AZZ
#Thank you, <UNK>.
Good morning to all of you on today's call and we thank you for your continued interest in AZZ.
It's good to have my first full year as AZZ CEO under my belt and to be able to report higher earnings and sales on a year-over-year comparison.
FY16 is a year of great potential for us.
But, we are also watching the energy markets carefully and evaluating the impact of low oil prices on our businesses, particularly those located along the Gulf coast.
Overall, I am pleased with our results for the fourth quarter.
The integration of the nuclear and industrial operations at WSI is complete and already generating benefits in customer service, improved efficiency, and effectiveness.
Our legacy galvanizing and electrical businesses continue to perform well in spite of some bad weather and lower rig activity.
We are making progress with NLI and key operational metrics are improving which bodes well for FY16.
We are gaining traction on several important M&A activities including a few international joint ventures.
We remain committed to maintaining a disciplined M&A process and never getting deal fever.
WSI is benefiting from improved operational performance and a more normal nuclear outage cycle.
The high refinery utilization rates and strikes in the fourth quarter did generate headwinds for WSI, but we are optimistic as we head into the new fiscal year.
We look for WSI to benefit from their continued international focus and rebuilt North American sales team and are seeing a high level of activity already in the first quarter of FY16.
Our galvanizing business is solid and has accelerated several new products and service growth initiatives.
The price of oil has a limited impact on this segment, but generally, we feel good about the upside in this business both for organic and inorganic growth.
We remain active on the M&A front in this segment.
For galvanizing services, we will continue to focus on operational excellence, pricing on our value, and continued growth through acquisitions and also new metal finishing services.
We have a fairly high concentration of galvanizing capacity in the US Gulf coast area, so are monitoring the economic impact of low oil prices carefully.
So far, the impact has been small, but we are seeing a few fabrication project delays.
For our legacy electrical business, the results overall are meeting our expectations with some businesses doing well and others being a little more challenged.
This platform's overall performance is reasonably good given their mixed market conditions.
The electric utility market in the US remains sluggish, but we have benefited from strong international opportunities and a good backlog.
We are optimistic about their opportunities as we enter FY16.
They are focused on establishing international joint ventures to provide quick market access and on improving their operational efficiencies in customer service.
The legacy electrical platform, as with galvanizing, has a stable leadership team and solid operating performance.
Also, some good niche technology.
The exposure to oil price impacts is relatively small for this platform and focused on the API [to being] hazardous duty lighting businesses.
These represent approximately 5% of AZZ's overall revenues.
We also focused on key fundamentals during FY15 and improved our tax position and emphasis on cash efficiency.
Additionally, we have aligned our incentive programs more closely with the investor community.
We have converted our profit-sharing program to a performance-based bonus program.
This program designed predominantly around operating income, cash flow, return on assets, and productivity.
To help drive results, every employee is now a participant in the incentive program.
We have also extended equity-based compensation deeper into our management ranks.
I'm happy to be here at AZZ and believe we have the leadership team, products, capabilities, and balance sheet to generate above-market results for a long time.
We have taken a lot of the actions during FY15 that have positioned us for a stronger performance in FY16.
Based on our confidence, we are confirming our previously announced guidance range for FY16 at $2.75 to $3.25 EPS and $875 million to $925 million in revenue.
Now, I would like to turn it over to <UNK> <UNK> to cover the financial highlights.
For FY15, we reported record net sales of $816.7 million, an increase of $65 million or 8.6% over the prior year.
EPS also grew 8.6% to $2.52, and our backlog finished at $332.6 million, up 2.3% versus last year and up 10.8% sequentially from the end of the third quarter of FY15.
We were also successful in two areas of focus for the year, taxes and cash.
Our effective tax rate fell from 36.5% in FY14 to 27.9% for FY15, and we posted 10.1% growth in cash flow from operations year-over-year.
That's up $10.9 million to $118.2 million.
As for our full-year segment results, FY15 revenues in our energy segment were up 10.1% to $458.3 million compared to the prior year while operating incomes fell 13.1% to $38.7 million compared to the prior year reflecting the effect of costs related to our previously announced realignment program and Project cost overruns at NLI and WSI recognized in the second quarter of FY15.
In our galvanizing services segment, full-year revenues grew 6.8% to $358.3 million, compared to FY14 while operating income rose just under 1% to $88.6 million compared to the prior year that was negatively impacted by severe weather conditions and higher zinc costs we paid during the year.
Looking at fourth-quarter performance.
For the fourth quarter of 2015, we reported revenues of $182.3 million, and EPS of $0.63 as compared to $181 million in revenue and EPS of $0.40 in the same quarter last year.
A fourth-quarter book-to-bill ratio of 1.18 drove backlog up to $332.6 million.
We expect to ship 24% of that backlog outside of the US.
The effective tax rate for the quarter fell from 39% in the fourth quarter last year to 14.5% in the fourth quarter of FY15.
As for our segments in the fourth quarter, revenues for the energy segment from the fourth quarter of FY15 fell to $97.2 million as compared to $103.5 million in the same quarter last year.
A drop of 6.1%, partially driven by the effects of strike at certain refineries.
We expect to be able to recover these delayed refinery projects during FY16.
Operating income for energy increased 6% to $9.8 million compared to $9.2 million in the same period last year.
Operating margins for the fourth quarter were 10.1% for the quarter as compared to 8.9% in the prior-year period.
Revenues for the galvanizing service segment for the fourth quarter were $85.1 million compared to the $77.5 million in the same quarter last ---+ same period last year, an increase of 9.8% from a combination of the acquisitions of Zalk, our Joliet plant being fully online, and organic growth.
Operating income was $20.3 million as compared to $18.7 million in the prior period, an increase of 8.8%.
Operating margins for the fourth quarter were 23.9% compared to 24.1% in the same period last year.
We believe that our ability to generate cash and our strong balance sheet are two of our core strengths and when coupled with the access to borrowings under our existing banking agreements, we can support growing our operating platform.
During FY15, we paid down about $68 million in debt, driving the year-end balance of $337.8 million while further improving our leverage ratios.
We also used our cash to purchase the Zalk galvanizing business and to increase our dividends to our shareholders.
I'm very pleased with the progress we have made this year on key fundamentals like cash flow generation, working capital, management, SG&A cost control, tax efficiency, and creating a much greater focus on returns on capital deployed.
For FY16, we expect to continue on driving returns on capital, cost control, and cash generation.
And, we expect to achieve an effective tax rate closer to 33% for the year, although there may be variances between quarters.
With that, I'll turn it back to <UNK> for concluding remarks.
<UNK>.
Thanks, <UNK>.
The key takeaways I'd like to leave you with are these.
I believe AZZ remains a compelling investment due to our 28th year of profitable operations, our strong balance sheet and cash flows, rate portfolio of products and services, significant international growth opportunities, and a talented and seasoned leadership team.
We will continue to focus on growing our galvanizing business both organically and through acquisitions.
We will continue to expand the presence of our electrical businesses internationally, both directly and through joint ventures.
We are accelerating our emphasis on operational excellence and customer service at both WSI and NLI.
While we have made significant progress over the past year, we have tremendous upside going forward as our leadership team continues to gain traction on our key initiatives and our customers experience the improvement in our service performance.
We are looking forward to continued improvement in our businesses and greater impact from our new growth strategies as we enter FY16.
Thank you for your participation on the call today.
Now, we'll open it up for questions.
The weather impacted our volume a little bit in the quarter.
Particularly, along the Gulf coast, there ---+ as I mentioned last time, we did have some new competition come into the market, so there are some pricing pressures.
And, quite frankly, the growth in the Gulf coast market didn't really materialize as people have been expecting with a large petrochemical buildout for obvious reasons.
Also, we've taken some large projects at lower prices.
The cost of acid has gone up fairly significantly.
Those are all the things that have happened in the last couple of quarters to our galvanizing business.
I think, going forward, we are seeing more stabilized cost on acid.
We've got a lot of initiatives to reduce our usage of acid and the fact that we are driving project activity and the new products, I think, are going to have a positive impact going forward on our margins.
New services taking on ---+ providing more all-inclusive service capabilities to the customer base in the form of more sandblasting, more pickup and delivery transportation services.
Trying to be more of a ---+ I hate to call it a one-stop shop.
But, because of our size and our presence in so many parts of the country, we are well positioned to take on additional services.
And then we do have some new technologies that we are not quite ready to talk about that we think will have impact more toward the end of the year or even in outer years.
I think the good news, for us, and what we are looking at, is our quoting activity into the nuclear segment is up, and we are seeing not just more opportunities, but larger opportunities in both our WSI and NLI operations.
So, when we say it's normalized, it's because we are seeing more activity in the US marketplace.
We do have some international initiatives.
For the most part, it's ---+ our coverage is US.
So, our sales organizations are feeling better about what they're seeing.
They are seeing more activity, and whether it's more outages ---+ I haven't looked at the numbers in the last month or two.
But, at least there's more activity on the outages that we are participating in.
Very comfortable with the structure now.
I've got three good general managers over the three different business segments.
The Vice President over legacy electrical has been here, I think, 27 years.
Long-standing executive.
Once we integrated WSI, and really integrated the leadership team, integrated the operational structure between nuclear and industrial, we still have separate sales forces in that organization.
The Vice President and general manager over WSI and SMS, real solid performance.
It doesn't really show up in our numbers that much yet, but they've made a lot of headway.
And, we are seeing it in how we are quoting, we're seeing it in the ability to take market share because the sales force is back in place.
And, just the better level of service and management that we are bringing to bear there.
Then, on NLI, the general manager there was brought in, I believe, May of last year.
So, coming up on one year under his belt.
Once again, the results aren't reflecting it yet in the financials.
But, our on-time deliveries are up.
Our cost of quality is down.
The plant is a different plant than it was a year ago.
Feeling good about that organizational structure.
You pretty well nailed it, Sean.
<UNK> will probably comment here in a second.
NLI will not have those really ugly ---+ what they did ship was ugly, as we've talked about.
They took some pretty large losses on jobs.
Those are gone.
The projects that remain in their backlog that are delayed are much better margin.
And, mostly around our performance on those jobs is far better.
In the legacy electrical, that's pretty much normal stuff.
We will anticipate a little bit of improvement there from operating improvement activities.
A little bit of some of the international stuff, and then we are anticipating much better performance out of WSI.
That is just where mid-single-digit margins was kind of ugly, and it is indicative of all of the changes that one, needed to be made.
But, two, in my view, we were late making them by about a full year before we really integrated the management, put the businesses back together, started to leverage the operating platform, and leveraged the resources.
So, all of that is behind us.
So, yes, we are looking for 100, 200 basis points, is well within my expectations.
<UNK> may want to give you a few more specifics there.
That's exactly it.
I actually won't give you specifics on where we are going to put those segments.
I think <UNK> nailed it.
We've been talking about it for the last year that really the value here is getting NLI and WSI turned around, if you will.
We've been talking about this for a while that we see WSI is definitely answering the helm.
We see improvements going on there.
They ran into a little bit of headwind in the fourth quarter based on the strikes.
Otherwise, the operating margins were actually up on the energy side of the fourth quarter, year-over-year.
We are expecting NLI to do the same thing.
We are starting to see the green shoots of spring come forward there, and those are going to be the two areas of improvement for the year.
That's our expectation.
There is actually ---+ it's hard to put an exact number on it.
We think that it's probably, revenue-wise, around $6 million to $10 million-ish.
I will also say, <UNK>, that from what we've seen those strikes are over.
They're still negotiating in a couple places, but that's done.
<UNK>, this is <UNK> <UNK>.
What we're seeing on the transmission distribution side is some nice upticks.
It remains stable.
We are seeing a much more solid year ahead of us than we did last year.
On the solar market, we are still seeing nice, steady growth in that area.
It's much smaller projects as we discussed in previous calls, but it's still good, solid business for us.
We've seen some nice ---+ in fourth quarter especially, we saw some nice projects rolling forward.
It looks to be solid for us throughout the year with some impact of the oil prices still remains a little sketchy going beyond FY16.
Right now, what we consider the industrial market is so well diversified we are looking at it to remain stable for us throughout the year.
We are seeing a little bit of weakness on specific projects, but overall, the OEM outlook remains very solid for us and is overshadowing the little bit of weakness we are seeing in the industrial market.
Sure.
That's a couple of good points, there.
We don't have a large international presence.
WSI is located in ---+ has a facility in Poland and headquartered out of the Netherlands.
We've got some new operations, relatively new operations, in Brazil, and then we've got several of our businesses are up in Canada.
As we look at a lot of the growth opportunities for our high-voltage bus and our medium-voltage bus products are in the Middle East and in China.
We need to have more of a local presence, and we really just don't want to go by ourselves in this case.
So, a big factor there being speed to market and familiarity with the rules and customs in the regions.
That's where we have a lot of opportunities, and those opportunities are going to continue for several years.
That's where we are looking at joint ventures.
The new Vice President of business development that we brought on a few months ago has very good contacts in those areas and is very seasoned in those international markets.
As well as, most of the people we've either promoted or brought on into the ranks on the team have a lot of international experience.
We feel very comfortable at this point.
We are in some negotiations.
Obviously, I don't want to get into any specifics.
Over the next quarter or two, you'll see some of those announced.
I think that ensures that the opportunities we are bidding today we will be able to close and bring in and that's on the electrical side, primarily.
Although, we have made some additions to the sales team primarily on WSI and NLI to focus on the international side.
Then, we are looking at some new reps, and we've tightened up our rep agreements.
But, at the same time, we want to change over some of the reps that have been around a long time and haven't generated much for us.
So, as we go into ---+ and that would include Latin America.
Because, we've been doing some things on the technology front for some of our products so that they comply with international electrical standards, and we can move them into Latin America relatively easily.
We've kicked off an initiative there that's been underway for a relatively short time.
On the pure acquisition and divestiture side, we talked about the divestitures were on the electrical platform related to more of the oil and gas side, and we put it on hold.
The pricing in that market, right now wouldn't be conducive to divesting assets that are reasonably good for us.
We just think that there's probably other people that can do more strategically with them than we can.
But, we're not willing to give them away.
On the acquisition side, I think mostly it is around galvanizing.
I don't think ---+ it is mostly around galvanizing.
We've got some good activities ongoing.
Obviously, we've got NDAs in place on both sides of those so we can't talk about them.
But, we've been ---+ they've been underway for a few months.
These are not brand-new things.
These are ones we've been negotiating.
So, you can anticipate.
Hopefully, we'll have some positive news here over the next few months.
No.
The organic growth rate.
The difference would be Zalk, and ---+ I will put you in the ballpark on Zalk.
It's FY15 versus 2014, your revenue is up about $4 million.
Back from zero.
Well, tell you what.
Actually, I'm not going to call it mix.
(laughter)
Yes.
I think we are seeing some operational improvement on the energy side.
It's still early days, so that should improve as the quarters play out in FY16.
I hate to call it mix, too.
I think, when we look at ---+ we are trying to drive margin up in all of our businesses on the energy front and, like I said, you will see the benefit of improved margins at NLI.
They were up in the fourth quarter.
But, it's still pretty marginal.
(laughter) Basically, everything was up except for what we saw going on with the headwinds at WSI.
You are getting a nice positive tailwind from all of them.
It's kind of across the boards.
We're seeing some upgrade projects.
We're seeing some safety-related projects.
We're seeing just the delayed components for maintenance are now being ---+ are now active.
So, it's like they've got to spend some money now to keep their facilities running.
They've stabilized around what the regulations are.
Even though, as we read pretty regularly, they are not real profitable.
These are just activities they have to go forward with and some of it is compliance.
Most of it is just the delayed maintenance that needs to take place.
Nothing.
On the nuclear side, there is noise out there, but nothing that I'd consider even firm enough to be budgetary quotations, at this point.
(multiple speakers)
I think that it falls into the fourth quarter and then quoting activity for the fall season turnaround cycle is also pretty high.
Those are things that I ---+ how quickly they actually spend that because there are some offsets.
There are some companies that are delaying maintenance activities due ---+ the integrated oil companies.
So, it's a little bit of a mixed bag, but we're very active right now in the first quarter.
And, we are very active on quotations for the fall outage season.
So, whether it's falling into this quarter or it's going to file later in the year, they are going to happen because this is maintenance that needs to occur.
I think there's a couple of things.
One, the sales organization on the WSI side, the rebuilt sales organization, is already allowing us to either regain old market share or take new market share, whichever way you want to look at it.
Also, as they are doing that, they are back out there selling our value and the real high-quality solution capability that WSI brings to coker vessels, to containment shells.
The things like that, that there's not a whole lot of companies out there to do.
We lost those relationships.
So, I think part of this is, as we are able to demonstrate that value again to old customers that may be coming back to us.
You are looking at a couple hundred basis points down the road for them in the longer-term.
We will see maybe a little bit of it this year, but I think most of it actually comes post-FY16.
Over and above what we already have in our guidance for this year.
NLI, we've got to normalize that business and decide what it really needs to be going forward.
There's some decisions we need to make.
It's going to have a big shipment year this year because of the delayed big projects in its backlog.
So, this year would actually be somewhat of an anonymously just like FY15 for NLI was an anomaly on the low side.
But there, we are going after new services.
We have invested some capital in new equipment for seismic testing, for instance, and I think on a normalized basis, once again, I'll stick with that 200, 300 basis points of margin improvement beyond this fiscal year is where we are trying to take them.
In the NLI case, we may decide to maintain them at a somewhat smaller revenue level than we have this year.
Those are the things that we'll talk about as this year wears on before we get into next year.
Yes, correct.
I think WSI, they've got their marching orders.
The team is in place.
They've been taking the actions.
The sales force is rebuilt and engaged.
Internationally, they are in good shape.
Poland is a great operation for us.
Brazil has come up nicely, in spite of lower activity levels at Petrobras.
NLI, the team is in place.
They've taken a lot of the actions.
We've got to clear this backlog that we've been talking about, and then see where we are at.
It's <UNK>.
I'll stay consistent with what we have said in the past, which is we are a lot more comfortable between one and two times leverage than over two.
Obviously, we are paid down to ---+ do the math yourself, but probably about 2.25 turns of EBITDA right now.
We've done the other things.
We made small acquisitions ---+ or made small acquisition in the last year, and <UNK> has already talked about we are active in M&A.
We will continue to drive for that low leverage and utilize the cash flow to add on to the operations of the business.
We are not calling that out right now.
I would say there's a normalized level that will stay about the same.
But, if we look at some buy versus build for the year, maybe we'll be talking about that more later.
We are taking a look at a couple of things.
Very good.
Thank you for participating in today's call, and we look forward to talking with all of you again at the conclusion of this current quarter.
Again, thank you and have a great day.
