AZZ Inc (AZZ) 2012 Q4 法說會逐字稿

Welcome to the AZZ Incorporated fourth-quarter and fiscal-year 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. Please note, this event is being recorded.

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

Thank you, Denise. Good afternoon. Thank you for joining us today to review the financial results for AZZ Incorporated for the fourth-quarter and fiscal-year 2012 ended February 29, 2012. As Denise indicated, my name is Joe Dorame. I'm with Lytham Partners, and we're 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'll 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 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 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 thank each of you for taking the time to join us today for the conference call for the fourth-quarter and fiscal-year 2012, which ended on February 29, 2012. We are very pleased with the results for the quarter and the fiscal year. For the fiscal year, our operating results reflect a double-digit improvement in revenues, net income, earnings per share, backlog, and incoming orders, when compared to the prior year. We achieved another effective quarter and fiscal year of identification and execution of our opportunities. Our markets reflect modest improvement 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, pricing has been slow to recover, and we still need further improvement. 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 it has slowed the rate of backlog growth, we are pleased that we've been able to maintain this strategy, and still see increases in our backlog, and maintain a positive book-to-ship ratio. We achieved a book-to-ship ratio in the fourth quarter of 105%, and 106% for the fiscal year.

Traditionally, our fourth quarter is our weakest in terms of new incoming orders. And as we discussed in the third-quarter conference call, we expected that to be the case for the fourth quarter of fiscal 2012. The stronger-than-anticipated incoming order rate for the fourth quarter was more a reflection of the receipt in the fourth quarter of orders we had originally forecast to receive in the first quarter of our new fiscal year, or subsequent to the year-end, rather than that being a reflection of additional opportunities.

For the fiscal year, bookings totaled $499.4 million, while shipments totaled $469.1 million. The galvanizing services segment had another outstanding quarterly operating performance. The strong fourth-quarter and fiscal-year operating margins were essentially unchanged from the same period of a year ago, despite higher zinc cost. 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 our pricing strategies.

The electrical and industrial segment operating margins were down, as anticipated, from the prior year, due to pricing pressures. We will see modest improvement in margins over the next few quarters, as price improvement is slower than desired. The completion of another successful quarter and fiscal year, the financial strength of the Company, and a great group of employees is reflected in our operating results and the confidence we have in our future.

With that as an overview, Dana will now give us a review of the operating results for the fourth-quarter and fiscal 2012. 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 will review our unaudited consolidated results for the period ending February 29, 2012. As outlined in our press release, revenues for the quarter ending February 29 were $123.6 million, as compared to $100.7 million in the prior year. Net income and diluted earnings per share for the quarter were $11.6 million and $0.92, as compared to $9.2 million and $0.73 in the prior year. The fourth quarter includes a favorable non-recurring tax valuation allowance adjustment for $0.10 per share. For fiscal 2012, as compared to the prior fiscal-year period, revenues increased 23% to $46.9 million; earnings per share increased 16% to $3.21.

Our book-to-ship ratio for the quarter was 105%, and 106% for the fiscal year, ending with a backlog of $138.6 million. This represents our fifth consecutive quarter to achieve a 1-to-1 or greater book-to-ship ratio. Our backlog at the end of our previous fiscal year was $108.4 million.

Our electrical and industrial segment generated 40% of our revenues for the quarter, while galvanizing services segment generated 60%. In our electrical and industrial products segment, we recorded revenues for the quarter of $52.7 million, as compared to our prior-year results of $43.6 million. Operating income was $7.6 million as compared to $6.7 million, and operating margins were 14.3% for the quarter compared to 15.4% in the prior-year period. Increased operating profits improved due to higher volumes. Lower margins for the quarter resulted from less favorable pricing due to competitive market conditions for the compared periods.

Revenues in our galvanizing service segment for the quarter were $71 million, as compared to $57 million recorded in our fourth-quarter and fiscal 2011. Operating income was $18.5 million compared to $14.8 million in the prior year. Operating margins for the quarter were 26.1% compared to 26% in the prior year. The acquisition of NGA added $22.3 million to our fourth-quarter revenues and $5.2 million to our operating income. The improvement in our overall operating margins in this segment was a result of improvements from operating efficiencies, and an increased plant utilization, 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 12-month period, cash provided by operations was $64 million compared to $42 million in the prior year. EBITDA, which is defined as earnings before interest, taxes, depreciation and amortization, surpassed $400 million for the first time in the Company's history. Our accounts receivable days outstanding were 48 days at the end of our fourth quarter, as compared to 47 days at our last year period ending. Year-to-date capital improvements were made in the amount of $19.8 million, and depreciation and amortization amounted to $22.6 million. Our total outstanding debt at the end of the fourth quarter remained at $225 million; our cash balance at the end of the quarter was $143 million.

Our leverage ratio, which is defined as our funded debt divided by our cash flow, at the end of our fourth quarter was 2.4 times. The ceiling for our covenant requirement on our senior credit facility is 3.2 times. We continue to believe that our balance sheet is our core strengths, and along with our strong cash flow characteristics combined with excess borrowings under our existing banking arrangements, provides 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.

Overall, the power generation market continues at a strong pace. Activity was well-balanced between new natural gas fired plants, renewables, hydro, and nuclear power plants. Industrial and petrochemical demand for our power distribution and motor control centers remains below pricing levels of our other markets, which has limited our incoming order rate for this market.

The demand for our electrical distribution substation products continues to show improvement. However, they remain below pre-recessionary levels, even though we are recovering. Our high-voltage transmission bus duct products' quotation activity improved both in the domestic and international market. Timing of placing these orders is always difficult to predict, but we anticipate some improved bookings level by the second quarter of fiscal 2013. Domestic business opportunities continued to see foreign competition.

Our specialty lighting products continued to show very positive growth when compared to prior periods. The primary growth driver has been the petrochemical market. For the galvanizing services segment, the electrical and telecommunications market remains very 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 fourth quarter, our shipments increased 28%, when compared to the same period last year.

In summary, our products and services are extremely well-positioned to continue to benefit from market improvements, and also as we push our pricing levels. The timing of the 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 and success.

Based upon the evaluation of information currently available to management, we are maintaining our previously issued guidance for fiscal-year 2013, for revenues to be in the range of $475 million to $510 million, and for earnings to be within the range of $3.25 to $3.55 per diluted share. Achievement of these projections would be our 26th 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 any significant delays in the delivery or in the timing and the receipt of orders of our electrical products, and 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 give us the confidence to aggressively pursue additions to our products and to our markets.

Thank you for your participation today. And we would like to open it up for any questions you might have at this time.

Thank you, Mr. Dingus. (Operator Instructions). Our first question will come from John Franzreb of Sidoti & Company. Please go ahead.

I'd just like to talk a little bit about the pricing in the electrical business. When do you expect some of the less favorable-priced jobs to run through the P&L at this point?

I really think the bulk of it is going to be finished by the end of the first quarter, John. We're going to see modest improvement. But we can as we measure that margin in backlog, we're encouraged that -- we're not going to do it faster, but we believe that by the second quarter and continuing through the end of fiscal year, we're going to see modest improvement. I think we're through it by the end of the first quarter.

That's great. And sticking on the margin a little bit, in galvanizing, you kind of been stuck at 26% for a while. Granted, that's great op margin. But I'm wondering when we would expect some sort of benefit from maybe lower zinc prices or maybe a little bit of color commentary about why we're stuck at that level for so long?

Well, John, I think, as you indicated and complimented us, that we think the 26% is great. I don't see anything out there, as we look at the mix of business is coming at us, where the drivers of the market are, what the price of zinc is, we're assuming it's going to be in that $0.95 range for the bulk of the year. Our pricing is kind of at that level, so I think we would be quite thrilled to execute at the same 26% we exited last year. There may be a quarter where we will edge it up a little bit, and naturally, we pushed every opportunity we have. You know us that well. But I don't see anything that's really going to change. I think that's about the max that the market is going to give us.

Okay. And just you mentioned that M&A is something you're looking at actively at this point. Could you talk a little bit about the purchase in Canada, maybe a little bit of color about the margin profile and maybe some-- if there is a more of a strategic fit there that you saw than maybe you talked about previously?

John, we just have two months now of actual results of our first entry into the Canadian market. And I can tell you we couldn't be more pleased in the first two months than we have so far. And this is the bottom of their market, because of the winter time, and the severity of the winter, always impacts their business. I think overall, and we are still infants in all of our due diligence for the Canadian market, but doing the work that we have done, the margin profile is as good as or slightly better than the US market profile. So we're quite excited about our efforts to increase our business participation in the Canadian market, and everything that we see just encourages us more to pursue this strategy.

Okay. Great. Thanks very much. I'll let somebody else get in.

Our next question will come from Brent Thielman of D.A. Davidson. Please go ahead.

David, first, a clarification. When you say expecting an improvement in E&I margins over the next few quarters, is that improvement from the 14% margin you just posted, or are you looking at more year-over-year improvement here?

Year-over-year improvement. I think that we're going to still be in that 14% to 16% range for the full year measurement, but I think we'll see more 14% in the beginning and more 16% at the end, if we continue to book and improve our pricing levels, and based upon what I've seen in the backlog. So again, it's not moving as rapidly as we would like, because as I said, the pricing recovery is not moving as rapidly as we'd like, but we're picking up very modestly here and there. And we're pretty encouraged. We've turned the corner. We've bottomed out. And we started our climb back up.

I see. So getting to the 16% in any individual quarter might be more a function of mix here in the short-term? Is that fair to say?

That would be very fair to say. It would not be a trend if we would hit a 16% early on. It would be mixed within it.

Okay. And then on the galvanizing side, I know that kind of the Gulf region for you guys has been made a little bit more challenging relative to what you're seeing in the Midwest, maybe an update on what you're seeing in that region? I know a couple quarters ago, we talked about maybe some petrochemical opportunities beginning to show up here in the first half of fiscal 2013. Wondering if those are still kind of on the table for you?

They are. We're starting to see improvement in this region. It's beginning to start to catch up with the improvement that we've seen in the other regions. So it is consistent with what we said before.

Okay. And does that inevitably up the margin for you guys? I would think with the extra volume leverage there it would help.

Well, very modestly. Because even at the operating levels that we are, those are companies that we've owned for a number of years, and they are strong performers. They do well in even with markets that haven't fully recovered. So we don't get much leverage pick up from there. But they're on the strong end of performers for us. So it will -- overall it will fit right in with what we're doing.

Okay. And then just two more if I could. Dana, sorry if I missed it. Could you give a cash number for the end of the quarter?

$143 million.

Okay. And then the SG&A increase, is there anything in there noteworthy?

Just a little bit of the acquisition costs.

The Canadian one we completed.

Right.

Okay. All right. Thanks.

Our next question will come from Schon Williams of BB&T Capital Markets. Please go ahead.

Wondered if we could just maybe focus back on the acquisition outlook. Could you maybe give us an update on what you're seeing out there. What the focus is on, in terms of galvanizing versus E&I? And maybe what you're seeing in terms of multiples that people are asking for these days?

We are approaching both segments with aggressiveness. We want to grow in both segments. We're not looking at one and just the other. I think you will see hopefully that most of our efforts in the galvanizing will be geared towards the Canadian market, as we go forward. And that's new to us, so it's hard to project the timing on it or exactly how those multiples will end up, but I don't expect those to be that much higher than they were in the US.

Regarding the electrical, it's still pricey, but not as pricey as it was six months ago and definitely not as pricey as it was a year ago. So we're a little more encouraged that we're going to be able to find a good fit for us there. It's still on the top end, because most of them are being priced as pretty high growth companies. But it is a little more reasonable than it was, as I said six months ago, and quite a bit more reasonable than it was a year ago.

And where is the focus geographically within E&I? Is it overseas in emerging markets? Or is it more on the domestic side?

It's domestic, yes.

Okay. I mean, we're looking at opportunities internationally, but the larger transactions that we are evaluating have an international component to them but are basically a domestic business. In other words, they are headquartered within the US, and at least half of their volume is in the US. So the rest may be spread in the mature as well as emerging markets.

Okay.

Pretty much the profile of what we have, we're essentially two-thirds domestic, one-third export. These maybe two-thirds domestic and one-third either export or foreign-based.

Okay. That's helpful. I'm just wondering, did any of the weather -- I'm hearing that certainly all the warm weather beginning at least on the East Coast has been helping some construction activity in the first part of the year. Did any of that affect either E&I or galvanizing that you've heard?

Not in any measurable fashion.

Okay. And then maybe one last question, just you do have the repurchase authorization out there. It looks like you aren't really active in the fourth quarter. What's the thought going forward?

Again, we did not-- during the fourth quarter we did not repurchase anything under the authorization. Our focus is still to utilize cash for acquisitions. Secondly, the dividend. And thirdly as share repurchase. Now, the thing-- that's a very opportunistic approach. On the share repurchase agreement, but we still believe the best utilization of cash is acquisition. But we thought that it was prudent on us for us to have that authorization in place and we will utilize it if opportunity presented itself. But our focus is still acquisitions.

All right. Thank you, guys.

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

I was hoping, looking at your electrical and industrial growth, you posted really strong growth in the quarter on a year-over-year basis. Can you give us any sense of what you think came from -- how much came from volume versus price?

The bulk of it was volume, because we essentially didn't move price. Year-over-year we were behind the price.

Year-over-year you were behind on price. Okay.

Right but if you look at the quarter, it's a little more in line with the fourth quarter of last year, but it's volume, Noelle.

Okay. That helps. Just wanted to make sure. And then looking out at the tax rate for 2013, do you have a sense at this point of what you are expecting?

We're using 37%.

Okay. And then another housekeeping question, what are your CapEx plans for 2013?

Essentially equal to depreciation of roughly $20 million.

Okay. And then can you give us your capital cost of zinc in the fourth quarter versus your purchased -- average purchase cost?

Yes. Well I can give you what we consumed. We consumed at $1.05 and replace at $0.98.

Okay. Thanks a lot.

I don't have the it in front of me.

Okay.

But it's getting very close to being a one-to-one relationship, Noelle. We're pretty much in balance. And in the next few months we're going to be almost -- assuming that there's not a change in the LME price, we will probably be on a one-to-one ratio. Very quickly.

Thanks a lot.

I'm showing no additional questions in the queue. I would like to turn the conference back over to Mr. Dingus for any closing remarks. Excuse me, sir, we do have one more question. One moment please. The next question will come from Ned Borland of Keeley Asset Management.

I think I heard in the prepared remarks something about orders being pulled forward from the first quarter to the fourth quarter. Could you maybe quantify that a little bit?

We said in the third-quarter conference call that we thought the fourth quarter would be at about a one-to-one ratio, would be really flat because that's traditionally our weakest quarter. I think the orders that we've pulled forward, if we were to push those back to the first quarter, you'd be right at the one-to-one, so you're in about that $7.5 million, $8 million range, Ned.

Okay. All right. That's all I had. Thanks.

Ladies and gentlemen, that will conclude our question and answer session. I would now like to turn the conference back over to Mr. Dingus for any closing remarks.

Thank you again for your participation today. We're pleased to present the very positive results for the Company. We look forward to speaking with you in a couple months, and wish you the best for your holiday weekend. Thanks again, and have a great day.

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.