Q1 2020 Earnings Call
Good morning, and welcome to the Ace easy Inc. first quarter financial year 2020 financial results earnings Conference call.
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At this time I would like to turn the conference over to Joe Dorame managing partner list them partners. Please proceed.
Thanks, Chris Good morning, and thank you for joining us today to review the financial results of easy Inc. for the first quarter of fiscal year 2020 ended May 30, Onest 2019 on the call representing the company are Mr., Tom Ferguson, Chief Executive Officer, and Mr., Paul Fehlman, 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 call, which can be found on easy These 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 HCV.
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 which are detailed from time to time in documents filed by easy with the United States 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 response to products and services offered by the company, including demand by the power generation markets electrical transmission and distribution markets, the industrial markets, the metal coating 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 easy 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. The company can give no assurance of such forward looking statements will prove to be correct. These statements are based on information as of the date hereof and easy assumes no obligation to update any forward looking statements, whether as a result of new information future events or other.
Otherwise with that said, let me turn the call to Mr., Tom Ferguson, Chief Executive Officer of A's easy Tom.
Thanks, Joe.
Welcome to our first quarter fiscal year 2020 earnings call. Thank you for joining us this morning.
We are pleased with the solid start in fiscal year 2020, we generated 10% revenue growth and 35% in net income growth versus prior year.
Our energy segment had a fairly normal spring turnaround season ship the portion of the high voltage bus Chinese order that pushed out of the last quarter and regain operational traction in most businesses. The metal coating segment experienced increased demand in the solar and petrochemical markets and contribution from the acquisition of tenancy galvanizing and K two partners.
Overall, we generated 289 million in revenue, which is over 10% growth versus Q1 fiscal year 2019.
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 and continue our emphasis on value pricing.
We experienced lower cost zinc flowing through our kettles, although labor costs continue to rise as the craft labor market remains tight.
Overall, we were able to drive net income up over 35% versus first quarter last year to 21.3 million.
While our consolidated bookings were down 13% as compared to the first quarter last year. It is important to note. During the first half of fiscal year 2019, we booked two large Chinese orders with $45 million in the first quarter and $55 million in the second quarter and also had a very large international order for welding solutions.
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 into the back half of the year, while our metal coatings business continues to gain traction from our key initiatives to drive growth, both organically and through acquisitions. The metal coating segment revenue increased 6% from the first quarter of last year operating margins increased to 20, 424.1% compared to 21.9% in the first quarter of fiscal 2019.
This is due to lower zinc costs flowing through our kettles value pricing and the immediate contributions our two acquisitions made in the quarter.
We have taken steps to improve later labor productivity and are seeing our digital galvanizing system, driving greater operational efficiencies and productivity.
We remain the industry leader in North America was 40, when galvanizing plants.
We are pleased to be gaining meaningful traction in our new businesses powder coating plating and galvanized rebar.
These make up our ages the surface technologies business group.
This gives us growing confidence that our investments will yield positive financial performance in the years to come.
Our energy segment high voltage bus business had a strong first quarter executing on a large contract in China that along with other Chinese contracts will continue to be shipped throughout this fiscal year.
While some of our electrical served markets despite improvement compared to prior year oil pass businesses are seeing somewhat reduced demand.
We are especially pleased with the demand for our 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.
We remain somewhat cautious due to the uncertainty related to tariffs and the Chinese trade situation as well as the tighter market for labor in many of our U.S locations.
Looking forward, we are reaffirming our previously issued fiscal 2020 guidance of earnings per share in the range of $2.25 to $2.75 per diluted share and annual sales in the range of $950 million to 1.030 billion.
And with that I'll turn it over to Paul Fehlman, Paul Thanks, Tom.
For the first quarter fiscal year 2020, we reported net revenue of $289.1 million, a $26.9 million increase or 10.3% greater than the first quarter fiscal year 2018.
Net income for the first quarter of fiscal 2020 was $21.3 million, an increase of $5.6 million or 35.4% greater than the prior year first quarter.
Reported diluted EPS rose, 35% to 81 cents compared to 60 cents in the prior year first quarter.
Quarter, one fiscal 2020 gross margins improved to 22.9% from the 22.4% on a year over year basis, primarily on strong margin performance in the metal coating segment operating profit for the first quarter fiscal 2020 grew from $23.7 million in the prior year.
So $31 million in the current year, representing a 30.7% increase.
Operating margins of 10.7% increased a 170 basis points compared to 9% in the prior year.
Our effective tax rate for the quarter was 21.1% compared to last year's rate of 22%.
As for our segment results first quarter revenues in our energy segment were up 13.6% to $167 million compared to the prior year of $147 million.
Much of the increase in sales can be attributed to high voltage bus start shipments to China.
In a stable domestic refinery turnaround markets somewhat offset by lower international refinery revenues as we left a very good prior year quarter.
Energy segment operating income increased 26% to $12.6 million compared to $10 million in the prior year.
Gross profit in the segment improved to 32.6 million in fiscal year 2020, compared to $29.6 million in the prior year.
This pushes the gross margin down slightly to 19.5% this year.
Compared to 20.1% in the prior year first quarter.
Operating margins for the first quarter, however was 7.5% compared to 6.8% in the prior year.
In our metal coatings segment.
First quarter fiscal 2020 revenues rose, 6% to $122.2 million compared to prior year at 115.3 million, while operating income grew 16.7% to $29.4 million compared to the $25.2 million in the same period last year.
The increase was due primarily due primarily to lower zinc cost and an increase in pricing.
Operating margins finished at 24.1% for the quarter up 220 basis points compared to the 21.9% for the prior year.
Cash flow from operations fell by $6.2 million in Q1 compared to the prior year first quarter. Despite higher net income year over year, we normally see the first quarter as a negative cash quarter for the business and this year was no different.
We continue to invest in the business in the first quarter with two acquisitions now operating as part of the metal coating segment.
And already contributing to the bottom line in the first quarter.
We will continue to seek more opportunities like these to continue to profitably grow our metal coatings offerings.
The risks to fiscal year 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 in the first quarter of the year as metal coating margins increased we did indeed ship high voltage ball Stultz, China, and we are seeing firming orders for the fall turnaround season.
With that I'll turn it back to Tom Tom Thanks, Paul.
In closing, we are focused on improving productivity and efficiency throughout the company continuing to adapt our products to new market opportunities and to develop innovative solutions for our served markets.
We remain committed to driving our metal coatings operating margins back to the 23% to 25% range consistently.
And our energy margins to above 10%, we believe our first quarter performance is an early indication that we've emerged stronger and much better positioned to generate consistent operating results going forward.
And now we'll open it up for some questions.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
Todays first question will come from Joe Franzreb of Sidoti and company. Please proceed.
It's John but good morning, Tom Paul how you doing.
Hey, Doug.
Good start to the year.
My first question is Tom you kind of characterize this spring as a normal turnaround season or what are your initial thoughts on how the fall turnaround season is shaping up relative to the spring.
Yeah false stacking up to be.
Be stronger and.
Yeah. So we're we're quoting a lot of stuff already we're we're getting some engineering bookings were seeing positive signs as we get it to get closer to the fall season.
And that's both domestic and international in that case.
Okay, great, but much of the beat in the quarter actually had come from the metal coating side of the business.
So can we talk a little bit I guess, there's a couple of things here one.
Okay, too and I'm, the tenancy acquisitions, how much in revenue they contribute to the quarter and it doesn't sound like they contributed anything to the op income line is is that true.
Yes, they were relative there.
There are normal bolt on acquisitions are relatively small revenue. We were just pleased that they did contribute and they actually did contribute some operating income but.
Given their size, it's not really significant we just wanted to call. It out because the team did such a great job getting them integrated quickly.
Given the support they need it and it just really for US is it just shows we're back on track with how we have we can.
That would bring them into the company and that we're acquiring good teams and good businesses.
Okay, you know.
Sure this isn't material coming and ask it anyway, just how you characterize the two businesses in the Q you know sounds a K two is more of a normal regional galvanizer, but Tennessee seems like it has a client base. That's throughout the country is there a particular reason for that difference that they provide any kind of different services that they make more of a country wide business.
Yeah, you actually need to flip the other way John Okay. You partner is a powder coating and Patrick underemployed or out of.
Close close by in North Texas.
And ER and then they've got to location over in Tampa.
So they do because they do a lot of.
Automated type powder coating, they do attract business from further away than you'd normally see from Oh, galvanizing business, Tennessee, Galv is outside of Chattanooga, Tennessee, and they draw from that that southeast market and in eastern Tennessee and of course, we have a facility up in Nashville that.
It picks up as you go further north.
Okay Fair enough and one last question also on the Q there was mention of the.
Westinghouse settlement I'm wondering is that.
If that revenue contribution and then in the energy side of the business in the quarter.
And kind of maybe just update us on where that all stands.
Yes, so we do called out in the 10 years earlier.
On the revenue side, it's not it's not a big contributor though.
So we're going to pull out of a number on it but it's.
Somewhat de Minimis.
What that is.
In terms of the entire.
The entire deal first thing you know basically.
We.
We've entered into deals.
Alex the representative of Westinghouse.
We are on the open items that we filed with the.
With the bankruptcy court so.
Yes pretty much.
Getting to the end of it and it was pretty favorable return.
Okay. Paul Thank you very much I get back into queue.
Our next question comes from Jon Braatz of KC capital. Please proceed.
Hi, Tom.
Paul.
Hi, John .
On the coatings side, you called out on a couple of factors that contributed to the better margins sink prices efficiency productivity and so on.
Can you give us a little color on.
Obviously zinc prices can go up and down.
But on some of the items that are more sustainable and your ability to retain these margins.
In the face of maybe some risings and costs and trying to get better idea of how much of how much real internal progress you're making on the margins as opposed to maybe taking advantage of lower zinc prices.
Yeah, that's a great question or set of questions.
Yeah.
Yes, zinc zinc cost move around I think one of the we reorganized the sales effort.
Little over a year ago, so and I think thats really taking root we we can do to bring in more value oriented sales technical sales folks and now and focused effort on making sure that we're getting paid.
For the services, we provide because we do in some cases, we provide transportation services and in other plants we.
You know, we do more hand lead and then another so we we've got about 35 or 38 different services that we consider we offer so that focus on value pricing.
It's really taken root I feel good about the team's ability to.
To get paid for the value that their delivery and then on the other side Dgs. We bought we set up a lot of focus on.
Labor productivity.
Efficiencies.
Dr. keep keep our Z strap low if you will.
But I think with Dgs, we're getting more instrumentation more sensors, we're taking paper out of the plants.
And when you think about how the plant galvanizing plans laid out you can have.
You had routers that are 150 200 yards away from the office to get them to bring them in and get things input. It. So to me, that's where we're driving.
Labor productivity and efficiencies because we're now doing a better job using the digital tools that we've been working on for the last couple of years are finally truly coming into play so I view that as that's what's going to allow the we've got a great team there now and I feel like they're going to be in a week.
To sustain productivity inefficiency with you only capture the caveat to that beyond that in some parts of the country. We are scrambling to get a get direct labor and to handle handle the business, but we've done a lot of work on recruiting retention.
Motivation things like that to try to.
So he is the the demand for new Labour as much as possible.
If.
So many zinc stays at current levels, you still have a little bit of a had when I'm looking forward.
No we've actually.
Pretty much tailwind I'm until yeah, yeah. Okay. Yeah, we do have a little more of a tailwind then I'd I'd go along with that.
Yeah, we we have a hard time predicting the direction of commodity cost like Zee.
[laughter].
If you look back over the last few years, usually we probably bet wrong. If if we if we made a guess.
But we feel pretty good there's zinc supply and demand are kind of rock and in a range and so we have had.
We have done some things to.
You know keep our keep our zinc.
Predictable I guess would be the way I like to put it.
So as we look forward for the year you know we have about six months of zinc inventory in our kettles. So we're getting close to that point, where the cost of our zinc is it pretty much in the bag by the end of this quarter anyways okay.
You talked a little bit about uncertainty surrounding China, and the tariffs are those uncertainties or concerns.
Reflecting your ability maybe to bid on new business or issues that confront your customers and hence your ability to work with your customers.
What exactly is the.
Sort of the uncertainty and concerns surrounding.
You know a lot of these contracts date back a couple of years and so you know they.
They weren't anticipating things like tear ups and so as we've mentioned before we did switch from having a joint venture over in China to go on with.
A wholly owned manufacturing facility here and having that capability of haven't technicians in country, which allows us to control that better.
But you know it is 30% tariffs for stuff coming out of us into China.
And we're managing through that with the combination of.
One negotiating with the customers and to.
You know what what.
What we manufacture in country, that's not going to be subject to those tariffs. So yes, we're I feel like our team there is managing this very effectively.
But it's you know we we keep it at the forefront just because it's a big chunk of our backlog so making sure that we can generate the margins that we had estimated were going to get and abide by by the contractual commitments for deliveries and not get things hung up in custom so.
Yeah. The team working on that they are really good and we've we've added some good resources in China.
And they are helping us and then our folks in the facility in Medway.
They've been doing business in China for quite a while so we what we feel comfortable we also feel.
We feel we should call it out sure okay. Thank you much.
Again, if you do have a question. Please press Star then one on your telephone keypad.
Our next question comes from.
Dilts of Stifel. Please proceed.
Hi, good morning, and congratulations on a nice quarter.
Thanks.
Good morning.
Good morning, So just I just want to spend a bit on John's question on the metal coating margin.
Is there any way you can kind of again walk us through how to think about how much of the improvement from the fourth fourth quarter to the first quarter came from.
Versus pricing.
And then maybe.
Corporate that the headwind from labor.
And then how are you thinking about.
Is there any clarity you can give us on how to think about the cattle cost to think through the year and if you think these margins and the 24 around the 24% mobile are sustainable.
Well, we typically don't go too deep into that level of detail.
It's pretty close to.
To half and half from some some pricing in some cost reduction just from zinc.
I would say that on the pricing it's more of.
We've gone into.
Weve done in.
Pick and chose in our pricing and how we're going to price in certain markets. So we're definitely not making blanket statements about the overall market.
As far as the pricing goes one of the things we learned last quarter is that.
We do a different amount of zinc in every market and that can be a little bit different the way it moves up and down but I'd say going forward new will as you as Tom alluded to earlier basically on a comparative basis to last year from here on out for another six to nine months you should expect it to be a positive comparison, just because you know where that market is come from.
It's been down for the majority of the year.
There's been a couple of blips here and there, but I think we're pretty well.
I think a predictable.
It was the word Tom use which I think is exactly the right word to use for the next six to nine months, yes.
Having said that we're still keeping an eye on the labor cost, but I would say that.
We are now getting into.
That zone that we had committed to get back to earlier and while it may not be exactly 24, I think that.
Not making a forward looking statement on exactly what the margin is but we're back to that 20, 324% range for a while Tom.
Yeah, I think the one thing that you know as we continue to acquire powder coatings, which so far the ones Weve acquired it have been.
Fairly.
But I'd say as we get more we start to get some of the same leverage points that we have with galvanizing. So thats one of the reasons will trend.
To look at buying.
Powder Coaters inflators.
Building up in.
Within certain areas.
I have a couple of states and then expanding beyond that but.
But those margins typically it would be a little bit lower than our galvanizing margins and so as we as we do that as as continuous galvanized rebar becomes a bigger part of our sales that's why we're giving a range of 23.5%.
So we feel real good about the galvanizing stability to it.
To be in that range.
Okay great.
Thanks, that's helpful.
Then in terms of just shifting over to the energy segment two questions. One any additional clarity you can provide on the timing of the shipments on the project in China through the year that might drive some variation across the quarters and second could you you mentioned that certain electrical markets are improving I know you said that.
You know the oilfield services that the oil patch business I think we can do that but can you give us a little bit more detail on where you're seeing improvement.
Yeah, I think the we now have three enclosure sites.
From Chattanooga up outside of Baltimore, and then over to Kansas and then we've got the two switch gear plants.
One in Missouri, and the other up in Oshkosh, Wisconsin, and we feel good about that coverage that is so we feel like there's enough market activity.
That's becoming.
The focus now is more on operational excellence and taking care of customers and.
Because we can move load around to some extent.
We're far enough apart in some cases, the transportation can become a little bit of a bird but.
But we can.
At least share resources better than we used to be able to.
So we see that transmission distribution market is looking okay for us we like the activity on.
Data data.
Centers and.
That's where I'd say, we've we've adapted some of the things we've been doing in enclosures to go after.
That type of business and seeing those opportunities and so that's just a lot of our internal business development is going on targeting niches.
Versus the broad market and but we feel good about those were where we haven't seen.
A lot of improvement is in medium voltage bus.
Because we had to replace that nuclear.
A portion of the business that isn't available to us anymore.
With more traditional.
Bus business and Thats, where there is still a lot of competition out there and and demand hasn't improved enough to at least in my from my perspective to occupy the capacity that's available and then oil patch those are relatively small.
Business units overall, but but we did want to call out the fact.
The oil patch related business, which is lighting and tubing.
Hi, there just seen a little bit of a slowdown and now.
Yes, so thats kind of the range of things, we're seeing across those businesses.
Great. Thanks very much.
All right.
This concludes our question and answer session. At this time I would like to turn the conference over to.
Mr., Tom Ferguson, Chief Executive Officer.
For any closing remarks.
Yes. Thank you.
You know this we feel good about how we finished our first quarter, we feel good about where our teams are now position.
We're building out a leadership bench to ensure that we have the right.
The right capabilities as we go forward, we have a lot of good things going on in terms of innovation.
And pursuing new opportunities and.
As we de risk.
Away from nuclear.
To some extent and depend more on our international opportunities in international sales and business development organizations.
We feel good about the pipeline.
As I call on the bolt on.
Acquisitions and.
And feel good about our ability to focus on those and get it done and get them integrated.
Effectively so with that I look forward to.
Finishing out Q2, which.
I watched one caution is that is when.
That is when there is not a lot of turnaround in outages in the season. So Tim This Q2 tends to be a little bit lower and.
I just highlight that for you.
But then we get into the fall season, which right now looks looks positive for us and with that I. Appreciate it look forward to talking on the next call.
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