AZZ Inc.

Q3 2022 Earnings Conference Call


spk_0: day and welcome to the easy easy and folklore first for your two thousand twenty three financial results hasn't sell
spk_1: as that has a pencil and was normally mode such assistance for signaled had some specialists professor the star he followed by zero obviously presentation they'll be laboratory to ask questions to ask questions and my first started when touchstone for all to enjoy your question for his first started and to note to this event is being recorded
spk_0: our analysis on a conference over a job i may with are some papers please go ahead sir
spk_2: thanks rocco good morning thanks for joining us today to review the finance results of a these the eight for the third quarter of fiscal year twenty twenty two and november thirtieth twenty twenty one joining the call today are time ferguson chief executive officer bylsma chief financial officer and david narc senior vice president ma kentucky's jason and i are after the composed of today's fair remarks will open a call for questions please note there is a slide presentation for today's call which can be found on a disease that relations page under latest earnings release presentation again that w w w dot a dot com before a deal with prepared remarks and like to remind everyone certain statements made by the management team of easy during the conference call constitute forward looking statements within the media the private security litigate reform act and nineteen ninety five it's up in a statement of historical fact is conference call may contain or lucky stay is what risks no certainty summer which is detail from time to time documents filed by easy easy with the securities and exchange commission including the and report for ten k for the fiscal year end of february twenty eight twenty twenty one those risk nurseries include that are not limited to change the customer demand and response to product serves as offered by the company including demand by the power generation market lateral transmission and distribution markets the industry markets and the middle tony's market prices a raw material costs including week and natural gas which is used in the hot if galvanizing process changes in the political stability and economic conditions that the various marks the dvd surged forward and domestic possible by to delay the shipment acquisition opportunities currency exchange rate adequate financing and a bill daly and experience management employees to implement the company's growth strategy in addition easy easy customers and it's operations could potentially be adversely impacted by the ongoing cause a pandemic the company could give new shirt that at all rookie seems to be correct these demons are based on information as of the date hereof and he is he assumes no obligation of update any forward looking statements weather as result of you information future advanced or otherwise with that our the wait let me turn power to or isn't chief executive officer it easy easy tom
spk_3: they go and welcome to our third quarter of fiscal twenty twenty two earnings call and thank you for joining us this morning we continue to gain momentum and third quarter in depleted our fifth consecutive quarter of saw to form adapted disruptive and coveted first half of last year i especially want to thank our employees to show up every day and do their job well that perseverance continues to allow us to achieve these kinds of results it's audit sales of almost two hundred thirty two million improve two point three percent versus the prior year or four point one percent when adjusted for the divestiture of sms last year
spk_2: metal coat is generated another excellent quarter with sales up fifteen point four percent job or one hundred and thirty three million and if the structure solution sale down eleven percent at about ninety nine million
spk_3: sales and a i s were impacted by labour constraints covered related material shortages and covert issues at some customers sites which i will describe further during the school we're pleased to have completed another strong core performance we continue to generate saw cash flow in return capital to our shareholders during the third quarter we generated net income of over twenty one million dollars in a p s of eighty five cents per diluted share reflecting the resiliency of our businesses and the dedication of our people er visits as leverage the real i'm an ex has taken last year to improve profitability while maintaining their focused on providing outstanding quality and service to our customers we also benefited from lower an interest expense and a lower tax rate of twenty two percent for the third quarter in line with our strategic commitment to value creation we repurchased over one hundred and forty eight thousand shares for seven point six million dollars and distributed four point two million in dividends in medicare it's we achieve twenty four point five percent operating margins on sales of one hundred and thirty three million this resulted in operating it can be up over forty percent from the previous year the margin of brim it was primarily due driving operating deficiencies and productivity while realizing improve pricing in the face of rapidly rising st labor and energy costs in spite of the ongoing challenges of kelvin our team succeeded in completing the acquisition of still be galvanizing in south carolina this site was completed in two thousand and nineteen and includes a lot of automation making it the newest and most modern in our fleet our team is excited about the growth opportunity presents in a region we were not president america is team continues to demonstrate their ability to perform and deliver great results will manage a labor shortages and the increasing costs or infrastructure solution segment demonstrated continued profitability improvement in the quarter leveraging the cost reduction actions that they took last year we were down about eight percent when considering the impact of the sms divestiture the infrastructure solution segment delivered operating income of over nine million dollars with operating margins improved one hundred and forty basis points to nine point three percent as compared to the prior year the segment did face rowing labour constraints and delays and material due to supply chain disruptions resulting from covered including components from customers one that ws i international project was significantly impacted by covert outbreak which was managed well that resulted in lower profitability we remain focused on strategic excel and initiatives across both the electrical an industrial platforms and we believe we are well positioned to finish this fiscal fiscal year well or fiscal year twenty twenty two while kill of it continues to generate some uncertainty in many sectors given a strong performance in the first three quarters and due to see more opportunities than rest the balance of this year we are tightening our e ps games we anticipate annual sales to be in the range of eight hundred sixty five nine hundred twenty five million dollars and e p s at three dollars to three dollars and twenty cents per diluted share we did not anticipate any material impact in the fourth quarter from the recently announced acquisition as we're focused on integration is first couple of months metal coding just continuing to focus on sales growth including leveraging are spin galvanizing operations at several sites operational execution a customer service is labor and operating expenses increase due to inflation or if it's sexist lucian segments cautiously optimistic as and enters the fourth quarter was some momentum and bookings activity particularly in the electrical platform or ws i bet the same good results from the expanded poland facility although internationally the business continues to experience some in intermittent project delays due to covet 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 the look to kick off a little earlier than normal the electrical platform is focused on operational execution and growing at the house and switchgear businesses due to the project extension from the third quarter we expect better than normal performance in the fourth quarter i will note that are outlook for the spring turn around season is quite good based on the level of quotations but we remain cautious due to the ongoing battles with covered outbreaks a customer sites for the balance of fiscal year twenty twenty two easy easy will continue to execute on our strategic growth initiatives to drive shareholder value proposition and for a strong start to fiscal twenty twenty three our commitment disappear customer service is unwavering our ability to generate strong cashflows based on initiatives that drive operational excellent tightly is costs and sure pricing discipline and emphasis emphasis on receivables collection within our operating platforms we are confident that are businesses remained vital to improving and sustaining infrastructure so we continue to drive profitable growth and enhance shareholder value with that said i'll turn over to fill up
spk_4: thanks tom
spk_3: bookings or incoming orders in the third quarter for two hundred forty million a fifty three point six million or twenty percent increase over the third quarter of the prior year or bookings to sail ratio remained consistent with last quarter a hundred seven percent and while above the book the sales ratio of point eight six for the same quarter last year as time had alluded to we have seen consistently strong markets for a metal cutting segment and continue to experience improving markets and our infrastructure solution segment third quarter fiscal two thousand and twenty sales or two hundred thirty one point seven million five point one million dollars a two point three percent higher than the prior year third quarter sales of two hundred twenty six point six million the rear for a third quarter not cutting same sales were up seventeen point eight million and were partially offset by lower sales in the infrastructure solution segment more seen the industrial segment where we took significant actions to restructure the business in the middle of last year the business generate a gross profit of fifty seven million compared with gross profit of fifty four point seven million in the third quarter of the prior year are gross margin was twenty four point six percent for the third quarter compared with gross margin of twenty four point one percent and the third quarter of last year as business and both the segments continue to improve operating income for the corner was thirty point one million compared with twenty seven point nine million in the third quarter of the prior to two point two million or eight percent improvement year over year earnings per share was eighty five cents or nine cents higher than last year's third quarter report he feels the seventy six cents and adjust dps of eighty cents in the prior third quarter the prior year was impacted by or loss on the divestiture of southern mechanical services or sms
spk_5: third korea but i was thirty nine point eight million was flat compared with the be done the their core the prior year
spk_3: year to date sales the the third quarter of this for twenty twenty two or six hundred and seventy eight million dollars a five point four percent increase in last year's third quarter your date sales
spk_5: from last year's third quarter you're a sales a six hundred forty three million dollars excluding the impact of the semester her sales would have increased eight point six percent year over year on a pro forma de sus
spk_3: fiscal twenty twenty two year to date net income as sixty two point four million was thirty eight point nine million or more hundred and sixty six percent about the prior year to date report in any item of twenty three and a half million and twenty three point one million or fifty eight point nine percent above the adjusted net income from the prior year did a period where in the company had recorded impairment restructuring charges that of tax or fifteen point eight million
spk_5: he ps on a year to date diluted share basis is two dollars and forty eight cents compared with ninety cents report in the prior year and dollar fifty on an adjusted basis
spk_3: current year to date he ps improved ninety eight cents or sixty five point three percent over the year to date twenty twenty one results
spk_5: only continue return capital to shareholders the dividends and share repurchases our balance sheet remain strong the following our capital allocation highlights for the year
spk_3: on a gross basis outstanding debt at the end of the quarter was a hundred ninety two million consisting one hundred fifty million on our seven and twelve year senior notes and forty two million are standing on our revolving credit facility this reflects that thirteen million dollar increase in borrowings from the under the last fiscal year marines have increased primarily as a result of our continue share repurchase activity piracy both and harriman tories as a business volumes improve
spk_4: year to date we have deployed nineteen point one million in capital investments and anticipate capital investments are roughly thirty two million the year slightly below our previous estimate of thirty five million
spk_5: supply chain constraints of continued impact and delay the timing of spending on our plan capital expenditures
spk_3: we repurchase seven point six million outstanding stuff during the quarter and your date of repurchase seven hundred and twelve thousand shares or twenty eight point nine million dollars we declared and continued to make quarterly dividend payments
spk_5: through the nine months ended nov thirty at twenty twenty one cashflows generated from operations was forty nine point seven million down nine point seven million or sixteen point four percent from the same period the prayer operating cash flows pas were positively impacted by the earnings for more than offset by hiring people like increasing
spk_3: sales and increase in the tories primarily a result of hires a tossed and our metal buildings we continued remain active on the merger acquisition front and completed the acquisition of the galvanizing operation in south carolina i'll expand our se footprint and should be a creative during the first year of operation is tom and noted earlier on alternate back to tom for his final thoughts
spk_6: thank you fill up
spk_3: here's some key indicators that we're paying particular attention to for the metal coat is segment galvanizing business we are carefully tracking fabrication in construction activity and material and labor cost inflation as well as osha's coben vaccine mandate where the surface technology platform we're primarily focused on expanding our customer base and benefiting from improved operational performance griffith structure solutions domestic turn around and out his activity as returned to a normal level the spring season is currently looking to be good although we remain cautious due to cope it particularly for international customers elected platform is benefiting from transmission distribution and utility spending and growing data center and battery energy storage activity in regards to the strategic review of infrastructure solutions and stated desire to become predominantly a metal coat his company we have many play advanced or work on a couple of strategic options that are designed to achieve this commitment unfortunately due to related and yeas we're not able to comment further at this time we remain committed to ours or growth strategy around know coatings and achieving twenty one to twenty three percent operating margins with galvanizing performance being quite steady while we continue to improve surface technologies we will remain acquisitive particularly metal coatings and hope to complete one where acquisition before the end of this fiscal year for if structure solutions we're focused on profitability and cashflow the segments business unit should benefit from more normalize turn around added seasons and a solid market for renewables transmission and distribution utility battery energy storage data center he houses and switchgear we did his you are first the sg a report dispatch quarter will continue to pursue unproven in these areas and finally are normal cadence would be issued guidance for fiscal year twenty twenty three later this month that we will not be doing so while we're committed to providing sales be as guidance we may not be in a position to do so until our work on the strategic options can be factored in with that will open it up for questions
spk_1: i have on our behalf hostile answers sm to ask costs are starving long touchdown farm the for his on the speakerphone we ask for help or handset before facilities which i have cost him for his first started and so i went on swan song starving one of you have a question today's first question comes from john friends from west on and up please go ahead
spk_7: one guys and things take the question
spk_2: john percent i like sort method sync prices in the corner and comic notes to properly the fake thanks by to up by the are high but you have to realize and pricing i'm maybe be helpful is kind of review when does that a high price whoa through your p or how you able to realize pricing that a difficult up
spk_8: operating environment
spk_3: yeah a couple of things john one we we normally have about six months of inventory and our cattle so ah and we had we were probably out a relative for high inventory level as we came into the last fiscal year ah so as we're we're now in the part of the year where those they costs or just increasing every month ah rising towards sir turn ella me so i'm so yeah that of this continue every month and and we naturally we just prices we do surcharges we've we've got a variety of for tools we we attempt used offset that
spk_2: after goddesses so you'll be absorbing some a higher price in coming months he didn't hit the phone pack in the yeah third quarter right
spk_9: know that there
spk_5: yeah it it arises over the six month period and defense counsel the kettle on an occasional mission
spk_2: okay it or and and how much of revenue was deferred in instruct solutions business complete you into for you
spk_3: on another we have a real specific number on that because it's and six the project related in some of these turnarounds just extended but job
spk_10: you know it's it's a few million
spk_2: i am dumb to sticking with me since around this spring thurman season he said looking promising i'm has a compare year we year basis i opposed to on a sequential basis from i'll hazard looking and in that regard
spk_3: yet the looks nicely improved over our last spring
spk_2: incorrect right and i guess is one last question than on the acquisition so creek
spk_7: ah how much revenue that baptism still annually
spk_3: ah you know was schedule a couple years old so it was still ramping up when you figure new facilities take three and four years to ramp ah it's about fifty sixty percent of where it should be an a week but it's a big facilities so we would anticipating it becoming more than you know our average beyond the pot pie or end of our up of our normal scale
spk_2: oh can't remember that scale as
spk_11: where are you think yeah you know you take our revenue divided by about forty shots
spk_12: and either
spk_11: add that and as the be on the higher the that sell his eyes as a break
spk_13: think delhi with the largest kettle in the was
spk_7: okay i i guys they like a backer to give i have
spk_0: and i wasn't for house on there are parts on staff all for his car
spk_14: i go to an thing for taking my question
spk_15: reversed i was hoping you paid
spk_14: i'm first i was hoping to kind of walk through the and market trends that you're seeing for metal coding
spk_16: i'm in a utility tunnel or industrial infrastructure etc i'm it's of to help us help give us a feel for how things are trending here in the they part of the skeptical your and into next year thanks
spk_17: yeah well this is dave i'll take that one and be oh we'd certainly continue to see you know strong indicators from the renewables market particularly that the solar market a lot of work going on there are only a market remains strong and we also continued to see a good girl from the overall construction market so those are all doing doing quite well and then yeah last but not least of course you know the utility segment particularly the in a transmission polls and such as container main strong and and will the care for kentucky strength into that the next fiscal year
spk_16: okay great i'm and then he never seen some of the still produces talk about putting new mills are putting the mouth and in the us deepened battle have any impact on on the adjustable market for you are because of the aftermarket aspect of your your galvanizing not too much to clarify your thinking about that
spk_3: yeah i think i'd say that's that we still view that as a positive because the more steel it's produced locally and use locally and fabricated locally that the better it is for us ah and and shortens lead times and cycle times and and gives access to what literally as a constrain market for steel and side i think we generally viewed as positive that obviously these things take a while to build so we we don't anticipate much benefit any time real soon so are so we don't we don't have that factored into next year
spk_16: okay great on and the my class and you know maybe could and nuts have to talk about the by segment our overall but
spk_15: do you have any that get a sense of if he looked at some kind of the covered related inefficiencies is there a rough estimate of how much that might be impacting your marches on at this at this point or or for the quarter
spk_3: yeah i think when i when we look at metal coding sir they've got a lot of i would be careful i say this but they they do it do a nice job of managing their labor force they can use temps him probably more readily than where we need skilled craft it's i think they flexed its it but it's still had a headwind just because on any given day you know right now with i'm a crime or you can have sides with you know the seventy five eighty person site with five people out it's were having to work extra overtime i hesitate to put of yeah how many basis points and margin but bit but generally it say it gets probably you know fifty to one hundred basis points ahead wins that the guise of that the team is a managed through and continues to to hit us on the infrastructure solution side is more ah they tend to be bigger sites and also with the herbicide and dirt deployed to customer sites it's slowed projects in can you know so a lot of the stuff that's going on now we're pushing things from third quarter and fourth quarter were those things extend it's serve it's a lot of labor there's gotta be moved in and on the on the one project we had the the international project with the issues and que three 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 crap said in the hotel quarantine you know i'd say for them or i'm gonna go with probably a hundred basis points of headwinds ah that they were challenge with in the quarter
spk_16: okay perfect that helpful thank you
spk_0: amazon women as a a minor survive ask questions please hostile and ran at this time
spk_1: max was how some but carney echo belly flop
spk_18: add
spk_19: i got the morning thanks to my question
spk_11: a my breath
spk_20: i'm curious eye on the steel creek acquisition if you could talk about just dumb geographically opportunity sat that opens up for the company arm in the southeast region and then also on your how i obviously at a high level that state ah amongst many others ah it very hot labor market curious how
spk_3: with the labour dynamic set up at i the newly acquired facility ah given the potential ramp and positive growth outlook you are seeing ah in not that region yeah brad i you know it's it's on the border of south carolina north carolina so we're looking at that entire market our closest facilities or up in bristol virginia and down in nashville ah so so we've you know this this gives us a nice facility kind of between ah so that opens up another you know we typically like these things is a hundred fifty two hundred mile radius in an area that we didn't serve in and while it is a hot labor market it's you know we're going after mostly unskilled material nearly in semi skilled and the a the the are we got a lot of recreating resources that we deploy that are a one off for facility doesn't have access to so and you know and we continually hit the job boards really hard so i ah and we got sales in the region so looking to ah access so additional opportunities son on both sides but improving the capabilities and leveraging that ah ramping up with manpower ah and and we can share resources to some extent not the we like to do it too much
spk_13: but we can bring in at least office manager support things that that we can do
spk_3: to help get that facility
spk_21: fully functioning quickly and are generating what we would tip typically want that of a facility that's us
spk_0: traffic like as much
spk_7: analyzes all an ox wasn't off from john fans or up at that company please go ahead
spk_2: yeah a dog got just regarding the bit of potential divestiture it it is that still on target to be done by end to this fiscal year
spk_3: i'm i guess that's first as cares about
spk_2: in a jar i'm not proven terrible at handicap in these guys are telling someone to stick with my tom add at ah and then just refer back to that's where we're we're not comfortable given guidance for next year for for that reason
spk_3: right arm how about is already potential that you retain some of these businesses that now made it is better to keep it in house for now but that's a that's a that's a tough what i think there's sweet we have multiple options but you know i think these businesses need to be invested in and and so as i look at dad and and are we the best ones to be able to invest in a long time and
spk_22: to give give both people and investors opportunities to benefit from it and and i still have to say we're we're probably not
spk_3: that the best
spk_2: owner if he will ah but do we like these businesses we really do like these businesses in we like what their pin potential is going forward so i'm gonna give you can have a half a happy answer a noncommittal answer on our
spk_3: not it is i was curious and regarding the backlog and and about his strength know which the ratio the backlog right now is it is it falling into the first half of fiscal twenty three boys in extending beyond that your typical lead time if you just talking about our liturgical platform side rather as tends to be hannah the three to six months period it has extended out a little bit with supply chain when what you're seeing as a nice increase in our backlog and both are enclosures and are switchgear business and even are smaller businesses on the electrical side up marginally
spk_5: are awesome say martland but they're up there smaller businesses and that that's somewhat asset when you look in her backlog as if you go back just will quickly
spk_3: yeah we had over one hundred million and backlog in china back and he wanted swanee and that backlog is sitting around sixteen million dollars right now so we're kind of if you look at our total dog backlog number you're seeing a nice increase in left of a platform offset by the the decreased every talked about quarter over quarter and china vagina i will add it while learn the lead times or less than what they were for china they're probably twenty five percent longer do to availability of materials and including customer supplied stuff so ah
spk_13: so that's impact in our enclosures or switchgear problem more so than than the other around the other business units within
spk_7: or the electrical platform
spk_3: got it got it thanks for the colleague as i appreciate that thank you i think makes an ominous closer hassan answer session of i found a half us back our to the mountains with him for a marks i will thank you for a joint in us this morning we look forward to talking to you in april and now and now
spk_23: reporting on the full year in the fourth quarter so have to once again
spk_3: then to stay there
spk_0: hitting our guide and now thank you for joining us

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