AZZ Inc (AZZ) 2014 Q1 法說會逐字稿

Good morning, and welcome to the AZZ incorporated first-quarter of fiscal year 2014 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to 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 first quarter of fiscal year 2014 ended May 31, 2013. 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'll 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 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 in raw material costs, including zinc and natural gas, which are used in the hot dip galvanizing process; changes in the economic conditions of the various markets the Company serves, foreign and domestic; customer-requested delays of shipments; acquisition opportunities; currency exchange rates; adequate financing; and availability of experienced management employees to implement the Company's growth strategies.

The Company can give no assurance that such forward-looking statements will prove to be correct. AZZ assumes no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise.

With that having been said, I'd like to turn the call over to Mr. David Dingus, President and Chief Executive Officer of AZZ. David?

Thank you, Joe, and thanks to each of you for taking the time to join us today for the conference call of our first quarter of fiscal year 2014. We are extremely pleased with our accomplishments for the first quarter of fiscal '14, both strategically and operationally. Our first quarter continued to reflect solid operational performance as we continue to take organic actions to further position us for growth, as well as continued our assimilation of our recent acquisitions that are an integral part of our stated strategies for both of our segments.

Joining Dana and I on the conference call today, and for the question-and-answer session, will be Ashok Kolady, Senior Vice President and Chief Operating Officer for the Electrical and Industrial Products and Services 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 operations and the assimilation process of this acquisition.

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

At this time, I'll turn it over to Dana for a presentation of the prepared remarks on the results of our first quarter of fiscal 2014.

Thank you, David. On an operational basis, our first quarter of fiscal 2014, we recognized revenues of $183.2 million, and earnings per share of $0.57. Our backlog was $219.6 million at the end of the quarter, reflecting a book-to-ship revenue ratio of 0.99 to 1.00. We were reporting backlog only on our legacy electrical products, as the seasonal trends and shorter-term cycles in the Aquilex business that we just acquired does not lend itself to long-term backlogs.

Margins in our Electrical and Galvanizing segments were 13.5% and 29.6%, respectively. As we outlined in our press release, the nonrecurring items in the current quarter were again significant. Adjusted earnings per share for the first quarter of fiscal 2014 without these nonrecurring items would have been 56% -- $0.56 per share compared to $0.51 for the same quarter in fiscal 2013. Our results for the first quarter reflect a continuation of our very successful strategic growth accomplishments achieved in fiscal 2013.

We are pleased with our continued integration efforts of the Aquilex SRO, a global leader in maintenance, repair and revitalization services for the nuclear and fossil fuel power generation markets, and continue to see multiple cross-pollination opportunities with our other operations. Going forward, we will be referring to Aquilex SOR business as AZZ-WSI. AZZ-WSI will be a part of our Electrical and Industrial Products and Services segment, and will reflect AZZ's branding and values in the marketplace, while continuing to deliver their industry-leading services that they have provided in the past.

I will now provide a brief overview of the market conditions we are experiencing in both of our segments.

In our Electrical and Industrial Products and Services segment, we recorded revenues for the quarter of $96.5 million as compared to the prior-year results of $44.7 million. Operating income was $13.1 million as compared to $6.8 million, and operating margins were 13.5% for the quarter compared to 15.3% in the prior-year period. Our increased revenues were the results of the inclusion of acquisitions with NLI, which added $17.5 million to revenues for the quarter, and Aquilex, now referred to as AZZ-WSI, which contributed $41.5 million. The inclusion of the acquisition of NLI added $4.2 million to operating income for the quarter, and AZZ-WSI contributed $3.3 million.

From a market perspective, our international power generation markets remain strong. The construction of power plants remains robust, and we see strong demand for our products, especially in the Middle East. We expect the domestic fossil fuel generation market to skew further in the direction of natural gas for the new construction and expected quotation activity to remain slow domestically in the near-term. NLI continues to experience strong interest levels for their products and services in the nuclear power generation markets. We are experiencing strong demand for our specialty services in the nuclear market in China, and fossil fuel market in the Latin American market.

We're starting to see slack pickup and inquiries from our utility customers. Over the long-term, we continue to believe that -- continue to be optimistic regarding the opportunities associated with the upgrade of the domestic distribution substation network. Industrial markets are showing revival, especially in the pipeline and petrochemical sector. 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.

Our Galvanizing Services segment, revenues for the quarter were $86.7 million as compared to $82.5 million recorded in our first quarter in fiscal 2013. The first quarter saw modest gains in overall production, as a late winter hampered our quick rebound, while the solar and transmission markets have leveled off. However, we did experience improvements in our industrial markets, as well as our bridge and highway markets. We have moved out of the seasonality of the Northern construction markets and are well-positioned for the prime season. We remain optimistic that we will see an improvement in our petrochemical work in the coming months as well.

The Joliet facility is now in full construction mode, and we look forward to its completion and reopening. Our Canadian operations continue to provide solid contributions to our overall diversity of the markets we serve. Our growth through acquisition strategy continues to minimize the impact of the low GDP growth. Operating income was $25.7 million compared to $22.6 million in the prior year. Operating margins for the quarter were 29.6% compared to 27.4%. Excluding the nonrecurring gain from the lawsuit settlement during the quarter, our pro forma operating margins on our legacy business would have been 25.7%.

The balance sheet remains strong, and we believe is one of our core strengths; and along with our strong cash flow characteristics, provides us with adequate flexibility to continue the growth and expand of our Company.

David will now give us our closing comments.

We remain committed to setting the standards in the quality and service for both segments, positioning us to take advantage of opportunities to maximize volume and market share while maintaining price. The completion of another successful quarter for AZZ, the financial strength of the Company, and a great group of employees, is reflected in our first-quarter operating results, and the confidence that we have in our future and the balance of fiscal 2014.

Now based upon the evaluation of information currently available to management, we are maintaining our previously-issued guidance for fiscal 2014 for revenues to be in the range of $825 million to $900 million, and for earnings to be within the range of $2.65 to $2.95 per diluted share. Due to the significant impact of recent acquisitions and the seasonal trends associated with the acquisition of Aquilex, or WSI, we are issuing quarterly guidance for the second quarter of fiscal 2014, and will continue this for the balance of fiscal 2014.

Our second-quarter guidance is for revenues to be in the range of $195 million to $210 million, and our earnings are anticipated being in the range of $0.60 to $0.70 per diluted share. Our guidance reflects 11 months of the acquisition of Aquilex. Their business and revenue recognition is more cyclical than the traditional Electrical and Industrial Products and Services segment of our Company. And we anticipate, as we go forward, that the fourth quarter will continue to reflect our lowest quarterly performance, which is applicable to both segments of our businesses.

The first and second quarter should show some momentum building for our revenue recognition, with our strongest operating performance being our third quarter. We will continue to comment and provide guidance on this with each quarterly conference call.

Achievement of these projections will be our 27th 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 delivery or timing in the receipt of orders for our Electrical and Industrial Products and Services, and demand from Galvanizing Services. The strength of our balance sheet, the confidence of the management team, and the strong customer acceptance of our products and services, give us the confidence to aggressively pursue additions to our products and services currently offered.

Thank you for the opportunity today. And we'd like to open it up for any questions you might have at this time.

(Operator Instructions) John Franzreb, Sidoti & Company.

First, I'd like to discuss the seasonality you just outlined, David. Certainly, I don't think I appreciated how much it seems that revenue flows into Q3. Could you talk about why that's the case and just give us a little color behind that?

Sure. And I'm going to let Ashok address that, John, but it deals essentially with the planning of the utility companies themselves.

John, the end market for Aquilex, which I'm going to refer to as WSI going forward, is power generation and petrochemical refining, primarily. So, their services and the seasonality goes with the outage season for power and the refining markets, which almost matches identically with our Q1 and Q3. So if you look at outage seasons for both these markets, it's the spring and fall outages, that's when WSI performs the work.

Does that --?

I guess that certainly helps. Just along those lines, while we're still talking about Aquilex, your initial guide for accretion for that business was $0.25 to $0.30, and a step-up in year two of $0.60 to $0.70. Are you still, A, comfortable with that guide? And can you just walk us through what the bridge was that would drive that significant earnings improvement in the business?

John, this is David. The services business and the participants in that similar market, essentially, it's a 8% to 12% margin business. And naturally in the beginning, we are trending more towards the lower end of that range, and believe that we can grow over the next 15 to 18 months into the higher range. So, the -- it's taking us -- the timeline may have stretched just slightly on us, but we are still as optimistic on the long-term accretion opportunities as we were at the time of acquisition, and as we previously announced. So, as you are modeling that, I think you'll see us move over the next 18 months much closer to the 12%, 12.5% range than the 8% to 8.5% range that we are operating at now.

Okay. And just one last question. The legacy E&I business had another soft quarter. I wouldn't expect that, given the seasonal trends for the business. Is there something behind that, that we should be aware about?

Ashok?

The legacy electrical business was down 16% in revenue for the first quarter. We are forecasting to end the year slightly ahead of last year, 3% to 5% higher for the year, which means a stronger second half for the business. First quarter was a combination of orders moving out from the first quarter, a timing issue; the lower power gen newbuild in the US; but we see a strong rebound in the second half, primarily international business in power gen.

All right. So you have the orders booked that gives you the confidence that you can make that full year 3% to 5% up?

Yes, absolutely.

Great. Thank you very much, guys. Appreciate it.

Thank you, John.

Brent Thielman, D.A. Davidson.

Just a question again on the electrical business. You know, you're backing out the acquisitions, your operating margins held near 15%, pretty consistent with the prior year, even though you had a 16% organic revenue decline. How are you able to sustain those margins?

Well, again, I think it's reflective. As we've talked about, there's been some pricing improvement over the last 18 months in our backlog. It was pretty balanced across the different legacy segments. So I think we're right, margin-wise, with where we wanted to be in that first quarter. But as Ashok said, we had some timing issues that cost us on the volume side. But we were overall pleased with our backlog and our forecast for the full-year fiscal '14.

Okay, and just on the galvanizing side, I mean, 26% margin, you back out some of those items. Certainly, strong by historical standards, but a little lower than the run rate you saw first few quarters of last year. Is it lower margins for the weight -- or excuse me, lower volumes that sort of weighed on the margin?

It's volume-related (multiple speakers) -- primarily.

Okay, and are you seeing pressure in certain regions during the quarter? Can you point to anything specific there?

Now, are you talking about pricing pressures or volume pressures?

Volume pressures.

Okay, I'll let Tim comment on it then.

What we're seeing is we've seen the transmission and solar market plateau. We are now at a steady state on that. We don't have the growth rate running in that market that we had last year, but still at a nice steady rate. We've also seen the petrochemical projects that we were anticipating getting pushed out a little further, plus the long winter months -- we had a protracted winter, a late season this year. And that held up a lot of the construction activity.

Okay, that's helpful. And then just one last one. What, from a sort of a market perspective and/or sort of operationally needs to occur to get to the high end of your guidance range this year?

I think it's timing of the projects. If we stay on schedule with what is planned for, according to our backlog, if the nuclear builds in the US stay on schedule, there are opportunities there. We continue to advance our market share improvements in the international markets, particularly in the power generation. I think we've got a real shot at the higher end.

So, if we miss it, I think it will be just timing, because I think we are in great shape when it comes to the order floatation backlog scenario. And we'll just have to see. But we're doing excessively well in some areas with our legacy business. We are excessively pleased with the results of NLI; the opportunities and the cross-fertilization between NLI and WSI -- opportunities are growing. Our international presence and our coverage is improving. So I think if we don't hit the higher end, we just ran out of time in getting it done. And then we'll still be marching on that improved level as we enter fiscal '15.

Thank you.

Thank you.

Schon Williams, BB&T.

I just wanted to maybe talk about the portfolio here of companies. Just can you give us an update on -- now that you've had the service businesses under your control for a little bit -- I'm just wondering if, have you found them to be more attractive than where you kind of started this initial process? Could we see -- going forward, are we still looking for more targets on the service side of the business? Or is there anything else out there that we should be paying attention to on the galvanizing side? Could you just give a little bit of color around where the acquisition strategy goes forward?

Sure. We are excessively pleased with what we're finding out the more that we are in it, on the portfolio design now, and the Electrical and Industrial Products and Services. We think it's just a wonderful mix as we go forward. The acquisitions that we will identify I think are going to be product and market-specific, and more towards tuck-ins. That may fill a void that we have in a particular offering.

On the galvanizing, again, as we've indicated, it's adding geography. We'd love to do more in Canada. We'd love to do more internationally than we are doing. The opportunities in the US for one-of's are a little less than we've had in the past, simply because of the success that we've had in acquiring. But we in no way are backing off, and believe that we have reached the highest level that we can in the galvanizing, and that they'll continue to have more of an international flavor than a domestic flavor.

And I know timing is always difficult, but I mean, would it be reasonable to see another acquisition, even a small bolt-on? Would it be reasonable to see another acquisition in the next 12 months?

It's reasonable to expect a bolt-on. I don't think that we have anything close that I would say is a high probability.

And can you talk about whether it would be E&I versus galvanizing?

I think both are equal opportunities.

Okay. All right, thank you for the color.

Thank you.

Noelle Dilts, Stifel Nicolaus.

First, I'd like -- I'd like to first go back to John's question that was first, on just really digging in a little bit more to the WSI seasonality. So have you done -- I understand that it's going to be a pretty dramatic move, but what's the typical historical move from, say, the first quarter into the second quarter? Do you have a sense of that for revenues or profits?

Well, I mean, our forecast is based upon their historical performance and their historical forecast. But we are not forecasting more seasonality than they previously have experienced.

Right. Right.

Is that the answer --?

Well, I was just wondering what the typical seasonality is from a -- on a sequential basis.

Identical to what we are forecasting.

Okay. Okay. And the second question is -- I actually just got back from a trip to China, and there was some enthusiasm about nuclear picking up a bit next year. I was wondering if you are starting to see any acceleration in quotations surrounding that business?

Yes. And I'll let Ashok comment on that.

Yes, we are seeing the same in the Chinese market. They took a little pause after the Fukushima incident to review their safety protocols, but they have restarted their program. And we are starting to see inquiries. We are well-positioned to take advantage when that market actually starts building the -- up to 40 reactors they have in their pipeline.

Okay.

The Company, WSI and NLI, and our traditional electrical products, we are very optimistic about the Chinese nuclear market.

Okay, great. And then one last quick question. What was your [total] cost [in the bank] in the quarter and where current purchase is running?

$0.94. And current purchasing is almost the same.

Perfect. All right, great. Thanks so much.

Thank you.

(Operator Instructions) Jon Braatz, Kansas City Capital.

David, you were talking about WSI moving the margins from -- on the service business from 8% to 12% over the next, let's say, 12, 18 months. What needs to be done? What has to be accomplished to drive those margins higher?

Well, I think it's very similar to what we've done in our other products. You know? We, as AZZ, we've typically run a little bit higher than the industry standard on the margin. But I mean, at the end of the day, it comes down to, how do you price the product? How do you control your product? And how -- the cost of your product, and how do you project execute?

And I think all three of those are in the skill set of AZZ. And I think the focus that we are going to be putting on making sure that we are pricing the product at the optimum level; that we are matching our cost and revenue. Since it is seasonal, we've got to exercise extreme care, and make sure that we are matching that costs with the seasonality of the revenue. And then it's execution of projects. I mean, that is the key to our success. That's the reason our legacy businesses have traditionally exceeded industry standards. And so I think it's molding it into the AZZ philosophy of how you execute, how you price, and how do you cost control projects.

Okay. So it's not -- it's more nuts and bolts as opposed to one particular item that maybe WSI was maybe deficient in, so to speak?

It's blocking and tackling in the most aggressive manner.

Okay. Looking at the legacy business of E&I, you spoke of a little bit some delays and timing issues. Is there a recurring theme as to why -- it seems like some of these projects from other companies are being delayed, too -- is there a recurring theme that you are seeing out there as to some pushback in the schedules?

Ashok, you want to --?

It depends. We are seeing a lot of talk about the petrochemical projects coming through. We are seeing primarily budgetary proposals coming this way, but we are not seeing the orders yet or firm quotes yet. So we know that's out there. Similarly, in the pipeline market. We're seeing an increase in inquiries in the utility side. Starting to see a rebound in there. But, again, it's very early and that's why we are forecasting a stronger second half of the year.

Okay, okay. Lastly, when you closed on Aquilex, you mentioned that you thought you'd have about $5 million in transaction costs. We saw $2 million this quarter. Are we expected to see another $3 million? And how will that play out across the quarters?

No, we've essentially recognized the vast majority of it.

You have? Okay. All right. Thank you very much.

Thank you.

Ed Lefferman, First Manhattan.

I don't have a question; I just have a comment -- that, I obviously noticed the announcement of your retirement, David. And as you know, we've been very long-term shareholders in AZZ. And I just want to congratulate you on the job you've done over the years. You've done a terrific job in growing the Company. And we, as shareholders, have profited enormously. It's been one of the best investments we've made in a number of years. And I just want to congratulate you again on a job extremely well done. And we were fortunate to have your leadership at the Company, and I just wish you well in the future.

That's all I have. And I look forward to meeting the new management when they come to New York in the next few months. Thanks, and good luck.

I deeply appreciate that, Ed. Thank you so much.

Rob Longnecker, Jovetree.

Just a couple of quick questions. Can you talk a little bit about the organic tonnage in the galvanizing business for the quarter?

The organic tonnage was down about 4%. Once again, as we discussed earlier, it was primarily down because the protracted winter delayed the normal construction start-ups, and in that leveling off of the transmission and solar market.

Okay. Thank you. And then I saw you guys filed financials on the Aquilex acquisition. When you guys talked about the acquisition of $250 million for cash, did you also assume the debt [add] on their balance sheet? Or was it just $250 million was the total transaction value there?

We assume the liabilities.

So it's -- you paid $250 million cash, and then you took in another $85 million in Aquilex debt -- or $89 million?

No. (multiple speakers)

(multiple speakers) No, their long-term debt was all paid off at closing by them. We bought it debt-free. Only current liabilities. (multiple speakers)

The current liabilities was the debt that we assumed.

Right.

Got you. Okay. And then just kind of looking through the margins in that business that they've reported historically, it looked to me like the EBIT margins were in the kind of the 5% to 6% range? So I'm wondering -- you talk about blocking and tackling, but getting from 5% to 6% to 8% to 10% is a pretty big move. Was there something fundamentally different the way the business was run over the last couple of years?

The margins you are referring to also include segments that we did not buy.

Oh, okay.

It's segments that we buy and did not have a historical level ever hit that low.

So the filed financials that you guys put out there, that's not the segment; that includes pieces that you didn't buy?

Give me just a moment.

We'll have to get back with you on that one. I'm not sure what you're looking at.

Okay. Yes, maybe we can do that in a follow-up call. I'm looking at the 8-K that you guys filed on June 11 with the financials.

Yes. we'll get back to you. I'll call you back on that one.

Okay. And then I also just wanted to echo the comments that were made before about David Dingus. We have also been pretty long-term shareholders, and it's been a great investment for us, too. And have a lot of respect for the business you guys have built over there. So, just thank you and wish you well, as well. Thank you.

Thank you.

Cezary Nadecki, Schroders.

(multiple speakers) Just wanted to follow up, a few questions on your comments by segment. I think the electrical and galvanizing. And you talked a little bit about petrochemical business and then some trends on the galvanizing, electric transmission, I think. Could you kind of parse it a little bit sequentially versus year-over-year? Those comments?

I'm sorry. I don't understand the question.

I think you talked a little bit about out a better outlook for pipeline and petrochemical and electrical going forward. Is that sequential since these businesses are highly sequential? Or is this a year-over-year comment and kind of a similar fashion on an electric transmission?

I think Ashok's comment was that he expects the year-over-year to be up forward of 5%.

Okay. And on the electric transmission, the -- are you still seeing strength year-over-year? Or is that -- because it seems to me, from other areas that business is leveling off a little bit.

It definitely leveled off. Still strong, but leveled off, whereas last year, we had a tremendous growth in that mostly the same thing with the solar market. It's still at a nice level, but it has plateaued and leveled off.

Okay. And my last question, I believe you talked about the volume on the galvanizing side being 5%. I don't know if I missed it, but was there any impact from pricing year-over-year for the quarter?

No. Pricing was essentially consistent.

Okay. Okay. Thank you so much. Good bye.

Brent Thielman, D.A. Davidson.

Yes, just on the comments on transmission plateauing, do you think it's that investment in these projects is at similar levels as last year? Or are your customers that we see you focused on effectively running at capacity to address the projects?

What we are seeing is, overall, the pipeline has been filled, and the demand for it from the generators is declining, as those lines get moved from -- primarily from -- the growth came from the addition of the renewable resource market, and bringing that through the main power grids.

Okay, thank you.

Thank you, Brent.

Schon Williams, BB&T.

I wonder if you could just comment specifically on what you're seeing out of electrical distribution? Are you seeing any pickup in that business yet?

Ashok can comment on that. He made a comment earlier that the quotation activity is improving, but the orders are not yet materializing. I will let him add to that.

I agree. From a revenue perspective in Q1, we have not changed much from the previous year. But from a proposal standpoint, we have seen a significant uptick, which haven't translated to backlog or orders yet, which we hope to book down the line in the second or third quarter.

And those would be projects that you would anticipate shipping more for fiscal 2015? Or when you receive those orders, you can move almost instantaneously on them?

Those have a little shorter lifecycle, so if an order would come in early in the second quarter, it could favorably impact the fourth quarter. Normally, a four to six-month cycle on the distribution side for us, Schon.

All right. That's helpful. Thank you.

(Operator Instructions) This will conclude our question-and-answer session. I would like to turn the call back over to Mr. David Dingus for his closing remarks.

We again appreciate the time that you've taken today to join us on this call. We do, as we indicate, believe it's an exciting and encouraging time for AZZ. And we look forward to coming back to you at the end of the second quarter, and reporting even further progress in the assimilation of our acquisition and recovery in our markets.

Have a wonderful day. And thanks again for joining us.

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