscal year.

Okay, great, congratulations on a good quarter, thanks.

Thank you, appreciate it.

(Operator Instructions). Our next question comes from Noelle Dilts from Stifel Nicolaus.

Hi, just had a quick follow-up question. I was wondering what you were looking for, for the tax rate for the year?

37%.

Okay, thanks.

Yes. Jamie?

(Operator Instructions). Gentlemen, at this time, I'm showing no additional questions. I would like to turn the conference call back over to Mr. Dingus for any closing remarks.

Again, we appreciate your participation today. We're pleased to report what we believe is a very good quarter for us, and we are very optimistic about our future, and look forward to talking to you at the end of the second quarter. Everyone have a great holiday weekend, and be safe. Thanks again.

The conference has now concluded. We thank you for not attending today's presentation. You may now disconnect your telephone lines.