AZZ Inc (AZZ) 2013 Q1 法說會逐字稿

Good morning and welcome to the AZZ incorporated first quarter of fiscal year 2013 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 of Lytham Partners. Please go ahead.

Thank you, Amy. Good morning, and thank all of you for joining us today to review the financial results for AZZ incorporated for the first quarter fiscal year 2013 ended May 31, 2012. 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 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 customers' demand; 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 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 requests that delays a shipment; 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 year 2013, which ended on May 31, 2012. We're extremely pleased with the results for the quarter. Our record-setting operating results reflect double-digit improvement in revenues, net income, earnings per share, and backlog when compared to the prior year. It was another quarter of effective identification and execution of opportunities and strategic initiatives.

The operating results for the Electrical Industrial segment were as anticipated and internally forecast. Galvanizing Services segment had another outstanding quarterly operating performance that exceeded our internal expectations. Most served markets reflect robust demand. We expect continued strong demand and operating performance in this segment for the balance of our current fiscal year.

The strong first-quarter reflects a 25% growth in revenues, a 32% growth in operating income when compared to the prior year. Tonnage was up 32%. Solar power generation projects, transmission line work, and OEMs reflected the largest quarterly growth when compared to the prior year.

We're extremely pleased that we were able to complete the acquisition of Nuclear Logistics Inc. on June 1, 2012. This significantly increases our presence in the power generation market with an extremely successful product offering.

We continue to demonstrate our commitment to quality and service during these market conditions, and take advantage of all opportunities to maximize volume and market share while maintaining pricing. The completion of another successful quarter, the financial strength of the Company, and a great group of employees, is reflected in our record-setting 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 first quarter of fiscal 2013.

Thank you. I would also like to welcome each one of you to our first-quarter conference call. At this time, I will review our unaudited consolidated results for the period ending May 31, 2012.

As outlined in our press release, revenues for the quarter ending May 31, 2012 were $127.1 million as compared to $114.3 million in the prior year. Net income and diluted earnings per share for the quarter were $16 million and $1.26 as compared to $9.5 million and $0.75 in the prior year. The first quarter of this year reflects a pretax gain of $6 million related to a partial insurance settlement for the assets that were destroyed in a recent fire at one of our galvanizing facilities, as well as $600,000 of expense associated with the acquisition of Nuclear Logistics.

Our pro forma earnings per share exclusive of these nonoperational income and expense items would have been $1.02. Our book to ship ratio for the quarter was 0.98, ending the core with a backlog of 136.1 million. This compares to our backlog at the end of the previous fiscal year of 138.6 million. Our Electrical and Industrial Products segment generated 35% of our revenues for the quarter, while our Galvanizing Services segment generated 65%.

With the acquisition of NLI, we expect that at the end of this fiscal year, fiscal 2013, our Electrical Industrial segment will contribute 45% of our revenues while the Galvanizing segments will contribute 55%. In our Electrical and Industrial Products segment, we recorded revenues for the quarter of $44.7 million as compared to the prior-year results of $48.3 million. Operating income was $6.9 million compared to $7.4 million in the prior year, and operating margins basically flat at 15.3% this quarter compared to 15.4% in the prior year.

Revenues in our Galvanizing segment for the quarter were $82.5 million as compared to $66.1 million recorded in our first quarter of fiscal '12. Increased revenues resulting from improved demand from the renewable energy, industrial and OEM markets. The acquisition of Galvan Metal's in Canada contributed approximately $3.2 million to our quarterly revenues. Operating income for this segment was $22.6 million compared to $17.1 million in the prior year. Operating margins for the quarter were 27.4% compared to 25.9%.

During the fourth quarter, a loss recorded in the amount of $600,000 associated with the loss of production as a result of the fire at our Joliet galvanizing facility. This loss, as well as a portion of future losses associated with this facility, will be partially offset with insurance proceeds from our business interruption policies in future quarters. Without the loss, margins would have been approximately 28% for the quarter.

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 $16.2 million compared to $9.7 million in the prior year. Earnings before interest taxes, depreciation and amortization surpassed $33.9 million. Our accounts receivable days outstanding were 48 days, which compares favorably to our 48 days outstanding at the end of last fiscal year.

Year-to-date capital improvements were made in the amount of $3.5 million, and depreciation and amortization amounted to $5.8 million for the quarter. Our total outstanding debt at the end of our first quarter was $211 million and our cash balance at the end of the quarter was $139 million.

At our regular scheduled Board meeting, we approved and declared our quarterly cash dividend from $0.25 per share to be paid on July the 26th. We also approved and declared a 2-for-1 stock split of the Company's common stock in the form of 100% stock dividend payable on July 30th to shareholders of record of July 16th. Our leverage ratio, which is defined as our funded debt divided by our cash flow at the end of our first quarter was 2.1 times. The ceiling for our covenant requirement on our senior credit facility is 3.25 times.

We continue to believe that the balance sheet is one of our core strengths, and along with our strong cash flow characteristics, combined with access to borrowings under existing banking arrangements, provide us with [adequate] flexibility to continue our growth of our Company.

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

Overall, the gas-fired power generation market has slowed domestically but is improving internationally. While the international opportunities are improving, the incoming order rate has not fully replaced the downturn in the domestic market. We anticipate this gap to close. Additionally, we remain bullish on the long-term domestic power generation opportunities. Nuclear Logistics Inc., or NLI, as we refer to, continued to see strong demand for their products due to ongoing spending related to safety and license extension for nuclear power generation.

Industrial and petrochemical demand for our products has improved, pricing remains a challenge, and it was below our target level that we yield an acceptable margin and return. We continue to lessen our dependence on this broad market, and are looking to offset this business with market share gains in selected industrial and petrochemical markets, and with our utility customers.

Demand for our electrical distribution substation products has flattened out, due to the concern of utilities, spending, and an uncertain economic climate. Over the long-term, we're still encouraged with the opportunity associated with the upgrade of the domestic distribution substations. Our high-voltage transmission bus tech products, quotation activity improved, both in the domestic market and the international market, but quote to order times have increased. Timing of placing of these orders is always difficult to predict, but we anticipate some improvement in the booking level by the third quarter of fiscal 2013.

Our specialty lighting products continues to show very positive growth when compared to the prior periods. The primary growth driver has been due to the strong rig count. For the Galvanizing Services segment, the electrical utility market remains strong and growth of our OEM business is encouraging. The strength of these markets has more than offset the impact of [below] GDP growth.

When compared to the prior year, quotation levels reflect improvement. While overall opportunities have increased over the prior year, we have seen in recent weeks a slowing in the release of orders consistent with the increasing concern over the state of the economic recovery. This has and may continue to impact our backlog.

We achieved a book to ship ratio in the first quarter of 98%. We stated in our fourth quarter of last fiscal year that we had received some orders earlier than anticipated that were originally forecast for the first quarter of fiscal 2013. This appears to be the major cause of the first-quarter shortfall. However, the slowing of the release of orders from the utility companies due to concerns over the economy, and lower domestic power generation, also added to the impact of the incoming order rates. We still anticipate that the full year will be a book to ship ratio of 1-to-1.

In summary, our products and services are extremely well-positioned to continue to benefit from market improvement. The timing of the projects and the release of orders will always have an impact on the quarterly recognition of bookings, backlog, revenue and earnings, and will result in quarter-to-quarter fluctuations which may be greater than true changes in market demand and our competitive position and success.

Based upon the evaluation of information currently available to management, we are increasing our previously issued guidance for fiscal 2013 for revenues to be in the range of $550 million to $575 million, and our earnings to be within the range of $4.10 to $4.30 per diluted share. Our guidance does reflect the acquisition of NLI for the last nine months of fiscal 2013.

Revenues from the acquisition are anticipated to range from $55 million to $60 million, and earnings per share accretion to be $0.30 to $0.35. The NLI accretion has been adjusted by approximately $0.16 per share to reflect the estimated amortization of their acquired backlog, which will amortize over the next two years. This guidance does not reflect the effect of the 2-for-1 split which the Company announced on June 28th.

Achievement of these projections would be our 26th consecutive year of profitability and will be record-setting both in terms of revenue and earnings. 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 in the receipt of orders of our Electrical and Industrial products, and/or the demand for our Galvanizing Services.

The strength of our balance sheet, the commitment of our employees, and the strong customer acceptance of our products and services, gives us the confidence to aggressively pursue additions to our products and our markets.

Thank you for your participation today, and we'd like to open it up for any questions you might have at this time.

(Operator Instructions). John Franzreb, Sidoti.

Good morning, David and Dana. (multiple speakers) David, can you talk a little bit about your confidence and having a greater than 1.0 book-to-bill for the balance of the year or for the full year in total? I know that seems to be this -- some under-investment by some of your customers, but is it that quotation activity that gives you that confidence? Just talk a little bit about that.

I think, John, that it is the level of the quotation activity. We're always disappointed with that delay that takes place from quote to the order release. But I think we keep increasing our opportunities enough that we're going to be able to offset that and sustain a 1-to-1 ratio. So it's going to take some more market share, it's going to take some more penetration of some international markets, a little stronger than we've done to date; but in total, I believe we have a real shot at maintaining that 1-to-1 for the balance of the fiscal year.

Do you have a sense of when the utility-based customers will come back to a normal spend level or something more in line with historical trends?

I believe it's ultimately -- it's just paralleling the economy, which is driving demand, and they're just following their trendline. Traditionally, they would stay on program for maintenance CapEx in some of their discretionary spending. But they seem to be behaving and reacting exactly with -- you know, if the economy is going on a lateral basis and then stalling there, they seem to stall. If it's going up, they seem to then go down. So we're seeing much more of a following of the projection of the economy than adhering to a program that they've had in place for a number of years.

Could you just talk a little bit -- moving to the Galvanizing business, the tonnage was up despite being down a facility. That's fairly impressive. Could you talk a little bit about how that was achieved?

Yes. The solar market is being very kind to us. The extension of the transmission grids to handle the wind power is very kind to us. Our marketing efforts to convert more OEMs to galvanize products has been extremely kind to us. So it's -- when you look at the largest year-over-year percentages, John, and how we're able to compensate for that, you have to point to the solar market and the transmission grid market.

Okay. One last question. The cost of zinc is coming down; it's a global pricing phenomenon. I would imagine that'd be a net benefit coming quarters for you; is that the case?

Well, as you know, it will be a while before we feel that (multiple speakers). We'll probably get a little more pricing pressure when it does. But we're getting that pricing pressure at a 28% margin level. So that's why we still have the confidence we're still going to be trucking in that 25%, 26% range, John.

Okay. Thank you very much. I'll let someone else go.

Thank you.

Brent Thielman, D.A. Davidson.

First, just a clarification on the guidance. I'm assuming that does include the net gain you recorded in the first quarter?

Yes, but no other gains. Just the one that has been realized, Brent.

Okay. So I guess as I look at it, you did $1.02 per share without Nuclear Logistics in Q1. As I look at the guidance to sort of to get to the high end of the range, sort of implies $1.00 per share kind of quarterly run rate from here. So I guess I'm just trying to get a sense which side of the business in AZZ you're expecting to see some pressure going forward.

Well, I think that our forecast for the electrical is down a little bit from the first quarter, simply because of this booking rate. But the margins are still going to be fine. And then naturally, we have to be a little suspect of the continuation of the strong galvanizing volumes in the first quarter. They were extremely high. Our visibility looks good the next six months, but you get to the end of that fourth quarter, we had to get a little more conservative (technical difficulty) -- visibility. But I think both segments reflect more conservatism in the balance of the year than we achieved in the first quarter.

Okay. Understandable, thank you. And then on SG&A, you had [a step] up there. Obviously, there was some expenses with the acquisition. Is there anything else in there?

Remember, the first quarter is always when we record all of the executive equity compensation. We have to accrue for that in the first quarter. So that's always a high watermark for us there, Brent. And then you add that 600-plus-thousand that we spent on NLI that, outside of that, there's nothing unusual.

Got you, sorry. One more if I could. The slowing gas market, gas power market domestically, I guess that's sort of surprising; just with low fuel prices, it seems like everybody is looking in that direction. Yet you think this is just sort of a shorter-term blip in the market?

Definitely. Definitely. When you look at the plans, you still have -- I think it's more of a shift of -- we did the small megawatt easy ones; now we're doing the larger megawatts going to power, and they're being a little more judicious in this process. But there's a lot of people that are very bullish on the domestic gas generation market for late calendar 2013 and early calendar '14.

So I do believe that it is not a change in the trend. We're still as bullish over the long-term of that. We're a little bit surprised that at the slowdown, there's been a little bit more, but I think that, again, it's just the checking of themselves on overall demand and overall economic conditions.

Great. Thanks. (multiple speakers)

The justification is there to do it, so.

Yes, yes. Thanks, guys.

Thank you.

(Operator Instructions). Rob Longnecker, Jovetree.

Can you guys just provide an organic tonnage growth number for the galvanizing business?

Yes. It was 32% year-over-year tonnage, on a tonnage basis.

That's without acquisitions or anything like that?

That includes the acquisition, but again, that is a very small portion of it. We had -- I don't have the tonnage that was attributed to that, but as Dana indicated, the acquisition was 3.2 million out of the 88 million of volumes. So, it would be -- you can do the same percentage against my increase of 32% on tonnage.

Okay. And that was -- and that's all from the Canadian acquisition?

The $3.2 million is the Canadian acquisition (multiple speakers) --

(multiple speakers) Right, got it. Right. Can you talk a little bit about the Canadian market and how consolidated it is, and maybe other opportunities you see up there?

As we've stated before, we are -- believe it's an opportunity for us to grow and to become a consolidator in the market; is essentially an unconsolidated market. However, it's a very small market in terms of number of players, and the players tend to be a little larger than the players in the domestic market. So, in total, there's fewer players, but -- in the total volume; and as we've indicated, we believe we have the opportunity to continue to advance ourselves in Canada and we're very excited about that opportunity.

Okay. Thank you. Can you also -- can you talk about how much in the backlog was international?

It's still running at that 30% level.

Okay. Thank you very much.

Thank you.

Kevin Leary, Spitfire Capital.

I was wondering if you could just spend a quick moment expanding on the EIP margins, just trends. Firstly, how trends are working in backlog; and then, second, if you're seeing any difference or trends in quoting activity.

Well, we're pleased with the improvement that's showing up in backlog. It's slow, but it's moving. Now when we report for the full year, we've got an unusual situation here because the actual GAAP impact on margins from NLI will cause the margins to be a little bit lower than we traditionally have seen.

Now if you add back the amortization of backlog, they're in that 17%, 18%, 20% range through that. So, in total, we still think we're going to finish in that 13% to 15% range. If you take that and pro forma that back into it, now we're back in that 16% to 17% range.

So we're real pleased with the trend. As I've spoken before, we naturally want it to go faster than it has gone, but we're encouraged. And then our being more selective in our participation in the petrochemical market as part of that strategy [hits] that, as we refocus more on the utility market, now all of those things are working in concert. So it's going to be very gradual, but it is moving in the right direction, definitely. But like I said (multiple speakers) --

(multiple speakers) That's great. Thank you.

When you look at it on the surface, we'd be sure and pro forma that amortization backlog back in for -- and we'll try to lead you in that direction. So you have a better measurement of how we're actually trending in that backlog work.

Perfect. Thank you.

Thank you.

Jon Braatz, Kansas City Capital.

David, are you going to rebuild the facility in Joliet?

Absolutely.

Okay. (multiple speakers) How long would that take and so on?

It will probably take us about 10 to 12 months. We just have cleared the property and are in the process of getting the final contractual work set up, but we're going to commence on that expeditiously. So, hopefully, next March or April probably, we should be up and running.

And have you been able to successfully move all the production from there to your nearby facilities?

We think we've moved about 50% of it. And that's -- we feel good about that. We naturally would like to have moved 100% of it, but we don't think there's any permanent loss of customers. Once we rebuild, we'll be able to get them back. But in total, we've been able to move about 50%. And we'll continue to try to increase that number. But initially, that's right where we are.

And that loss of 50%, that will be covered by insurance? Business interrupt insurance?

(multiple speakers) That's part of our business interruption, that's correct.

A portion of it.

(multiple speakers) Okay.

(multiple speakers) A portion -- you know, that's the hardest piece, of course, to (multiple speakers) --

Right.

(multiple speakers) -- because you do get some from historical run rate, so it will be in that number [too].

Okay. Has the ATF made a final conclusion on the fire?

No, they have not.

Okay. Going to NLI, I think on their website, they said their goal is to maintain a double-digit growth rate, I assume they mean sales. Are they -- do you expect to see double-digit growth there this year, and let's say for the foreseeable future?

Our forecast, if you annualize -- our nine-month forecast annualized over the most recent year is a double-digit improvement. That is true.

Okay. And are the margins in that business, are they very volatile? Or are they pretty consistent across the years?

They're quite consistent, yes.

Okay. And Dana, can you tell us -- I guess maybe I can work through the numbers, but -- what the amortization charges associated with NLI will be on a quarterly basis?

The total amortization on a yearly basis is going to be around $6 million -- $6.6 million total. Of that, about (multiple speakers) --

(multiple speakers) Okay.

-- but of that, about $3 million a year will be associated with the backlog over the first two years.

Okay. Okay, that's perfect. All right. And I think -- that's about it. Thank you very much.

(Operator Instructions). Brent Thielman, D.A. Davidson.

Hey, have you guys begun to see any of the petrochemical project work start to flow through for you? I think, I guess, that's more on the galvanizing side?

Yes. We have seen some improvement and are encouraged. As we talked about before in the galvanizing side, that's the last market to come back. But we have started seeing an improvement in our Gulf Coast operations.

Okay, great. Thanks guys.

Thank you.

At this time -- (Operator Instructions). Rob Longnecker, Jovetree.

I wonder if you guys could just give a little more color on the tonnage in the galvanizing business? What would it look like if -- and if you can do this, if you stripped out the solar start part of that business?

We're not about to disclose that in any fashion.

Okay, thank you.

Jon Braatz, Kansas City Capital.

David, just a follow-up. How much is it going to cost to rebuild the facility in Joliet?

Between $20 million and $25 million.

Okay. Thank you.

At this time, we show no further questions. I would like to turn the conference back over to David Dingus for any closing remarks.

We appreciate your support and your participation today, and look forward to our next visit together. Have a great weekend and a great Fourth of July holiday. Best wishes. Thanks again.

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