AZZ Inc (AZZ) 2016 Q3 法說會逐字稿

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

(Operator Instructions)

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

Thank you, and good morning and thank all of you for joining us today, to review the financial results of AZZ Incorporated for the third quarter of FY16, which ended November 30, 2015. As the conference call operator indicated, my name is Joe Diaz. I am with Lytham Partners, and we are the financial 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 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 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 hot dip galvanizing process. Changes in the economic conditions of the various markets the Company serves, foreign and domestic. Customer requested delays in 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 statements, 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?

Thanks, Joe. Good morning to all of you on today's call, and we thank you for your continued interest in AZZ. I'm pleased with our financial performance in the third quarter of FY16. We achieved double digit growth in net income and EPS during the quarter. Our WSI and electrical businesses did well, and as we mentioned on the last earnings call, the fall season is always a strong period for our WSI business. I would like to congratulate the WSI team for managing the large volume of projects in an efficient and timely manner, while focusing on operational excellence.

Our galvanizing business faced some challenges that we will discuss later in the call. We will also address the impact on the small portion of our energy business that serves the oil patch segment. As expected, we had some integration expenses in our recently acquired US galvanizing plants that impacted our galvanizing margins, but we remain confident that these plants will generate our normal galvanizing margins in the near term.

We had a successful soft opening of our new galvanizing plant near Reno, Nevada, and as of this week, it is now fully operational and officially open for business. This now gives us 42 galvanizing locations, as we have integrated the two Hurst sites into one. Additionally, we continue to make progress on several technology and operational improvement initiatives, that we believe will drive future organic growth, and value in our galvanizing business.

FY16 continues to be a solid year, as we drive market share growth in our galvanizing and energy businesses, in spite of some market headwinds, due to lower oil prices. On a year-to-date basis, we've generated 25% net earnings growth year-over-year, 11% bookings growth, and leveraged 14% operating income growth on 8% sales growth. And that's in a pretty weak set of market conditions. Quite frankly, it's a pretty impressive story, and I believe we can still do much more.

Our WSI specialty welding business continues to improve its operational performance, and has regained business with many former high profile refining customers. While refinery utilization rates remain high, we have benefited from market share gains as our business development efforts have gained traction. This has resulted in winning new customers and growing in several international markets. With improved efficiencies and operating margins, a stable leadership team, and good technology and field performance, we anticipate this business will continue to perform well.

Our galvanizing services segment margins have been impacted by the sluggish US manufacturing activity, and by the recently acquired US galvanizing plants, whose margins are still ramping up to AZZ historical levels. It's important to note, we are gaining strength in other sectors including bridge and highway and electric utilities, to help offset some of the current headwinds. We have a fairly high concentration of galvanizing capacity in the US Gulf Coast area, and because of that, we've seen a moderate decline in volume from customers affected by lower oil prices. The higher volume of refinery and petrochemical projects has not materialized to any great extent.

During the quarter, we did have some more maintenance activities than we normally do at some sites, so we lost a few more production days than in prior quarters. We also began incurring operating expenses at the new Reno, Nevada site, while the revenues are just beginning to ramp up. Zinc prices continue to remain low, which has begun to impact pricing in the market. The galvanizing team is driving productivity and efficiency to offset these margin impacts as much as possible.

For our legacy electrical business, the results overall for the quarter have met our expectations, with some businesses doing well with substantial gains in backlog, and a few continuing to be affected by the current state of the upstream oil and gas market. Overall, we are pleased with our enclosure, switch gear and bus businesses. These pure electric platform's overall performance was reasonably good for the quarter, given its mixed market conditions. Electric utility spending in the US was stable, and we benefited from strong international opportunities. We are seeing order growth on domestic utility infrastructure investments, which makes us optimistic about this platform's opportunities for the balance of 2016 and into 2017.

We remain focused on establishing international joint ventures to provide broader market access, and on improving operational efficiencies and customer service. We are in the early innings on these initiatives, and are already seeing the improved 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.

Our NLI nuclear business is continuing to focus on more normal maintenance opportunities instead of new projects and did not ship anymore of the long delayed Westinghouse nuclear project orders during the third quarter. We still anticipate these final orders shipping by our fiscal year end.

Our new incentive programs that tie performance with pay continues to drive positive results. These programs are designed predominantly around performance in 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, which ensures focus as we enter the final quarter of the fiscal 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 18 months that have positioned us for a solid finish to FY16.

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. As a result, we are narrowing our previously-announced EPS guidance for FY16 to $2.90 to $3.10 per diluted share, and revising the revenue range to $890 million to $915 million. Now, I'd like to turn it over to Paul Fehlman to cover the financial highlights.

Thanks, Tom. For the third quarter of FY16, we are reporting revenues of $242.4 million, an increase of 7.8%, compared to $224.8 million for the same quarter last year, and net income of $23.5 million, an increase of 17.9%, compared to $20 million last year. This results in fully diluted EPS of $0.91, which is up 18.2%, compared to the $0.77 for the same quarter last year.

Revenue grew year-over-year in both energy and galvanizing services, albeit at different rates. Revenue in the energy segment was up 4.6% to $136 million in the third quarter compared to the third quarter last year and did not, as Tom said, include shipments of our remaining large Westinghouse backlog at NLI, which we expect to ship in the fourth quarter of FY16. Revenues in galvanizing services were up 12.3% to $106.4 million for the third quarter, compared to the third quarter last year primarily due to the impact of the US galvanizing acquisition in the second quarter this year.

Bookings were $228.7 million in the third quarter, compared to $196.1 million in the third quarter of FY15, an increase of 16.6%. Our book-to-bill ratio for the third quarter grew to 0.94, up from the 0.87 book-to-bill ratio posted for the third quarter last year. Based on the strength of bookings, our backlog finished the third quarter at $324.4 million, up 8% compared to the backlog of $300.3 million reported for the third quarter last year. Additionally, approximately 33% of the backlog is scheduled to be shipped outside of the United States.

Gross margins for the quarter finished at 25.8%, a decrease of 120 basis points compared to the 27% gross margin posted in the third quarter last year. Gross margins fell primarily due to the acquisition of US galvanizing during the second quarter fiscal this year, specifically on their lower margins that we expect will reach our normalized galvanizing margins over time, and on some normal integration costs. And as Tom discussed, there were some pricing headwinds as well.

SG&A improved to 10.7% of sales compared to 12.4% in the third quarter of FY15. This improvement was primarily attributable to our Company-wide focus on cost efficiency and on our prior year realignment efforts. We achieved an operating margin of 15% for the third quarter of FY16, up 40 basis points compared to the 14.6% reported in the third quarter of FY15.

Our tax rate improved as we reported an effective rate of 28% for the third quarter of FY16, compared to 30.4% for the same quarter last year, primarily as a result of capturing certain state tax benefits in the third quarter. I appreciate the continued efforts and results achieved by the entire team on cost control, strong cash flow generation, and managing the effective tax rate. Additionally, the continued strong bookings performance for the quarter bodes well for the continued growth of the Company.

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: 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 into FY17 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.

We will continue to leverage our expertise as a solutions leader in protecting metal and electrical systems that drive infrastructure, and with the strategic acquisition of six galvanizing plants in the second quarter and the recent opening of the greenfield in Nevada, we're looking forward to continued improvement in our businesses and greater impact from our new growth strategies for the balance of FY16 and into FY17.

And with that, we'll open it up for some questions.

Thank you, Mr. Ferguson.

(Operator Instructions)

Our first question will come from Schon Williams of BB&T Capital.

I wonder if we could maybe dig in a little bit on the galvanizing margins -- came in well below our expectations, and pretty big variance versus where we were even in fiscal Q2. I wondered if -- I don't know, can you walk us through all of the moving pieces, and maybe rank order or quantify how much of either the sequential change or the year-over-year change -- how much of that was integration costs related to the Texas assets, how much of that was potentially price down in the zinc market? If we could just get a little bit more detail on all of the moving pieces there, that would be helpful.

We'll take you through -- we're not going to go all the way down into it, Schon, but as we said, the integration and the initial performance of the acquired six plants throughout the Gulf Coast region were pretty important. As we made the acquisition in June, we had pretty good initial performance there. But this is typical of any integration, where you get to see what you've got once you take them on, during the first two months, and then you start implementing those changes, spending some money, making some management changes during the next three months, as we got into the initial stages of bringing those on.

As far as quantification, we won't get into specifically what the margins were at those six plants, but I will say that that would be the number one reason why you saw the margin dilution year over year, quarter over quarter. As far as the costs go, those get rolled into that margin dilution, if you will, or the lower margins of the six acquired plants. So that would be why there may have been a step down quarter over quarter just at the acquired plants. We do feel like that's going to come back though, middle of next year I would say, when we hit about the one year anniversary of those plants, that we'll be achieving AZZ-like margins on that.

As far as the pricing headwinds go, that's really a lot harder to quantify it specifically. It does have an effect. It is a mixed bag between the different markets that we serve, but I would say that would be number two in line, to what we experienced with the dilution from the initial six plants.

Tom, anything to add to that?

Yes, I think we've expressed our caution about the manufacturing economy along the Gulf Coast. And as we've also talked about, we were anticipating some large petrochemical refinery projects that might offset some of the risk on the upstream side.

And it's not so much that our business in galvanizing was focused on upstream. It's just the overall fabrication manufacturing market along the Gulf that's somewhat impacted from Oklahoma through Texas and Louisiana. So we have had some customers that -- their volumes are down, and it's not that we've lost market share, their volumes are down.

So I'd say, while our volume overall is up, we've had to give some on pricing to sustain that volume. And we'll probably continue to do that to a point. We don't want to give away price anymore than we have to. But with the lower zinc prices that the entire industry is experiencing, that leads you to -- people can afford to lower price without sacrificing -- the mom and pops can lower price without sacrificing too much income.

So that's just the market. It's messy. We feel good about it overall. We've got a lot of good things going on. I'll take the blame for probably loading our galvanizing guys up with maybe two or three too many balls in the air, and we'll manage that better as we go forward.

But we do want to continue to grow it through technology for the longer term, to be able to sustain our Business and our market share, and grow market share. We want to be able to use that technology to help us improve our margins in the longer term, and then we want to continue with the acquisitions. And we don't have any greenfield -- any additional greenfields on the horizon right now, but we like the idea that we can get into white space and get an AZZ flag planted from time to time.

So like I said, we had a whole lot of moving pieces in the third quarter, and probably a few more than we're used to handling. That's why I think Paul was cautious at being too specific on any one point, because to me, it was -- we juggled a lot of things in the quarter.

And just so I'm clear, is the pricing concessions that you're seeing on the zinc side -- is that more focused in the Gulf region, or are you seeing it across your footprint?

I'd say it's across the footprint, and some competitors are very good at pricing discipline. We tried to maintain our pricing discipline, but obviously, in a somewhat stagnant to even weak manufacturing market arena, you see it everywhere. You see it in every region, but in different spots.

All right, thanks. I'll get back in the queue.

Our next question will come from John Franzreb of Sidoti & Company.

I'd like to start with the guidance. It's a pretty wide range for one remaining quarter, and I was wondering what are the puts and takes that take you from one end to the other of that range that we should be aware of?

Yes, I think there's a couple of things. One, we still have that Westinghouse backlog at NLI that has got some decent margin in it, and we're still worried about whether that goes or not. I know we sound like a broken record on it, but that just gives us a little pause, because it can move the number a few points.

So the other is -- we talk about -- we just talked about galvanizing pricing, for instance, and the markets just -- we're continuing to maintain our revenue. But, well, I'll give you a better one. We don't know -- a few days extra of lost production due to winter can move that.

So, even though our galvanizing business is fairly stable, as you look at it year over year, in the winter months, because we now have more facilities up in Canada and things like that, or if we have a big hard freeze in north Texas like we had last year, that can just impact us. And because the margins are so significant in galvanizing, a few extra days has a big impact on us.

So we're just cautious about that. The last thing we want to do is put out guidance, and then have to come back in two weeks before the end of the quarter and tell you oops. So that's two big things. Everything else is puts and takes, and normal puts and takes, and that's about it.

Paul, did I miss anything?

No, it's our normal approach to this, is that we don't want to disappoint, that there are a lot of different moving pieces. I think you're absolutely right with what you called out, and a couple of days here and there does make a tremendous amount of difference, as we've seen. That's it.

Okay, fair enough. Significant success on the OpEx line -- down $1 million or so sequentially, and more so year over year. Could you just give us a little bit more color on what you're doing there, and I'm assuming that it's sustainable going forward.

Yes, boy, I could point to a lot of different things. It's really small pieces aggregating every day, all the way to professional services -- significant reduction in professional services year over year, which we had actually called out last year as well. We continue to make headway on that.

We continue to -- well, there were a lot of things that we had called out last year that we were using services to help us improve things. We've gotten traction on those improvements. We took a charge last year for realignment to take some costs out, and you're seeing the fruits of that this year. So it's a lot of little things adding up.

We closed an operating site in enclosures, so to consolidate operations, leverage that operating platform -- so, a little bit of administrative management cost that comes out there. For us, it's a continual exercise, and we try to -- we just look at it as a normal part of the Business. We don't want to be known as a serial restructurer.

We just want to manage our Business, and we do that by running as lean as we can, and keeping an emphasis on -- everybody we add in SG&A has to bring value. So that's just our focus and that's our mantra, and I think you're seeing -- that's why, to me, it's sustainable. We would like to continue to leverage sales volume up while not adding SG&A.

On the other hand, we are investing in, as we mentioned, some of the sales resources, where we could get high-value market share growth. So, we've done that at the same time we brought the costs down.

Okay, and one last question: I know you are taking share back in the welding side of the Business. That's great; the sales initiative seems to be playing out nicely.

What are you hearing about customer spending times, though, in the spring, in light of high refinery utilization? What color are you getting from the customer base in the refining market?

It's mixed. The good utilization rates, I think, remain high with -- given refinery margins at the moment, and as they're being projected forward. The good news for us is the maintenance they are having to do is bigger -- because they've waited so long on a lot of this. So, when they are doing maintenance, they are taking on some of the bigger things, and that tends to be more of our sweet spot. So we're getting close to, I'd say, having regained the market share of years past, and then we'll get into a normalized turn-around cycle, if you will.

On the other hand, we've got some good things going on internationally. We also have some new technologies we've been rolling out on the welding side that I think will help us offset whatever happens with turn-around cycles. So, what we're hearing is really mixed, and yet we are not feeling too nervous about it because there's enough activity, and it's enough of the right kind of activity that we think the spring will be okay for us.

Perfect, thank you for taking my questions.

(Operator Instructions)

The next question will come from Brent Thielman of D.A. Davidson.

The backlog growth -- is that isolated to a particular area, or widespread across the energy platform?

I'd say that electrical is probably the biggest area of growth for backlog right now.

Yes, we've won some nice jobs in our enclosures bus, and both high voltage and medium voltage bus businesses. So, I'd say it tends to be there, because we don't track backlog in galvanizing. And the backlog in WSI tends to come and go, over a quarter or so. So it really is those electrical businesses; and while the volume in the oil-impacted businesses is off, it's really nice in those pure electrical businesses.

And what kinds of projects are those that you're winning?

I don't want to get into too many specifics, because we have customer confidentiality things, but we've won some nice -- strangely enough, not in NLI -- but we've won some nice nuclear jobs in the electrical businesses. We've won -- the T&D is okay. Our enclosure businesses are doing well.

We've won some international stuff in China that -- some nice projects. We've been well positioned there for a while. And the economy -- all of the things going on in China have not impacted those. Those are things that are sitting in our backlog that are firm jobs.

And so it comes back to -- everything that's playing for us is the stronger -- the improved international sales emphasis, the broadening our market penetration in some of these sectors. It's paying off for us, in the legacy electrical.

Okay, great. And then on WSI, obviously saw an uptick in turn-around activity here in Q3. When you take a look back, was it in line with your internal expectations, or were you expecting more that may fall more into the spring? I know you talked about this a little more in the previous question, but just trying to understand that a little more.

I think we only had one significant job, and it was an international one that moved, in the WSI front. The rest was -- we had pretty good visibility coming in to the quarter. We knew we were going to be busy. We were actually happy one job pushed out, because it allowed us to keep resources on a couple other jobs that were really good for us.

And what's happening is -- and this is -- I don't know if it's typical for other companies, but as WSI gets on to these sites, and because they've deferred maintenance, these jobs are going from a few hundred thousand dollars up into the millions because they're finding so much stuff that has to be done once we are on site. But we're to the point of where we just -- that's just what's happening, and we expect it.

So I can't say I was disappointed, because the team was basically chock-a-block full. I don't think we had any project managers, any project engineers, any supervisors sitting on the sidelines in the third quarter. So it would have been tough to handle very much more.

Okay, great, understood. And then, Paul, is it possible on galvanizing to break out what the impact of pricing was on growth in the quarter, as sort of a matter of percentage points against you, or for you?

Yes, getting back to the first question from the call today, probably not going to go down into that level of detail and spike out the percentage points on --

Well, because it's messy. It's a volume, price, zinc cost -- there's too many variables to pinpoint it, without giving away information we may not want to give away.

But there's pricing headwinds, and we anticipate those are going to continue, partly because of the low price of zinc. So, everybody's costs are down, and the tendency in this kind of a market, where there's not robust demand, is to compete more on price. And we don't like to do it.

We don't set our prices centrally. We compete site by site with whatever the competitive situation is in the market. And that's the other problem we have on quantifying it for everybody, is basically we have 42 different pricing philosophies going on every single day, based on their demand, based on what they've got out on their yard, based on what their sales force is telling them is out on the horizon.

So we fight that battle at each location every day. And so while we can actually track a lot of it, and we can trend it, I'm just hesitant to pinpoint what the exact impact was with the price.

Okay, I appreciate that. And just back on the Gulf Coast commentary, with the galvanizing business, what types of projects are you really seeing a pullback in, in particular?

I'd have to say it's more of the overall activity. We've seen a pullback in Oklahoma, which for us is heavy oil patch-related, not necessarily pure oil patch.

But as the economy goes, we've seen the refinery and offshore business, which is very nice business for us because offshore platforms are very aggressive environments. And we've seen a pullback on that which relates to the production side. And then we've continued to see the big petrochemical refinery jobs that we thought were going to come in haven't come in, and because of that there is a little extra capacity sitting there in Louisiana, particularly that's come about because of that expectation.

So we're pretty diversified. Every one of our plants does anything from -- well, not everyone, but a lot of them will do poles, will do stadium bleacher seating, things like that. So it's a broad mix of business. And we go chase other things, which may or may not be as profitable as some of the project activity.

But just overall, the market is not robust. We're scrambling (multiple speakers).

Understood, well, thanks for your time.

And the next question will come from Jon Braatz of Kansas City Capital.

Tom, you've done a very good job of increasing your international business and gaining market share, and winning some new projects. But obviously there's a lot of turmoil in the international markets, China, and oil prices coming down.

When you look at the international markets broadly speaking in the macro environment, are you seeing any change in the opportunities for you -- any change in demand and so on? Like I said, obviously you've been gaining share, but are you seeing maybe some headwinds developing in that market?

I don't want to be cavalier about this, but we really are not seeing that. And I'd have to say it's because we're such a niche player in what we do. So, whether it's high voltage, gas insulated line or medium voltage bus -- the things that we're -- the WSI stuff, a lot of the welding solutions. As I've talked about in the past, what's happening is you've got these coker vessels coming up for their first maintenance cycle, and so even though Brazil may be a mess, they've still got to maintain their equipment.

And so, in each of those three areas, from the electrical side to the welding side, we're not impacted so much by the overall turmoil going on in China, or even Saudi Arabia, for instance. And while we're pursuing opportunities in those areas, we've not seen the volume of those opportunities fall off, but it's only because we're in such a niche. And if they need our products, they need our products. There's other people to supply them, but those types of projects are going forward.

So, we remain -- we're very vigilant about -- are we seeing quoting activities reduced or things like that. Fortunately, we did put in salesforce.com so that we can track our opportunities better on a Company-wide basis. And we're just not seeing -- I mean, my sales guys would probably shoot me because they say they are scrambling every single day, but we are not seeing the opportunity levels fall off.

Okay. Turning to NLI, can you talk a little bit about maybe the progress you're making there, or the upside opportunity, and where NLI might stand in relationship to where you want it to be?

Yes, we talk probably too much about the big project nuclear backlog, the Westinghouse stuff (multiple speakers).

Beyond Westinghouse.

Yes, exactly. Their on-time deliveries are up to over 90%. Their quality is dramatically improved; the sales force is first here; we get a shot at everything that we should get a shot at. We'll see continued margin improvement.

The issue we face with that business is, for us, it's a business that we can only grow so much, because we don't have any other synergies with that business from our other business units. So, for us, going forward it would be a nice, decent margin business. We're running it the way we need to run it, so it is where it is.

As we look at it, we don't -- but we don't have any leverage points to where we can grow it, and there's not a whole lot of new project activity out there, as you can imagine. So it's a tough market for somebody who's only in a small portion -- serves a small portion of it, like we do.

I know it's not a big revenue generator, but is it something that would be part of your long-term plan going forward?

Paul is sitting over here laughing, so I'm going to let him answer it.

Jon, we constantly evaluate our portfolio and our assets, and available assets on the market. And as we've said many times before, we won't comment on any specific business in that regard, but we're constantly evaluating where we are.

Thank you for your standard comment.

You're welcome, sir.

The boilerplate. All right, thank you.

I will say something though, Jon, that we are very focused on -- we've basically been here a couple years now, and we're very focused on cleaning up our platforms, and in making sure we've got the right businesses going forward that we can bring more value to or real value to. And so that's why clearly we can't say anything specific about NLI.

What we can talk about is, we understand; we're a couple years in now. This is at the point where we've got to have the business units we want on the platform going forward, and so we're heavily into the middle of that stuff.

Jon, I will say this: I'll echo what Tom said is that the Business is in much better shape. Many, many things have improved there. And so we've taken the time, we've taken the effort, and it's a real -- it's a very good story compared to where you might have seen it when you came on here, as well as when we came on here. So, hats off to the team there.

Yes.

Okay, thanks much.

Our next question will come from Bill Baldwin of Baldwin Anthony Securities.

Tom, you've mentioned that you're beginning to see some improvement in the domestic electric utility markets. Could you comment on what the product categories that impacts you, and how visible you think this improvement might be, as far as looking out into 2017?

Yes, I think, for me, I'm glad we're in these niches. So, like our medium voltage bus business is seeing -- they've got some nice orders in the nuclear arena. It's different than the nuclear side than NLI deals with. But we've seen some of the -- our enclosure businesses are doing fine. They're pretty well full, so to speak.

Our switch gear business -- we've done some operational improvement. I think their customer satisfaction levels are up. They're benefiting from that, both in orders, as well as hopefully in margins going forward.

And then our high voltage bus business, the gas insulated line stuff, which tends to run feast or famine, even they've had some opportunities in North America recently, which is, for the last couple years it's almost been all international for them. So it's those products.

Pretty much across the board then.

Yes, for our electrical guys, it's pretty much across the board. I think that stuff is doing well.

That's good. Good job.

I give our sales team credit there -- our folks that work with the reps. And I do think our focus on operational excellence is starting to pay off. When you're delivering on time, you're giving the customer quality product, they're paying attention. And of course, we've got to keep that up.

No, I understand that, but do you think this represents some market share gains for you in some of these product areas, or is this just business coming down the pike that wasn't there before?

It's a good question. I think, at our next quarterly, I'll make sure that the leadership team there has that answered.

Right now, I can't say. And part of that reason is -- and I'm just not recalling -- they actually have a graph on it, and we could get that back to you, but I just can't recall what it showed last time, whether it's market share or whether it's just we've just got more quoting activity because there's more (multiple speakers). But we would be happy to find that out, because it's a standard thing they look at in their win versus loss versus their win rates and all that.

And second and final question: With these lower zinc prices we've been seeing that are pretty substantially down over the last few months, when do you think that will begin to cycle through your income statement -- these lower zinc costs?

Yes, I think as we get into middle part of next year, or middle part of this year, middle part of this calendar year.

Calendar year?

Yes.

Okay, well, good job. Thank you.

I appreciate it.

The next question will be a follow-up from Schon Williams of BB&T Capital.

Just a couple quick ones here -- any impact from -- I know you had a lot of storms in the region there over in December over the holidays. Any negative impact, or I don't know, maybe any impact on maybe some of the galvanizing business, as we move into the next couple months, from rebuilding?

We may have lost a couple of days. I think some of it was maintenance; some of it may have been weather related. But it's just -- we may have a freeze coming here in DFW over the weekend, so, as you know, we aren't real prepared for this, so -- but that's all we see.

We're no better -- well, we may be as accurate as the weathermen, I don't know. We're forcing it; unless it's a big, widespread, long freeze, it's probably pretty normal as we look at it year over year, on a year-over-year basis.

Yes, but from these storms, I would say any effects would have been more on our customers than on us.

Okay, that's helpful. And then, Paul, can you -- what was the ForEx effect in the quarter? Do you have either the revenue or operating income impact or both?

It was de minimus, as you saw. The below-the-line fallout was almost nothing. And our number one exposure -- we're pretty well balanced around the world, because we still do a lot of our contracts in US dollars, or we've done a good job of matching up, say, in -- our euro expense matches up pretty well with our cost of doing business in the very good Poland-based group of welders that we have at WSI.

Our main exposure is to Canada. Canadian dollar obviously has moved down steadily, but we've been able to manage that pretty well. So it hasn't had a very big impact. The biggest thing you'll see is on the translation exposure inside the [other] comprehensive income.

Okay, and then I noticed accounts payable popped pretty good in the quarter on a sequential basis. Anything unusual there?

It's pretty similar to the same sort of seasonal pop we saw in the third quarter last year. You'll also notice that we added six plants during the quarter that would have -- I'm sorry, during the second quarter that would show up here as higher levels than you were probably expecting at the end of the third quarter So we've taken on these extra balance sheets; you're going to see more activity going on.

Backlog is up; there's more stuff going on. But again, it's followed a seasonal pop that we saw happening third quarter last year, as well. So there's a big ramp going on now.

Okay, and then last one for me -- any guidance on the tax rate? It seems to be consistently coming in at the low end of your -- I think your 28% to 30% range. Any thoughts on the final quarter, and maybe as we move into FY17, FY18?

We'll be ready to talk about tax rate when we bring out the guidance for the next year, and we'll talk specifically about that. As far as the rest of this year, I'll say this forever -- you're probably safe continuing on about where we are now.

Okay, that's helpful. Thanks.

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

Thank you.

I'm confident we'll make progress on the M&A front, while improving the structure and focus of our operating platforms as we get into FY17. I look forward to discussing the impact of these activities, as well as continued progress in our Business, as it's appropriate.

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

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