Q4 2020 Earnings Call
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Good morning, and welcome to the Azz Inc fourth quarter fiscal year 2020 Financial results conference call. All participants will be in a listen-only often. 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.
The financial results of Azz Inc for the fourth quarter and fiscal year twenty-twenty ended February 29th, 2020 joining the call today are Tom Ferguson chief executive officer and Paul film and Chief Financial Officer after the conclusion of today's prepared remarks. We will open the call for a question-and-answer session, please note. There is a slide presentation for today's game which can be found on these investor relations page under financial information at, before we begin with Professor remarks. I would like to remind everyone certain statements made by the management team of Azz during this conference call constitute forward-looking statements within the meaning of the private Securities litigation Reform Act of 1995, except for the statements of historical fact, this conference call may contain forward-looking statements that involve risks and uncertainties some of which are detailed from time to time.
In documents filed by Azz with the Securities and Exchange Commission including the annual report on form 10-K for the fiscal year ended February 29th, 2020 off 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 awful record transmission and distribution markets the industrial markets and the Metal Coating markets prices and raw material costs, including zinc and natural gas which are used in the hot dip galvanizing processes changes in the political stability and economic conditions of the various markets That Azz serves foreign and domestic customer requested delays, the shipments of opportunities currency exchange rate adequate financing and availability of experience management and employees to implement the company's growth strategies in addition wage.
He's he's he's customers and its operations could potentially be adversely impacted by the ongoing covid-19 pandemic the company could give no assurance that such forward-looking statements need 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 out of the way. Let me turn the call over to Tom Ferguson Chief Executive Officer of a z z Tom. Thanks Joe and Welcome to our fourth quarter of year fiscal 2020 earnings call and thank you for joining us this morning with covid-19 on everyone's mind. Our top priority at Azz is ensuring employee health and safety as well as support our customers during these unprecedented times. I'd be remiss if I did not express my great appreciation for the way our employees families and partners have stepped up during the covid-19 is well phone number.
Uncertainty we're running rampant around the week.
I'm extremely proud of the way our folks stepped up and got cruise home from countries that had closed realigned processes to ensure safe operation and took care of each other during this page. I also want to thank our Auditors Grant Thornton for their diligent efforts under difficult remote circumstances. We are truly grateful to be here today present in our results on time for fiscal 2020 total revenues grew 14.5% versus prior year reaching a record 1.06 billion dollars with metal Coatings Revenue growing 13% 2/4 to 99 million and energy Revenue growing 16% $263 million dollars. I will get into the details of this as we go along.
We are pleased to have completed our thirty-third year of consecutive year of profitability while achieving strong double-digit growth in Revenue operating income and cash provided by operating activities for the 2020 fiscal year are metal Cody's businesses grew operating income on an adjusted basis to 107 million dollars an increase of over 39% versus fiscal 2019. We have a strong cash flow business that in fiscal two thousand twenty generated $145 million dollars of net cash provided by operating activities and increase of almost 30% versus prior year for fiscal 2020, excluding one-time expenses. We deliver it adjusted EPS of $2.71 per diluted share and increase of more than thirty bucks says compared to the prior-year we successfully completed the divestiture of our nuclear Logistics Inc business, which we call in l i at the end of our fiscal year as we previously communicated a bath
Completing our annual strategic review of our businesses and became apparent additional. I was not a core business and then it was better suited being part of another company that had a stronger commitment to the nuclear Market. We also took the opportunity to take a non-cash impairment of the majority of wsi's nuclear intangibles do to lower demand for most of their major nuclear customers and and the continued challenging for the nuclear industry in the US overall sales growth was driven by increased volumes and higher selling prices in our Metal Coating segment along with for Acquisitions within metal Coatings wage growth and energy was driven by an uptick in the sales of our Electrical Products highlighted by switchgear and houses also contributing to the Top Line growth and energy was successfully shipping large International High Voltage bus project in China and the completion of large International refining turnaround projects operating income grew as a result of increased operating leverage across both the metal Coatings and energy segments metal wage.
Is margins improved for the year predominantly in galvanizing but overall margins for the segment were impacted by Surface Technologies Revenue mix at somewhat lower margins. We remain committed to our strategic plan for the Surface Technologies business and driving meaningful. Margin Improvement posts covid-19 crisis.
In this regard, we recently closed one plating site without affecting our customers by integrating those operations into the remaining North Texas sites.
In metal Coatings for fiscal 2020 we posted record revenues of $499 and improved operating margins by 260 basis points to 21.6% as compared with 18% for the previous year for reference are galvanizing platform, exceeded operating margin of 28.3% for the year primarily due to higher volumes of Steel processed lower wage costs and maintaining above-average industry pricing by offering quality workmanship and outstanding customer service growth in our metal Coatings business came from continued organic growth in galvanizing an offer for both galvanizing and Surface Technologies. We remain committed to delivering meaningful Returns on the Investments made in our Surface Technologies business during the year. We completed three Acquisitions and surfing I was just giving us a total of seven locations as we Consolidated to nearby facilities into one of our product continues to expand his Market presence as more. Approved the product spec.
Region Highway projects across the United States admittedly. This process has been slower than anticipated and now somewhat impacted by the covid-19 tadak downs.
Our energy segment for fiscal 2023 Revenue by 16% to $563 million while increasing adjusted operating while increasing the just adjusted operating income by 34% and operating margins by 110 basis points over the previous year Revenue growth was a result of increased demand for a switchgear any houses in our electrical platform and large Jay Masti China for high-voltage bus products the industrial platform completed large refining turnaround projects during the year with a particularly large project in Canada, Although our industrial business had a strong internationally. Our crews have not been able to deploy from Poland due to The Cove it travel restrictions.
Prior to the covid-19 pandemic pistol 2021 was developing into another solid year for us with substantial momentum in all four business groups working on several key Acquisitions off the signals from our customers and their end markets and continuing to invest in key growth opportunities, since the initial covid-19 lockdowns all of our metal Coatings plants remain open and while Mom plants are operating continue to operate a prepay endemic levels. Some are beginning to see declines caused by various States covid-19 restrictions.
The Consolidated impact that's far has been moderate and we continue to assess operations daily by leveraging our investment in the digital galvanizing system uninterrupted manufacturing operations continue with the electrical platform as our end markets for switch Geary houses and bus that remained good while hazardous-duty lighting and tubular products are seeing lower demand do to lower rig counts and less activity in the Old Paths do to lower oil prices are Industrial Field Services platform to Santa shifting work originally scheduled for q1 move into the summer que tu as well, 3 as refiners defer turnarounds collectively the industrial platform shops are open and working but very few crews are being deployed during the normally busy spring season while I'm able to get our crews home from International projects where those countries went on lockdown after our cruise had deployed. We have little field activity going on internationally at this time.
Discuss the recent covid-19 pandemic a bit more again at Azz employee health and safety remains our top priority. We will continue to follow the recommendations and guidelines provided by the CDC Health Organization. We have ratcheted up our best practices around protecting employees from the spread of covid-19 while in the workplace and have had very few cases dismissed following physical distance and hand-washing sanitization and disinfecting guidelines for work areas. Most of our shops have high Bays.
With good air circulation which reduces the chance for viral droplets to well. We have had very few employees test positive for the virus and almost all have now received a z z produces products and services that are critical to operating maintaining infrastructure our products and services are counted on to meet the needs of critical infrastructure throughout the United States as well as around the globe for Homeland Security cyber security and infrastructure Security Agency Azz is classified as an essential business in supporting the critical infrastructure needs the United States all of our manufacturing facilities remain open around the world and we are not facing any craft labor shortages at this time.
Due to uncertainty associated with the recent covid-19 pandemic on many of our end markets. We are currently discontinuing our previously issued fiscal 2021 earnings per fully diluted shares a guidance range of $2.65 to $3 and fifteen cents as well as sales guidance range of 970 million to 1.06 billion dollars at this time near the duration or depth of disruption can be accurately estimated. We have adjusted Capital spending plans operating plans and headcount. We've implemented a salary freeze on executive compensation and have taken other mitigating actions in response to the prices are low debt level combined with our consistent ability to generate cash gives us the confidence that we can manage both debt and liquid satisfactorily throughout fiscal year, 2021 and Beyond we will provide an update during our first quarter 2020 earnings release for the period ended May 31st, 2020.
That said let me just take a moment now.
For fiscal year 2021 Azz will continue to execute on strategic growth objectives that drive shareholder value at our core. We are a metal Coatings company and a manufacture products and provider of services that are critical to sustaining infrastructure. Our commitment to Superior customer service is unwavering our ability to deliver strong cash generation is based on faith is the drive operational excellence manage costs ensure pricing discipline and receivable collection within our operating platforms. We are confident that our business has a vital to improving and sustaining infrastructure. So we will use this time of global pandemic to position our core businesses to emerge stronger and better equipped to provide sustainable profitability long into the future with that said, I'll turn it over to Paul. Thanks Tom for the fourth quarter of fiscal year 2020 we reported net revenue of birth.
45.4 million dollars a 42 point nine million dollar increase our 20
1.2% greater than the fourth quarter of fiscal year 2019. Net income for the fourth quarter of fiscal twenty was a -10.6 million dollars on a reported basis as we recorded some non-cash charges including a loss on sale of nuclear Logistics business of 18.6 million and an impairment of nine point two million dollars off a nuclear assets the specialty welding business. We've been talking about the secular decline in the domestic new for your business for a while and exiting that business supported our strategy of focusing on core businesses.
We also recognized 1.9 million dollar one-time tax expense stemming from the original purchase price tax treatment of nli that was recognized in the fourth quarter as well. Without those charges our net income for the fourth quarter would have been twelve point four million dollars, which is a 39.3% higher increase than the fourth quarter in the last fiscal year. So when we refer to adjust items in this call, they're related to these items reported diluted EPS for the order was a loss of $0.41 per share that came in at $0.47 per chef and adjusted basis, which would have been 38.2% higher than the prior-year fourth quarter.
For the full year fiscal twenty revenues 14 and half percent compared to Prior year and finished at one point six billion dollars adjusted gross margins improved to 22.5% from 21.4% of the year-over-year on better margin performance across the board operating profit for fiscal year twenty-twenty on an adjusted basis Grew From $77 in the prior-year to 107.1 million dollars in the current year, representing a 39.1% increase and driving higher operating margins off of 10.1% 180 basis points higher than the 8.3% Margin in the prior-year even for fiscal year twenty-twenty on an adjusted basis Monday through from 128.2 million dollars in the prior-year to 156.3 million dollars in the current year representing a 21.9% increase over the prior year.
For the full year cash flow from operations grew by thirty three point three million dollars or 29.9% in fiscal twenty compared to the prior-year on Strong net income and better working Capital Performance combined with the cash in the fourth quarter from the sale of nli we were able to reduce our debt to a total of 203 million dollars higher level of debt in many years creating a very low debt leverage metric. We were able to walk into the new fiscal year with a strong balance sheet very flexible financing a supportive of Bankers an ample liquidity to push through these unprecedented times.
During the year we invested in the business during with for Acquisitions. Now operating is part of the metal coding segment. We also deployed capital for organic spend are still giving back to shareholders in the form of dividends and had a small amount of share repurchases which are now suspended as we Marshal our liquidity.
going forward
We have the ability to throttle back cash outflows and I'll have already taken steps to do. So with that. I'll turn it back to Tom Tom. Thank you Paul wage while we have discontinued our guidance. Let me give you some key indicators that we are paying particular attention to for the Metal Coating segments galvanizing business. We are carefully tracking fabrication and construction activity particularly through the normally active summer months.
For service Technologies, we are primarily focused on determining what are top customers will be either reopening their operations or getting back to normal production for the energy segments industrial group. Well, you can determine when you're up in India will normalize their travel restrictions and how is the fall turnaround schedule filling in in the US for the electrical group. We are carefully tracking proposal activity for life, since we need proposals to turn to orders during the summer to provide sufficient backlog for many of our be used for the balance of the year for tubing and lighting which make a small portion of our electrical group Thursday. We're looking for signs of life and rig activity but have already taken significant realignment actions finally for corporate. We have very good cash management processes and a further tighten our oversight on cash flow indicators and customer credit.
Most covid-19 crisis we remain committed to our growth strategy around metal Coatings and achieving 21 to 23% operating margins including a growing contribution from Surface Technologies for energy. We will continue to focus on our core businesses and seek to divest things that are not quarter our future strategic interests While most of our energy be used are experiencing a relatively small level options due to the code crisis. We were taking this opportunity to right-size operations and align them with expected demand post-crisis. We have run numerous models around outside and even severe downside scenarios and do not currently see anywhere by we do not maintain a reasonable level of liquidity. The first quarter will be a difficult compared to q1 of fiscal 2020 due to realignment expenses disruption to the spring turnaround season and the distractions associated with managing through the covid-19 issues, but the diversity and scale-up argh
As you know operations are providing a very sustainable level of income and cash flow are electrical businesses for the most part have good backlogs to work with while our industrial businesses carry a certain amount of fixed costs off the majority of their craft labor pool is variable and finally our cash management discipline credit line with first-tier banks low debt levels and ability to react quickly to the changing Market Dynamic wage positions as well as during these as well as during these uncertain times with that will open it up for questions.
We will now begin the question-and-answer session to ask a question. You may press star one on your telephone keypad. If you are using a speaker phone, please pick up your handset before pressing the keys off to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.
And our first question comes from John Franz herb acid Odeon Company, please go ahead. Good morning guys. Thanks for taking my question.
I want to start with the the backlog that's down 27% year-over-year. Can you talk a little bit about what the order profile was? Like, I mean, I realize it's the end of February that's that numbers as of so I'm kind of surprised was down so much. Um, what's happening there? And can you talk a little bit about how the auto Tempo has gone in for calling two months. So we got going too much into the first course. We should have a good idea of what it's looking like, you know is as things progressed and as far as cold as concerned,
Yeah couple of things there John 1:1, yeah, most of the backlog reduction is because the shipping those those big Chinese high voltage bus orders wage a matter of fact I'd say the vast majority of it we've had relatively normal bookings activity in in the other electrical business office is in terms of houses and switchgear obviously we've been we've been off in tubing and lighting but particularly in tubing wage, um, when it comes to the bus businesses we've been picking up a pretty good amount of service work in in medium voltage bus, uh, which is an interesting Dynamic package is something that we had been more focused on so it's good to see see some of that happening on the high voltage by side we've been picking up some decent wage
Domestic us orders which tend to be more profitable so, you know, obviously it doesn't take as much of that backlog to as it would from China Thursday to make up the same same level of profitability contribution, but it hasn't been a little slower as we've gotten into the year as you would expect, you know, a lot of customers have long as we have reduced the access to their facilities. So our our sales folks have been in contact by email and telephone proposal activities been good, but not a lot closing because you just don't have you know teams get it together project teams able to get together but but the indications I won't say they're strong but I'll say they're encouraging. Uh, we just like to, you know be able to get in more direct contact with our customers to to give us a better feel. That's why we say as wage
Kind of finish up this quarter and get into the summer. We're we're we're expecting and what we're hearing from customers particularly on the transmission distribution electric utility solar side is is it they're still pretty good project activity to look forward to okay. Just give me a sense of when you talk about deferred turnaround jobs. I guess this I want this to Pieces. I'm curious about here. How much of deferred revenue are we talking about from q1 and Q2 and Q3 and how much have you experienced any cancellations? I guess the other part of the question could just walk, um address those two issues and and then I'll get back into you.
John
You know the I I don't think we've had any significant cancellations almost everything we've had is just deferrals. We had some things that were TWP for the spring that have now either pushed into summer or fall and and I want to give you the context of that as you know, normally during the summer you'd have refineries running all out to produce gasoline and jet fuel during the heavy vacation travel season that obviously is not with the way things look right now and also in terms of utility allergies outages of you know, we're we're we're not sure we're hearing there's going to be to be activity. But but when it comes to the turnarounds, we we see some of this we're being told that it's some is pushing in the summer. Everything else is dead.
For what could be a really really big fall my caution. There is that we only have so many project managers and so many project Engineers so we can only deploy while we can get access to more direct labor and crafts labor, you know, we can't we can't replicate or replace the spring with with the fall season. So, you know, we're we're looking at down fairly significant downsides. We're not going to recover this whole spring season. We've got a handful of cruise deployed in the US and Canada in Brazil. We've we've got no Cruise deployed in Europe, but our plants are which is a relatively small piece of the Industrial Age. But all of the operations are actually open and have have orders that their processing through the shops in in in, Atlanta, Georgia.
And and um in Poland so, you know, it's just a real mixed bag. It's uh, it it it's not going to be a real good year for industrial. So we've taken off some realignment activities and we'll look at some more as as the as things play out, which is why I mentioned a good bit of what are you know are fixed costs just hard to get out we can get at the the labor portion very easily because the vast majority of it is is contract labor for the projects so long, so that's how we're managing that.
Okay. Thanks. I'll get back into you next take my questions.
Our next question comes from Noel dilts of stifel, please. Go ahead. Hi guys. Good morning and congratulations. Congratulations on the good years. So I guess first I wanted to figure