Q3 2020 Earnings Call
Good day and welcome to the HCV Inc. third quarter fiscal year 2020 financial results Conference call.
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I'd now like to turn the conference over to Joe Dorame. Please go ahead.
Thank you Sarah good morning, and thanks for joining us today to review the financial results of agency Inc. for the third quarter fiscal year 2020 ended November Thirtyth 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.
Please note there was a slide presentation for today's call, which can be found on A's ease investor Relations page under financial information at Www Dot A's easy Dot com.
Before we begin with prepared remarks, I'd like to remind everyone. Certain statements made by the management team of A's easy. 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.
Solve risks and uncertainties some of which are detailed from time to time and documents filed by easy with the Securities and 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 and response of products and services offered by the company, including the band by the power generation markets electrical transmission and distribution markets, the industrial markets and the metal coatings markets prices on raw material costs, including zinc and natural gas, which are used in the hot dip galvanizing process changes in the political stuff.
Realty in economic conditions of the various markets at HCV serves foreign and domestic customer requested delay of shipments acquisition opportunities currency exchange rate adequate financing and availability of experience management and employees to implement the company's growth strategies the company could give no sure.
Such forward looking statements will prove to be correct. These statements are based on information as of the date hereof and HCC 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 to Mr., Tom Ferguson, Chief Executive Officer of A's easy.
Tom.
Thank you Joe welcome to our third quarter fiscal year 2020 earnings call. Thank you for joining us this morning.
We're pleased with the continued strong performance of our business groups in fiscal year 2020, as a direct result of successfully implementing our strategic growth initiatives, we generated 22% revenue growth at 43% net income growth in the third quarter versus prior year.
Operating margins improved overall elevenand half percent with strong performance by both business segments.
Our energy segment experienced a strong fall turnaround season continued shipping the Chinese high voltage bus orders our energy team did a good job of focusing on operational execution for improved margins.
Our bookings in the third quarter of two to 264 million were up 25% year over year, driven by improving market conditions in welding solutions, electrical enclosures and domestic high voltage bus.
We continue to build on the positive momentum in the energy segment was strong third quarter bookings of 134 million, an increase of 32% versus last year.
Coating segment experienced increased demand in the solar and petrochemical markets and contribution from the acquisitions completed earlier this year, resulting in improved volumes across.
Most of our regions.
We experienced continued revenue growth from our surface technologies group, which now includes a powder coating and plating plants.
On a consolidated basis, we were able to drive operating income up over 47% to 33.4 million versus third quarter of last year.
The metal coating segment revenue increased over 20% in operating income of 27.3 million was up 49% versus prior year.
Operating margins increased to 21.1% compared to 17% in the third quarter fiscal year 2019.
This improvement was due to lower zinc cost blowing through our kettles value pricing and the contribution from our emphasis on operational improvement offset somewhat by the growing impact from surface technologies, which currently operates at a lower contribution margin level.
Metal code is team improved operational efficiencies as usage of Dgs, which is our digital galvanizing system continues to be implemented throughout all of our galvanizing plants. We remain the industry leader in North America with 41 galvanizing plants, we're pleased to be gaining meaningful traction in our served our new surface technology businesses.
Coding plating and galvanized rebar.
This gives us growing confidence that our investments will yield positive financial performance in the years to come.
Overall, our energy segment had a very good quarter with operating income was 17.4 million an increase of 51% over prior year, demonstrating great leverage on the 23% revenue growth.
Our energy segments electrical platform continues to focus on operational execution and improving customer service.
Well some of their electrical markets, particularly for electrical enclosures are improving compared to last year, our lighting in tubular business products businesses are seen reduced demand due to slower upstream production activity.
During the quarter, we booked a nice domestic order for high voltage bus, we're especially pleased with the demand for specialty welding solutions, both domestically and internationally, particularly as our investments in Europe , Brazil, and Canada have positioned us to participate in these opportunities and reduced our dependence on the U.S. nuclear market.
Our upgraded welding technology is earning as large new opportunities and our teams are performing extremely well, which will help us maintain our differentiation in the downstream markets.
Just to recap how we're doing year to date overall, our revenue was up 12.7% and net income up 37% versus prior year.
Our metal coating segment has completed four acquisitions, resulting in the addition of one galvanizing plant and five surface technology plans.
Year to date, our metal coatings revenue is up 11% and operating income up 30% versus prior year, driven by both organic and inorganic growth.
Our energy segments revenue was up 14% in operating income up 33% versus prior year, driven by growth at welding solutions and China high voltage bust projects.
We will continue focus on these these core strengths of customer service productivity and operational excellence.
Looking forward, we're maintaining our previously issued fiscal 2020 guidance of earnings per share in the range of to 60 to 90 per diluted share annual sales in the range of.
1.020 billion to $1 billion 60 million and with that I'll turn it over to Paul Fehlman, Paul Thanks, Tom.
For the third quarter fiscal year 2020, we reported net revenue of $291.1 million, a $51.6 million increase or 21.6% greater than third quarter fiscal year 2019.
Net income for the third quarter fiscal 2020 was $22 million, an increase of $6.6 million or 43.1% greater than the prior year third quarter.
Reported diluted EPS rose, 42.4% to 84 cents compared to 59 cents in the prior year third quarter.
Third quarter fiscal 2020, gross margins improved to 23.1% from 20.8% on a year over year basis, primarily on strong margin performance in the middle coating segment.
Operating profit for Q3 fiscal year 2020 grew from $22.8 billion in the prior year to $33.4 million and the current year, representing a 46.8% increase.
Operating margins of 11 half percent increased 200 basis points compared to 9.5% in the prior year.
EBITDA for Q3 fiscal 2020 increased 34.4% to $46.8 million compared to third quarter fiscal year 2018.
As for our year to date results.
Year to date through the third quarter fiscal 2020 reported net revenue of $816.5 million.
91.9 million dollar increase or 12.7% greater than the same period in fiscal year 2019.
Net income for year to date ended third quarter fiscal 2020 was $58.9 million, which was an increase of $16.5 billion or 39% greater than the same period in fiscal 2019.
Reported diluted EPS rose, 38.3% to $2.24 compared to $1.62 in the same period in fiscal 2019.
Year to date fiscal 2020 gross margins improved to 22.8 from 21.4% on a year over year basis, while operating profit for year to date fiscal 20 grew from $63.6 million in the prior year to $86.6 billion in the current year, representing a 36.2% in.
Increase.
Operating margins of 10.6% increased 180 basis points compared to 8.8% in the prior year.
For the year to date cash flow from operations grew by $14 million in fiscal 2000 compared to the prior year as a result of higher net income offset slightly by higher working capital year to date.
We continue to invest in the business in the third quarter with one acquisition no operating as part of metal coating segment that is expected to be accretive to the segment. This year.
We'll continue to seek more opportunities like these to continue to profitably grow our military things offerings. As you can see we're also still deploying capital for organic spend are still giving capital back to shareholders with that I'll turn it back to Tom Tom.
Thanks, Paul and closing, we're 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 Coty is operating margins in the 21% to 23% range and getting our energy margins to above 10%.
We will continue to acquire galvanizing businesses and look for acquisitions in the surface technologies arena that will generate.
15% to 20% operating margins and greater than 25% EBITDA.
We have a disciplined process for bidding opportunities and have built the core leadership team with deep experience in the surface, finishing space.
The third quarter performance continued to build confidence in our outlook for fiscal year 2020 and beyond.
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. We've also increased our emphasis on the environmental sustainability and we'll be making significantly more information available to our investors in this regard strategically our focus is on growing metal coatings organic link.
And on executing our aggressive acquisition pros.
In energy, we will continue to focus on reducing our exposure to the U.S. nuclear market, while increasing emphasis on domestic opportunities in the electrical enclosure and switch gear businesses as well as growing our welding solutions internationally and now we will open it up for questions.
We will now begin the question and answer session to ask question you May Press Star then one on your Touchtone phone.
You are using a speakerphone please pick up your handset before pressing lucky.
So with Guy Your question. Please press Star then tail.
Time, we'll pause momentarily to assemble roster.
Our first question comes from John Franzreb with Sidoti and company. Please go ahead.
Hi.
John .
I just wanted to start with B.
Hi.
Business China.
Could you remind me.
You're right that project.
Thanks, Greg Congratulations.
Okay.
Add John we're kind of losing you there we've got to some interference on on your phone but.
To answer what I think you asked.
It's actually several high voltage bus orders in China, they spread over a couple of years.
So we still we've shipped a good chunk of that backlog, we still have some of it left that will go into the next fiscal year.
And then we'll be providing support for that.
Even beyond next fiscal year so.
And then of course, we're looking to hopefully book some some more opportunities and as I mentioned, we also we did book at a nice domestic order.
Which which tends to help us in our in our midway facility.
Got it I apologize for interference.
And switching over to the middle coating side, how much is surface surface technology of total quarterly revenue either on a percentage basis or total.
You know its.
It's sub 10% is probably in the five or 6% range maybe seven.
And part of that is we we completed.
Some acquisitions in the quarter and we just completed some coming into the quarter. So.
So those are our havent, they will have a growing impact going forward.
On an annual basis, it's still going to be.
Somewhere between 5% to 10% as as we go forward next year.
Got it sounds and one last question tax rate's been jumping around can you kind of help us out there what we should expect not only for this year, but into next.
Right so.
The third quarter here. The this is a return to provision adjustment for for the tax return.
So that drove it up a bit that's just kind of normal currently the year.
In any tech cycle for the year, it's we're going to leave it about where we were.
For.
The last call, which was 20, 223% for the year that hasn't moved so you are under in the second quarter, you're a little bit over in the third over the third quarter.
But we still expect that 20 to 23 for the full year John .
Got it guide.
Thanks, guys I'll get back into queue.
All right.
Our next question comes from Noel dealt with Stifel. Please go ahead.
Hi, good morning, Congrats on a good quarter.
Good morning.
So I was just hoping you could comment a little bit on how you're thinking about the metal cutting margin profile moving forward on give us a little bit of a 10th of how to think about those investments that you're Michael on the galvanized rebar Adams.
Surface technologies kind of when when you think that start to roll off the how to think about the margin profile as we head into the fourth quarter and next fiscal year. Thanks.
Yes, no out the.
Yeah as Gavin Galvanizing is still the vast majority of.
Of the segment.
And.
And as you know, we've we've talked about it it's been holding in the 20% to 23% range for galvanizing.
As we are doing these surface technology acquisitions, we're still targeting those due to be near eight near 20% over time.
But on unlike galvanizing, where we have tremendous operational capability to bring to bear immediately on an acquisition.
Here, it's it takes us a little bit longer so I think.
To bring the margins up and so we're looking for things of above 15%.
And then over time get those up closer to 20 so.
But in the fourth quarter.
The surface technologies is still a relatively small pieces.
Of the segment.
So.
Well I think there.
The margins will likely be a little well, they're probably going to be relatively close to a third quarters. Paul if you will add to that yes.
Well there were a if they've been performing pretty well as Tom pointed out in his discussion earlier too.
We had some we had some costs involved there and the third quarter.
Some of probably one time as we're bringing these businesses on but he is spot on the money would to.
Percentages and I think you should expect to see about the same.
In the fourth quarter.
No well I'll add one thing on that one thing we did learn in in the quarter is that.
As you kind of come into the late fall winter season that tends to be the downtime for some of these powder coating plating businesses.
So so probably the better time to buy him would be in the in the spring and summer season. So.
So as Paul is talking about some of those costs that.
It relates to a.
Kind of by any end at the in the down season.
That's helpful and you guys talk about some of that end market verticals that the men in the quarter on solar and Petrochem in particular could you expand upon what you're going to the other market.
And how you're thinking about going into 2020 and I'll call. It the both on the 2020 and 2021 outlet curious how you're thinking about solar given some of the uncertainty around the tax credits.
Yes, I think generally the industrial markets construction and.
Bridge and highway things like that have.
I had been relatively solid in in our metal coating segment.
As we're getting into other surface technologies, it's taken us into.
More of the OEM markets and some of the other thing so that'll that'll start to have a.
A growing impact and those those look pretty pretty good going into next year.
Hi, guys feel pretty good about solar.
But I'd say, that's specifically around our customer base that serves that market. So in terms of the general.
Tax credits and things like that what impact does going to have I think thats yet to play out there right now the.
The customers, we have our feeling fairly optimistic for next year.
And then we look for continued petrochemical we'd love to see some.
Some more spend on.
On infrastructure, particularly bridge and highway but.
But we're kind of forecast in that as a or outlook is kind of about what it was this year, which wasn't really robust that wasn't bad so.
But in general our overall industrial markets or as we're looking for this quarter, which were already well into and looking into next year.
Our I'd say solid I won't say robot robust and I won't say week, so, they're they're kind of trending normal.
Okay, Great and then diplomats a question for me any comment on how the spring turnaround season is shaping up at that point.
Yes, it looks really solid.
Some of that I mentioned some of the technology, we've deployed and is being very well received in the marketplace.
So there is some continuing.
Or.
Some things from the fall that are going to start again in the spring.
So we're feeling really good about that spring season coming up.
Great. Thank you.
Okay.
So again, if you'd like to ask a question. Please press Star then one.
Our next question as a follow up from John Franzreb with Sidoti and company. Please go ahead.
Yes, just a follow up on the wells question on the spring turnaround season.
Would you expect the spring season to be.
Hi, good or better than the full season coming off works that strong when this fall or.
Just on a relative basis, how should we think about it.
We don't have.
We look forward to be strong.
Where I'm going to be a little cautious is we don't have.
Mega project like we had in the fall.
That's being teed up for the spring. So so while the activity is really really strong it's probably not going to be is quite as good as the fall.
But it's probably going to be better than mid last spring. So.
Perfect. Thanks, that's great.
And Ken when I think about the high voltage plus stock domestic job that you said you'd just Scott.
Fair to assume that job would be a higher margin business than the Chinese high voltage work.
Yes, Thats a good assumption.
Okay all right.
I guess, that's just to me thanks, guys I appreciate it.
Yes.
Our next question comes from Bill Baldwin with Baldwin Anthony Securities. Please go ahead.
Thank you and good morning.
Or no.
Tom could you.
Remind me again, what's your differentiating core competencies ours, especially welding.
Segment of the market that you're doing well and what are the core competencies of Ace easy there that differentiate you from the competition.
Yes, we're we're we've got the longest and largest track record if you will in.
In the really big complex things like Coker drums, large reactor vessels, so when you get into.
Yeah, the really big vessels that are critical to refinery operation.
Thats where our.
Our welding.
Technology, our teams our track record our references are just vastly more and better than anybody else out there. So.
Regardless of where those are in the world.
That led to the our sweet spot. So what we have done is weve continued to invest in that technology.
Move into.
And this is all custom we we take your the standard Lincoln Miller welding equipment, and then we customize it significantly with our controls our video equipment art.
And and then deploy it so our differentiation is is with that customized equipment.
And in our experience.
Okay. Thank you.
And.
Could you comment on what the.
Outlet close like for the markets for you or less you're going closure and your switchgear business you know what you're seeing out there looking out over the next year. So.
Yes, I think the inclusion market. We've we've got three facility, serving that Chattanooga, Millington, which is outside of Baltimore and in Pittsburgh, Kansas. So we're in the Midwest an east coast.
And.
Weve.
Those markets are ours are strong we've got a really good customer base.
A lot of the major.
Outfits are.
We've got.
Purchase.
Yes, I'd call, they're not really blanket agreements, but but supply agreements with and so so we're looking at that began.
Vince being solid to pretty good next year and in part of that is just our presence where we're at what we've done too.
Improve our operations focus on customers.
Switch gear I think the the big the bigger stuff out of Fulton is looking pretty good. We've we've got a really good backlog there going into the year and look to continue to grow that on some of the smaller stuff.
I think it's it's a little bit softer and.
But but okay.
What drives that smaller switch gear market.
What are the main applications there.
It's that's the industrial stuff instead of the utility grade.
Okay. Yeah, yeah. So that's that's where we get into a much broader set of customer opportunity, but but.
It tends to drive off of off that that industrials breeders native better.
On the manufacturing side of the as the economy it sounds like there.
We do we need to have a little pickup there we were doing good coming into this this past year, but.
Coming to this year, it's a little bit softer right. Okay. Thank you much and.
Good job, but so what you guys are down there.
All right appreciate it.
Our next question is a follow up from Noel dealt with Stifel. Please go ahead.
Okay just.
Wondering if you could comment on the lighting and tubing business as you know what the.
Continuing.
Challenges how are you thinking about.
Those operations as a part of your portfolio from a strategic standpoint.
Our lighting business, we had converted daily these early in the cycle going all the way back to 2013 in 14.
And so we look at that we've got good technology good good application base.
And we have broadened the market.
To differentiate away from.
Just the oil patch to get into food processing and things like that so.
So we still feel really good about that we've got good technology. It's we've got a good cost structure.
In that operation and while the and we've also expanded some representation outside of the country to to pick up some international opportunity. So so we feel we feel good about lighting business in terms of looking forward and how we're positioned and.
And so even while there their volumes off a little bit there. They are very profitable on the tubing side, it's our heritage.
Call it the roots of the company and.
In the in the tubing side so.
It's not a big piece business, we've got a really good team. That's a that's in that operation and if we can find we only need to find two or $3 million of incremental volume to make it nicely profitable. So.
You know, we look at that and neither of these business I mean between the two of my I'd like both of them because I like the operating teams.
I like where they are positioned and so any any uptick in the oil patch, we would benefit that tubing business nicely. So.
So I feel good about the outlook and.
And quite frankly the.
They are there.
Both work into to drive profitability in those operations.
Okay.
And then quickly can you comment on what you're still little more electric transmission and distribution markets. Both with on the galvanizing side, and then looked a lot, but such care equipment.
And then question.
Yeah, it's kinda.
This stable if you will I'd hesitate to.
It's really good stable to to maybe slightly off.
As we look forward on the galvanizing side.
And.
But but we have a broad customer base there so we're chasing opportunities.
On the electrical side it's.
It's it's good and and we look forward to remain that way we.
We still think Theres, a nice nice run.
On the TLD side for for the electrical and closures and switch gear.
Great. Thank you.
All right.
This concludes our question and answer session I would like to turn the conference back over to Mr., Tom Ferguson for any closing remarks.
Thank you Sarah.
I think just a couple of comments, we covered most everything between the our scripts and.
And the question so, but just a reminder, we're committed to driving 21% to 23% operating margins for that metal coating segment.
Inclusive of whatever acquisitions, we do and.
And as we continue to grow the surface technologies piece. So we're going to remain acquisitive and then we are continuing to review our portfolio of businesses and decide what is Gordon on more as we as we look forward. So we'll we'll continue to.
To keep you informed as as we make decisions there.
Very much for a participating on the call and look forward to talking to you and just a few months about our full year in Q4.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.