Q2 2020 Earnings Call
Good morning.
Welcome to the easy Inc. second quarter fiscal year 2020, <unk> financial results Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then too. Please note. This event is being recorded.
I'd now like to turn the conference over to Joe Dorame. Please go ahead.
Thanks, Ben Good morning, and thanks for joining us today to review the financial results are the easy <unk> for the second quarter of fiscal year 2020 ended August 31st 2019.
On the call representing the company are Mr., Tom Ferguson, Chief Executive Officer, Mr., Paul Fehlman, Chief Financial Officer.
After the conclusion of today's prepared remarks, well open the call for question and answer session.
Please note there was a slide presentation for today's call, which can be found on Hccs Investor Relations page under financial information at Www Dot easy Dot com.
Before we begin with prepared remarks, I'd like to remind everyone. Certain statements made by the management team of AIDS easy. During this conference call constitute forward looking statements within the meaning of that 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 and documents filed by easy with the Securities Exchange Commission, including the annual report on Form 10-K for the fiscal year ended February 28 2019.
Those risks and uncertainties include but are not limited to changes in customer demand and responsive products and services offered by the company, including demand by the power generation markets electrical transmission and distribution markets, the industrial markets and the middle coatings market prices and raw material costs, including.
And natural gas, which are used in the hot dip galvanizing process changes in the political stability in economic conditions in the various markets at HGTV serves foreign and domestic customer requested delays of shipments acquisition opportunities currency exchange rates adequate financing and availability of experience.
Management and employees to implement the company's growth strategies.
The company can give no assurance as such forward looking statements will prove to be correct.
These statements are based on information as of the date here of an easy 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 A's easy Tom.
Thanks, Joe.
Welcome to our second quarter fiscal year 2020 earnings call. Thank you for joining US. This morning. We are pleased with the continued strong performance of our business groups in fiscal year 2020, we generated 6% revenue growth of 38% net income growth versus prior year.
Operating margins improved overall, the 9.4% in spite of about 1 million of tariff and FX impact on the Chinese project shipments during the quarter.
Year to date, our business is tracking nicely ahead of our plans, which bodes well for the full fiscal year.
Our energy segment experienced the normally slow summer season shipped another portion of the high voltage bus Chinese orders and regained operational traction in most businesses, while our energy bookings were down 6% versus second quarter last year, we were lapping a quarter, where we booked one of the large Chinese orders. So non China related bookings are in the range we expected.
The metal coating segment experienced increased demand in the solar petrochemical markets and contribution from the acquisitions completed earlier this year.
The metal coatings team improved operational efficiencies as usage of Dgs, which is our digital galvanizing system continues to grow in our galvanizing plants.
We also experienced improved contribution from surface technologies, which now includes eight powder coating and plating plants.
We also continued our emphasis on value pricing, while we had lower zinc cost flowing through our kettles labor costs continue to rise as the craft labor market remains tight overall, we were able to drive net income up over 38% versus second quarter last year to $15.6 million.
We continue to build on the positive momentum in the energy segment with a strong backlog of more than $300 million. This sets the stage for solid performance in the back half of the year, while our metal coatings business continues to gain traction from our key initiatives to drive growth for both organically and through an aggressive acquisition program.
The metal coating segment revenue increased 7.4% from the second quarter of last year operating margins increased to 23% compared to 19% in the second quarter fiscal year 2019.
This improvement was due to lower zinc cost flowing through our kettles value pricing and the contribution from our emphasis on operational improvement we've taken steps to improve labor productivity and are seeing our digital galvanizing system drive greater operational efficiency and productivity, while also improving customer service we remain the into.
History leader in North America, with 41 galvanizing plants.
We're pleased to be gaining meaningful traction in our new surface technology businesses, which include powder coating plating, and the galvanized rebar business.
This gives us growing confidence that our investments will yield positive financial performance in the years to come.
Our energy segments electrical platform continues to focus on operational execution and improving customer service, while some of their electrical markets are improving compared to prior year, our oil patch businesses are seeing somewhat reduced demand.
Profitability was negatively impacted by the tariffs on the high voltage bus Chinese here shipments.
We're especially pleased with the demand for specialty welding solutions, both domestically and internationally, particularly as our investments in Europe , Brazil in Canada have positioned us to participate in these opportunities and reduced our dependence on the us nuclear market.
We remain somewhat cautious due to the uncertainty related to tariffs and the Chinese trades situation as well as a tighter market for labor in many of our us locations.
Looking forward, we're raising our previously issued fiscal 2020 guidance of earnings per share in the range of to 60 to $2. A 90 cents per diluted share an annual sales in the range of $1 billion 20 million to 1.060 billion, we've completed our third quarter and experienced a very strong turn.
In around season internationally.
We also have the benefit of our recent surface technologies acquisitions have more Chinese backlog to ship in electrical and continue to gain traction in our galvanizing business with that I'll turn it over to Paul Fehlman, Paul Thanks, Tom.
For the second quarter fiscal year 2020, we reported net revenue of $236.2 million, a $13.4 million increase or 6% greater than the second quarter fiscal year 2019.
Net income for the second quarter fiscal 2020 was $15.6 million, an increase of 4.3 million or 38.4% greater than the prior year second quarter.
Reported diluted EPS rose, 37.2% to 59 cents compared to 43 cents in the prior year second quarter.
Q2 fiscal 2020 gross margins improved to 22.3% from 21.1% on a year over year basis, primarily on strong margin performance in the middle coatings segment.
Operating profit for Q2 fiscal 2020 grew from $17.1 million in the prior year to $22.2 million in the current year, representing a 29.8% increase operating margins was 9.4% increased 170 basis points compared to 7.7%.
In the prior year.
EBITDA for Q2 fiscal year, 2020 increased 10.5% to $33.8 million compared to the second quarter of fiscal year 2019.
In early October we announced that we were rescheduling, we conference call for our second quarter fiscal 2020 financial results and delaying the filing of our Form 10-Q .
The delay was the result of an extensive review of Easy's historical deferred tax accounting practices.
As part of the review, which was concluded in early December we identified several income tax accounting issues, requiring adjustment that spend several years going back to calendar year 12 2012.
However, we determined that these errors were not material to any prior period financial statements and that's a cumulative effect of correcting. These errors in the current period was not material. Accordingly, we corrected the cumulative effect of these tax accounting errors in the second quarter fiscal 2020, which resulted in a onetime.
Deferred tax benefit of $1.4 million or five cents per fully diluted share.
Earnings per fully diluted share would have been 54 cents per share without this tax benefit.
As for our year to date results.
Year to date through the second quarter fiscal 2020, we reported net revenue of $525.3 million, a $40.3 million increase or 8.3% greater than the first half of fiscal year 2000 mid teen.
Net income for the year to date ended the second quarter fiscal 2020 was $36.8 million, an increase of $9.9 million or 36.6% greater than the first half of fiscal 2019.
Reported diluted EPS rose, 35.9% to one dollar and 40 cents compared to one dollar and three cents in the first half of fiscal 2018.
First half fiscal 2020 gross margins improved to 22.6% from 21.8% on a year over year basis, while operating profit for the first half fiscal year 2020 grew from $40.8 million in the prior year to $53.2 million in the current year representing a.
30.3% increase.
Operating margins of 10.1% increased 170 basis points compared to the 8.4% in the prior year.
For the first half of the year cash flow from operations grew by $21.5 billion in fiscal 2020 compared to the prior year as a result of higher net income and working capital performance year over year, our ratio of free cash flow to net income was also higher compared to prior year.
We continue to invest in the business in the second quarter with one acquisition.
And have announced one additional acquisition in the first month of the third quarter. Both now operating as part of the metal coating segment with both expected to be accretive to the segment this year.
We will continue to seek more opportunities like these to continue to profitably grow our middle coatings offerings.
As you can see.
We're also deploying capital for organic spend and are also still giving capital back to shareholders.
Most of the risks to fiscal 2020 that we described in the last earnings call still exist for the year as a whole but for the most part did not materialize. The first half of the year as metal coatings margins increased year over year, we did indeed ship high voltage bus stuff to China, but we did see related tariffs for the second quarter and.
Fall turnaround season in North America has indeed firmed with that I'll turn it back over to Tom Tom Thanks, Paul.
We are focused on improving productivity and efficiency throughout the company continuing to adapt our products to new market opportunities and developing innovative solutions for our served markets. We remain committed to generating metal coatings operating margins in the 21% to 23% range and getting our energy margins to above 10%.
We're looking for acquisitions in the surface technologies arena that will generate 18% to 20% operating margins in greater than 25% EBITDA days.
We have a very disciplined process for bidding opportunities now that we have built to core leadership team with deep experience in the surface, finishing space.
The second quarter performance continues to build confidence in our outlook for fiscal year 2020. Additionally, we have invested more heavily in talent acquisition retention training and development to ensure we have the talent necessary to sustain our growth plans.
Strategically our focus is on growing metal coatings organically and on executing our aggressive acquisition program in energy, we will continue to focus on reducing our exposure to the U.S. nuclear market while maintaining.
Emphasis on domestic opportunities in the electrical enclosure and switch gear businesses and now we'll we will open it up for questions.
Thank you.
I'll begin the question answer session to ask a question you May Press Star then wondering your Techxtend phone. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press star continue at this time, we will pause momentarily to assemble our roster.
Our first question comes from Noelle Dilts with Stifel. Please go ahead.
Hi, guys.
Good morning.
Good morning. So first I was just hoping that you could give us a little bit more detail on the acquisition that you completed on within metal cutting.
What this operation is still expected and expected revenue contribution and I guess that they'd be accretive, but a little bit more detail would be helpful.
Yes, I think.
We did two in the first quarter, which were one one gal traditional galvanizing tenancy Galv. We also did.
Yes.
Sim Conor K, two partners, which had two facilities and.
I guess, what wed put it is galvanizing were traditionally targeting something in the $10 million revenue range.
On the on the surface technologies powder coating side.
They're smaller.
So when we talk about eight facilities, but you'd probably be looking at.
Call it $3 million to $5 million in revenue for a facility.
So much smaller in just in scope.
We typically are going to talk too much about individual deals just because we view our pricing is the as proprietary so but that hopefully that gives you. Some idea what we're talking about it or disco shut up for that.
So when I was hoping we could just shift over to galvanizing, taking a little bit more.
Obviously with just what to think trend on and maybe some that somewhat more favorable price cost dynamics. It does.
You know seem like you guys should should see.
Pretty significant benefit here over the next few quarters could you just speak to how you're thinking about those dynamics and.
How you're thinking about margins now relative to kind of some of the previous calls that you have that you've talked about.
Yes, I think yes.
Hi, galvanizing at about 23% I think the one cautionary note on give is.
Over the holidays.
Just given the level of absorbs a number of hours, we can generate the reduced number of actual working days.
You 10, we tend to have a little bit of negative impact on margins in the fourth quarter or galvanizing for those reasons.
Offset to some extent bye.
Lower zinc cost going through our kettles, but we're we're kind of down to a level now that of what's flowing through there I don't I don't see that continuing to decrease a whole lot.
Labour costs have been higher but they've been stable recently so.
We had made quite a few adjustments late last year in early this year in terms of wages, we repaid to be able to attract.
The level of talent that we need in our facilities. So.
I remain committed to 23% on the galvanizing side, but.
And the reason I stated that powder coating plating surface technologies are going to run lower than that as those become a bigger piece of our business.
They will provide a little bit of downside pressure to that 23% number across the total mental coatings piece.
We are targeting 18% to 20% on on average some do better some do a little bit worse. It takes us a couple of quarters to get them fully integrated on the powder coating side, whereas usually on the galvanizing side, it's almost immediate.
And it's just that the difference in scale the amount of operating capability, we have in galvanizing, while we're still building on the the powder coating plating side.
Okay and then one last question I'll get back on Q on Galvanizing can you just nice volume volume during the quarter can you speak to some of the verticals, where you're seeing strength versus those that maybe a little bit more challenged.
Yes, we've done well in solar which has been extremely active and.
And I'd say petrochemical has has at least strengthen which is good news so, particularly when you kind of looking to map of where a lot of our locations are in kind of the southeast in Texas in Texas Gulf Coast.
So that tends to to be strong for us.
And then just general industrial we've we've done well the.
We still haven't seen tremendous investment in infrastructure, but.
In terms of roads and highways, although as you go around here in Texas, you see lots of them under construction.
So.
So it's been general, but but with heavy emphasis on solar and petrochemical having a lot of impact positive impact for us and I'd also say were.
We're doing a what I view as a better job going after new customers in some of these verticals.
Customers that we haven't done much business, with if any and and being more creative and innovative in how we work with them.
So right. So I think there's there's several things at play when it comes to sell our in and petrochemical.
Thank you.
Once again, if you have a question you can press Star then one to answer the question.
Our next question comes from Jon Braatz with Kansas City Capital. Please go ahead, Martin Tom more and Paul.
Just following up on the previous question.
Was organic.
Organic sales up and the.
In the quarter and and metal coatings.
Yes, it was.
Yeah, we actually called out in the deck yeah.
I'm sorry, what.
Actually called out in the deck okay. Okay.
Coatings, where it says 1% okay. Okay. Okay. Okay. Good okay.
And Tom could you speak little you called out specialty welding, a couple times and reducing our dependence upon the nuclear market.
Can you tell me.
Exactly where where you where that business is going.
What end markets your service, serving and sort of the growth opportunities.
Beyond the U.S. and elsewhere.
And the specialty welding business.
Yes, that's a that's a great question we've.
We've mentioned it before we invested probably three or four years ago in Brazil in Canada, We've continued to expand.
Our Polish facility over in Europe and.
And so we have a strong presence in Europe , and we're picking up both refinery as well as waste to energy opportunities over there when you come into Canada.
And Brazil, we're into our more traditional downstream refining some F DSL work down in Brazil, So it's mostly.
Petroleum related and and we are there premier provider of automated high high end solutions.
Particularly for things like Coker drums large.
Large refinery reactor vessels those kinds of things so.
We've done well in in Canada, we've done well in Europe , and and we've we feel good.
About what's going on in Brazil, We also do very well over in India, and and we've recently expanded into.
China.
But it's almost all oil and gas petroleum downstream.
Okay. Okay, what are the competitive landscape and special specialty welding like and and when you look at the margins currently in that that segment.
How might that compare to where you think they could be and in a couple of years.
Oh boy that's a.
Part of the issue, we're using union contract labor, which everybody knows what their rates are so when you go to a refinery they they know what our labor costs are.
Where we where we are able to.
Improved price realization. If you will is on the equipment side and so the more of the specialty equipment, which is mostly were taken.
Your common Lincoln and Miller welding equipment, and then heavily modifying it with controls automation.
Things like that so.
That's that's where as we can get more equipment on jobs, particularly on these large international jobs that that tends to improve our margins.
But labors, it's as season.
Craft labor.
Outfitters and welders and.
So that's that's just kind of the nature of that market Yep Yep. Okay. Thank you very much.
All right.
Our next question comes from John Franzreb with Sidoti and company. Please go ahead.
Hi, good morning, guys.
I apologize if you address these present passing between conference calls Brian .
Regarding the tax rate.
What should we think about the tax rate going forward not only in this current year, but into next year.
Well obviously.
This one was a little blip in the second quarter, but I think for.
This full year, you should probably be thinking about 22.
Ish and the full year for next year, probably about the same may or may jump up to 23 depends what sort of.
What sort of issues come up next year, what makes itself.
In terms of.
Okay got it and regarding the spring turnaround season, what is the incoming order book tell you about how that shaping up at this point.
Yes bring shaping up nicely.
It's it is.
This sitting here knowing knowing how we did for the fall is.
Puts us in an interesting situation, but.
Spring looks strong we've had a lot of activity there's some carryover.
In terms of some of the projects we had in the fall.
That are going to too.
The they'll do additional portions.
Of equipment in the refineries, which to me bodes well. It says we performed really well for our customers and that that's always a good sign.
When when they're ready to sign up for repeat work in the next turnaround season. So we're seeing some of that deferred maintenance finally.
Finally come into.
To being and.
I'd say, the spring looks well looks looks strong for us.
Got it kind of and I think I mentioned that you mentioned in your prepared comments an effort to reduce your exposure and the nuclear market.
Are you doing something actively to reduce your exposure or you just assuming that the other businesses growing that business diminishes.
Hi, Yes, I'd say we're.
We've got two pieces that are.
Well there were three that we have to now that are exposed the nuclear one is the nuclear logistics zinc business.
We're pretty much just maintaining that business I, we're not trying to.
Pull away from any customers so to speak.
But we're also not.
Not seeking to grow it so we're just maintaining and then on the.
On the specialty welding side, we are actively.
Focused on growing in the non nuclear so.
I don't know that I'd say, we're we're trend we're walking away from stuff, but.
But.
We are definitely taking refinery projects in favor in favor over and above nuclear.
Okay. So its asset allocations in the welding side and just leaving Thats for an ally as is got it got it okay. Thank you for taking my questions.
Hi, Thanks.
Our next question comes from Bill Baldwin with Baldwin Anthony Securities. Please go ahead.
Yes, Thank you and good morning.
Morning No.
Can you offer us some.
Color on your CNN the.
Domestic switch gear and cloud your markets.
Sporting timely kilowatts year.
It is about the longer term outlook, you know looking that come in here.
Yes, I think into switch gears kind of mixed.
In some of the larger step we're seeing good activity in.
Some of this more stuff it's less so.
Our outlook is still positive we we like those markets. We've got two facilities focused on it in.
Full, Missouri and up in Oshkosh, Wisconsin, and so being able to leverage the capabilities. Those two facilities, we feel positions as well for that.
So it's kind of.
I think the outlook as we go into next year would we're probably more positive than we are right at the moment in terms of the electrical enclosures, we feel really good about that the market or the capacity has consolidated so to speak and weve participated in doing that with.
The act a couple of acquisitions over the last three years or so.
That's strong theres a lot of activity in.
The houses the data centers the.
Things like Fiveg so.
So we're bullish on that and we feel well position we're in.
In Maryland, Tennessee and Kansas.
So we really don't get too much into the Gulf coast, So not too much into the oil and gas base were mostly focused on the electrical utility the.
The data centers and pipeline activity.
Hi, good good insight there and.
So what's going on.
And the medium.
Deleverage breast business these days Tom.
You know Thats a.
They had they had.
Quite a bit activity would they were they were exposed to the nuclear stuff that.
Some of them the plants the one plant that decided not to go forward and and so we've been then move in that capacity into the more traditional.
Utility in transmission distribution side, it's it's just okay. It's it's not a great market we're looking for.
More opportunities if you will it's it's not a big facility, but it's a it's a nice facility in a really good workforce. So.
So were trend to.
I guess, the best way to put it we're trying to make.
Lemonade out 11, but.
And we're looking for new new opportunities, but it's not robust so.
And your high voltage business there.
Yes, I mean inside there as to what that markets looking a lot.
Yes.
We'll have a lot of backlog in China, the president of that business would be buying back to China, probably this weekend.
But we also have picked up more domestic opportunities. So we were seeing that activity, we like that domestic activity and so we feel good about that business and.
We've got the facility in.
Up in Massachusetts, and it's it's a very nice facility and well positioned for the opportunities that we see out there right now in.
The ones we've been participating in so.
So thats in a little that's in much better situation than the medium voltage side.
And.
As most of your international business right now and high voltage is that the China.
He's been desktop.
Yes that said thats pretty much yet.
I've got a joint venture in Saudi Arabia, but.
The activity there is it's a joint venture so.
But but the majority of our international backlog is high voltage bus in China.
Is there much opportunity the.
Grow that business in Europe .
Or.
No not its you know, it's a different market for us and just not.
Yeah, we compete with the European high voltage bus.
Providers in some of these other international opportunities but.
But we don't see a lot of opportunity in Europe to go in there.
Okay. Thanks, Phil.
Our next question comes from Noelle Dilts.
From Stifel. Please go ahead.
Did we lose or up I think my last or no out can you start star one again to enter the Q.
Jim added jump on the other call.
Okay.
Right.
Okay.
The question kill and I'd like to turn it back over to Mr. Ferguson for closing remarks.
Thank you.
Hi, just a couple of comments before signing off we answered a lot of good question. So while we remain committed to achieving the 21% to 23% operating margins for our metal coating segment, we're going to be very acquisitive as well, particularly in surface technology space. Additionally, we're continuing to review our portfolio of businesses based on what is core versus non core.
Daisy these long term success.
Well announce any divestiture actions as they become likely and probable. So thank you for participating in today's call. We look forward to provide you an update on Q3 and just a few weeks.
Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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