Q3 2022 AZZ Inc Earnings Call
Good day and welcome to the AZZ, Inc. Third quarter fiscal year 2020 financial results Conference call.
All participants will be in listen only mode.
Should you need assistance. Please signal conference specialist by pressing the star followed by zero.
After todays presentation, there will be an opportunity to ask questions.
To ask a question you May press Star then one on you touched on trough to withdraw your question. Please press Star then two.
Please note today's event is being recorded.
I'd now like to turn the conference over to Joe Doorman Awesome Partners. Please go ahead Sir.
Thanks, Rocco good morning, and thanks for joining us today to review the financial results of AZZ, Inc. For the third quarter of fiscal year 2022 ended November 32021, joining the call today are Tom Ferguson, Chief Executive Officer, Bill <unk>, Chief Financial Officer, and David <unk> Senior Vice President marketing.
Medications in IR.
After the conclusion of today's prepared remarks, we will open the call for questions. Please note. There is a slide presentation for today's call, which can be found on Azz's Investor Relations page under latest earnings release presentation, again, Thats Www Dot AZZ dot com.
Before we begin with prepared 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.
Some of the statements of historical fact this conference call may contain forward looking statements 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 28 2021.
Those risks and uncertainties include but are not limited to changes in customer demand and response to products and services offered by the company, including demand by the power generation markets electrical transmission and distribution markets, the industrial markets and the metal coatings markets prices and raw material costs, including zinc and natural gas.
Which are used in the hot dip galvanizing process changes in the political stability and economic conditions of the various markets that AZZ serves foreign and domestic.
Customer requested delays of shipments acquisition opportunities currency exchange rates adequate financing and availability of experienced management and employees to implement the company's growth strategies and.
In addition, AZZ customers and its operations could potentially be adversely impacted by the ongoing COVID-19 pandemic. The company can give no assurance that such forward looking statements will prove to be correct. These statements are based on information as of the date hereof and AZZ assumes no obligation to update any forward looking statements whether as a result of.
New information future events or otherwise with that out of the way, let me turn the call over to Tom Ferguson, Chief Executive Officer of AZZ Tom.
Thanks, Joe and welcome to our third quarter fiscal 2022 earnings call and thank you for joining us this morning.
We continue to gain momentum in the third quarter and completed our fifth consecutive quarter of solid performance. After the disruption from Covid in the first half of last year.
I, especially want to thank our employees, who show up every day and do their job well their perseverance continues to allow us to achieve these kinds of results.
Consolidated sales of almost $232 million improved two 3% versus the prior year or four 1% when adjusted for the divestiture of SMS last year.
Metal coatings generated another excellent quarter with sales up 15, 4% to over $133 million.
In infrastructure solutions sales down 11% at about $99 million.
Sales in Aaas were.
By labor constraints COVID-19 related material shortages and COVID-19 issues at some customer sites, which I will describe further during this call.
We are pleased to have completed another strong quarter of performance, we continued to generate solid cash flow and return capital to our shareholders during the third quarter.
We generated net income of over $21 million and EPS of <unk> 85 per diluted share, reflecting the resiliency of our businesses and the dedication of our people.
Our business has leveraged the realignment actions taken last year to improve profitability, while maintaining their focus on providing outstanding quality and service to our customers.
We also benefited from lower interest expense and a lower tax rate of 22% for the third quarter in.
In line with our strategic commitment to value creation, we repurchased over 148000 shares for $7 $6 million.
And distributed $4 2 million in dividends.
In metal coatings, we achieved 24, 5% operating margins on sales of $133 million.
This resulted in operating income being up over 14% from the previous year.
The margin improvement was primarily due to driving operating efficiencies and productivity, while realizing improved pricing in the face of rapidly rising zinc labor and energy costs.
In spite of the ongoing challenges of Covid. Our team succeeded in completing the acquisition of Steele Creek Galvanizing in South Carolina.
This site was completed in 2019 and includes a lot of automation, making it the newest and most modern in our fleet.
Our team is excited about the growth opportunity. It presents in a region, we were not present yet.
The metal coatings team continues to demonstrate their ability to perform and deliver great results, while managing labor shortages and the increasing costs.
Our infrastructure solutions segment demonstrated continued profitability improvement in the quarter.
Leveraging the cost reduction actions that they took last year, we were down about 8% when considering the impact of the SMS divestiture.
The infrastructure solutions segment delivered operating income of over $9 million with.
Margins improved 140 basis points to nine 3% as compared to the prior year.
The segment did face growing labor constraints and delays in materials due to supply chain disruptions, resulting from COVID-19, including components from customers.
One WSI International project was significantly impacted by Covid outbreak, which was managed well that resulted in lower profitability.
We remain focused on strategic selling initiatives across both the electrical and industrial platforms and we believe we are well positioned to finish this fiscal year well.
For fiscal year 2022, while Covid continues to generate some uncertainty in many sectors given our strong performance in the first three quarters and due to seeing more opportunities than risks the balance of this year, we are tightening our EPS guidance.
We anticipate annual sales to be in the range of 865 million to $925 million.
And EPS at $3 to $3 20 per.
Per diluted share.
We do not anticipate any material impact in the fourth quarter from the recently announced acquisition as we're focused on integration. These first couple of months.
Metal coatings is continuing to focus on sales growth, including leveraging our spin galvanizing operations at several sites.
Operational execution and customer service is labor and operating expenses increased due to inflation.
Our infrastructure solutions segment is cautiously optimistic as it enters the fourth quarter with some momentum in bookings activity, particularly in the electrical platform.
Our WSI business is seeing good results from the expanded Poland facility, although internationally. The business continues to experience some intermittent project delays due to COVID-19 outbreaks at some customer sites.
As we noted on the last call some of the fall season projects will now be completed in the fourth quarter.
We also have some spring projects that look to kick off a little earlier than normal.
The electrical platform is focused on operational execution and growing at <unk> House and switchgear businesses do.
Due to the project extensions from the third quarter, we expect a better than normal performance in the fourth quarter.
I will note that our outlook for the spring turnaround season is quite good based upon the level of quotations, but we remain cautious due to the ongoing battle with Covid outbreaks at customer sites.
For the balance of fiscal year 2022, AZZ will continue to execute on our strategic growth initiatives to drive shareholder value, while positioning for a strong start to fiscal 2023.
Our commitment to superior customer service is unwavering our ability to generate strong cash flows based on initiatives that drive operational excellence.
Tightly manage costs ensure pricing discipline and emphasis emphasis on receivables collection within our operating platforms. We are confident that our businesses remain vital to improving and sustaining infrastructure. So we continue to drive profitable growth and enhance shareholder value with that said I'll turn it over to Philip.
Thanks, Tom.
Bookings or incoming orders in the third quarter were 248 million, a $53 6 million or 28% increase over the third quarter of the prior year.
Our bookings to sale ratio remained consistent with last quarter, 107% and.
And well above the book to sales ratio of <unk> 86 for the same quarter last year.
As Tom had alluded to we are seeing consistently strong markets for our metal coatings segment and continued to experience improving market center infrastructure solutions segments.
Third quarter fiscal 2022 sales.
$231 7 million $5 1 million or two 3% higher than the prior year third quarter sales of $226 6 million.
Year over year for the third quarter metal cutting segment sales were up $17 8 million and were partially offset by lower sales in the infrastructure solutions segment, mostly in the industrial segment, where we took significant actions to restructure the business in the middle of last year.
The business generated gross profit of $57 million compared with gross profit of $54 7 million in the third quarter of the prior year.
Our gross margin was 24, 6% for the third quarter compared with the gross margin of 24, 1% in the third quarter of last year as business in both the segments continued to improve.
Operating income for the quarter was $30 1 million compared with $27 9 million in the third quarter of the prior year, a $2 2 million or 8% improvement year over year.
Our earnings per share was <unk> 85, or <unk> higher than last year's third quarter reported EPS of <unk> 76.
And adjusted EPS of <unk> 80 in the prior year third quarter.
Prior year was impacted by a loss on the divestiture of southern mechanical services or SMS.
Third quarter EBITDA was $39 8 million was flat compared with EBITDA in the third quarter of the prior year.
Year to date sales through the third quarter of fiscal 2022 or $678 million.
A five 4% increase from last year's third quarter year to date sales.
From last year's third quarter unit sales of $643 million, excluding the impact of SMS divestitures sales would have increased eight 6% year over year on a pro forma basis.
Fiscal 2022 year to date net income was $62 4 million.
It was $38 $9 million and 166% above the prior year to date reported net income of $23 5 million.
And $23 1 million or 58, 9% above the adjusted net income from the prior year to date period, where in the company had recorded impairment and restructuring charges net of tax of $15 8 million.
EPS on a year to date diluted share basis is $2 48.
Compared with 93 reported in the prior year and $1 50 on an adjusted basis.
Current year to date EPS improved 98.
Our 65, 3% over the year to date 2021 results.
While we continue to return capital to our shareholders through dividends and share repurchases our balance sheet remains strong.
Following our capital allocation highlights for the year.
On a gross basis outstanding debt at the end of the quarter was $192 million consisting of $150 million on our 7% and 12 year senior notes and $42 million outstanding on our revolving credit facility.
This reflects a $13 million increase in borrowings from the end of the last fiscal year.
Borrowings have increased primarily as a result of our continued share repurchase activity higher receivables and higher inventories as a business volumes improve.
Year to date, we have deployed $19 1 million in capital investments and anticipate capital investments of roughly $32 million. This year slightly below our previous estimate of $35 million.
Supply chain constraints of continued impact and delay the timing of spending on our planned capital expenditures.
We repurchased $7 6 million in outstanding stock during the quarter and year to date have repurchased 712000 shares or $28 9 million.
We declared and continue to make quarterly dividend payments.
Through the nine months ended November 32021 cash flows generated from operations was $49 7 million.
Down $9 7 million or 16, 4% from the same period in the prior year operating cash flows were positively impacted by the higher earnings but were more than offset by higher receivables on increased sales and increased inventories primarily as a result of higher zinc costs in our metal coatings.
We continue to remain active on the merger and acquisition front and completed the acquisition of the galvanizing operations in South Carolina that will expand our southeast footprint and shouldn't be accretive during the first year of operation as Tom noted earlier I will now turn it back to Tom for his final thoughts.
Thank you Philip.
Here are some key indicators that we are paying particular attention to for the metal coatings segment's galvanizing business, we are carefully tracking fabrication and construction activity and material and labor cost inflation as well as osha's Covid vaccine mandate.
For the surface technologies platform, we are primarily focused on expanding our customer base and benefiting from improved operational performance.
For infrastructure solutions domestic turnaround and outage activity has returned to a normal level. The spring season is currently looking to be good. Although we remain cautious due to COVID-19, particularly for international customers.
Electric platform is benefiting from transmission distribution and utility spending and growing datacenter and battery energy storage activity in regards to the strategic review of infrastructure solutions and stated desire to become predominantly a metal coatings company.
We have meaningfully advanced our work on a couple of strategic options that are designed to achieve this commitment.
Unfortunately due to related NDA is we are not able to comment further at this time.
We remain committed to our growth strategy around metal coatings, and achieving 21% to 23% operating margins with galvanizing performance being quite steady while we continue to improve surface technologies, we will remain acquisitive, particularly in metal coatings and hope to complete one more acquisition before the end of this fiscal year.
For infrastructure solutions, we are focused on profitability and cash flow. This segment's business units should benefit from more normalized turnaround outage seasons, and a solid market for renewables transmission and distribution utility battery energy storage datacenter E houses and switch gear.
We did issue our first ESG report this past quarter, and we'll continue to pursue improving in these areas.
And finally, our normal cadence would be to issue guidance for fiscal year 2023. Later this month, but we will not be doing so while we are committed to providing sales and EPS guidance, we may not be in a position to do so until our work on the strategic options can be factored in with.
With that we'll open it up for questions.
Thank you I'll begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
Using a speaker phone please pick up.
Before pressing the keys to withdraw your question. Please press Star then two.
And gentlemen, I just wanted to start with <unk>.
Question.
Today's first question comes from John <unk> with Sidoti <unk> Company. Please go ahead.
Good morning, guys and thanks for taking my questions.
John first of all.
So.
Zinc prices in the quarter.
It's a property it looks like zinc spiked to a five year high but you were able to realize some pricing.
Maybe it'd be helpful. Just kind of review when does that are higher priced ROE through your P&L or how are you able to realize pricing in such a difficult operating environment.
Yes couple of things John one we normally have about six months of inventory in our kettles. So.
And we had we were probably at a relative high.
High inventory level as we came into the last fiscal year.
So as we're now in the part of the year, where those zinc costs are.
It is increasing every month.
Rising towards current <unk>.
So.
So yes that will just continue every month.
And we naturally we adjust prices, we do surcharges, we've we've got a variety of tools, we attempt to use to offset that.
Okay got it so you'll be absorbing some of the higher pricing in coming months, you didn't hit the full impact in the third quarter right.
No that's fair.
Yes, it arises over the six month period and independence cattle to cattle.
Our location to location.
Okay got it and how much of revenue was deferred and infrastructure solutions business from <unk> into <unk>.
I don't know that we have a real specific number on that because it's just.
<unk> related and some of these turnarounds just extended but.
It's a few million dollars.
Okay, Alright and.
Just sticking with decent turnaround. This spring turnaround season, you said is looking promising.
How does it compare on a year over year basis as opposed to on a sequential basis.
How is it looking in that regard.
Yes, it looks nicely improved over last spring.
Okay, Great and I guess, just one last question on the acquisition Salt Creek.
<unk> revenue in that business too.
Julie.
It was it's only a couple of years old. So it was still ramping up when you figure new facilities take three to four years to ramp.
It's about 50%, 60% of where it should be and but it's a big facility. So we would anticipating it becoming more then.
Our average it'll be on the.
Higher end of our <unk>.
Our normal scale.
Okay and can you remember what the scale is.
Well you think you take our revenue divided by about 40.
Yeah.
<unk>.
And this will be on the higher end of that.
It is a big big facility with the largest cattle in the region.
Okay, Alright, guys, thanks, I'll get back into queue.
Alright.
And our next question comes from Noelle Dilts with Stifel. Please go ahead.
Hi, guys. Thanks for taking my questions.
First I was hoping you could.
First I was hoping you could kind of walk through the end market trends that youre seeing for metal coating.
Utility solar industrial infrastructure et cetera.
Just to help us help give us a feel for how things are trending here in the.
Late part of this fiscal year and into next year. Thanks.
Yes, Noelle this is Dave I'll take that one and we certainly continue to see.
Strong indicators from the renewables market, particularly the solar market a lot of work going on there.
There are OEM market remains strong and we also continue to see good growth from the overall construction market.
So those are all doing doing quite well and then last but not least of course, the utility segment, particularly the transmission poles and such.
<unk> remained strong and we look for continued strength into the next fiscal year.
Okay great.
And then youre seeing some of the steel producers talk about putting new mills.
Putting new medicine in the U S. Do you think that'll have any impact on.
The addressable market for you or because of the aftermarket aspect of your galvanizing not so much just curious how youre thinking about that.
Okay.
Yes, I think I'd say that we still view that as a positive because the more steel is produced locally in used locally and fabricated locally the better it is for us.
And and shortens lead times and cycle times and gives access to what currently is a constrained market for steel and.
So I think we generally viewed as a positive but obviously these things take a while to build so we don't anticipate much benefit.
Anytime real soon so we don't have that factored into next year.
Okay great.
And then last question.
Maybe you could I'm not sure if you could talk about the supply segment, our overall, but.
Do you have any do you have a sense of if you looked at just kind of the COVID-19 related inefficiencies is there do you have a rough estimate of how much that might be impacting your margins.
At this point or for the quarter.
Yes, I think when I, when we look at metal coatings.
Got a lot of.
I want to be careful how I say this but they do a nice job of managing their labor force they can use.
Tamps.
Probably more readily than where we need skilled craft.
So I think they flexed it but it still had a headwind just because on any given day.
Right now with Omicron.
You can have sites with.
$75 80 person site with five people out.
So we're having to work extra overtime.
Hesitate to put.
How many basis points of margin, but.
Generally it's.
It's probably 50 to 100 basis points of headwinds that the guys that the team is.
Manage through and continues to hit us on the infrastructure solutions side is more.
They tend to be bigger sites.
And also with WSI.
Deploying to customer sites.
Slowed projects and so a lot of this stuff that's going on now we're pushing things from third quarter and fourth quarter, whereas those things extend its.
It's a lot of labor that's got to be moved in on the one project we had the.
The International project with the issues in Q3 was really we had to bring in a lot of extra craft to be able to finish the project because we had a lot of craft sitting in the hotel quarantine.
So I'd say for them.
<unk> was probably 100 basis points of headwinds.
That they were challenged within the quarter.
Okay perfect that helps a lot. Thank you.
Yeah.
Ladies and gentlemen, as a reminder to ask a question. Please press star one at this time.
Today's next question comes from Brett Kearney Gabelli funds. Please go ahead.
Hi, guys. Good morning, Thanks for taking my question.
Hey, good morning, Brett.
I was curious.
The Steele Creek acquisition, if you could talk about just geographically the opportunity set that opens up for the company.
Southeast region, and then also how obviously at a high level that state amongst many others.
It's very hot labor market curious, how the labor dynamics sets up at the newly acquired facility.
Given the potential ramp and positive growth outlook you are seeing.
In that region.
Yes, Brad it's on the border of South Carolina, and North Carolina. So we're looking at that entire market. Our closest facilities are up in Bristol, Virginia, and then down in Nashville.
So we've.
This.
It gives us a nice facility kind of between.
So that opens up another we typically look at these things as a 150 200 mile radius.
In an area that we didn't serve and while it is.
Hot labor market, we're going after.
Mostly unskilled material handling semi skilled and the AZZ are we've got a lot of recruiting resources that we deploy data.
One off facility doesn't have access to so and we continually hit the job boards really hard so.
Hi.
And we've got sales in the region, so looking too.
Access additional opportunities on both sides, both improving the capabilities and leveraging that.
Ramping it up with manpower.
And we can share resources to some extent not that we'd like to do it too much.
But we can bring in at least.
Office manager support things that we can do.
To help get that facility fully functioning quickly and generating what we would typically want out of a facility of that size.
Okay.
Thank you so much.
Ladies and gentlemen, our next question is a follow up from John France, Robert at Sidoti <unk> Company. Please go ahead.
Yes, Hey, John.
Just regarding the potential divestiture.
That still on target to be done by the end of this fiscal year.
I guess, that's the first thing I was curious about.
You know John well.
Proven terrible it handicap and these guys are today, so I'm going to stick with my comment.
And then just refer back to that we're not comfortable giving guidance for next year for that reason.
Right.
How about is there any potential that you retain some of these businesses that maybe its better to keep it in house for them.
Well that's.
It's a tough one I think there is we have multiple options.
But I think these businesses need to be invested in and so as I look at that and are we the best ones to be able to invest in our long term model.
To give give both people and investors opportunities to benefit from that.
And I still have to say, we're probably not.
The best.
Owner, if you will.
But do we like these businesses, we really do like these businesses and we like what their potential is going forward. So.
Going to give you kind of at a half answer noncommittal answer on that one.
No I was just I was curious and regarding the backlog and the relative strength now what's the duration of the backlog right now is it falling into the.
First half of fiscal 'twenty, three or is it extending beyond that.
Our typical lead time, if you're just talking about our electrical platform side of our business tends to be kind of the three to six months period. It has extended out a little bit with supply chain.
And what Youre seeing is a nice increase in our backlog in both our enclosures and our switchgear business and even our smaller businesses on the electrical side are up marginally.
Or I shouldn't say marginally, but theyre up theres, a smaller businesses and thats somewhat offset when you look at our backlog because if you go back just real quickly.
We had over $100 million in backlog in China back in Q1 of 'twenty and that backlog is sitting at around $16 million right. Now. So we've kind of if you look at our total backlog backlog number.
Seeing a nice increase in the electrical platform offset by the decrease that we've talked about quarter over quarter in China.
But John I will add that while the.
The lead times are less than what they were for China there.
Probably 25% longer due to availability of materials, including customer supplied stuff. So.
So that's impacting our enclosures that are switch gear, probably more so than the other.
The other business units within <unk>.
The electrical platform.
Got it got it thanks for the color guys I appreciate that thank you alright. Thanks.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to the management team for any final remarks.
Alright, well. Thank you all for joining us. This morning, we look forward to talking to you in April.
And.
Reporting on the full year in the fourth quarter. So once again.
Anticipate.
Hitting our guidance soon.
Thank you for joining us.
Thank you Sir This concludes today's conference call. Thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
Thank you.