AZZ Incorporated (AZZ)

AZZ 
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Industry: Consumer Durables
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AZZ Incorporated (AZZ)

F2Q10 Earnings Call

September 25, 2009 11:00 am ET

Executives

Joe Dorame - Investor Relations, Lytham Partners

David H. Dingus - President and Chief Executive Officer

Dana L. Perry - Chief Financial Officer

Analysts

John Franzreb - Sidoti & Company

Ned Borland - Next Generation Equity Research

Fred Buonocore – CJS Securities

Brent Thielman - D. A. Davidson & Company

Tim O’Toole – Delta Management

Presentation

Operator

Welcome to the AZZ Incorporated second quarter 2010 financial results conference call. (Operator Instructions) I would now like to turn the call over to Mr. Joe Dorame. Mr. Dorame, please go ahead.

Joe Dorame

Good morning. Thanks for joining us today to review the financial results for AZZ Incorporated for the second quarter of fiscal year 2010, ended August 31, 2009. As the operator indicated, my name is Joe Dorame. I am with Lytham Partners and we are the financial relations consulting firm for AZZ Incorporated.

With us today on the call representing the company are Mr. David Dingus, President and Chief Executive Officer and Mr. Dana Perry, Chief Financial Officer. At the conclusion of today’s prepared remarks we will open the call for a Q&A session.

Before we begin I would like to remind everyone this conference call includes statements that 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 the company with the SEC.

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 electrical power generation markets, electrical transmission and distribution markets, the industrial markets and hot dip galvanizing markets, prices in raw material costs including zinc and natural gas which are used in the hot dip galvanizing process, changes in the economic conditions of the various markets the company serves, foreign and domestic, customer-requested delays of shipments, acquisition opportunities, currency exchange rates, adequate financing and availability of experienced management employees to implement the company’s growth strategies.

The company can give no assurance that such forward-looking statements will prove to be correct. We undertake no obligation to affirm publicly, update, or revise any forward-looking statements whether as a result of information, future events, or otherwise.

With that having been said I would like to turn the call over to David Dingus, President, and Chief Executive Officer of AZZ.

David Dingus

Thanks to each of you for taking the time to join us today for the conference call for our second quarter of fiscal 2010. Despite the economic and served market conditions that we faced, the company is pleased to report another excellent quarter.

For the second quarter revenues were $95.2 million compared to $103.3 million in the same period last year. Net income was very strong at $11.1 million. Earnings per share were $0.89. As we had projected, backlog was $139.4 million and did reduce $10.7 million in the second quarter when compared to our first quarter.

The increase in domestic and international quote activity which we reported in the first quarter of 2010 has continued into the second quarter. The primary increases have been in our power generation, transmission and distribution markets. While some of the increase can be attributed to the budgetary quotation of new projects that have yet to be released, it is still encouraging that overall project activity appears to have increased. The release of orders for new and existing projects remains sluggish and we have not seen any decrease in the extended evaluation period we have witnessed over the past several months.

We anticipate the slow and selective release of orders continuing into our third quarter and fourth and while it is difficult to forecast the timing of order releases in these market conditions we would anticipate that it will be the first quarter of our fiscal 2011 before we start seeing a rebuilding of our backlog.

Our international quotations are strong and we did secure two significant international orders in the second quarter. One for a Canadian project and another for a nuclear project in China. We are pleased to date we have seen few cases where customers have requested delays in delivery of orders which are in our backlog. Additionally, cancellations have been minimal. Based upon customer requested delivery dates and our production schedules, 65% of our backlog is expected to ship in the current fiscal year. Of the backlog of $139.4 million, 43% is to be delivered outside the United States.

Operating margin for the electrical industrial segment was a record setting level of 22%. Volume for the quarter was up 7% when compared to the prior year and operating income grew 23%. We continue our pricing discipline, improved project management and were assisted by favorable costs of key commodities. Operating margins for the first six months were 20% and compared favorably to the 17% in the first six months of last year.

Galvanizing demand continued to be below our record setting pace of last year. Our continued commitment to quality and service, the close attention to all operating performance criteria combined with favorable cost commodities led to another outstanding margin performance quarter.

Second quarter margins were 31%. The price of zinc purchased has continued to be in the low 80 range for the past several weeks. Without some price recovery we may see an adverse impact on margins in the fourth quarter of our current fiscal year. The impact of the decrease in the petroleum demand for galvanizing services has been greater than our expectation. However, increases for galvanizing services in the electrical transmission, distribution and renewable has been stronger than we thought. Competitive forces on pricing continue to be mixed with some deciding to maintain production levels regardless of price and others deciding to follow a more disciplined approach. For the most part, within our served territories the industry has resisted massive price discounting despite lower demand.

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