AZZ Inc (AZZ) 2013 Q3 法說會逐字稿

Good morning, and welcome to the AZZ incorporated third 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 Mr. Joe Dorame of Lytham Partners. Please go ahead, sir.

Thank you, Denise. Good morning, and thank you for joining us today to review the financial results for AZZ incorporated for the third quarter of fiscal-year 2013, ended November 30, 2012. As Denise 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 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 and 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 of fiscal 2013, which ended on November 30. We're extremely pleased with the results for the quarter and the first nine months of fiscal 2013. Our operating results for the first nine months reflect a 25% improvement in revenues, a 62% increase in net income, earnings per share increased by 61%, and backlog improved 63% when compared to the prior year. Another quarter of effective identification and execution of opportunities and strategic initiatives. These comments apply both to our third quarter and the first nine months of fiscal 2013.

The operating results for the Electrical & Industrial segment, and the Galvanizing Services segment, were as anticipated and internally forecast. Nuclear Logistics continued to make a positive contribution in the quarter for orders, revenue, and operating income. For the third quarter, year-over-year growth in revenues for the Electrical segment was 38%, and operating income was 57%. The Galvanizing Services segment had another outstanding quarterly operating performance; most served markets reflect good demand. The strong third quarter reflected a 23% growth in revenue, and a 32% growth in operating income when compared to the prior year. Tonnage was up 23%. Solar power generation projects, transmission line work, OEMs, and acquisitions positively impacted the quarterly growth when compared to the prior year.

We're extremely pleased that we were able to reach agreement to acquire another Canadian galvanizer, which was effective January 2, 2013. This continues our efforts to consolidate the Canadian market, and become a leading supplier of Galvanizing Services to the Canadian market. G3, while relatively small in terms of production and revenue, has a rich heritage of providing superior levels of service and support to their customers in the Canadian Maritimes market. Existing operating management will remain with the company, and the results are expected to be accretive from the date of acquisition and for the first nine months of ownership.

We continue to demonstrate our commitment to quality and service, 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 year-to-date operating results and confidence 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 of fiscal 2013.

Thank you, David. At this time, I will review our unaudited consolidated results for the quarter ending November 30, 2012. As outlined in our press release, revenues for the quarter ending November 30 were $149.7 million, as compared to $116.5 million in the prior year. Net income and diluted earnings per share for the quarter were $15.4 million and $0.60, as compared to $10 million and $0.39 in the prior year. Our book-to-ship ratio for the quarter was 102%, ending the quarter with a backlog of $215.8 million. The acquired backlog from NLI on June 1 was $78.5 million. Our backlog at the end of our previous fiscal year end was $138.6 million.

Our Electrical & Industrial segment generated 40% of our revenues for the quarter, while our Galvanizing Services segment generated 60%. With the acquisition of NLI, we anticipate at the end of the fiscal 2013, our Electrical & Industrial segment will contribute 42% of our overall revenues, while the Galvanizing segment will contribute 58%. In our Electrical & Industrial Products segment, we recorded revenues for the quarter of $60.4 million, as compared to the prior-year results of $43.8 million. Increased revenues were results of increased order intake during the last two quarters of fiscal 2012, as well as the inclusion of the acquisition of NLI.

Operating income was $9 million as compared to $5.7 million, and operating margins were 14.8% for the quarter, compared to 13% in the prior-year period. Operating profits and margins increased for the compared period, due to leverage obtained from increased revenues, a limited amount of improved pricing, as well as the inclusion of the acquisition of NLI. NLI contributed $16.4 million to revenues for the quarter. Without the amortization of intangibles resulting from the acquisition of NLI, pro forma margins for the quarter would have been 17.4%.

Revenues in our Galvanizing segment for the quarter were $89.3 million, as compared to $72.6 million recorded in the third quarter in fiscal 2012. Increased revenues resulted from continued improved demand from the renewable energy, industrial and OEM markets. Operating income was $24.5 million, compared to $18.6 million, and operating margins for the quarter were 27.4% compared to 25.5% during the third quarter of last year. A loss was recorded in the amount of $1 million, which was a result from the lost production associated with the fire at our Joliet facility. This loss, as well as a portion of future losses associated with the facility, will be partially offset with insurance proceeds from our business interruption policy in future quarters. Without this loss, margins would have been 29%.

For the nine-month period, cash provided by operations was $66.6 million compared to $46.8 million in the prior year. Earnings before interest, taxes, depreciation and amortization surpassed $80 million year to date. Our accounts receivable days outstanding were 49 days at the end of the third quarter, as compared to 48 days at the end of the last fiscal year. Year-to-date capital improvements were made in the amount of $19.6 million, and depreciation and amortization amounted to $21.1 million.

Our total outstanding debt including the third quarter was $211 million, and our cash balance for the end of the quarter was $49.5 million. Our leverage ratio, which is defined as our funded debt divided by our cash flow at the end of the third quarter was 1.75 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 arrangements, provides 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.

We continued to experience a slow down in domestic fossil fuel power generation opportunities. Internationally, especially in the Middle East, the construction of power plants remains robust, and we see strong demand for our products. We expect domestic fossil fuel generation market to skew further in the direction of natural gas for new construction, and expect quotation activity to remain slow domestically in the near term.

NLI continues to see strong demand for their products and services in the nuclear power generation market, and we expect this market to remain strong as new nuclear facilities are being built in the international market, and as the aging reactor licenses in the domestic market are being extended.

Demand for our domestic substation market is stable. Utility spending has not picked up significantly, and we expect the market to be at the current levels going forward in the near term. Over the long term, we continue to be optimistic regarding the opportunity associated with the upgrade of domestic distribution substation networks. High voltage transmission market is seeing activity pick up internationally, particularly in Asia. Competition is intense from European and Asian vendors, and we hope to close projects despite severe pricing pressures in these markets.

Industrial markets are showing a revival, especially in the pipeline and mining sectors. Increasing domestic oil and gas exploration and production is driving demand for our products, and we expect this segment to remain strong in the near term. International mining opportunities remain strong.

Our specialty lighting products continue to show very positive growth when compared to prior periods. 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 a low GDP growth.

When compared to the prior year, quotation levels reflect only very modest improvement. We continued to see a slow release of orders, consistent with increasing concern over the state of economic recovery and regulatory environment. This has, and may continue to impact our backlog. We achieved a book-to-ship ratio in the third quarter of 102%. The slow release of orders from the utility companies and lower domestic power generation demand adversely impacted the incoming order rates. We anticipate that our fourth quarter will be the most challenging in terms of incoming orders. This is consistent with the trend that we have seen in our prior fiscal years.

In summary, our products and services are extremely well-positioned to continue to benefit from market improvements and pricing levels. 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 the market demand, and our competitive position and success.

Based upon the evaluation of information currently available to management, we are revising our previously issued guidance for fiscal 2013, for revenues to be in the range of $575 million to $585 million, and for earnings to be within the range of $2.35 to $2.45. The previously issued guidance was for revenues to be in the range of $575 million to $600 million, and the fully diluted earnings per share to be in the range of $2.25 to $2.40.

We anticipate reporting strong operating results that reflect year-over-year improvement in the fourth quarter of fiscal 2013. However, our current guidance does not anticipate that the fourth quarter will be as strong as the previous quarters of fiscal 2013. As we continue to grow in the Canadian market, and the reduced production days due to holidays during our fourth quarter, is resulting in more seasonality of our operating results than we have traditionally seen. This is particularly true for the Galvanizing segment.

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 adverse appreciable change in our current market conditions, competitive activity including pricing or significant delays, and the delivery or timing and receipt of orders of Electrical & Industrial products and/or 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 service gives us the confidence to aggressively pursue additions to our products and our markets.

I thank you for your participation today, and we would like to open it up for questions at this time.

(Operator Instructions)

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

It looks like the E&I sales were roughly flat on an organic basis, and is that principally due to the slowdown you're seeing in terms of domestic fossil fuel power plant opportunities? And then also, I guess the guide-down in revenues for the year, is that more so for the base business or for NLI? Just maybe a little bit more color around that.

Well, the downturn, the most severe downturn that we've seen compared to the prior year, is causing more of a flatness is in the domestic fossil fuel market, and we had very strong year last year in natural gas domestically. The international market has picked up, but not at the pace to offset it. We think that going forward, that it will be able to do that. NLI's demand is increasing. It's been strong, and we're very optimistic as to what it looks like going forward.

Okay. That's good to hear. And then any implications or impact from Hurricane Sandy in the quarter, as well as going forward?

No, nothing of significance, Brent.

Okay. Then just lastly, SG&A was a little higher than I was anticipating. Anything unusual in the number? And maybe some thoughts going forward in terms of modeling.

Since we're having a better year, naturally profit sharing drives that up, and then we had some acquisition spending also.

Okay. I'll get back in queue. Thanks.

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

Congrats on the quarter. I wonder if I could just turn back to E&I again. Sequentially, a pretty big tick-down Q3 versus Q2. I mean, a 10% decline sequentially, yet margins actually perked up a little bit, about 80 basis points. I wonder if you could just comment a little bit about what you saw last quarter versus this quarter, in terms of the top line and marginally.

As we've talked about before, Schon, quarter-to-quarter is really difficult for us to do at E&I. One order can swing significantly more than the other, but NLI is having a very positive impact on our margins, even after amortization, as well as before amortization, and they're becoming a larger and larger piece of that E&I as our domestic market is decreasing, and our international market is starting to turn around. I don't think there's anything that you can read excessive into the change from quarter-over-quarter, other than that's the natural transitioning of our markets.

Okay. Thank you. And then you talked a little bit, I think, excluding NLI, looks like revenues were kind of flattish for that business on a year-over-year basis. Can you maybe talk about what the organic orders looked like within E&I? Are they flattish as well?

Well, without NLI it's all organic, isn't it?

I'm just saying that -- yes, certainly excluding NLI, I'm just saying, what does your core order growth look like, if I exclude any orders that NLI got, do you think your core business, were those orders flat as well, or do we actually see those declining?

They were essentially flat.

Okay. And then last question, the G3 acquisition, it looks like it's maybe -- I guess it's one location up in Canada. Would it be safe to assume that's $5 million to $10 million in revenue?

Well, again, we're in a pretty non-populous area of Canada, and the we're the only galvanizer there, so yes, it's relatively small, so yes, the range would be towards the lower end of that.

Okay. Thank you. That's it for me. I'll get back in queue. Appreciate it.

(Operator Instructions)

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

I'm sorry if you addressed this question, but I got disconnected. Could you talk a little bit about the acquisition pipeline, a little bit about what the timing is you see going forward; you've added a lot recently. Maybe you can address your appetite in the near term?

I think, John, that it is continuing to strengthen as it has all through this fiscal year. I think we're seeing more viable opportunity on both sides of the business. We have been extremely successful in the Canadian acquisition. That naturally will slow down a little bit, just simply from the number of candidates that there are in the Canadian market, but we're going to pursue that. But we still like some of the things we're seeing in the E&I segment. Nothing is that close at this point but we are encouraged that things are a little more reasonably priced, opportunities that fit us well are out there, so we're going to pursue them, and our appetite is very strong.

David, with a very strong appetite, what are your thoughts about Galvanizing in Europe? You've kind of thought about it previously as a longer-term opportunity. Has that time line narrowed at all?

No it hasn't, John. I wish it would, because we have a very strong appetite. As you've heard me talk about before, the European market is already more consolidated than when we started in the US market. So whatever play we're able to do in that market's going to be pretty good sized, and it's going to take some time to convince them to come over. So as well as logistically, it's hard for us to do a two or three unit deal. You need probably a five to seven unit deal at a minimum. Ideally, it would be a 10 to 15 unit transaction, and we would love for the phone to ring and say that they're ready to start talking to us.

Okay. David, I know you don't release fiscal 2014 guidance until next week, but can you talk a little bit about when do you think you'll see a more meaningful turn in your E&I backlogs? Not anything imminently, but when do you expect to see -- what are your customers telling you about their CapEx budgets and how is it playing out, out there?

John, I think if it plays out the way we're anticipating, we'll see an improvement in our E&I backlog from international projects probably six to nine months before we'll see an improvement in our domestic. Now, there is some improvement that we may get in the domestic from the pipeline work and some more towards the Industrial, but the pure Electrical -- power generation and high voltage transmission -- should happen about six to nine months earlier in the international market than it does in the domestic. We don't see anything out there that is probably going to change that. We wish it were. But the pick-up in the international market is encouraging and I think that will be our first sign that the market is trending in the direction we've been waiting on it to trend.

Thank you very much.

Our next question will come from Jon Braatz of Kansas City Capital. Please go ahead.

David, you talked about Nuclear Logistics being very strong, and I guess my question is, since we don't have the numbers, but on a year-over-year basis, what is Nuclear Logistics growing at, their revenue? Can you give us a little insight on that?

10% to 15%.

Okay. All right. Would you see, given the environment at the moment, that would continue into next year?

I think so. I think it's important to point out that part of that growth is, we continue to expand our served market, particularly in the international markets. So we're picking up, we're having organic growth probably in that 10%-plus and the other is coming from continuing to expand it. And then the new recommendations that are anticipated as a result of the Japanese incident should only drive our business even more. So we don't see anything slowing that down for a number of years, and we believe that it's at least a 10% business, 10%-plus growth for the next few years, and hopefully closer to 15%.

Do you think you can leverage expenses and their bottom line expand a little bit faster rate?

It's so engineering and management and people-intensive, you don't get a lot of leverage points on that. But the main thing is when that amortization of that backlog drops off, and we pick up that 2 to 3 points from there, so I think the rate that it's operating at is pretty -- it has room for improvement, naturally. There's always some low-hanging fruit when you get some more volume through there, but it doesn't lend itself to a real quick leverage point, because like I said, it's so people and engineering intensive.

You'll still have the full amortization for next year, correct?

Yes, we will.

Okay. And then a couple other questions. It looks like, and I don't have all the -- you didn't give us all the numbers, but it looks like the core Galvanizing operations revenue growth slowed to sort of the 10% area, and it looked like the previous quarters it was sort of in the upper teens. If my numbers are correct, was there any change in the market conditions that might account for that?

No, not any in particular. I think what you were seeing, the growth in the prior quarters that drove that to such a higher percent was, we had so much solar work coming in.

Okay.

That drove that up. That is settling down. I hope it settles at 10% for a long time.

No doubt.

You had that big in-rush of solar work coming in, in the prior quarters, that drove that organic up to a greater number.

One last question. The Joliet facility, when do you think that might be opening?

Probably in July, August time frame of next year.

Okay. Thank you much.

Our next question will come from Rob Longnecker of Jovetree Capital. Please go ahead, sir.

Just following up on that last question, can you actually give an organic tonnage growth for the Galvanizing business for this quarter, and maybe for the previous quarter as well, please?

I don't have that in front of me.

Okay. And then the end market in Canada for Galvanizing, is it a pretty similar customer base that you guys have in the United States?

I'm sorry?

The customer mix, the Galvanizing business in Canada, is it pretty similar to the United States?

The customer profile is very, very similar to what our US business is, yes.

Okay. And then last question, I think when you did Nuclear Logistics, there was a discussion of a potential additional $20 million in earn-out. Where does that stand right now?

Well, under the rules, we have to monitor that as we go on. We think it's going to be a minimum of $10 million, and could be potentially $20 million, and we have recorded it, the $10 million is all reflected in our indebtedness.

Got you. Okay. Thank you.

Our next question will come from Noelle Dilts of Stifel Nicolaus. Please go ahead.

Just to start first with a housekeeping question, could you talk about the kettle cost of zinc in the quarter versus your zinc purchases?

Right. For the quarter, the cost that we amortized was $0.96, and the average LME was $0.95.

Okay. Great. And then sticking with Galvanizing, given some of the changes you've had with the acquisitions and then the very strong growth you've seen in some of these segments like solar and transmission towers, can you maybe give us an update on how that business breaks down now by end market, even if it's kind of rough? How much is Industrial, how much is Electrical and telecom, just provide us an update with that?

35% is Electrical and telecommunications. 15% is OEMs. 30% is Industrial. 10% is bridge and highway. And 10% is petrochem.

Great. And then on the E&I side, first, I just wanted -- it was a few questions ago, but you said you expected on the high voltage side and the power gen side, you expected the international market to lead the US market by I think six to nine months or something like that, you said. I'd like a little more clarification there. I don't understand where you see a connection there. When I think about the market and say, I look at the transmission investment in the US, that's a very powerful trend that's happening right now. You have a very niche product in that market, but I just don't completely understand what you're saying about this kind of connection. So if you could just expand there, I'd appreciate it.

As we told you several times, the transmission work that's going on in the US does not drive our E&I business. It drives our Galvanizing business.

Right.

So we don't get a driver from that because you're running hundreds and hundreds of miles of overhead towers. That doesn't drive our E&I work. In my comments, we would see a larger growth in backlog from international power generation and high voltage transmission. What drives the transmission market on the international, is when you build an international power plant, you build a transmission grid, you build a distribution network, you build the entire thing. So we get from A to Z of the package. So what we're participating on there is in a hydro project, delivering the power from the base of the hydroplant, all the way up to the top to tie into the grid. That's high voltage transmission, compressed gas work. It's not your overhead power lines. If it's an overhead power line, we don't do anything that hangs on the power line.

Right. Yes. Okay.

And it's announced how many programs the Middle East is building in natural gas, how much they're building in nuclear, China has picked back up in the process. So I don't see anything that would say our E&I business is going to be driven more dramatically domestically than internationally.

Okay. I'm sorry, I was just using that as an example. I was just trying to understand better why you thought -- why you were citing that timing. But that's fine. I'll actually take that offline. Thanks. I appreciate the commentary.

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

We appreciate your participation today. As was indicated earlier in the conversation and comments, we will be issuing guidance for our next fiscal year by the end of next week. That's the anticipated plan. And we won't be doing that via conference call, just via a press release, and then we'll delve into it in more detail at our next scheduled conference call in April. Again, thank you for your participation. We trust you all had wonderful holidays, and have a great day. Thank you.

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