AZZ Inc (AZZ) 2015 Q4 法說會逐字稿

Good morning and welcome to the AZZ incorporated financial results for the fourth-quarter and FY15 conference call.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Joe Dorame of Lytham Partners.

Thank you, Denise. Good morning and thank you for joining us today to review the financial results of AZZ incorporated for the fourth quarter and FY15 ended February 28, 2015. 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 on the call representing the company are Mr. Tom Ferguson, Chief Executive Officer, and Mr. Paul Fehlman, Chief Financial Officer. At the conclusion of today's prepared remarks, we will open the call for a question-and-answer session. If anyone participating on today's call does not have a full text copy of the press release, you can retrieve it from the Company's website at www.AZZ.com or numerous financial websites.

Before we begin with prepared remarks, I would like to remind everyone certain statements made by the management team of AZZ during this conference call 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 AZZ with the US Securities and Exchange Commission, including the annual report on Form 10-K for the fiscal year ended February 28, 2015.

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-dipped galvanizing markets; prices in raw material costs including zinc and natural gas which are used in the hot-dipped 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 of such forward-looking statements will prove to be correct. These statements are based on information as of the date hereof and AZZ assumes no obligation to update any forward-looking statements whether as a result of new information, future events, or otherwise.

With that said, let me turn the call the call over to Mr. Tom Ferguson, Chief Executive Officer of AZZ. Tom?

Thank you, Joe. Good morning to all of you on today's call and we thank you for your continued interest in AZZ. It's good to have my first full year as AZZ CEO under my belt and to be able to report higher earnings and sales on a year-over-year comparison.

FY16 is a year of great potential for us. But, we are also watching the energy markets carefully and evaluating the impact of low oil prices on our businesses, particularly those located along the Gulf coast.

Overall, I am pleased with our results for the fourth quarter. The integration of the nuclear and industrial operations at WSI is complete and already generating benefits in customer service, improved efficiency, and effectiveness.

Our legacy galvanizing and electrical businesses continue to perform well in spite of some bad weather and lower rig activity. We are making progress with NLI and key operational metrics are improving which bodes well for FY16.

We are gaining traction on several important M&A activities including a few international joint ventures. We remain committed to maintaining a disciplined M&A process and never getting deal fever.

WSI is benefiting from improved operational performance and a more normal nuclear outage cycle. The high refinery utilization rates and strikes in the fourth quarter did generate headwinds for WSI, but we are optimistic as we head into the new fiscal year. We look for WSI to benefit from their continued international focus and rebuilt North American sales team and are seeing a high level of activity already in the first quarter of FY16.

Our galvanizing business is solid and has accelerated several new products and service growth initiatives. The price of oil has a limited impact on this segment, but generally, we feel good about the upside in this business both for organic and inorganic growth. We remain active on the M&A front in this segment.

For galvanizing services, we will continue to focus on operational excellence, pricing on our value, and continued growth through acquisitions and also new metal finishing services. We have a fairly high concentration of galvanizing capacity in the US Gulf coast area, so are monitoring the economic impact of low oil prices carefully. So far, the impact has been small, but we are seeing a few fabrication project delays.

For our legacy electrical business, the results overall are meeting our expectations with some businesses doing well and others being a little more challenged. This platform's overall performance is reasonably good given their mixed market conditions.

The electric utility market in the US remains sluggish, but we have benefited from strong international opportunities and a good backlog. We are optimistic about their opportunities as we enter FY16. They are focused on establishing international joint ventures to provide quick market access and on improving their operational efficiencies in customer service.

The legacy electrical platform, as with galvanizing, has a stable leadership team and solid operating performance. Also, some good niche technology.

The exposure to oil price impacts is relatively small for this platform and focused on the API [to being] hazardous duty lighting businesses. These represent approximately 5% of AZZ's overall revenues.

We also focused on key fundamentals during FY15 and improved our tax position and emphasis on cash efficiency. Additionally, we have aligned our incentive programs more closely with the investor community.

We have converted our profit-sharing program to a performance-based bonus program. This program designed predominantly around operating income, cash flow, return on assets, and productivity.

To help drive results, every employee is now a participant in the incentive program. We have also extended equity-based compensation deeper into our management ranks.

I'm happy to be here at AZZ and believe we have the leadership team, products, capabilities, and balance sheet to generate above-market results for a long time. We have taken a lot of the actions during FY15 that have positioned us for a stronger performance in FY16. Based on our confidence, we are confirming our previously announced guidance range for FY16 at $2.75 to $3.25 EPS and $875 million to $925 million in revenue.

Now, I would like to turn it over to Paul Fehlman to cover the financial highlights.

For FY15, we reported record net sales of $816.7 million, an increase of $65 million or 8.6% over the prior year. EPS also grew 8.6% to $2.52, and our backlog finished at $332.6 million, up 2.3% versus last year and up 10.8% sequentially from the end of the third quarter of FY15.

We were also successful in two areas of focus for the year, taxes and cash. Our effective tax rate fell from 36.5% in FY14 to 27.9% for FY15, and we posted 10.1% growth in cash flow from operations year-over-year. That's up $10.9 million to $118.2 million.

As for our full-year segment results, FY15 revenues in our energy segment were up 10.1% to $458.3 million compared to the prior year while operating incomes fell 13.1% to $38.7 million compared to the prior year reflecting the effect of costs related to our previously announced realignment program and Project cost overruns at NLI and WSI recognized in the second quarter of FY15. In our galvanizing services segment, full-year revenues grew 6.8% to $358.3 million, compared to FY14 while operating income rose just under 1% to $88.6 million compared to the prior year that was negatively impacted by severe weather conditions and higher zinc costs we paid during the year.

Looking at fourth-quarter performance. For the fourth quarter of 2015, we reported revenues of $182.3 million, and EPS of $0.63 as compared to $181 million in revenue and EPS of $0.40 in the same quarter last year. A fourth-quarter book-to-bill ratio of 1.18 drove backlog up to $332.6 million. We expect to ship 24% of that backlog outside of the US.

The effective tax rate for the quarter fell from 39% in the fourth quarter last year to 14.5% in the fourth quarter of FY15. As for our segments in the fourth quarter, revenues for the energy segment from the fourth quarter of FY15 fell to $97.2 million as compared to $103.5 million in the same quarter last year.

A drop of 6.1%, partially driven by the effects of strike at certain refineries. We expect to be able to recover these delayed refinery projects during FY16.

Operating income for energy increased 6% to $9.8 million compared to $9.2 million in the same period last year. Operating margins for the fourth quarter were 10.1% for the quarter as compared to 8.9% in the prior-year period. Revenues for the galvanizing service segment for the fourth quarter were $85.1 million compared to the $77.5 million in the same quarter last -- same period last year, an increase of 9.8% from a combination of the acquisitions of Zalk, our Joliet plant being fully online, and organic growth.

Operating income was $20.3 million as compared to $18.7 million in the prior period, an increase of 8.8%. Operating margins for the fourth quarter were 23.9% compared to 24.1% in the same period last year. We believe that our ability to generate cash and our strong balance sheet are two of our core strengths and when coupled with the access to borrowings under our existing banking agreements, we can support growing our operating platform.

During FY15, we paid down about $68 million in debt, driving the year-end balance of $337.8 million while further improving our leverage ratios. We also used our cash to purchase the Zalk galvanizing business and to increase our dividends to our shareholders. I'm very pleased with the progress we have made this year on key fundamentals like cash flow generation, working capital, management, SG&A cost control, tax efficiency, and creating a much greater focus on returns on capital deployed.

For FY16, we expect to continue on driving returns on capital, cost control, and cash generation. And, we expect to achieve an effective tax rate closer to 33% for the year, although there may be variances between quarters.

With that, I'll turn it back to Tom for concluding remarks. Tom?

Thanks, Paul. The key takeaways I'd like to leave you with are these. I believe AZZ remains a compelling investment due to our 28th year of profitable operations, our strong balance sheet and cash flows, rate portfolio of products and services, significant international growth opportunities, and a talented and seasoned leadership team. We will continue to focus on growing our galvanizing business both organically and through acquisitions.

We will continue to expand the presence of our electrical businesses internationally, both directly and through joint ventures. We are accelerating our emphasis on operational excellence and customer service at both WSI and NLI.

While we have made significant progress over the past year, we have tremendous upside going forward as our leadership team continues to gain traction on our key initiatives and our customers experience the improvement in our service performance. We are looking forward to continued improvement in our businesses and greater impact from our new growth strategies as we enter FY16.

Thank you for your participation on the call today. Now, we'll open it up for questions.

(Operator Instructions)

John Franzreb, Sidoti & Company.

I'd like to start with the galvanizing business. Another quarter of -- we'll call it below historic norms on the operating margin. Last quarter you called out pricing pressures. Seems to me that you are calling out the weather. I wonder if you could talk to what's having the greater impact on the margin profile, now? And, how does it play out going forward?

The weather impacted our volume a little bit in the quarter. Particularly, along the Gulf coast, there -- as I mentioned last time, we did have some new competition come into the market, so there are some pricing pressures. And, quite frankly, the growth in the Gulf coast market didn't really materialize as people have been expecting with a large petrochemical buildout for obvious reasons. Also, we've taken some large projects at lower prices. The cost of acid has gone up fairly significantly.

Those are all the things that have happened in the last couple of quarters to our galvanizing business. I think, going forward, we are seeing more stabilized cost on acid. We've got a lot of initiatives to reduce our usage of acid and the fact that we are driving project activity and the new products, I think, are going to have a positive impact going forward on our margins.

I'm sorry. New products in galvanizing? Could you talk about that?

New services taking on -- providing more all-inclusive service capabilities to the customer base in the form of more sandblasting, more pickup and delivery transportation services. Trying to be more of a -- I hate to call it a one-stop shop. But, because of our size and our presence in so many parts of the country, we are well positioned to take on additional services. And then we do have some new technologies that we are not quite ready to talk about that we think will have impact more toward the end of the year or even in outer years.

Okay. Great.

You mentioned in your prepared remarks that the nuclear business is -- I think you phrased it as more normalized. Could you talk a little bit about the outage cycle for the first half of the year? How it's looking compared to your expectations going into the year and discuss that at some length?

I think the good news, for us, and what we are looking at, is our quoting activity into the nuclear segment is up, and we are seeing not just more opportunities, but larger opportunities in both our WSI and NLI operations. So, when we say it's normalized, it's because we are seeing more activity in the US marketplace. We do have some international initiatives. For the most part, it's -- our coverage is US.

So, our sales organizations are feeling better about what they're seeing. They are seeing more activity, and whether it's more outages -- I haven't looked at the numbers in the last month or two. But, at least there's more activity on the outages that we are participating in.

One last question. What do you think about how the structure of the energy segment looks now? You've been there for a while. You've done some realignment. Is there further moves that have to be made? Or, are you comfortable with the structure as it now stands?

Very comfortable with the structure now. I've got three good general managers over the three different business segments. The Vice President over legacy electrical has been here, I think, 27 years. Long-standing executive. Once we integrated WSI, and really integrated the leadership team, integrated the operational structure between nuclear and industrial, we still have separate sales forces in that organization. The Vice President and general manager over WSI and SMS, real solid performance.

It doesn't really show up in our numbers that much yet, but they've made a lot of headway. And, we are seeing it in how we are quoting, we're seeing it in the ability to take market share because the sales force is back in place. And, just the better level of service and management that we are bringing to bear there.

Then, on NLI, the general manager there was brought in, I believe, May of last year. So, coming up on one year under his belt. Once again, the results aren't reflecting it yet in the financials. But, our on-time deliveries are up. Our cost of quality is down. The plant is a different plant than it was a year ago. Feeling good about that organizational structure.

Okay. Thanks for taking my questions.

Schon Williams, BB&T.

Tom, Paul, help me get comfortable with where the revenue guidance is right now. At the midpoint, it seems like you're expecting a rather sizable acceleration in the growth profile of the businesses. Help me understand what did you lose in fiscal Q4 that you think you're going to get back in FY16? How do we get comfortable with where that guidance is?

Especially in light of the fact that the backlog is only modestly up at this point on a year-over-year basis and the electrical order patterns have actually been down the last couple of quarters. Again, maybe just talk about where you see the opportunities?

Yes. Good question, Schon.

Let's start with NLI and I will remind you we've been talking about probably ever quarter the delayed large projects in NLI. We anticipate those shipping this year, and I don't know that we've given any real numbers around that. It's over $25 million of these past due or delayed projects that we anticipate will go out. So, there is one big difference as we go into 2016.

Two is WSI. We had really pulled in the reins once we integrated the management team; stopped taking what I consider to be riskier jobs; beefed-up the contractual reviews, and we've walked away from projects in the last couple of quarters that just didn't meet our risk profile. Part of that was clearing the deck so that WSI could perform on the projects that they do take. Get new technology, in terms of welding solutions, brought to bear. And, let the organization stabilize.

So, we anticipate in a more normalized refinery turnaround cycle, as well as just a better presence in the US nuclear outages as we've talked about. We are going to have nice increase in activity in shipments at WSI and SMS.

On the electrical, most of what you've seen in the downturn over the last couple of quarters, or the, call it stagnant sales activity is -- it is our tubing business, our lighting business, the ones that are exposed to rig counts and price of oil. That business is off, and we don't insist -- that's not -- we are not anticipating that's going to come back significantly at all. So, that's what's not in our guidance.

The other electrical piece is, we are looking at a normal year. We are seeing opportunities -- some of it will come from taking market share. Some of it will come from the better presence internationally in China and the Middle East. But, we are not looking for dramatic improvement on the electrical side because of the headwinds from the price of oil.

Okay. Maybe, if we could address the margin profiles of these businesses as we go into FY16. It sounds like maybe there's some internal work that you can do with galvanizing in terms of sourcing, but maybe not a lot of change there. I don't know. As you look, maybe particularly at the energy business, what should we anticipate getting back as we move into FY16?

I think about the cost overruns that you had earlier in the year and some of the lower margin projects. You get a little bit of the purchase accounting back. What is reasonable in terms of the margin profile for energy as we go into 2016? Could we be looking at another 100 basis points, 200 basis points of margin expansion there? What's a reasonable outlook?

You pretty well nailed it, Sean. Paul will probably comment here in a second. NLI will not have those really ugly -- what they did ship was ugly, as we've talked about. They took some pretty large losses on jobs. Those are gone. The projects that remain in their backlog that are delayed are much better margin. And, mostly around our performance on those jobs is far better.

In the legacy electrical, that's pretty much normal stuff. We will anticipate a little bit of improvement there from operating improvement activities. A little bit of some of the international stuff, and then we are anticipating much better performance out of WSI. That is just where mid-single-digit margins was kind of ugly, and it is indicative of all of the changes that one, needed to be made. But, two, in my view, we were late making them by about a full year before we really integrated the management, put the businesses back together, started to leverage the operating platform, and leveraged the resources.

So, all of that is behind us. So, yes, we are looking for 100, 200 basis points, is well within my expectations. Paul may want to give you a few more specifics there.

That's exactly it. I actually won't give you specifics on where we are going to put those segments. I think Tom nailed it. We've been talking about it for the last year that really the value here is getting NLI and WSI turned around, if you will. We've been talking about this for a while that we see WSI is definitely answering the helm.

We see improvements going on there. They ran into a little bit of headwind in the fourth quarter based on the strikes. Otherwise, the operating margins were actually up on the energy side of the fourth quarter, year-over-year. We are expecting NLI to do the same thing. We are starting to see the green shoots of spring come forward there, and those are going to be the two areas of improvement for the year. That's our expectation.

Got it. Thanks. I'll get back in queue.

Noelle Dilts, Stifel.

Quick question, first. Is there any way you can quantify just how much the strike you think impacted revenues and profitability within the energy segment?

There is actually -- it's hard to put an exact number on it. We think that it's probably, revenue-wise, around $6 million to $10 million-ish.

All right.

I will also say, Noelle, that from what we've seen those strikes are over. They're still negotiating in a couple places, but that's done.

Okay. Great. Second, I was hoping you could give us a little bit more color on some of the segments within galvanizing? Specifically, was curious to hear about the electric transmission side? Just what you are seeing in that market in terms -- in the sub-markets in terms of demand now, and how you are thinking about those moving into 2016?

Noelle, this is Tim Pendley. What we're seeing on the transmission distribution side is some nice upticks. It remains stable. We are seeing a much more solid year ahead of us than we did last year. On the solar market, we are still seeing nice, steady growth in that area. It's much smaller projects as we discussed in previous calls, but it's still good, solid business for us.

Okay. Obviously, some of these Petrochem projects aren't materializing to the extent that you were expecting, but are you starting to see -- are you seeing a little bit of an uptick in demand there?

We've seen some nice -- in fourth quarter especially, we saw some nice projects rolling forward. It looks to be solid for us throughout the year with some impact of the oil prices still remains a little sketchy going beyond FY16.

Okay. Also, on the industrial side, I know that's a relatively sizable market within galvanizing. Are you seeing any -- what we are hearing from a lot of larger industrial companies is that broadly industrial is slowing down because of the oil price declines. Is that something that you are seeing? Or, is activity there holding in relatively steady?

Right now, what we consider the industrial market is so well diversified we are looking at it to remain stable for us throughout the year. We are seeing a little bit of weakness on specific projects, but overall, the OEM outlook remains very solid for us and is overshadowing the little bit of weakness we are seeing in the industrial market.

Okay. Perfect.

Tom, I want to go back to your comments on the JVs in the international markets and then also the comment you made in your press release that you are pursuing -- aggressively pursuing international expansion. Maybe you could talk a little bit about some of the markets that you see as most attractive? And, just how the potential acquisition candidates -- how pricing is looking in the markets?

Sure. That's a couple of good points, there. We don't have a large international presence. WSI is located in -- has a facility in Poland and headquartered out of the Netherlands. We've got some new operations, relatively new operations, in Brazil, and then we've got several of our businesses are up in Canada.

As we look at a lot of the growth opportunities for our high-voltage bus and our medium-voltage bus products are in the Middle East and in China. We need to have more of a local presence, and we really just don't want to go by ourselves in this case. So, a big factor there being speed to market and familiarity with the rules and customs in the regions. That's where we have a lot of opportunities, and those opportunities are going to continue for several years. That's where we are looking at joint ventures.

The new Vice President of business development that we brought on a few months ago has very good contacts in those areas and is very seasoned in those international markets. As well as, most of the people we've either promoted or brought on into the ranks on the team have a lot of international experience.

We feel very comfortable at this point. We are in some negotiations. Obviously, I don't want to get into any specifics. Over the next quarter or two, you'll see some of those announced.

I think that ensures that the opportunities we are bidding today we will be able to close and bring in and that's on the electrical side, primarily. Although, we have made some additions to the sales team primarily on WSI and NLI to focus on the international side.

Then, we are looking at some new reps, and we've tightened up our rep agreements. But, at the same time, we want to change over some of the reps that have been around a long time and haven't generated much for us.

So, as we go into -- and that would include Latin America. Because, we've been doing some things on the technology front for some of our products so that they comply with international electrical standards, and we can move them into Latin America relatively easily. We've kicked off an initiative there that's been underway for a relatively short time.

On the pure acquisition and divestiture side, we talked about the divestitures were on the electrical platform related to more of the oil and gas side, and we put it on hold. The pricing in that market, right now wouldn't be conducive to divesting assets that are reasonably good for us. We just think that there's probably other people that can do more strategically with them than we can. But, we're not willing to give them away.

On the acquisition side, I think mostly it is around galvanizing. I don't think -- it is mostly around galvanizing. We've got some good activities ongoing. Obviously, we've got NDAs in place on both sides of those so we can't talk about them. But, we've been -- they've been underway for a few months. These are not brand-new things. These are ones we've been negotiating. So, you can anticipate. Hopefully, we'll have some positive news here over the next few months.

All right. Thanks. That's really helpful.

(Operator Instructions)

Brent Thielman, D.A. Davidson.

Paul, Tom, could you provide the organic growth rate for galvanizing this quarter?

No. No. The organic growth rate?

Yes.

The difference would be Zalk, and -- I will put you in the ballpark on Zalk. It's FY15 versus 2014, your revenue is up about $4 million. Back from zero.

Okay. The margin uptick in the energy segment on lower sales, nice to see. Was mix a big benefit to you this quarter because you would have had less services turnaround work? Can we look at this as more operating efficiencies driving the improvement?

Well, tell you what. Actually, I'm not going to call it mix. (laughter)

Yes. I think we are seeing some operational improvement on the energy side. It's still early days, so that should improve as the quarters play out in FY16.

I hate to call it mix, too. I think, when we look at -- we are trying to drive margin up in all of our businesses on the energy front and, like I said, you will see the benefit of improved margins at NLI. They were up in the fourth quarter. But, it's still pretty marginal.

(laughter) Basically, everything was up except for what we saw going on with the headwinds at WSI. You are getting a nice positive tailwind from all of them.

Okay. Fair enough. The uptick in quoting activity on the nuclear side, is this safety upgrades? Or, what is it you are specifically seeing right now?

It's kind of across the boards. We're seeing some upgrade projects. We're seeing some safety-related projects. We're seeing just the delayed components for maintenance are now being -- are now active. So, it's like they've got to spend some money now to keep their facilities running. They've stabilized around what the regulations are. Even though, as we read pretty regularly, they are not real profitable. These are just activities they have to go forward with and some of it is compliance. Most of it is just the delayed maintenance that needs to take place.

Okay. Anything brewing in the new project front, or -- ?

Nothing. On the nuclear side, there is noise out there, but nothing that I'd consider even firm enough to be budgetary quotations, at this point. (multiple speakers)

Okay. One last one if I could. With the refinery strikes gotten some delays in turnaround work. I think you put a rough number around it, $6 million to $10 million. Does that potentially fall here into the first quarter? Is it spread across the year? How do we think about that?

I think that it falls into the fourth quarter and then quoting activity for the fall season turnaround cycle is also pretty high. Those are things that I -- how quickly they actually spend that because there are some offsets. There are some companies that are delaying maintenance activities due -- the integrated oil companies. So, it's a little bit of a mixed bag, but we're very active right now in the first quarter. And, we are very active on quotations for the fall outage season. So, whether it's falling into this quarter or it's going to file later in the year, they are going to happen because this is maintenance that needs to occur.

Okay. Great. Thanks. Good luck.

Jon Braatz, Kansas City Capital.

Turning back to NLI and WSI, we're obviously expecting some nice improvement in margins in those businesses here this year. As we look forward, how much more improvement can we see in those businesses, independent of any really meaningful increases in the top line? I guess I'm just trying to get a better sense on what more can be done internally to improve those margins? Any comments in that regard?

I think there's a couple of things. One, the sales organization on the WSI side, the rebuilt sales organization, is already allowing us to either regain old market share or take new market share, whichever way you want to look at it. Also, as they are doing that, they are back out there selling our value and the real high-quality solution capability that WSI brings to coker vessels, to containment shells. The things like that, that there's not a whole lot of companies out there to do. We lost those relationships.

So, I think part of this is, as we are able to demonstrate that value again to old customers that may be coming back to us. You are looking at a couple hundred basis points down the road for them in the longer-term. We will see maybe a little bit of it this year, but I think most of it actually comes post-FY16. Over and above what we already have in our guidance for this year.

NLI, we've got to normalize that business and decide what it really needs to be going forward. There's some decisions we need to make. It's going to have a big shipment year this year because of the delayed big projects in its backlog. So, this year would actually be somewhat of an anonymously just like FY15 for NLI was an anomaly on the low side. But there, we are going after new services.

We have invested some capital in new equipment for seismic testing, for instance, and I think on a normalized basis, once again, I'll stick with that 200, 300 basis points of margin improvement beyond this fiscal year is where we are trying to take them. In the NLI case, we may decide to maintain them at a somewhat smaller revenue level than we have this year. Those are the things that we'll talk about as this year wears on before we get into next year.

So, you would characterize NLI as more of the work in process relative to WSI?

Yes, correct. I think WSI, they've got their marching orders. The team is in place. They've been taking the actions. The sales force is rebuilt and engaged. Internationally, they are in good shape. Poland is a great operation for us. Brazil has come up nicely, in spite of lower activity levels at Petrobras.

NLI, the team is in place. They've taken a lot of the actions. We've got to clear this backlog that we've been talking about, and then see where we are at.

Second question. Looks like you could generate another good year of free cash flow. I assume that's going to continue to be directed toward debt repayment. And, on a broader sense, how do you look at the capital structure and what kind of leverage you think is appropriate for this business?

It's Paul. I'll stay consistent with what we have said in the past, which is we are a lot more comfortable between one and two times leverage than over two. Obviously, we are paid down to -- do the math yourself, but probably about 2.25 turns of EBITDA right now.

We've done the other things. We made small acquisitions -- or made small acquisition in the last year, and Tom has already talked about we are active in M&A. We will continue to drive for that low leverage and utilize the cash flow to add on to the operations of the business.

Paul, what do you think CapEx will be for the year?

We are not calling that out right now. I would say there's a normalized level that will stay about the same. But, if we look at some buy versus build for the year, maybe we'll be talking about that more later. We are taking a look at a couple of things.

Okay. Thank you very much.

This will conclude our question-and-answer session. I would like to hand the conference back over to Tom Ferguson for his closing remarks.

Very good. Thank you for participating in today's call, and we look forward to talking with all of you again at the conclusion of this current quarter. Again, thank you and have a great day.

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