AZZ Inc (AZZ) 2013 Q4 法說會逐字稿

Good morning and welcome to the AZZ incorporated fourth-quarter and 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 fourth quarter and the fiscal year 2013 ended February 28, 2013. As Denise indicated, my name is Joe Dorame; I am 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; Mr. Dana Perry, Chief Financial Officer; Mr. Ashok Kolady, Senior Vice President and Chief Operating Officer of Electrical and Industrial Products; and Mr. Tim Pendley, Senior Vice President and Chief Operating Officer of Galvanizing Services. At the conclusion of today's prepared remarks we will open the call for a question-and-answer 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 responds 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 request 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 would 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 our fourth quarter of fiscal 2013 and for the full fiscal year which ended on February 28, 2013. As I indicated in the press release, we are extremely proud of our accomplishments for fiscal 2013, both strategically and operationally.

For 2013 we reflected record-setting operating performance; we took organic actions to further position us for growth; and we were able to successfully identify and close on acquisitions that are an integral part of our stated strategies for both segments.

The strength of our balance sheet combined with strong cash flows allowed us to implement the organic and acquisition growth opportunities during fiscal 2013 and we believe this will continue to do so as we move forward in fiscal 2014 and beyond.

Now due to a scheduling conflict I'm not able to join the team in person in Fort Worth for today's conference call, but I will be monitoring the call by telephone. In view of this conflict we are going to modify the format for today's presentation of our fiscal 2013 accomplishments and our outlook for 2014.

Dana Perry will be presenting the prepared remarks as well as conducting the Q&A session. Joining him for the conference call for the question-and-answer session will be Ashok Kolady, Senior Vice President and Chief Operating Officer for the Electrical and Industrial Products segment. Ashok is also the officer in charge of the assimilation of Aquilex into AZZ and will be able to add his comments as it relates to their operations and the assimilation process. Aquilex results will be reported as part of the E&I segment going forward.

Also joining Dana will be Tim Pendley, Senior Vice President and Chief Operating Officer of the Galvanizing Services segment. Tim has done an outstanding job of leading our unprecedented organic growth of this segment as well as outstanding leadership in the assimilation of our new Canadian operation.

So at this time I would like to turn it over to Dana for the presentation of the prepared remarks and the conducting of the Q&A session. Dana?

Thank you, David. And again, I would also like to thank each of you for joining us on our conference call today. On an operational basis for fiscal 2013 we recognized revenues of $570 million, earnings per share of $2.37 and our backlog increased to $222 million. This reflects a year-over-year improvement 22% increase in revenues, 47% increase in EPS and an increase in backlog of 60%.

Margins in our Electrical and Galvanizing segments were 15% and 26% respectively for fiscal 2013 -- strong operational performance in a market of continued regulatory and economic uncertainties. The nonrecurring items included in the current fiscal year were significant for us. We continue to recognize gains and losses related to the fire of our Joliet facility, the consolidation of one of our West Virginia Galvanizing facilities with a facility in Ohio, and significant expenditures associated with our acquisition activities throughout the year.

Fiscal 2014 will see a continuation of business interruption and rebuilding of the Joliet facility. Additionally, we will be recognizing some $6 million in one-time costs associated with the acquisition of Aquilex in our first quarter.

When compared to the prior year quotation levels reflect only very modest improvements. While the book to ship ratio improved to 1 to 1 toward the end of our fiscal year, we continue to see a slow release of orders, consistent with the slow pace of the economic recovery and uncertain regulatory environments. This has and may continue to impact our backlog. We achieved a book to ship ratio for the fourth quarter of 104%.

In our opinion fiscal 2013 was a very successful strategic growth accomplishment year for us with the initial implementation of our stated Canadian Galvanizing growth strategy with three strong acquisitions and the accomplishment of the Electrical and Industrial product segment acquisition that met our stated strategy of participation and continuing revenues cycles, particularly in the power generation market, are major milestone for the Company. This combined with strategic organic growth initiatives continues to expand the Company's growth opportunities.

We are extremely pleased that we were able to reach an agreement to acquire another electrical company effective April 1, 2013. We acquired Aquilex Specialty Repair & Overhaul, a global leader in the maintenance, repair and revitalization services to the nuclear and fossil fuel power generation markets as well as refining and industrial markets.

Aquilex's proprietary processes and highly engineered technical solutions provide unique life extension opportunities for critical plant infrastructure using proprietary automated equipment and specialized work forces. Their existing operating management will remain with the Company and their results are anticipated to be accretive from the date of the acquisition.

In our Electrical and Industrial products segment we continue to experience a slowdown in the domestic fossil fuel power generation opportunities and internationally, especially in the Middle East, the construction of power plants remains robust and we see strong demand for our products. We expect the domestic fossil fuel generation market to be skewed further in the direction of natural gas for the 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. Demand for our domestic substation market is stable; utility spending has not picked up significantly and we expect that market to be at the current levels going forward in the near-term. Over the long term we continue to be optimistic regarding the opportunities associated with the upgrade of the domestic distribution substation networks.

The 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 pricing pressure in these markets.

Industrial markets are showing revival, especially in the pipeline and mining segments. 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 as well.

In summary, our Electrical Products and Services are extremely well positioned to continue to benefit from market improvement and pricing levels. For the Galvanizing Services segment growth of our OEM and industrial business remains encouraging. We should see an improvement in our petrochemical work throughout the coming year and look forward to the Joliet plant coming back online now that we are in the construction mode of that facility.

The consolidation of our Wheeling and Canton facilities will improve our customer services and margins for these operations in the coming year. While the electrical utility market remains strong, our solar and transmissions businesses are beginning to level off. The strength of these markets that we participate in has more than offset the impact of the low GDP growth.

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 year, the financial strength of the Company and a great group of employees is reflected in our record-setting year of operating results and confidence in our future.

To accommodate the acquisition of Aquilex, we structured a new banking syndication with Bank of America remaining our lead bank and three other banks. Our banking facility is now made up of $75 million term loan and a $225 million revolving line of credit.

Based on the evaluation of information currently available we are revising our previously issued guidance for fiscal 2014 for revenues to be in a range of $825 million, $900 million and for EPS to be within a range of $2.65 to $2.95 per diluted share. Our previously issued guidance was for revenues to be in a range of $625 million to $660 million and that fully diluted earnings per share will be a range of $2.50 to $2.75 per share.

Our revised guidance does reflect 11 months of the acquisition of Aquilex and the accretion reflects the write-off of some $6 million as one-time transaction costs associated with this acquisition. Aquilex business and revenue recognition is more cyclical than our traditional Electrical and Industrial products segment of our Company.

We anticipate that as we go forward that the fourth quarter will continue to reflect our lowest quarterly performance. This is applicable to both segments of our business. The first and second quarters should show some momentum building for our revenue recognition while our strongest operating performance being our third quarter. We will continue to comment on this trend with each quarterly conference call as we go forward.

Achievements of these projections would be our 27th consecutive year of profitability and will be record-setting in terms of revenues 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 delay or timing in the receipt of orders of our Electrical and Industrial products and demand for our Galvanizing Services.

Again, the strength of our balance sheet, competence of our management team and strong customer acceptance of our products and services gives us the confidence to aggressively pursue additions to our products and markets. Again, thank you for your participation today in our conference call and we would like to at this time open up to questions and answers.

(Operator Instructions). John Franzreb, Sidoti.

Good morning, everybody. Actually I would like to go back to the weakness that you experienced in the fourth quarter. You cited a delay in a project and across the board weakness in Galvanizing; and it is the latter part I want to focus on. Are you still experiencing some of that weakness in Galvanizing or has it bounced back to say third-quarter levels? Can you kind of give us an update on how that Galvanizing business is today versus six months ago?

Sure, John. I think we are seeing that bounce back somewhat from the -- in the fourth quarter from the third quarter. Tim, would you mind giving a little more color on what you are seeing going forward?

Certainly. What we are seeing is the typical seasonality occurring especially in the Canadian markets, so weak fourth-quarter as winter starts slowing down and spring kicks in we will definitely see a rebound in construction, especially the highway construction market. It will continue to get stronger building towards the third -- a typical very strong third quarter.

And why the decision to consolidate Wheeling and Canton now?

It basically provides better customer service and economy of scale for us in that market area. There was a lot of overlap in those two areas and now we are able to consolidate our efforts and provide much better customer service and gain economy of scale.

And what will you be doing with the Wheeling facility?

We have reallocated all of that equipment across the Company.

Okay. One last question. When you are thinking about the legacy E&I business, Dana, I know you mentioned that the market has not picked up lately. What's your sense of when that business turns around? Give us an update on the legacy AZZ.

Sure. I am going to let Ashok take a shot at that one.

For the legacy I am assuming you are referring to pre NLI AZZ electrical products?

Exactly.

We had a relatively flat year from fiscal 2012 to 2013. We expect the utility side, especially domestic, to remain flat from what we have seen in 2013 going to 2014?

Any sense when that business is going to bounce back? It seems like it is still below previous peaks by a considerable amount.

The power generation side domestically is where the weakness that we see is, especially on the fossil fuel side. As you know, we are not seeing as much as we used to see in new power plant construction. That is the delay on the [TMB] side. It is staying stable in our outlook.

Okay. Thank you very much. I will get back into queue, guys.

Schon Williams, BB&T Capital Markets.

Good morning. I just wanted to focus on Galvanizing here. Could you talk about what acquisitions contributed in the quarter?

We did three acquisitions last year. In January we had Galvan and in I believe June we did Galvcast and then wound up doing G3 at the end of January -- or first of January this fiscal year. On a combined basis they contributed about $6.1 million in revenue and $600,000 in operating income for the period of time that we had them on board.

Okay, thank you. Then I wanted to talk about the margin even if we kind of strip out some of the one-time items you talk about kind of a pro forma margin of around 25%. That is still 100 basis points below where you where last year and 200 basis points below where you had been running earlier this fiscal year. I just wondered, can you talk about what was the big delta in the quarter, was it simply from a volume standpoint the softness or were there other contributing factors?

You are exactly right, predominately it was a softness in our markets due to the weather delays, holidays, all those types of things with a hangover in that December/January time frame, a little more seasonality associated with our Canadian operations and so forth that we will continue to experience with weather delays and that type of thing.

But as Tim indicated, we are definitely beginning to see some positive improvements with those volumes and across the board. And ramping up and going forward we are confident with our guidance for the year of our margins rebounding.

Are you still comfortable talking about Galvanizing margins being in that 26% to 27% range?

That is correct.

And then just to switch gears a little bit, the delays that you talked about heading into the quarter on the EIP side, where do we sit now with some of the project delays there? Is there -- should we expect some of that to start to come in the door in fiscal Q1 or fiscal Q2?

We had some projects move out of the fourth quarter, as we announced earlier, and we expect to pick all those back up during the middle of the year. Most of them will be during the second quarter of the year.

You are saying second quarter of the fiscal year?

This fiscal year.

Okay. But nothing, we should not expect anything large to hit in fiscal Q1?

Well, fiscal Q1 is right on projections. The project that moved out, primarily the Westinghouse nuclear project, it's the delays associated with that. So those are moved out about six months, so we will see most of those projects in the second quarter.

Okay. And then NLI just in general, are you comfortable still talking about NLI being a $75 million to $80 million run rate annually on sales? It seems like obviously you have had these projects get kind of skewed out farther than you originally expected, but is that still a business that we should think about on a normalized basis being kind of $75 million to $80 million of revenues?

I think that is still correct. And again, we are going to see some seasonality in these guys as well as Aquilex due to their businesses operating around the outages of the industries they participate in. In the nuclear business during the peak periods they want those things running. In a petrochemical plant during peak periods they want those things continuously running.

And then when they have slow periods, that is when our operations are able to get in and actually get their work done and perform what they do best. And that is when you will start seeing a little more cyclicality in our businesses.

Okay, perfect. Appreciate the update, guys. I will get back in queue.

Brent Thielman, D.A. Davidson.

This is Taryn Kuida filling in for Brent today. I was just wondering -- I guess maybe this is more for Ashok -- if you can expand on some opportunities you are seeing with Aquilex and any synergies with your existing businesses in E&I?

The end markets for Aquilex is very similar to ours. [SBN] announced earlier they are a third serving the nuclear market, another third in the fossil market, and a third in the petrochemical market which is very similar to our projection for the Electrical Group. The target market for NLI and the nuclear side of Aquilex is identical and in effect we know the same customers with a much broader portfolio of products and services.

Okay, thanks. And just a housekeeping question. Where do you guys see G&A going forward, acquisitions?

Should be in that $45 million range, $45 million to $48 million say.

Okay, perfect. Thank you.

Noelle Dilts, Stifel Nicolaus.

Good morning, everyone. My first question is on Galvanizing. You cited a -- kind of a moderation I think in your transmission and your solar business, so I just wanted a little bit more detail there. Are you seeing just more of a flattening or are you actually seeing a slowdown? And if you could talk there about what the drivers have been of that slowdown?

No, I don't think we are seeing a slowdown, it use more of a flattening. You don't see as many large (technical difficulty) on the solar side out there coming about. It is more of a mature market right now and we should see it pretty stable for the balance of the year. Tim, do you want to comment any on the future of what you think you see?

Yes, I concur with that. What we are seeing is the big major fields, the big push from the 2020 initiatives are starting to play out and coming back into the pipeline though are the smaller projects, more around the 25 to 50 megawatt type fields as opposed to the very large 7500 -- 750 megawatt fields.

So what we are seeing, that peak has risen and now we are just riding the top of that peak. We are plateaued and anticipate that rolling forward certainly throughout the balance of this year.

And how about on more just the transmission towers and things like that on the transmission market outside of solar?

The transmission market what you have seen there is the same thing. Basically that market, the fabrication markets on the transmission side has reached saturation. They are pumping out all the polls that they can push out at this point and we are not seeing any new players move into the market to increase that capacity. So once again we are at the top of that plateau, flattened off and moving forward. That market also should remain strong for us for quite some time.

Okay. Then you mentioned that Petrochem is getting stronger. Can you comment on if you're seeing that strengthen yet or if you are kind of anticipating it over the next year or so?

We are starting to see signs of smaller rebuild type projects coming on the books and actually come into fruition. And then we are now beginning to see large expansion projects beginning to be put out for bid. Still some time away, but I believe we will start seeing that impact throughout the third quarter.

Okay. And just one additional housekeeping question more for Dana I think. But could you just remind us what your Joliet losses are embedded for 2014 that you have assumed in your guidance?

Yes, that is going to be running $1 million a quarter and we should be back online in that -- right now August/September time frame is our guidelines to be back online. And then of course it will take a little while to ramp back up.

Okay and if I can I will just squeeze in one last question. But in terms of the increase in your guidance, can you discuss if it entirely reflects the Aquilex acquisition or if there is also some change in your base expectations for the business?

Our base expectations were I believe $625 million to $660 million (multiple speakers) and our guidance reflects predominantly -- we are sticking with our national guidance (multiple speakers). Okay?

Okay, thanks.

Schon Williams, BB&T Capital Markets.

Just wanted to follow up on the Galvanizing and what you are seeing on some of the input costs there? We saw zinc kind of spike up and then fall back there in the quarter and we have actually seen natural gas start to run here recently? Can you just talk about your thoughts on input costs and whether you can hold the line in terms of pricing in that business?

So far we have been very successful in holding the line on matching our cost of zinc with our cost to our customers. Zinc is pretty stable in that $0.95 range right now and we are comfortable with our ability to continue to push our pricing to manage that in the year coming.

And what about on the natural gas side, are there four contracts in place for that or do you buy them on the market?

Most of that is on the open market. We do have some contracts with our specific utilities themselves, but that is about 8% to 9% of our overall costs. So we won't see that near as dramatic swings in our cost structure as we do on the zinc side. Zinc is about one-third of our overall cost structure.

All right. Thanks for the update, guys.

Jon Braatz, Kansas City Capital.

This is more of a question for Tim. Tim, can you discuss a little bit about the ramp up of the Joliet facility? I assume it will be your biggest facility again, but how quickly do we get it back to where it once was? And with the rebuild can it be more profitable than it once was?

We are definitely going to be, with any new facility, have some opportunities to streamline operations and we will take advantage of those. As far as ramping up, in the Galvanizing operation you typically have a very quick ramp up to full capacity. So we look at a very short time line of getting that operation back up and running towards the September time frame. And then in a month or two we should be back to what we consider normal volumes at that time.

And a lot of that normal volume will be coming from other facilities that you move production to?

Some of it, yes.

Okay, how much let's say of a net impact do you think there might be in terms of volume net new impact if you want to call it that?

I would really have to go back and pull those numbers. Off the top of my head I wouldn't want to just spout something out.

Okay, okay. Dana, I don't know if you are willing to do this, but obviously the fossil fuel business is weak per your E&I segment, but how important is that? Is there a number you can give us in terms of sort of a percentage of revenue that that market accounts for?

No, we don't break that out to that level at this juncture.

Is it your biggest market?

No, it is not our biggest market at this time.

Okay, all right. And just a point of clarification, the $6 million in one-time costs will be reflected entirely in the first quarter.

That will be our first quarter. You know, that is investment banking fees, legal fees, all those types of things we have to write off day one. Then of course there will be some increased amortization of the intangibles going forward and then of course banking intangibles and fees so forth going forward for our new facility as well.

How much will be the amortization piece?

It is built into our guidance numbers. Four Aquilex, I don't have that number off the top of my head right now.

Okay. All right. Thank you, Dana.

John Franzreb, Sidoti.

Just to put the guidance somebody just discussed on Dana -- so if you backed those numbers out you are looking at roughly $0.15 more of fundamental earnings power, is that right?

(Multiple speakers) the acquisition?

Yes.

Yes, that is correct, $0.15 to $0.20 is our 11-month guidance for this year.

Aquilex -- can you just give us a sense what the historical growth rates were for that business before you picked it up?

The last couple of years they were working their way through the coal-fired plants and some of the nuclear plants that they were doing some retrofits on that is behind them now. They are kind in a stabilized market and then we are looking for them to start ramping up going forward in some of the new markets they are participating. So when we acquired them they actually were coming off of some down periods.

I am sorry, what is the opportunity pipeline for the business?

Ashok, do you want to hit that a little bit?

Yes, they are a late cycle business. So as we are in this business cycle we see a ramp up for their business later in the cycle which we are starting to see. And the growth primarily is international and in the petrochemical market.

Okay, and is it fair to say, Dana, that after a couple big purchases that as far as M&A is concerned you are largely going to be in a digestive period right now? Is that a fair assumption or no?

We will keep continually looking for opportunities on the bolt-on side. We certainly can handle those things from a financial and management perspective as well. You are not going to see us do another Aquilex next week of course. We'll take a little time to digest that and get that under our belt.

And of course Ashok is going to be the major implementation officer of that project for the next few months as well. But we have definitely not stopped our review and analytic review of opportunities going forward. As you know very well, it takes a lot of time to put these together, so we have got to continue the pipeline and keep it working to be prepared for the next opportunity.

Okay, fair enough. And one last question -- what does the CapEx budget now look like for the total Company with the Aquilex purchase?

Probably be in that $40 million range -- $40 million to $42 million.

All right. Thank you very much, sir.

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

I would like to thank each of you again for participating in our conference call today. We are very excited about the year coming at us, got a lot of opportunities internally as well as externally and look forward to visiting with you on our next conference call. Thank you very much then.

Ladies and gentlemen, that will conclude today's conference call. We thank you for attending today's presentation. You may now disconnect your lines.