AZZ Inc (AZZ) 2012 Q3 法說會逐字稿

Good morning and welcome to the AZZ incorporated third-quarter fiscal year 2012 financial results. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist (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 of Lytham Partners. Please go ahead.

Thank you, Amy. Good morning, and thank you for joining us today to review the financial results for AZZ incorporated for the third quarter of fiscal year 2012, ended November 30, 2011. As Amy indicated, 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 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. 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 third quarter and the first nine months of fiscal '12. We're pleased with the results for the quarter and the first nine months of the fiscal year.

On a year-to-date basis, operating results reflect a double-digit improvement in revenues, net income, earnings per share, backlog and incoming orders, when compared to the prior year. Despite continued economic uncertainty, we achieved another effective quarter of identification and execution of our opportunities.

Our market conditions remain unchanged from the previous quarter. When compared to the prior year, quotation levels reflect improvement for all markets. While overall opportunities have increased over the prior year, we have 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 rate of backlog growth, we are pleased that we've been able to maintain this strategy and see increases in our backlog, and maintain a positive book-to-ship ratio. We achieved a book-to-ship ratio in the third quarter of 108%. The Galvanizing Services segment had another outstanding quarterly operating performance. The strong third-quarter operating margins were ahead of the prior third-year quarter, and year-to-date margins are equal to that of the prior year.

We continue to demonstrate our commitment to the galvanizing market with our quality and service in these market conditions, and take advantage of all opportunities to maximize volume and market share while maintaining our pricing strategies. The Electrical and Industrial segment margins were down, as anticipated, from the prior year, as we continue to work off backlog from prior periods when pricing pressures were even more severe than they are today. We believe we will only see modest improvements in margins over the next few quarters as pricing improvement 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, Dana will now give us a review of the operating results for the third quarter and the first nine months. Dana?

Thank you, David. I would also like to welcome each of you to our third-quarter conference call. At this time, I will review our unaudited consolidated results for the period ending November 30, 2011.

As outlined in our press release, revenues for the quarter ending November 30 were $116.5 million as compared to $102.9 million in the prior year. Net income and diluted earnings per share for the quarter were $10 million and $0.79 as compared to $9.7 million and $0.77 in the prior year. As reminder, our quarterly earnings per share included an additional $0.08 per share expense related to our note offerings this year that we did not incur in the prior year.

For the first nine months of fiscal 2012 as compared to the prior fiscal year period, revenues increased 23% to $345.5 million, earnings per share increased 13% to $2.30. Our backlog was up 30%. Our book-to-ship ratio for the quarter was 1.08, ending the quarter with a backlog of 132.1 million. Our backlog at the end of our previous fiscal year was 108.4 million.

Our Electrical/Industrial segment generated 38% of our revenues for the quarter, while our Galvanizing Services segment generated 62%. In our Electrical/Industrial segment, we recorded revenues for the quarter of $43.8 million as compared to our prior-year results of $41.1 million. Operating income was $5.7 million as compared to $6.2 million, and operating margins were 13% for the quarter compared to 15% in the prior-year period. Increased operating profits in margins resulted from less favorable pricing due to more competitive market conditions for our comparative periods.

Revenues in our Galvanizing segment for the quarter were $72.6 million as compared to $61.8 million in our third quarter and fiscal 2011. Operating income was $18.6 million compared to $15.4 million. Operating margins for the quarter were 25.5% compared to 24.9% in the prior year.

The acquisition of NGA added $21.2 million to our third-quarter revenues and $4.6 million to our operating income. The improvement in our overall operating margins in this segment was a result of improvements from operating efficiencies and increased plant utilizations, which were partially offset by higher zinc costs.

At this time, I will cover some of our key cash flow and balance sheet items on a comparative basis. For the nine-month period, cash provided by operations was $47 million compared to $26 million in the prior-year period. Accounts receivable days outstanding were 48 days at the end of the third quarter compared to 47 days at the end of our last fiscal year. Year-to-date capital improvements were made in the amount of $16.3 million, and depreciation and amortization amounted to $16.9 million.

Our total outstanding debt at the end of the third quarter remained at $225 million. Our cash balance at the end of the quarter was $160 million. Our leverage ratio, which is defined as our funded debt divided by our cash flow, at the end of our third quarter, was 2.5 times. The ceiling for our covenant requirement on our senior credit facility is 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 our existing banking agreements, provides us with adequate flexibility to continue growth of our Company.

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

Overall, the power generation market continues at a strong pace. Most domestic activity revolves around new natural gas-fired plants and new renewable plants. Internationally, the majority of our projects are hydro and nuclear power. There were no large international power generation projects booked in the third quarter.

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 incoming order rate for this market segment. Demand for our electrical distribution substation products has shown improvement. However, they remain below the pre-recessionary levels. We anxiously await the calendar 2012 utility budgets to determine if the improvement will continue.

Our high-voltage transmission bus duct products domestic activity was limited and international remains spotty. The outlook for the 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 continue to see foreign competition. Our specialty lighting products continue to show very positive growth when compared to prior periods. The primary growth driver has been due to the strong rig count.

For the Galvanizing Services segment, the electrical and telecommunication markets remain strong, and growth of our OEM business is encouraging. The strength of these markets has more than offset the impact of a low GDP. For the third quarter, our shipments increased 18% when compared to the same period of last year.

In summary, our products and services are extremely well-positioned to continue to benefit from market improvement and pricing levels. Our lead-times are shorter and should provide for more expeditious benefit of improving market conditions. The timing of the projects and release of orders will always have an impact on 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 our competitive success.

Traditionally, our fourth quarter is our weakest in terms of new incoming orders, and we anticipate that to be the case again this fiscal year. The fourth quarter of last year was an exception to this trend, and we reported a positive book-to-ship ratio for that quarter. Based upon quotation levels, we do believe it will be a challenge to maintain a positive book-to-ship ratio for the fourth quarter. As we have stated previously, we believe this is a timing issue and not a market correction. We still anticipate that the book-to-ship ratio will be positive for the fiscal year.

Based upon the evaluation of information currently available to management, we are revising our fiscal 2012 guidance for revenues to be in the range of $465 million to $475 million, and for earnings to be -- earnings per share to be within the range of $3 to $3.15 per diluted share. Previously, our guidance was 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 $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 market conditions; competitive activity, including pricing; or significant delays in delivery or timing of the receipt of orders of our Electrical and Industrial products, and demand for our Galvanizing Services. We are pleased that once again we were recognized by Forbes magazine as being one of the 200 best small public companies. Our overall ranking was 44. This is the fifth time in the past 10 years that we have received this recognition from Forbes magazine.

We anticipate issuing guidance for fiscal 2013 on January 20, 2012. This will follow our regularly scheduled Board meeting, where our operating plans and projections are approved by our Board of Directors. The strength of our balance sheet, the confidence of the management team, the strong customer acceptance of our products and service, gives us the confidence to aggressively pursue additions to our products and to expand our markets.

Thank you for your participation today. And we'd like to open up for any questions you may have at this time.

(Operator instructions) John Franzreb, Sidoti.

Good morning, guys. The Galvanizing business had a significant increase in tonnage in the quarter. Could you discuss why that was the case?

Well, John, it's still the strength of that transmission pole market is good. Our OEM business continues to pick up. And then overall, we've just seen nice, nice improvements. But the strength of that -- the pole market for the transmission grid is particularly strong. And like I say, we have seen very nice growth in our OEM business levels.

Well, with that kind of strength, I would have expected maybe some better -- a better margin profile from Galvanizing, David. Why wasn't that the case?

Well, John, we're still -- our average price paid for zinc in the quarter was $0.92. Our average cost that went through the cost of sales was $1.07. So we're still -- but we're still chasing that higher zinc we paid for six months ago. And you would think that's a valid assumption that that demand would have led to it, but we're real pleased that we've hung right in there at that [26], even with that disparity between cost of sales and what we're paying.

Now, in the fourth quarter, we think that will level out to about $1.05. And by the time we get to the first quarter of next year, if zinc stays in the current range that it's in, we should be back on that 1-to-1 ratio. So we're encouraged with the way that is trending.

And in regards to your comments about your expectation that your book-to-bill will sequentially drop below 1, you're alluding to a seasonality factor there. Which business is the most seasonal that would drive the book-to-bill down?

It will be the distribution side and the industrial side. The power gen and the transmission doesn't tend to be as seasonal through that.

Okay. And on the distribution side, how does that ramp up for the balance of the year? How would you expect that business to pick up for the balance of the year?

Well, we're cautiously optimistic that the budgets that come out for next fiscal year continue to show improvement over our current levels. So we believe that the strength of the total fiscal year next year will be stronger in the distribution market than it was this year.

Okay. Thank you very much, David.

Brent Thielman, D.A. Davidson.

This is [Taren Coida] filling in for Brent. How's it going?

Fine, thank you.

I was just -- wanted to confirm the cash number again for those --?

$160 million was our (multiple speakers) --

(multiple speakers) $160 million?

Yes.

Okay. And then that gives you guys a lot of cash. So I was just wondering what you guys are expecting in your acquisition pipeline going forward?

Well, as we've indicated in the prior quarters, we continue to aggressively pursue on both sides of the business. We're as anxious as all of you are that we land something. It's not come to fruition at this point, but we're not discouraged. We continue to identify those opportunities. We're aggressively pursuing them, and conversations do continue. But we don't have anything that is on the eminent radar screen at this moment.

Okay, thank you. And then I was just -- also in your bidding activity for the international projects, that is the E&I business?

It has remained essentially consistent all year long. We haven't seen any dramatic increase or dramatic decrease. We don't have any very large pending orders like we traditionally do at this time, but there is some strong business opportunities out there. And we are aggressively pursuing those. We're, again, pleased with what we believe we're getting a good chance to participate in those, but we're not seeing those -- the rush of the great big projects that we had a couple of years ago.

Okay, perfect. Thank you. I'll jump back in.

(Operator instructions) Schon Williams, BB&T.

I wondered if you could just comment. We've seen some new mercury regulations. I guess the industry has been expecting that for some time, but EPA has issued some final rules here just in the last couple weeks. Could you talk about how you envision that impacting your utility business and maybe what the timeline is? Because it looks like implementation is not required, I guess, until later on down the road, maybe 2015. When would you maybe start to see some work related to the mercury regulations?

I have not done any work associated with that, and I would have to get back to you on it. So I'm not prepared to comment at this time.

Okay, but in general, you would say -- I mean, that there's additional pollution controls that need to be going into utilities, whether it's down the road or not, that would certainly be helpful for your business?

Absolutely, absolutely.

Okay. The top end of the revenue guidance -- I think you're talking about $475 million for the year. That would actually imply a pretty significant acceleration in the fourth quarter. And I'm just wondering under what scenario would we achieve that number?

I mean, because, when I look at the seasonality, typically Galvanizing -- it varies, but typically Galvanizing is seasonally weak in the fourth quarter. E&I shipments can kind of be all over the place. I'm just wondering under what scenario could we actually hit the top end of that number? Is it we've got a big project that's just going to -- could possibly get shipped in the fourth quarter? Is it you see better pricing coming through? Under what scenario do we get to the top end of that guidance number?

We would have to get a request from a customer to ship early in order to hit that. And some of those requests have come in that we've not confirmed our ability to do that -- through that. But that's why you still have that much range this late in the cycle through there, is customers continually shifting their deliveries based upon a number of factors. But you're right -- the variance in the Galvanizing is a little more predictable, but we do have some customers who have requested some orders be shipped early. We have still not been able to confirm that we're able to do that. So that would be the primary driver of hitting that top end.

Okay, perfect. And then you guys have actually done a very good job on reining in corporate overhead. I mean, it actually -- year-to-date, you're actually running lower than where we were last year.

Can you help me think -- as we move into fiscal '13, how should I think about corporate overhead? Should we be moving in line with sales growth? Should we be accelerating faster than sales growth? Are there any big chunks that need to be spent over the next 12 months?

I don't think you're going to see anything unusual. And I -- again, we'll talk about this more later in the month. But you're going to be seeing an increase in that 3% to 5% range. And any special, of course, acquisition activity would change that. We don't know about it at this time, but there's nothing unusual anticipated in your modeling. So just a normalized increase year-over-year, I think, would be a very fair assumption at this time.

Okay, perfect. I appreciate the update.

Noelle Dilts, Stifel Nicolaus.

Good morning, David and Dana, and congratulations on a good quarter.

Thank you.

Okay, so the first thing I wanted to dig into a bit was just the NGA margin. It came down a little bit from the level you were at in the second quarter. So I'm just curious -- is that -- is what you're seeing there really just -- you know, it's more challenging to get pricing in that business, and you're still trying to implement more of the AZZ procedures and pricing methodologies there? So is that why you saw the margin come down more in NGA, because you have the zinc cost headwinds that were just harder to recoup?

And then I'd just like to get your thoughts on -- you had a goal of getting the NGA margin up to ACC core levels by roughly the end of the year. So what are your thoughts there on closing that margin gap?

We still believe we're on target for doing that. And yes, you are correct in that, as we've talked about in prior quarters, the price of zinc was low when we did the opening balance sheet, so we had six or seven months there of very favorable zinc costs coming through that. Now, it's -- the average zinc cost is pretty close to what we've got for the rest of the organization.

We still have improvements to put in place, and we still have pricing improvements that come as a result of improvements in quality and service. But we're not at all discouraged about that disparity. Whether we hit the fourth quarter, I'm not sure, Noelle, but we don't believe it's that far off that we're going to see more parity between the two.

Okay. So the decline in the margin, in NGA margin, from the second quarter to the third quarter, would you say that's mostly attributable to zinc? Or was there anything else going on?

Mostly attributable to zinc.

Okay. All right, great. And then looking at the E&I operating margin, it was nice to see that you kind of bottomed there in the second quarter and the margins come up a little bit in the third quarter. You talked about seeing gradual improvement over the next few quarters.

So -- but you should be working through some of that really low-priced work that you were getting into last year. So can you just talk a little bit about, I guess, the degree of margin improvement you're expecting? And how much of that is coming from working through this lower-priced work?

And then the other thing to touch on is just pricing. It sounds like it may be -- it's kind of flattish. But are you seeing any markets where pricing is getting better? And then is industrial continuing to deteriorate? Or is it really just flattening out at this point?

Well, I think we still have a pricing challenge to get us back to that 15% level. I don't think the market is yet there. I mean, we could hit it because of a favorable contract here or there, but overall, we're still struggling to get it back to that 15% level. We felt we'd be strongly there by the fourth quarter of this year. And I don't believe that we're going to see that, absent some of our fast-turn business that we've talked about before, or through that.

But overall, Noelle, the pricing improvement that we've realized in this year has fallen short of what our expectations were. So I'm still struggling as to when I think we'll get back to that. But right now, 15% is still a challenge for us. I believe it's achievable in the next fiscal year, but I don't believe we're going to get it this year, absent some one-time business. But I'm speaking overall as to what the trend in the E&I margin delivery is.

Okay. And then for the fourth quarter, do you have an estimated tax rate?

(multiple speakers) 37%.

Okay. All right, that's all for me. Thanks a lot.

Thank you, Noelle.

(Operator instructions) John Franzreb, Sidoti.

David, you've had the money for M&A for almost a year now. I can assume that you, like others, are seeing the pricing environment is just not very attractive. I wonder if that's leading you to look maybe at some alternative acquisition opportunities that maybe you weren't considering this time last year?

I don't think the profile of what we're looking at is that significantly different in terms of its products and its end-user market. We may be looking at some more smaller transactions than we were at this time last year, John. We're still looking at the large ones, but the pricing on those has prohibited us from moving. There may be opportunities for do a little more add-ons and tuck-ins than we were pursuing at this time last year.

Okay. And usually you get a good sense of your confidence level going into the spring time, at this time of the year. I just -- I remember at this time last year, you seemed a little bit more optimistic than you do today. Can you talk a little bit about what your confidence level of continued backlog growth is in 2012, calendar 2012, relative to what you were thinking, say, a year ago?

John, I think the only -- I think the volume side and the quotation side is as good or better than it was this time last year. I think my only point of disappointment is the pricing levels on the E&I side. It -- just not followed historical trends. So if I didn't come across as optimistic as I did last year, it's only about that segment. But I think, overall, we're going to find a way to still show improvement on a year-over-year basis as we look to next year. I'm -- it's just not going to be as good as I think it should be with current market conditions, and we're going to continue to push for that.

And with it being an election year and even more uncertainty through that cycle, I'm not sure what all the factors are going to have to be to get the stars to align, to get us back to that 15%-plus margin level in the E&I business. But we've not given up on that as a target. So, if I was comparing to this time last year, I would think our opportunities are a little bit greater in terms of what we're going to be quoting, what we're able to secure is going to be driven more by pricing than anything else.

Okay. Thanks a lot, David.

Thank you, John.

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

We appreciate your participation today. As we indicated, later this month, we'll be issuing our guidance for the upcoming fiscal year. That will be in a press release form. And then we'll have an opportunity to talk more about that when we review our fourth-quarter and final fiscal year results for fiscal year 2012.

Again, I trust you all had a wonderful holiday. And we appreciate your participation and look forward to our conversations in the future. Thank you.

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