AZZ Inc (AZZ) 2017 Q2 法說會逐字稿

Good morning and welcome to the AZZ Inc. second-quarter fiscal-year 2017 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. Please go ahead, sir.

Good morning and thank you for joining us today to review the financial results of AZZ Inc. for the second quarter of fiscal year 2017 ended August 31, 2016. As our operator Denise indicated, my name is Joe Diaz. I am with Lytham Partners and we are the investor relations consulting firm for AZZ.

With us on the call representing the Company today are Tom Ferguson, Chief Executive Officer, and 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 other financial websites.

Before we begin with prepared remarks, I would like to remind everyone that 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 29, 2016.

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 power generation markets, electrical transmission and distribution markets, the industrial markets, and the hot dip galvanizing markets; price and raw material costs, including zinc and natural gas, which are used in the hot dip galvanizing process; changes in the political stability and economic conditions of the various markets that AZZ serves, foreign and domestic; customer-requested delays of shipments; acquisition opportunities; currency exchange rates; adequate financing; and availability of experienced management and 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 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. While I was disappointed the way our second quarter progressed due to the weak markets, I am ever more optimistic about the opportunities ahead of us and our ability to focus our business on higher growth markets and products.

Since we don't have backlog to buffer our results in galvanizing, we have to be nimble when faced with slow market activity. Tim Pendley and his team were quick to react with a recovery plan that aligns our capacity with the demand outlook. As welding solutions saw turnarounds pushing out, they took the opportunity to realign their operating structure to better match a global customer-service-oriented business.

We demonstrated we could quickly react when the market activity declined in both our galvanizing and welding solutions businesses, but I can't emphasize enough the distraction the Nuclear Logistics LLC -- and forgive me if I refer to it as NLI once in a while -- divesture has been on our lean management team.

I can only express my personal appreciation for my staff's efforts and how the NLI management team responded to the distractions during the quarter while still managing to take care of their customers, employees, and other business demands. While the deal has not yet been consummated, we are now able to focus on some critical business development opportunities that have been in the pipeline.

We started fairly strongly in the first quarter, but struggled to get good traction in the second quarter. As we had cautioned previously, we sensed some softness in the regions impacted by low oil prices.

And during the second quarter, the galvanizing market along the Gulf Coast remained weaker than expected, particularly in West Texas and Oklahoma. The primary issue was volume, and since galvanizing does not operate with much backlog, the effects were felt quickly.

We had also indicated that because of our energy businesses, we are not a quarter-over-quarter business and that we believe that the front half of the year was going to be weaker than the back half.

While our quoting activity levels for the WSI business, which is driven by refinery turnarounds and power plant outages, was solid, more projects were deferred than anticipated. And most of those that did execute during the quarter tended to be smaller in nature.

Quite frankly, our electrical platform is performing well, if not for the oil-patch-related headwinds. Our tubing business continued to suffer from low oil patch activity, and our lighting business finally began to feel the impact of low rig activity.

Our enclosure businesses continued to perform well. While our bus businesses did reasonably well, they did not see any of the higher-margin emergency jobs like they did last summer. We also faced the year-over-year comparative headwind at NLI of the $14 million in the second quarter related to the large shipment of the now-completed Westinghouse new plant projects.

Consequently, we took the opportunity to realign some of our operations. We took some D&A reductions in WSI to reduce our overhead costs, closed a galvanizing site in Mississippi, shuttered a site in West Texas, and repurposed the Catoosa, Oklahoma, site to support our new metal coatings offerings. We do not believe any of these actions will negatively impact our revenue this year, but should provide us a more cost-effective operating structure that is better suited for supporting new growth more efficiently.

We recently announced an agreement with Westinghouse to divest our Nuclear Logistics LLC business. As I stated at the time of the announcement, Westinghouse is a premier player in the nuclear industry and could more effectively grow the NLI business due to its broader product portfolio and industry presence.

We view this as a good deal for shareholders, employees, and customers. We also believe this allows us to focus on our core businesses of industrial welding solutions, galvanizing metal coatings, and our electrical products, and also return to pursuing the healthy pipeline of M&A activity opportunities to build these businesses.

We have numerous opportunities that have been on the back burner for a while now. And so we should be able to proceed more quickly with these.

We see mix market dynamics that present a combination of challenges as well as opportunities. Despite the volatility of recent international events, the election year, we feel confident in our strategic plan to grow our operating platforms in a fiscally responsible manner.

We will invest in key initiatives to drive organic growth and operating excellence. We remain focused on growing organically with expanded products and services while efficiently deploying capital that will position AZZ to continue executing on our growth and performance plans.

As we look forward, we have a strong backlog of $352 million in spite of bookings being off as several large electrical projects pushed into Q3 and Q4. WSI activity is also pushing out as refineries continue to remain focused on cost controls due to lower margins.

Large maintenance events are being deferred in favor of just repair-and-go-type work. Nuclear power plant outage cycles have normalized, we are winning our share, and we also do have some large nuclear projects already booked that will begin in Q3.

The bright spot for our electrical platform is the increase in transmission and distribution work, as we are seeing numerous substation opportunities for our enclosure and switchgear businesses. Unfortunately, our lighting and tubing businesses, in spite of being a small portion of our portfolio, are feeling the impact of the low rig activity in the oil patch.

Our galvanizing segment still faces headwinds on the Gulf Coast related to the impact of sluggish oil and gas spending, but we are gaining strength in other sectors, including bridge and highway, construction and recreation, and original equipment manufacturers to help offset some of those current headwinds.

While federal credits were approved and extended for solar power, activity remained somewhat slow since companies now have some time to evaluate those projects. Our volumes have drifted lower as we have focused on maintaining price levels. And since we see this activity continuing, that's why we chose to take out some of our capacity in the affected areas.

The outlook for our energy segment is mixed for the balance of this fiscal year, but brighter as we look into fiscal year 2018. We continue to position ourselves to increase our share of international opportunities while improving our operational efficiencies and focusing on margins.

While I'm not thrilled with how the quarter turned out, we are having a solid year, continuing to structure our platform so that we can better focus on core growth and improved earnings and cash integration. We will continue to focus on improving our customer service levels while focusing on cost control and on maintaining a healthy M&A program. The agreement to divest Nuclear Logistics LLC is a major step towards a more strategically and operationally focused AZZ.

While we still have a couple of non-core business units to address, we can now be more focused on strategic growth initiatives. We are particularly interested in expanding our enclosure business, which is a business I like due to our capabilities and the limited exposure to low-cost imports it has. We are also focused on expanding our service offerings for medium-voltage and high-voltage bus.

We continue to have good uses for our cash, both within the existing businesses and also for M&A. Due to our strong cash flow outlook, we are increasing our dividend to $0.17 this quarter.

Additionally, as we have deleveraged our balance sheet and continue to generate strong cash flows, we are looking to buy in some of our stock to minimize the dilutive effects equity-based compensation and our employee stock purchase plan have had.

We have suspended guidance for fiscal year 2017 until we complete the divestiture of Nuclear Logistics LLC. While we anticipate the deal will be closed within the next several weeks, we do not want to gamble on the timing or the final accounting adjustments since operating control could pass any time between now and December 31 of this year.

Our businesses remain sound, our backlog is strong, and we continue to see opportunities to grow our top and bottom lines the balance of this year. Given the market uncertainties, we are even more intently focused on cleaning up our platforms as well as adding some important acquisitions to our portfolio this year.

Now I'd like to turn it over to Paul Fehlman to cover the financial highlights.

Thanks, Tom. For the second quarter of fiscal year 2017, we reported net sales of $195 million, a decrease of $19.2 million or 9% below the second quarter of fiscal 2016.

Net income for the second quarter of fiscal 2017 is $10 million, a decrease of $7.2 million or 41.9% compared to the second quarter of the prior year. This $7.2 million decrease included $8 million of realignment charges taken in the second quarter across both the galvanizing and energy segments.

Reported EPS, including the realignment charge, fell to $0.38 per share compared to the second-quarter fiscal 2016 EPS of $0.67. We expect the realignment to benefit the Company by approximately $6.2 million per annum well into the future.

Our backlog finished at $352.8 million, up 4.3% versus the second quarter last year. And our book to bill ratio for the second quarter of fiscal 2017 was 0.99 compared to 1.09 in the second quarter last year.

Gross margins fell to 21.5% from 25% in the second quarter year over year, primarily due to around $7.6 million of realignment charges reducing gross profits. SG&A, which included a little over $400,000, finished at 13.8% compared to 12.6% for the second quarter last year, but was actually down on a dollar basis year over year despite the realignment. The result was a reported second-quarter operating margin of 7.6% compared to 12.3% in the second quarter of fiscal 2016.

Our effective tax rate of 10.4% for the second quarter was well below the rate from the second quarter last year of 21.2%, stemming from certain favorable state tax benefits driven by the realignment charges as well as by the adoption of a new accounting pronouncement regarding employee share-based compensation.

Cash flow from operations for the quarter was $40.3 million compared to $50.1 million in the second quarter of the last fiscal year. As for our second-quarter segment results, second-quarter revenues in our energy segment were down 11.9% to $97.6 million compared to the second quarter of the prior year, while operating income fell 9% to $8.2 million compared to prior year as we recognized around $700,000 of realignment charges that affected the margins.

Gross margins in the segment improved from 24% in the second quarter last year to 24.2% in the second quarter of the current year, despite the inclusion of some of the charges to gross profit.

In our galvanizing segment, second-quarter revenues fell 5.8% to $97.4 million compared to the second quarter last year, while operating income fell to 15.4%, inclusive of realignment charges around $7.3 million, worth about 7.5 percentage points of margin compared to the same period last year.

I believe that the steps taken to shut down the two galvanizing plants, repurpose a third, and execute several smaller projects to drive operational and cost efficiencies were an appropriate response to lower volumes in galvanizing as well as the softness in certain energy markets. The expected efficiencies should begin to be realized almost immediately.

As part of our commitment to shareholder value, we have recently announced a 13.3% increase in our quarterly dividend from $0.15 per quarter to $0.17 per quarter. And we'll begin, as Tom said, to look at modest share repurchases to counteract the dilutive effects of share compensation and employee share purchase programs in the near future.

We continue to leverage our ability to generate cash, and the potential sale of our Nuclear Logistics business should support our strong balance sheet and allow us to strengthen our core operations going forward.

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

Thanks, Paul. The key takeaways I would 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 and metal coatings 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 beginning to see some benefits from our accelerated emphasis on operational excellence and customer service at both WSI and in our electrical businesses, but it's still early innings for these endeavors.

As I have stated before, we are not a quarter-over-quarter business due to the impact of refinery turnaround and power plant outage cycles as well as the dependence of some of our businesses on large projects. We continue to expect a solid year in fiscal year 2017, with earnings skewed to the back half of the year.

Now we'll open it up for questions.

(Operator Instructions) John Franzreb, Sidoti & Company.

Good morning, guys. I'd like to talk a little bit about the galvanizing restructuring. Could you tell us, I guess firstly, the facility that you are closing, was that part of legacy business or were they acquired with Trinity? Can you just clarify that, firstly?

Yes, these were sites that we acquired, one of which was the one in Mississippi at Kosciusko was really close to our Jackson facility, but we thought it could give us some extra capacity if that petrochemical boom ever took place. So that's why we went ahead and kept it open.

The West Texas, that was really dependent on oil patch infrastructure buildout. And as it turned out, a lot of that had occurred, so looking at it -- we own that one, so we've shuttered it for the time being. And if we get a sudden boom back in the oil production side of West Texas, we would be ready to take advantage of it.

And then the other one was a legacy site -- Catoosa. That's just -- we had four sites up in that Oklahoma area and we needed capacity for some of these new metal coating initiatives that we have underway. And that just made a perfect site, given its location, to repurpose that site.

Okay. So your intention is not to sell the properties, but to kind of mothball them until you need them? Or will you sell some and keep others?

We'll wait on that. We haven't called that -- made that decision. We're looking at different options and also looking to make sure that we can support the business that is out there through our existing facilities. So we'll look at that as time goes on.

I'll clarify one thing on that. The first one was a leased property and that one we did push back.

Yes, yes.

And we do own the second.

Okay. Because I guess I'm kind of curious how hard is it to restart the galvanizing facility. It's I guess something I've never heard of since I've been covering the Company.

It's easy. It's basically hiring and training people. The big issue is making sure that we got a good plant manager, good ops support. But getting people hired in that area would be quick. And getting equipment up and running -- the way we've shut it down would be very straightforward.

Okay. Fair enough. And just one other question and I'll let someone else get in. Regarding restructuring charges, the $6.2 million in annual savings, how much should we allocate to the galvanizing business and how much should we allocate to benefits on the energy side?

The majority of the benefits would be on the galvanizing side. It's probably I'd say 75%/25% galvanizing versus energy.

That's about right.

Okay. And would those savings in and of itself bring you back to the 25% top margin that you kind of were doing in recent prior years in galvanizing?

The only impact we had in the quarter was really volume -- or lack thereof. So with this restructuring and getting our capacity aligned with the market outlook, we're still on track to get back to the 25%, I think. We'll be real close to that by the end of the fiscal year, just as we intended.

Great. Thanks a lot, Tom. I'll get back into queue.

Brent Thielman, D.A. Davidson.

Good morning, Tom, Paul. Wanted to come back to kind of the turnaround maintenance activities. I thought these were pretty well planned in advance. I'm just trying to kind of understand what might've changed versus your expectations. Was it pushouts -- were they just canceled altogether?

And then Tom, any thoughts on kind of how things are shaping up for the fall outage periods? Does it look softer or stronger than last year?

I think, as we went into the quarter, it's a fairly weak quarter anyways for turnarounds and outages, but we took advantage of some opportunities.

Last summer, we had some big international things that helped us, and this year we didn't see those. So that's why going in, we had an idea it might be weak, and it was.

But as we look at the fall season, there's a lot of activity. The concern we have is a lot of it is pushed into the latter part of the season, which means it could push over into the winter months. We're seeing quite a bit of the smaller emergent-type work, which indicates they are just controlling expense -- the refineries are just controlling expenses.

On the power side, though, we have seen good activity, and we actually have already booked several good-sized projects for the fall season, which we're excited about.

So it's a mixed bag. We'd like to see more activity, but on the other hand, some of the stuff that's going to push actually helps us because we can handle -- we've only got so many field superintendents, so we can only handle so many jobs, whether they be smaller emergent jobs or larger ones.

So as we are looking at what we're seeing right now, the activity is picking up. But it's a little softer than last fall, quite frankly.

Okay. Appreciate that. And then I know you can't get too specific, but -- in terms of some of the business development opportunities, obviously, on the M&A side. Are some of these things large enough to offset what you'll lose from the sale of NLI? Just trying to get a sense of how quickly you might be able to offset some of that lost revenue and EBIT from Nuclear Logistics.

Yes, you know, we sure wish that we had better timing on some of these things. Because originally when we were looking at stuff, we were hoping we could maybe get a deal the size of a PEI done. And then not too far after that, go ahead and have a divestitures. So it never works out the way you'd like.

We've got enough in the pipeline. A lot of it is focused on the galvanizing and metal coating side of things. Some of them are a little larger, but for the most part, all of those are onesie-twosie kind of shop deals.

But then we are looking at some bigger things on the energy side that would help us offset that. The only caution I would make is once again, we will never get the timing quite right, but we'd sure like to get some of these things done the balance of this year.

Yes. Understood. And then one more, if I could. The volatility in zinc price is still quite interesting. Maybe just an update on your pricing initiatives, your capabilities to offset some of the increases we're seeing in the market again?

Actually, on the galvanizing side, we're seeing prices actually up year over year. Again, just what you've seen reflected in these numbers is really just a volume issue. Pricing is good; it was actually up. And that was both in our legacy stuff and in the acquired.

And if you are talking about zinc costs, we've continued to see that move around, mostly kind of trending up. We buy -- our kettles have several months of -- technically, we have several months of zinc inventory in our kettles. So we don't see the immediate effect of that, which also gives us time to work on the pricing side to ensure that we don't have any cost impacts from it -- or margin impact from it.

Great. Thank you.

Yes, I don't know if that helped, but it's just kind of volatile right now.

It does. Thank you.

(Operator Instructions) Noelle Dilts, Stifel.

Hi, guys. Good morning. I just wanted to go back to the -- I'm going to call it NLI -- divestiture. And can you just help us and give us a flavor for sort of how you were thinking about the performance and contribution for the operation for this year from a revenue and profitability perspective just so we can kind of get a sense of what this will mean to the model?

We never go down to that level, and we've actually intentionally not given out the details on the deal yet. But it was actually performing better than prior years and I think that it definitely had improved over the last couple of years.

Yes, I want to be cautious on that. The quarter itself, it actually performed lower than Q2 last year because of those projects, as we mentioned.

Yes, of course.

Fundamentally, the margins in the business are up. The issue we have is we are not a big player in nuclear, and so we did not view that as a business we could grow. So I think we've talked about it in the $50 million/$60 million of revenue as an overall level for that business.

And I don't know that we saw it any different than that. And we weren't chasing the large projects because of the issues we had had on those past large projects, not to mention the fact there's no large new nuclear plants being built other than -- at least in the US other than the few that have been under construction for years.

So Westinghouse is just a better fit. It allows them to be able to grow that business because of their much stronger presence, larger portfolio. And for us, it won't have the up-and-down impact on our quarters because that is where some of those big projects tended to flow through.

So -- but overall, I think we've mentioned from time to time it's a $50 million/$60 million business. Our focus had been on the profitability and we made a lot of progress in terms of the margin in the business, getting the operational fundamentals right.

And so it was a business that if we needed to keep it and couldn't find the right fit for it, which fortunately we did, it was one we were going to be perfectly comfortable running. Just, you know, it's -- but understanding that for a company our size it has those inherent ups and downs and a little more risky just because of the project-oriented nature of it.

Right. Okay. And then going back to that $6.2 million per-year savings associated with the realignment initiatives, how much do you think you will realize this year? Do you think you will recognize the full savings this year or will part of that flow into next year?

Most of it is going to flow into next year because a lot of it was asset write-offs. And it did affect some people in the plants that we closed and it did affect some management folks in the WSI business particularly.

But a lot of it was asset write-offs that the depreciation effect and those things rolled. We'll get a full year benefit of it next year, so --

A little less than half. [2, 2]

Yes, definitely less than half. Probably I would put it more like 25%/30%.

Okay. And then just circling back to the galvanizing business, you spoke about this a little bit in your prepared comments. But can you give us just a little bit more detail on what you are seeing in some of the end market verticals, particularly transmission.

And then also if you could comment on highway and street spending, where if you look at the Census Bureau data, that investments there have been a little bit weaker, I think, than expected. So maybe you could comment on what you are seeing in that space?

Yes, I think on the T&D side, we're seeing more substation work and things like that. And that helps, obviously, our electrical businesses more than our galvanizing side.

So we're happy with that. That's replaced some of the -- for the electrical side, it's replaced some of the pipeline activity that we've had the last few years and that has been somewhat reduced.

In terms of the solar -- we've seen solar off, as I mentioned in my comments. And so that's usually a big piece of business for some of our plants. And with that being off, that -- and there hasn't been other power generation construction, at least not of any major significance. So we've seen that off.

The pieces that are -- the bridge and highway has been a little more muted. We've tended to have facilities in areas that have done fairly well in terms of bridge and highway construction. Some of our new product offerings are focused on that.

So we think there's just -- I don't know whether it's election year delays or whatever, but we still look for that to be a positive for us as we get towards the latter part of the year and then as we go into next year.

Okay. Great. Thanks a lot. I'll get back in queue.

Andrew Storm, Cortina Asset Management.

Thank you. So I'm just curious: in 2015, I think you had $10.5 million in expense for the amortization of intangibles from the prior deals. So with NLI getting sold, is some of that going to go away?

Yes.

Can you give us an idea of how much?

Actually, that's one of the variables here with the timing and the relative size of the balance sheet of not only electrical, but also NLI at the time of the closing of the deal. So that will be worked out then.

Yes. And that will be one you'll get a lot more granularity when we are able to talk about it.

That's fine. Another way to ask then is if you had not done this deal, roughly what would it have been in 2016? Couple million, hundreds of thousands?

If we had not done this deal -- I'm sorry. I didn't --

Right. I'm just asking what would the full-year amortization have been had you not sold NLI? Because I'm just trying to figure out what next year's impact is more than -- you know --

Okay. NLI was about 300 a month.

Yes. $3.5 million or so.

Okay. Great. So my next question is just looking at galvanizing services for the last decade, the only period you ever had real negative declines on a year-over-year basis, you had one quarter in 2013 and then in 2009, where it was declining 20%. But even then, it was only three quarters in duration. And part of that, I suspect, was also commodity pricing.

So it is kind of surprising to see the year-over-year decline, especially given some of the acquisitions you've done. So it implies to me the organic might be a little worse.

Has something changed, or do you think it's just sort of a bad timing and confluence of events that would do it? Because the history suggests it happens rarely and not that long, but --.

Yes, and we're viewing it that way, too, that this is going to be a relatively short cycle that we get lots of initiatives as well as -- but rightsizing the capacity, when you look at the impact on margins, it was two very underutilized plants that were bringing those margins down.

So that's why we're pretty confident that the fundamental margins that we continue to talk about in the 25% range are still there. So the fundamentals of galvanizing are still really, really good.

But I think you have like 50 plants, right, give or take?

Yes. 41, 42.

Okay. So two plants completely going away if they were underutilized wouldn't cause a near maybe 10% organic decline in a quarter. Maybe high-single digits. So it just sort of sounds like it's maybe a broad weakness or was it really just more localized?

In terms of volume, yes, there was broader impacts on the volume that we talked about, which was the lower -- significantly lower solar business. The fact that we're still ramping up the new Reno plant. So you've got the investment there without -- it's doing just fine. We anticipated it will hit its stride by the end of the fiscal year, which generally we still feel is true.

And then the two plants. But keep in mind: one of the things that happens is in those two plants -- now that work we anticipate just moves to our existing plants. So we get improved absorption at existing plants and we get rid of the expense and cost of the ones we're shutting down or repurposing.

So you basically have three plants that are affected and -- but the volume was more than just West Texas/Oklahoma. It was we have not seen the petrochemical buildout that was anticipated in the Gulf Coast, which -- we're seeing activity, just not the activity that everybody would like.

The Texas economic fallout in West Texas -- because other parts of Texas are just fine -- that had an impact. And then solar, as I mentioned, which is a nice chunk of business for some of our Western plants. So we still view it as a pretty short-term thing.

Right. And so you highlighted bridges and highways as a positive. Who knows who is going to win the election, but it sounds like both are talking about fiscal stimulus. How meaningful is that if there is an increase in transportation spending, highway spending, et cetera?

That would be pretty significant for us because that tends to have a lot of galvanizing to it, particularly with some of the products we've got that we're focusing on that industry. So I would say that would have a very positive impact for us.

Okay. Great. Thank you.

Jon Braatz, Kansas City Capital.

Good morning, Tom, Paul. Returning back to the galvanizing question and organic growth, if you were maybe to take out the revenue losses in your weaker markets, Oklahoma and Texas, what kind of numbers are you seeing organically in other geographical markets? Are they still down, too?

I think in general, we're up in most places on a year-over-year basis, other than some of those Western US plants that are affected by lower solar activity. So generally, we're -- I was just looking for a number on a year-to-date basis. We're actually up 3.4%, if you take a year-to-date comparative in terms of volume.

And we anticipate returning to normal volumes as this year goes on. So it was kind of a confluence of things in the quarter. But yes, a lot of our plants are doing well.

Okay. Good. And then Paul, is it possible or could you report NLI as a discontinued operation next quarter or if the sale extended beyond the third quarter into the fourth quarter?

Yes, that's what we would do.

You will report it as a discontinued operation?

We would report it as a discontinued operation the next quarter, the assets held for sale. And we would also have -- if it closes during the quarter, then you would see a more showing of that.

Okay. Good. And then lastly, PEI. How did that perform in the quarter and is it matching your expectations when you acquired it?

It's one of the reasons I keep talking about how much I love the enclosure business. It had a really, really solid quarter and it's exceeding our expectations and integrating nicely into that enclosure structure that we have. So a great team there, great products, and they had a really, really good first quarter for us.

Okay. All right. Thank you much.

Bill Baldwin, Baldwin Anthony Securities.

Thank you. Good morning. Can you offer any color or insight as to what kind of expectations you might have regarding your joint venture announced here recently in Saudi Arabia? Looking out over a two- to three-year period, just benchmark that if you can in some way as to how important that might be to your energy division?

It's a positive for us. We've talked about things like that for some time. To put it in perspective, though, they're just building a factory. So it really won't be in operation until sometime next fiscal year, based on how I'm looking at it.

For the most part, it's more defensive than growth oriented. We needed a local presence because that's the way things are going in the Middle East. It should lower our costs of production; gives us better access to those customers.

But the kinds of projects we've had, particularly -- well, in the Middle East, particularly for our high-voltage bus business, those projects should, continue, but I'd say view this as more defensive than anything that's going to be a big positive for us.

I don't know what else to say about it. It was the right move to make because I think we would have lost projects going forward if we didn't have that local presence. And so that's why it was an important step for us.

Have you indicated, Tom, whether or not this is a 50-50 joint venture or what the breakdown is on the percentage ownership for the joint --?

Yes, we actually took a large minority stake. I don't know that we've published, but --

We haven't published them.

But we are a --

Let me follow up there with this issue. Will this joint venture still allow you to ship product into the Middle East like you have been doing from the US?

Absolutely. Absolutely. That was one of the things -- certain components we will continue to ship from the US. As a matter of fact, for some time going forward until that plant is fully up and running, an awful lot of the higher-value add items will be built in the US.

The issue we'll have is the local labor will reduce our overall cost of the product to serve the market as well as reduce transportation costs and final assembly and give us better field support in the [region].

Okay. Thank you.

John Franzreb, Sidoti & Company.

Guys, given PEI is doing better than expected, and I'm sure you are carving out NLI right now, could you give us a sense what the backlog would look like organically on a year-over-year basis? Was it up or down?

In the energy side, it would have been --

Down just a hair.

Down just a hair. It would've been down just a hair -- down slightly.

And that's stripping out PEI and NLI?

Actually, stripping out NLI -- sorry. I was just stripping out PEI.

So if you had done that, it would have been down.

I'm not looking at an NLI backlog number, but --.

[So we can actually analyze] some of the Westinghouse in the backlog?

What I'm thinking through is last year at this time, we still had all of -- we had gotten rid of most of the Westinghouse backlog. So it was right at that pivot point where the backlog was normal in NLI.

So we were actually down year over year.

Yes.

If we were to pull it out, it was zero compared to last year's would be way down.

Yes. And that's I think where we're struggling is just to pull it out completely. And we still have some periods where we are going to be shipping that backlog. And it's still booking business.

All right. So the legacy business was flat or modestly up is what you're saying now?

I think the legacy business on -- where we were down was the backlog in WSI was down a little bit, as we mentioned. The backlog in the oil and gas in the tubing and lighting business was down year over year, as we've talked about. The electrical, I think, if you take out PEI, still would have pretty close to flat. Maybe down just a hair.

And as I also mentioned was we had several large projects that were just on the verge of booking. And you missed a quarter by a week or two, and just the nature of that business. So we're very confident of the backlog we have in place on the electrical side on a go-forward basis as well as how it's stacking up for what we're going to have going into next year.

Got it. And is there any concerns that the NLI divestiture requires any kind of SEC approval, given how few plays there are in the marketplace?

No.

We don't anticipate anything at this time, given the size.

Yes, we're below the threshold.

Okay. Perfect. And one last question. The portfolio that you are leasing and giving back, are you taking equipment out or can the lessor re-lease it to somebody else?

Amongst the equipment we are retiring permanently -- it's part of the assets we're writing off. Those are just retired assets.

And there are some pieces being repurposed out of that particular plant.

Yes. So where we had a kettle we can move the kettle, we've done those things. Where it was stuff that was depreciated down to -- maybe you only had a few [years life] left. We're just taking the write-offs. And still sell some for scrap.

What I guess I'm kind of asking you, I just want to make sure that whoever holds the lease of the facility will then lease it out to another person who will start up another galvanizing facility and you find yourself in the same conundrum.

The lease -- the one that we are leasing that we're giving back was one leased from Trinity. And so they're not going to -- based on agreements and everything else, that's definitely not going to be their intent.

Okay. All right, great. Thanks for taking my questions, guys.

Brent Thielman, D.A. Davidson.

One more from me. Just assuming NLI is out of the picture, Paul, what do you think kind of the run rate CapEx would be on an annual basis?

It changes year over year. We do have maintenance CapEx of about $20 million-ish going forward. And then it really depends on what we're doing with internal -- the organic type of stuff that we're doing with CapEx.

But it sounds like you are building your model. And we bulged out in the $40s million for the highest, but our maintenance is about $20 million so you can put something in the number there.

Yes, I think this year as we go forward and we get through this year, we had some larger capital over the last few quarters for WSI because of some of their new project investments.

And NLI was not a capital-intensive business. Most of the CapEx that was spent on it was probably a couple years ago to get it into some expanded product offerings and update its equipment. So NLI is not a capital-intensive business, so it doesn't the fact our run rates a whole lot.

What we are doing is we've also made some of these investments on the new product offerings in galvanized and even in a lot of those. There's still some to go this year, but for the most part, we're going to get back to a maintenance plus something type of level.

Okay. So maybe the back half you are somewhat over that quarterly run rate?

Yes, we're not spending anywhere close to the CapEx that we had budgeted for the year. And particularly as we're pulling back on some things -- I won't say pulling back. We are trying to manage tighter to -- on some things.

And then just the focus on day-to-day business, given the fact that we continue to run a real lean organization. So there's just not resources to go do some of those things.

And we are reprioritizing some of them to ensure we're focused on the businesses that have the better growth opportunities as we get into next year. So yes, we are spending at a lower level than anticipated.

That's fair.

Okay. Thanks, guys.

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

All right. In closing, I'm confident we will make progress on the M&A front while improving the structure and focus of our operating platforms as we continue to execute in fiscal year 2017. And I look forward to discussing the impact of these activities when appropriate. Naturally, we will be announcing these as quickly as we can.

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 great day.

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