AZZ Inc (AZZ) 2012 Q2 法說會逐字稿

Good afternoon, and welcome to the AZZ Incorporated second quarter fiscal 2012 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, Denise. Good afternoon, and thank you for joining us today to review the financial results for AZZ Incorporated for the second quarter of fiscal 2012 ended August 31, 2011. Again, my name is Joe Dorame. I'm 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 & 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. 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 second quarter and the first six months of our fiscal 2012. We're pleased with the results for the quarter and the first six months of our fiscal year. On a year-to-date basis, operating revenues results reflected double-digit improvement in revenues, net income, earnings per share, backlog, and incoming orders when compared to the prior year, another effective quarter of our identification and execution of opportunities.

The conditions of our markets vary. We believe the transmission and industrial markets for our Electrical/Industrial products has leveled off but remains extremely price competitive. The distribution market is showing some signs of moderate recovery. Power generation market has been relatively stable for several quarters and generation opportunities have improved.

While overall quotations and opportunities have increased we've not seen corresponding improvements in pricing. This has and will continue to impact the rate of 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 the growth of our backlog we are pleased that we have been able to maintain this strategy and still see increases in our backlog and maintain a positive book-to-ship ratio.

We believe the overall economic and regulatory uncertainty is impacting volume and competitive pricing as competitors strive to increase their capacity utilization levels. The book-to-ship ratio for the second quarter was 107%. For our galvanizing markets, we continue to see growth in improving demand in most of our markets, the petrochemical market being an exception. There are some petrochemical projects that are in the early stages and should favorably impact the first half of our next fiscal year. The Galvanizing Services segment had another outstanding quarterly operating performance.

The strong second quarter operating margins were ahead of the prior year's second quarter and brought the year-to-date margins close to the prior six months. We continued to demonstrate our commitment to quality and service during these market conditions and take advantage of all opportunities to maximize volume and our market share while maintaining our pricing.

The Electrical/Industrial segment margins were down as anticipated and we continue to work off backlog from prior periods when pricing pressures were even more severe than they are today. We believe that we will only see modest improvement in margins over the balance of this year as pricing improvements is slow and difficult. 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 the confidence that we have in our future. With that as an overview of our results, Dana will now give us a review of the operating results for the second quarter and the first six months of fiscal 2012. Dana?

Thank you, David, and I would also like to welcome each of you to our second quarter conference call. At this time, I will review our unaudited consolidated results for the period ending August 31, 2011. As outlined in our press release, revenues for the quarter ending August 31 were $114.7 million as compared to $99.6 million in the prior year. Net income and diluted earnings per share for the quarter were $9.6 million and $0.76 per share, as compared to $9.6 million and $0.77 in the prior year. As a reminder, our quarterly earnings per share include an additional $0.08 per share expense related to our note offering this year that did not occur in the prior fiscal year.

For the first six months of fiscal 2012 as compared to the prior fiscal year period revenues increased 29% to $229 million, earnings per share increased 19% to $1.51 and our backlog was up 16%. Our book-to-ship ratio for the quarter was 1.07 ending the quarter with a backlog of $123.2 million and our backlog at the end of the previous fiscal year was $108.4 million. Our Electrical/Industrial segment generated 40% of our revenues for the quarter while our Galvanizing Services segment generated 60%.

In our Electrical/Industrial product segment we recorded revenues for the quarter of $44.4 million as compared to our prior year results of $40.8 million. Increased revenues were the results of increased order intake during the prior periods. Operating income was $5.1 million as compared to $7.5 million and operating margins were 11.4% for the quarter compared to 18.5% in the prior year period. Operating profits and margins were [virtually] impacted by the shipment of lower margin projects booked during the prior fiscal year which were reflective of a more competitive market condition.

Revenues in our Galvanizing segment for the quarter were $70.3 million as compared to $58.8 million recorded in the second quarter in fiscal 2011. Operating income was $18.8 million compared to $15.2 million in the prior year. Operating margins for the quarter were 26.7% compared to 25.9% in the prior year. The acquisition of North American Galvanizing added $21.2 million to our second quarter revenues and $5.1 million to our operating income. The improvement in our overall operating margins in this segment was a result of increased production levels as well as improved pricing.

At this time, I will cover some of our key cash flow and balance sheet items on a comparative basis. For the six-month period, cash provided by operations was $27 million compared to $8 million in the prior year. Our accounts receivable days remained strong outstanding at 48 days as compared to the prior year-end of 47 days. Year-to-date capital improvements were made in the amount of $10.5 million and depreciation and amortization amounted to $11.3 million for the first six months.

Our Board of Directors again approved and declared our quarterly cash dividend of $0.25 a share to be paid on October 31, 2011. Our total outstanding bank debt at the end of the second quarter continues to stand at $225 million and our cash balance at the end of the quarter was $149.1 million. Our leverage ratio, which is defined as our funded debt divided by our cash flow, at the end of our second quarter was 2.5 times. The ceiling for our covenant requirements on our senior credit facility is [2.25.]

We continue to believe that our balance sheet is one of our core strengths and along with our strong cash flow characteristics, combined with excess to borrowings under our existing banking arrangements, provide us with adequate flexibility to continue the growth of our Company. At this time, David will give us an overview of our two operating segments.

As we indicated, overall the power generation market has been good. Most domestic activity revolves around renewables, the upgrade of coal fired plants, and new natural gas fired plants. Internationally, the majority of the projects are hydro and nuclear power. There were no large international power generation projects booked in the second quarter.

We are pleased that China has announced that they will resume their build program for nuclear plants in calendar 2012. Industrial and petrochemical demand for our power distribution and motor control centers remains at pricing levels we are unable to effectively compete at which has limited our opportunities. The demand for our electrical distribution substation products saw improvement, however, they remain below the pre-recessionary levels. Utility budgets still reflect what I would call and have called as "nervousness" as to the strength of the overall economic recovery.

Our high voltage transmission bus duct products domestic activity was limited and international remained spotty. The outlook for international work remains positive but is anticipated to be outside the current fiscal year, as the timing of the release of these orders is difficult to predict. Domestic business opportunities continued to see foreign competition and we have experienced price deterioration.

For the Galvanizing Services segment, the electrical and telecommunications markets remain strong and the growth of our OEM business is encouraging. The strength of these markets has more than offset the impact of a lower than anticipated GDP. For the second quarter, our shipments increased 16%. The growth, exclusive of North American acquisition, was a strong 9%. In summary, our products and services are extremely well positioned to benefit from further market improvements, our lead times are shorter and should provide for more expeditious benefits of improving market conditions.

The timing of the projects and the rates of orders will always have an impact on the quarterly recognition of bookings, backlog and revenues and will result in quarter-to-quarter fluctuations which may be greater than true changes in market demand and our competitive position and success. Based upon the evaluation of information currently available to management, we are maintaining our existing fiscal year 2012 guidance for revenues to be in the range of $450 million to $475 million and for earnings to be within the range of $2.90 to $3.10.

Our guidance does include the increased interest expense of $0.34 per share associated with the $125 million of Senior Private Placement Notes issued on January 20, 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 and Industrial products and demand for our Galvanizing Services.

The strength of our balance sheet, the competence of the management team, the strong customer acceptance of our products and services gives us the confidence to aggressively pursue additions to our product offering and our served markets. Thank you for your participation, and at this time we would be happy to open it up for any questions you might have.

We will now begin the question-and-answer session. (Operator Instructions) And at this time, our first question will come from Brent Thielman of D.A. Davidson. Please go ahead, sir.

Hi, good afternoon.

Good afternoon, Brent.

David, just on the E&I segment, obviously, it looks like maybe some older projects filtering through the margins in the quarter. Do you expect to see E&I margins pick back up from here?

Well, as we've indicated, we think that they will improve over this level, but I think it's going to be modest for the balance of this year. But, yes, we think we've bottomed out in that, Brent, and we'll start to see modest improvement as we go forward.

Okay, and, Dana, did you give a cash number for the quarter?

$149 million.

Okay, I'll jump back in queue. Thanks, guys.

Thank you.

(Operator Instructions) Our next question will come from Sean Williams of BB&T Capital Markets. Please go ahead.

Hi, good afternoon.

Good afternoon.

I just wanted to look into the E&I shipments a little bit further. You actually saw E&I shipments tick down in fiscal Q2 versus fiscal Q1. Seasonally, that's pretty unusual. I'm just wondering if I should be reading anything into that or is there anything in Q1 that maybe would have pulled demand forward a little bit versus Q2?

The only major thing that happened between Q1 and Q2, if you recall, Q1 was very favorably impacted by some quick turn jobs and that is your, that was a big piece of the revenue change and of the earnings change quarter-over-quarter, but there's not a major shift between the two. It's just a natural timing of the shipment of the backlog, so that's the only characteristic, Sean, that is different of the two quarters.

Okay, and then how much did that, do you know -- can you quantify how much that quick turn benefited the quarter in Q1?

As we indicated--

For the operating margins?

As we indicated in the last conference call, it raised margins by about 1% to 1.5%.

Okay, and then just back to the balance sheet and -- in a very good position here. Can you talk about what you've been seeing in terms of the acquisition pipeline?

Well, we continue to review a number of things that not only are on the [option] market but things that we have sought out. Pricing expectations continue to be quite high in both areas but that hasn't slowed us in our review process. But we are as aggressive as we've ever been in that. We haven't found anything that we think is an outstanding fit for us on the Electrical/Industrial and as we've indicated we keep looking for new territories in Galvanizing.

Okay, and then last question here, guys. We've seen spot price of zinc has come off pretty dramatically here just in the last couple weeks. Would you expect that -- I guess maybe -- could you update us on where you are in terms of the kettle costs and then maybe what are your expectations going forward? If zinc were to remain at these low levels, would that be a plus to you guys because you should be able to hold pricing in the market or do you see maybe giving up some of that pricing in the back half of the year if these low prices were to hold?

Well, it's two-fold. I mean, obviously, the lower prices will benefit from six months from now, but our challenge will be, as you said in the last part of your question, naturally the customers will know of the reduction and they will put pressure on us to make pricing corrections in the third quarter which we have traditionally resist and will continue to resist because we never got pricing up to the level we were fully recovering the zinc cost anyway.

But we expect that our zinc costs in the third quarter will be in that $1.05 to $1.06 per pound, and so that will -- it looks like that it wouldn't be unusual if that LME price was in the high 80s, $0.80 range and then by the time you add our premium to it. So we do have a challenge to hang under that price but we're not excessively concerned about that at this time because demand is strong enough that we can hang on to most of the price that we've put in place.

And can you help me out, during the last downturn, when zinc started to fall and demand started to pull back, how quickly did you start to give up the price? I mean, was it maybe, if I'm thinking back to maybe August or September of 2008, were you giving up pricing already at that point or were you able to carry pricing well into 2009 and then it started to work off?

I'm going to have to trust my memory here because I don't have that in front of me, but I would say it was four to five months before we really were forced into acquiescing on the price pressures.

Okay, thank you, guys.

That's kind of the basis for why I'm saying I believe we can hang on in the third quarter.

Okay, thank you. That's very helpful insight, gentlemen.

Thank you.

Our next question will come from John Franzreb of Sidoti & Company. Please go ahead, sir.

Good afternoon, David and Dana.

Good afternoon.

You spent an awful lot of time in your opening comments discussing the pricing environment and price competition. I wonder if you just give us a little bit of color. Would you characterize it as typical at this stage of the recovery or more aggressive than you would expect at this point? Just give us a little flavor about the pricing environment relative to other turnarounds?

Based upon the quotation activity that we've seen, I think historically we would have seen more price release than we're seeing right now. And the only thing I can point to is everyone is still concerned about what is the real strength of the recovery and they are not acting like we are recovering. So I think the recovery is, on the price side, has been slower and the opportunities are enough out there that we should have seen more through that, so I think we're behind the normal recovery cycle when it comes to price recovery.

Okay, and I guess that would explain why you wouldn't expect that pricing improvement in E&I to be a fiscal 2012 event?

Right. We're easing it up and like I said it's very modest, but I'm not seeing anything in the quotation side in the orders that come through that says, yes, we're back to the normalized recovery that we should be at, John, which is very disappointing, of course.

Now, in the Galvanizing business, are you seeing any kind of changes in your geographies regarding demand considering how sensitive it is to localized GDP growth?

No. We've been very, very fortunate in the fact that in certain geographic areas, maybe the OEM market is up. Another geographic area, the solar market is up and another one the transmission tower market is up. So it's been enough, if you look on a region basis and then even at the next level of the North versus the South, the only thing, as I said, that we're still behind on is the petrochemical and it looks like we're going to start getting some relief of that in the next five to six months through that cycle.

So we've been very fortunate that one particular market has buoyed up another one geographic area while another market has buoyed up another one. So it's really nicely balanced, John, and my comment there was despite the lower than anticipated GDP for this year, we're doing a little bit better than we thought we were and it's simply because of the transmission lines that are going up, the favorable impact of solar, the strong OEM markets that we're seeing, so we're very fortunate that we've got a lot of strong markets despite an overall kind of anemic GDP growth.

Great, great. And back to the, I guess, the M&A topic. You said the prices are still relatively high. Has that changed which segments you're more likely to put the money to work in, E&I versus Galvanizing? Does it change your thoughts in that regard?

No, but, like I said, we, obviously, we're looking aggressively in the E&I segment and said those would probably be larger, but we're looking as hard for more geographies as we have ever had on the Galvanizing, John.

Okay.

And I think the pricing situation is more severe in the Electrical than it is in the Galvanizing.

Okay, fair enough. Thanks a lot, guys.

Thank you, John.

(Operator Instructions) And our next question will come from Noelle Dilts of Stifel Nicolaus. Please go ahead.

Hi, good afternoon, David and Dana.

Afternoon.

I have a few questions, but first going back to the margin decline in E&I. If you look across those businesses, distribution, transmission, power [gen], and then industrial, can you point to more margin decline in one of those businesses or is it pretty broad based?

I would say the one that we've seen the least in, Noelle, is power generation simply because demand has not been as erratic through those. Even though they've come under pressure and we've seen naturally the first one we always see is in the industrial market. That's the first one to come under pressure. And so if I had to rank them I'd say industrial is the most severe, transmission after that, distribution and then power generation would be the least impact. But it's all been felt but that's how I would rank the severity of it. I name those in the order of severity not in the reverse.

Okay, got it, great. And then it was nice to see that you essentially halved the margin gap between the NGA operation, galvanizing operation, and then your traditional core galvanizing margins. Can you give us a little bit of commentary on where you think the NGA margin is going, kind of the time period you think it will take to get those up to core margin, NGA margins up to core levels?

I think that we know where we are on that. I think we're right on target from where we were, and I don't think by the end of this fiscal year that you'll notice any difference between the two operations at all.

Okay. And it was nice to see SG&A was pretty low in the quarter as a percentage of sales. Do you think this level is sustainable or do you see that going up a bit over the next couple of quarters?

As we talked about before, our first quarter is always the heaviest but we would anticipate the SG&A level for the third and fourth would be much closer to the second quarter than first quarter.

Okay, and then finally, are you still looking for a 37% tax rate for the year?

About 37.5%.

Okay, great. Thanks so much.

Thank you.

I'm showing no further questions in the queue. This will conclude our question-and-answer session. I would like to turn the conference back over to Mr. David Dingus for any closing remarks.

Again, thank you for your participation today. We're continuing to maximize our results in these economic conditions and to look for growth and expansion opportunities, and we look forward to continuing to share those comments with you in the future. Have a great weekend and we appreciate your support and your help. Thank you.

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