AZZ Inc (AZZ) 2016 Q2 法說會逐字稿

Good morning, and welcome to the AZZ, Incorporated, second-quarter FY16 financial results conference call.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Robert Blum of Lytham Partners. Please go ahead.

Good morning, and thank you for joining us today to review the financial results of AZZ, Incorporated, for the second quarter of FY16 ended August 31, 2015. As Amy indicated, my name is Robert Blum. I am 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; 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 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 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-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. These statements are based on information as of the date hereof, and AZZ assumes no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise.

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

Good morning to all of you on today's call, and we thank you for your continued interest in AZZ. Overall, I am very pleased with our performance in the second quarter of FY16. Our galvanizing and legacy electrical businesses continue to perform well, and are meeting or exceeding our expectations. As we mentioned on the last earnings call, the summer season is always a slower period for our WSI business, but the team there did a great job of managing through the slow period. About one-third of our revenue is now subject to these seasonal trends, which is a significant change from AZZ's historical trends.

We are pleased with our progress integrating the recently acquired Trinity galvanizing sites, and are ahead of schedule on our construction of our greenfield galvanizing site near Reno, Nevada. We have also made progress on several technology and operational improvement initiatives that will drive future organic growth and value. FY16 continues to be a year of great potential for AZZ, as we drive market share growth in our galvanizing and energy businesses, in spite of some market head winds due to lower oil prices.

WSI continues to improve its operational performance, and is regaining business with many former customers. While refinery utilization rates remain high, we have benefited from market-share gains as our business development efforts gain traction. This has resulted in winning new customers, and growing in several international markets. With improved efficiencies and operating margins we anticipate a strong fall season, and are optimistic for the balance of the year.

I'm sure I sound like a broken record when it comes to our galvanizing services business, but we have accelerated several new product and service growth initiatives, and continue to drive both organic and inorganic growth. Both through operational excellence, as well as pricing for our industry-leading value-added solutions, these are areas of continued focus. We have a fairly high concentration of galvanizing capacity in the US Gulf Coast area, so we are continuing to monitor the economic impact of lower oil prices on fabrication projects. As we stated the last couple of quarters, the impact has been small to date, but we are seeing a few of the larger fabrication projects delayed, although the petrochemical opportunities are increasing.

Low zinc prices pose both a risk and opportunity for us, so we are monitoring this carefully. Fortunately this is not the first rodeo for our galvanizing team relative to zinc pricing, and they are driving productivity and efficiency to maintain their margins.

For our legacy electrical business, the results overall for the quarter have met our expectations, with some businesses doing well, and others being more challenged. This platform's overall performance was reasonably good for the quarter, given their mixed market conditions. The electric utility market in the US remains sluggish, but we have benefited from strong international opportunities and a solid backlog. We are optimistic about this platform's opportunities the balance of 2016. They are focused on establishing international joint ventures to provide broader market access, and on improving their operational efficiencies and customer service.

I'm optimistic about the potential for the electrical platform because we are only in the early innings on these initiatives, and already seeing improvement potential. The legacy electrical platform, as with galvanizing, has a stable leadership team, solid operating performance, and good niche technology. The exposure to lower oil prices is relatively small for this platform, and primarily impacts our API tubular and hazardous duty lighting businesses. In the aggregate, these represent approximately 5% of AZZ's overall revenue.

During the quarter, we consolidated our BSL Canadian enclosure operation into our Pittsburg, Kansas operation. Our NLI nuclear business benefited from finally shipping a portion of the long-delayed Westinghouse nuclear project orders, and is continuing to focus on more normal maintenance opportunities, instead of new projects.

We continue to see the benefits of having our new incentive programs that tie performance with pay. These programs are designed predominantly around performance and operating income cash flow, return on assets, productivity, and safety. To help drive positive results, every employee is now a participant in our incentive program. Morale is high as we enter the second half of the year.

Additionally, we will continue to focus on enhancing key operational fundamentals, including our tax and capital efficiency. I'm pleased with our progress, and believe we have the leadership team, products and services, and balance sheet to generate above-market results for a long time. We have taken steps necessary to reconfigure our businesses over the past 12 to 15 months that have positioned us for stronger financial performance for the balance of FY16.

As a result, we are maintaining our previously announced guidance for FY16 EPS of $2.85 to $3.30 per diluted share, and revenues in the range of $900 million to $940 million. We will also pay a dividend of $0.15 for this quarter. Now I'd like to turn it over to Paul Fehlman to cover the financial highlights.

Thanks, Tom. For the second quarter of FY16, we're reporting revenues of $214.2 million and EPS of $0.67, as compared to revenues of $193.4 million and EPS of $0.53 for the same quarter last year, reflecting a year-over-year EPS increase of 26.4%. Bookings were $233.5 million this quarter, compared to $213.4 million in the second quarter of FY15, an increase of 9%. Our backlog at the end of the second quarter finished at $338.1 million, reflecting a booked-to-bill ratio of 1.09, slightly up of the 1.10 booked-to-bill ratio posted for the second quarter last year, when we had a backlog of $329.1 million.

Overall, revenues were up 10.8% compared to the second quarter last year, as they grew 10.2% in the energy segment, which included the partial shipment of our Westinghouse project backlog out of our NLI business, and up 11.4% year over year in galvanizing services, primarily due to the acquisition of US Galvanizing in June of 2015. Gross margins for the quarter finished at 25%, an increase of 320 basis points, compared to the 21.8% gross margin posted in the second quarter last year. The second quarter includes a net amount of about $400,000 of additional realignment charges, taken to consolidate our Canadian enclosures operation into our Pittsburg, Kansas, enclosures operation. We call out the net amount, as we were still holding a small balance of the reserve taken earlier for realignment. Prior-year gross profit included charges of $5.2 million in our energy segment for certain cost overruns, as well as $2.8 million in realignment charges to cost of goods sold.

SG&A rose to 12.6% of sales, compared to 9.9% in the second quarter of FY15. This increase was primarily attributable to the release of a $9.1-million reserve, partially offset by charges of $1.1 million to SG&A for realignment, both taken in the second quarter of FY15. We achieved an operating margin of 12.3% for the second quarter of FY16, up 40 basis points compared to the 11.9% reported in the second quarter of FY15.

Our tax rate improved, as we recorded an effective tax rate of 21.2% for the second quarter of FY16, compared to 27.2% for the same quarter last year, primarily as a result of capturing certain state tax benefits in the second quarter. I am pleased that the business continues to execute on improvement efforts on several fronts, including cost control, cash flow generation, and once again managing the effective tax rate. Additionally, the strong bookings performance for the quarter nicely sets us up for the rest of the year for achieving top- and bottom-line growth. With that, I'll turn it back to Tom for concluding remarks. Tom?

Thanks, Paul. The key take-aways I'd like to leave you with are the following. I believe AZZ is well positioned to continue to expand our market share in galvanizing and energy, and confident in our ability to grow our businesses profitably. We have a solid balance sheet and strong cash flows, a great 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 targeted acquisitions. We will continue to expand the presence of our electrical businesses internationally, both directly and through joint ventures. We are now benefiting from our accelerated emphasis on operational excellence and customer service at both WSI and NLI.

While we have made significant progress over the past few quarters, we have tremendous upside going forward to grow our businesses, as our leadership team continues to gain traction on our key initiatives, and our customers experience the improvement in our service performance.

I'd also like to remind you that we have seasonality in our business, and because of the way our fiscal year calendar runs, the third quarter is usually a strong one for us. This is primarily due to the higher number of outages and turnarounds available during the fall months. While refinery utilization rates are still running quite high, we are seeing a nice number of turnaround opportunities for us to participate in for the third quarter.

We will continue to leverage our expertise as a solutions leader in protecting metal and electrical systems that drive infrastructure. With the strategic acquisition of six galvanizing plants and opening a greenfield in Nevada, we are looking forward to continued improve in our businesses, and greater impact from our new growth initiatives and strategies for the balance of FY16.

Now, we'll open it up to questions.

Amy?

Thank you.

(Operator Instructions)

Our first question is from John Franzreb at Sidoti.

Good morning, guys.

Hi, John.

I'd like to start with the backlog. Could you discuss two things regarding it -- one, the mix in the backlog by segment, or is one of the businesses doing stronger than the others? Secondly, are you seeing any pricing pressures within the backlog in and of itself?

Well, as you know, we -- number one, John, it's all in the energy segment.

Right.

In terms of particular strength, this is the quarter, second quarter as Tom pointed out, where we will be building our book for our WSI business. That's going on. In terms of particular strength year over year, we don't really get too much down into the weeds on that on this call, although I should say that we've got -- we do have a little bit more on the electrical side, as well, in terms of backlog.

I think on the WSI side, it's really -- they have a lot of opportunities. They quote them one week. They book them in a week or two. Then they have some of the normal cycle as well that they book, and then deploy resources in a month or two. We have solid backlog across the energy segment. We did drop backlog down at NLI somewhat as we've shipped some of the project orders, but we've filled some of that up with the normal maintenance component cycle, which tends to be higher margin. Then on the pricing side, we haven't really seen -- in energy, we haven't seen that much pricing pressure at all. I won't say there's none, because we're always competing, given our products and services, but for the most part I'd have to say that pricing in that backlog is pretty good.

Really. Okay, great. Paul, regarding the tax rate, I know you've been allocating more resources to get a better return on that. What kind of tax rate should we be thinking about for the balance of the year? What's a normalized number?

Yes, year to date if you take a look at the six months, we're at about 27%, just over 27%. I would say you're probably safe around 30%, maybe 30% on the high end for the year.

Okay, thank you guys. I'll get back into queue.

The next question is from Schon Williams at BB&T Capital Markets.

Hi, good morning.

Good morning, Schon.

I wonder if -- there's a specialist on the turnaround, refinery turnaround side out this morning, basically guiding down on low oil prices, essentially saying that some of their refinery work is actually drying up. I'm wondering, that seems to diverge from some of your commentary. Could you talk a little bit about what you're seeing on the refinery side in terms of the backdrop there? Is that changing? Then maybe a little bit more detail on how some of the energy prices are feeding into maybe the tubular business and hazard lighting, even on the galvanizing side?

Yes, one of the things, as you know, Schon, we're probably a year into having a fully capable sales organization on the WSI side, and doing well with that. A lot of our gains, and why we're maybe a little more bullish than others is we're still taking market share back. We're regaining customers. The other component there is I'd have to say we're probably seeing it the way some of the others are as well, that some of those turnaround opportunities are being pushed out as refiners are deciding to go ahead and run.

We're in a niche there. We're in the specialty overlay, which is going to be -- we only need a handful of large, full-cycle turnarounds to occur that we can participate in, and we're seeing those opportunities. We're feeling good about our third quarter. We're feeling good about the fall turnaround season because of the market share opportunities, as well as the fact that it's -- that the turnarounds are falling our way, if you will. But we are seeing some of those same trends. We're just not as concerned about it. Then we are -- we do feel like next year there's some deferred maintenance that's going to occur. As some of this happens, we feel good about how that will set us up for the next fiscal year.

Then when it comes to the pricing, I -- fortunately, it's a relatively small piece of our business. It's definitely impacted. I give the folks credit out there, though. They're doing a nice job of managing to make money on much lower volumes. We factored that into our guidance, and so we've absorbed it. The energy team has absorbed it.

Lighting, as we've talked about before, it's really less of what I would call pricing pressure. It's more yes, the rig stuff is off, but we had pivoted 18 months or so ago to a couple things -- one, LEDs; two, to other markets and applications. We're benefiting from having a broader product offering and broader application offering. It's felt the side from rig count being off, but it's not impacted nearly as heavily as tubing, because it had diversified.

All right, that's helpful. Tom, would it be fair to say that at this point the impact of lower oil that it's been fairly contained, as far as you're concerned? I mean, there's certainly pieces of the business that are feeling it, but you don't feel -- you're not sensing another letdown at this point?

No, we're not. I think on the galvanizing side, we've talked about one of the reasons we're still in my mind being somewhat cautious about our -- taking our guidance up, is because there is still some risk out there that the overall economy in Texas, Louisiana feel that pain from the lower oil prices, just in the general economy. So far, we've seen enough chemical, petrochemical projects for galvanizing to offset any of that impact, and the general economy has stayed pretty robust in most parts of those states. We have seen a little impact up in Oklahoma, where you don't have as much refinery, petrochemical opportunities to turn to, but for the most part we're looking forward and saying we've got a pretty good hand to play with right now.

Yes, Schon, I'd say that we continue to keep an eye obviously on oil and gas as we -- that's one of the reasons we still have a little bit of a spread in our guidance out there. We'll watch that as a head wind, potential head wind, global economies, margins, on the new assets. At the same time we've got some tail winds -- tax rates, as Tom talked about, a global growth internally, and improvement on the margins on those new assets. There's a pretty good balance there, and we continue to monitor it very closely. But so far it's okay.

All right. Thanks, guys. I'll get pack back in the queue.

The next question is from Brent Thielman at D.A. Davidson.

Hi, good morning.

Good morning, Brent.

As far as the backlog, how much is scheduled to be delivered this fiscal year versus next year?

We haven't really disclosed that, but typically that's going to be -- let's see, at this point in the year, two-thirds to three-quarters, I would suppose.

Yes, I think the majority of what's been in backlog up until what we just recently booked, we've got four- to six-month cycle times typically. Obviously when some of the projects -- as we've talked about, a lot been around for quite a while. Fortunately that stuff's clearing, and we anticipate it will continue to clear in the third quarter. Then they'll be in their normal cycle, which is more like 6 to 12 months. We're -- I'd have to say most of our business units on the electrical side would probably say they have their backlog in hand that they need to achieve their forecast for the year.

Okay. Given the nature of WSI, is it fair to say they don't -- there isn't a lot of backlog associated with outages in the number you reported today?

There's backlog there. As Paul alluded to, we booked some of that in the second quarter for the third quarter, for our third quarter fall outage season. We will -- we're quoting stuff now for what will be our fourth quarter as we get into after the first of the year. We're quoting that stuff now, but not booking those things yet. We'll book that in the third quarter. Yes, they've got the backlog pretty much that they need for the third quarter. Then as we've talked about, a lot of what happens to them is they go in, it's a $2-million job, and by the time they're done it's a $4-million or $5-million job once they're on site. We're very comfortable with the backlog they've got for the third quarter.

Got you, really helpful. Then on the delayed NLI shipments, how much did you recognize that was delayed? Was there a drag associated with the margin for some of that work that might have hit you in the quarter?

Okay. Yes, about $14 million of the $25 million we've been talking about shipped. In terms of margin, I'm not going to call it a drag to the overall. It may be just a slight drag to the overall business, but let's call it an up-tick for NLI.

Okay. Thanks, guys.

Sure.

(Operator Instructions)

Our next question comes from Jon Braatz at Kansas City Capital.

Good morning, Tom, Paul. Paul, maybe just answer this. I'm not sure, but if we strip out the Westinghouse shipment from NLI, how did NLI perform in the quarter on the margin front?

Sorry, John, we don't get down to that level in terms of calling it -- that goes to margin -- sorry, at that level. But it is improved.

Okay. All right. On the galvanizing side of the business, it sounded as if maybe the organic growth was flattish. Can you give us a little color on that?

Yes, that's fair. We're seeing a little bit of --

Yes, they had some organic growth.

Okay.

It wasn't all from the acquisitions, because we didn't have the full quarter for the acquisitions. They've got some organic growth in there. I think our focus is on that organic growth, new services, service expansion, covering more territory, new applications. We've been investing in that. As we've talked about, we're committed to maintaining that 24% to 26% margin profile.

Okay. Did the acquisition, Trinity acquisition, meet your expectations and contribute to the bottom line in the quarter?

Yes, it did. We're integrating quicker than we had planned on, and driving those margins up. There's still a drag on galvanizing's overall margins in the quarter, but we made a lot of progress and it's moving faster. We're feeling real good about the progress to date.

Okay. Thank you very much.

Sure.

The next question is from John Franzreb with Sidoti.

Sticking with the galvanizing side of the business and the margin profile, what do you think is going to hit you first? Would it be the improvements of the Trinity operations improving the margins there, or will it be lead prices. I'm sorry, not lead, zinc -- zinc prices. Zinc's at a five-year low right now. Which would be the first impact?

First impact's going to be the -- at least the first positive impact's going to be from the improved margins in the volumes from the US Galv sites. Like we said, we'll get those up pretty close to our normal run rates by the end of the year. I think the guys are well on track to do that. We're already seeing the benefit from that. That's occurring now. I'd have to say that's the first.

In terms of zinc, as we talked about, we actually in a lot of ways, because of our size and scale and our ability to drive efficiencies and productivity on zinc usage, we tend to prefer prices on zinc going up. On the other hand, because of the volumes we can buy -- and we tend to buy forward to some extent or commit forward, not buy forward. Yes, we're looking at next year as we get into say fourth quarter next year, benefiting from the lower zinc costs, but we're not overly excited about where it's at.

Okay. Does Trinity fall in between those two?

I'm sorry, the Trinity I referred to them as US Galv. But those are the Trinity.

Okay, so I thought you were talking the whole US operations.

No, I'm sorry.

I'm sorry, okay.

The official name of the Trinity galvanizing business was US Galvanizing. That's my fault, didn't mean to confuse you.

Okay, perfect. That's it. That's all I was looking for. Thank you.

Sure.

The next question is from Brent Thielman at D.A. Davidson.

Hi, guys, one more. In terms of the backlog, it looks like the international portion is down some from where you were in the first quarter. Is there just some seasonality to that?

That's lumpy because that tends to be the big electrical projects, our high-voltage or medium-voltage bus projects, which the one we've announced was $10 million. That's -- you can miss it by a few days and it makes it look a little different. There's a lot of lumpiness in that international project backlog. Same for WSI. When they're booking international jobs, those tend to be the bigger jobs, so it changes that backlog pretty quickly. While it's down, we're not concerned about that at all. We see plenty of opportunities on the international side, and we have more resources in place to ensure we get those.

And the Chinese portion of the Westinghouse went in the second quarter.

Yes, that's part of it. That was international backlog out of NLI that shipped.

Oh, okay. Okay, that makes sense.

Yes.

Thanks, guys.

Sure.

This concludes today's question-and-answer session. I'd like to turn the conference back to Management for closing remarks.

Well, thank you, Amy. I thank everybody for participating in today's call. We look forward to talking to you again at the conclusion of this current quarter. Once again, thank you and have a great day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.