AZZ Inc. (AZZ) Q3 2016 Earnings Report, Transcript and Summary

Good morning and welcome to the AZZ Incorporated Third Quarter of Fiscal Year 2016 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Joe Diaz of Lytham Partners. Please go ahead, sir.

Thank you and good morning and thank all of you for joining us today to review the financial results of AZZ Incorporated for the third quarter of fiscal year 2016, which ended November 30, 2015. As the conference call operator indicated, my name is Joe Diaz. I am with Lytham Partners and we are the financial relations consulting firm for AZZ Incorporated. With us on the call representing the company are Mr. Tom Ferguson, Chief Executive Officer and Mr. Paul Fehlman, Chief Financial Officer. At the conclusion of today’s prepared remarks, we will open the call for a question-and-answer session. If anyone participating on today’s call does not have a full text copy of the press release, you can retrieve it from the company’s website at azz.com or numerous financial websites. 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. 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 U.S. Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended February 28, 2015. Those risks and uncertainties 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 the hot-dip galvanizing markets; prices and 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 in 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. 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 said, let me turn the call over to Mr. Tom Ferguson, Chief Executive Officer of AZZ. Tom?

Thanks, Joe. Good morning to all of you on today’s call and we thank you for your continued interest in AZZ. I am pleased with our financial performance in the third quarter of fiscal 2016. We achieved double-digit growth in net income and EPS during the quarter. Our WSI and electrical businesses did well. And as we mentioned on the last earnings call, the fall season is obviously the strong period for our WSI business. I would like to congratulate the WSI team for managing the large volume of projects in an efficient and timely manner while focusing on operational excellence. Our galvanizing business faced some challenges that we will discuss later in the call. We will also address the impact on the small portion of our energy business that served the oil patch segment. As expected, we had some integration expenses in our recently acquired U.S. galvanizing plants that impacted our galvanizing margins. But we remain confident that these plants will generate our normal galvanizing margins in the near term. We had a successful soft opening of our new galvanizing plant near Reno, Nevada. And as of this week, it is now fully operational and efficiently open for business. This now gives us 42 galvanizing locations as we have integrated the two Hurst sites into one. Additionally, we continue to make progress on several technology and operational improvement initiatives that we believe will drive future organic growth and value in our galvanizing business. Fiscal year 2016 continues to be a solid year as we drive market share growth in our galvanizing and energy businesses in spite of some market headwinds due to lower oil prices. On a year-to-date basis, we have generated 25% net earnings growth year-over-year, 11% bookings growth and leveraged 14% operating income growth on 8% sales growth. And that’s in a pretty weak set of market conditions. Quite frankly, it’s a pretty impressive story and I believe we can still do much more. Our WSI specialty welding business continues to improve its operational performance and has regained business with many former high profile refining customers. While refinery utilization rates remain high, we have benefited from market share gains as our business development efforts have gained traction. This has resulted in winning new customers and growing in several international markets. With improved efficiencies and operating margins, a stable leadership team and good technology and field performance, we anticipate this business will continue to perform well. Our Galvanizing Services segment margins had been impacted by the sluggish U.S. manufacturing activity and by the recently acquired U.S. galvanizing plants whose margins are still ramping up to AZZ historical levels. It’s important to note we are gaining strength in other sectors including bridge and highway and electric utilities to help offset some of the current headwinds. We have a fairly high concentration of galvanizing capacity in the U.S. Gulf Coast area. And because of that, we have seen a moderate decline in volume from customers affected by lower oil prices. The higher volume of refinery and petrochemical projects is not materialized to any great extent. During the quarter, we did have some more maintenance activities than we normally do at some sites. So, we lost a few more production days than in prior quarters. We also began incurring operating expenses at the new Reno, Nevada site while the revenues are just beginning to ramp up. Zinc prices continue to remain low, which has begun to impact pricing in the market. The galvanizing team is driving productivity and efficiency to offset these margin impacts as much as possible. We are a legacy electrical business. The results overall for the quarter have met our expectations, with some businesses doing well with substantial gains in backlog and a few continuing to be affected by the current state of the upstream oil and gas market. Overall, we are pleased with our enclosure, switchgear and bus business. These pure electric platform overall performance was reasonably good for the quarter given its mixed market conditions. Electric utilities spending in the U.S. was stable and we benefited from strong international opportunities. We are seeing order growth on domestic utility infrastructure investments, which makes us optimistic about this platform’s opportunities for the balance of 2016 and into 2017. We remain focused on establishing the international joint ventures to provide broader market access and on improving operational efficiencies and customer service. We are in the early innings on these initiatives and are already seeing the improved potential. The legacy electrical platform as with galvanizing has a stable leadership team, solid operating performance and good niche technology. The exposure to lower oil prices is relatively small for this platform and primarily impacts our API tubular and hazardous-duty lighting businesses. In the aggregate, these represent approximately 5% of AZZ’s overall revenue. Our NLI nuclear business is continuing to focus on more normal maintenance opportunities instead of new projects and did not ship any more of the long delayed Westinghouse nuclear project orders during the third quarter. We still anticipate these final orders shipping by our fiscal year end. Our new incentive programs that tie performance with pay continue to drive positive results. These programs are designed predominantly around performance and operating income, cash flow, return on assets, productivity and safety. To help drive positive results, every employee is now a participant in our incentive program, which ensures focus as we enter the final quarter of the fiscal year. Additionally, we will continue to focus on enhancing key operational fundamentals including our tax and capital efficiency. I am pleased with our progress and believe we have the leadership team, products and services and balance sheet to generate above market results for a long time. We have taken steps necessary to reconfigure our businesses over the past 12 to 18 months that have positioned us for a solid finish to fiscal year 2016. I believe AZZ is well positioned to continue to expand our market share in galvanizing and energy and confident in our ability to grow our businesses profitably. As a result, we are narrowing our previously announced EPS guidance for fiscal year 2016 of $2.90 to $3.10 per diluted share and revising the revenue range to $890 million to $915 million. Now, I would like to turn over to Paul Fehlman to cover the financial highlights.

Thanks, Tom. For the third quarter of fiscal 2016, we reported revenues of $242.4 million, an increase of 7.8% compared to $224.8 million for the same quarter last year and net income of $23.5 million, an increase of 17.9% compared to $20 million last year. This results in fully diluted EPS of $0.91, which is up 18.2% compared to the $0.77 for the same quarter last year. Revenue grew year-over-year in both energy and galvanizing services, albeit at different rates. Revenue in the Energy segment was up 4.6% to $136 million in the third quarter compared to the third quarter last year and did not as Tom said, include shipments of our remaining large Westinghouse backlog at NLI which we expect to ship in the fourth quarter of fiscal 2016. Revenues in galvanizing services were up 12.3% to $16.4 million for the third quarter compared to the third quarter last year, primarily due to the impact of U.S. Galvanizing acquisition in the second quarter this year. Bookings were $228.7 million in the third quarter compared to $196.1 million in the third quarter of fiscal 2015, an increase of 16.6%. Our book to bill ratio from third quarter grew to 0.94, up to 0.87 book to bill ratio posted for the third quarter last year. Based on the strength of bookings, our backlog finished the third quarter at $324.4 million, up 8% compared to the backlog of $300.3 million reported for the third quarter last year. Additionally, approximately 33% of the backlog was scheduled to be shipped outside of the United States. Gross margins for the quarter finished at 25.8%, a decrease of 120 basis points compared to the 27% gross margin posted in the third quarter last year. Gross margins fell primarily due to the acquisition of U.S. Galvanizing during the second quarter of fiscal – this year, specifically on the lower margins that we expect will reach our normalized galvanizing margins over time and on some normal integration costs. And as Tom discussed, there were some pricing headwinds as well. SG&A improved to 10.7% of sales compared to 12.4% in the third quarter of fiscal 2015. This improvement was primarily attributable to our companywide focus on cost efficiency and our prior year realignment efforts. We achieved an operating margin of 15% for the third quarter of fiscal ‘16, up 40 basis points compared to the 14.6% reported in the third quarter of fiscal 2015. Our tax rate improved as we recorded an effective rate of 28% for the third quarter of fiscal 2016 compared to 30.4% for the same quarter last year, primarily as a result of capturing certain state tax benefits in the third quarter. I appreciate the continued efforts and results achieved by entire team on cost control, strong cash flow generation and managing the effective tax rate. Additionally, the continued strong bookings performance for the quarter bodes well for the continued growth of the company. With that, I will turn it back to Tom for concluding remarks. Tom?

Thanks Paul. The key takeaways I would like to leave you with are these. We have a solid balance sheet and strong cash flows, a great portfolio of products and services, significant international growth opportunities and a talented and seasoned leadership team. We will continue to focus on growing our galvanizing business both organically and through targeted acquisitions. We will continue to expand presence of our electrical businesses internationally, both directly and through joint ventures. We are now benefiting from our accelerated emphasis on operational excellence and customer service at both WSI and NOI. While we have made significant progress over the past few quarters, we have tremendous upside going forward into fiscal year 2017 to grow our businesses as our leadership team continues to gain traction on our key initiatives and our customers experience the improvement in our service performance. We will continue to leverage our expertise as a solutions leader in protecting metal and electrical systems that drive infrastructure. And with the strategic acquisition of six galvanizing plants in the second quarter and the recent opening of the Greenfield in Nevada, we are looking forward to continued improvement in our businesses and greater impact from our new growth strategies for the balance of fiscal 2016 and into fiscal year 2017. And with that, we will open it up for some questions.

Thank you, Mr. Ferguson. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Schon Williams of BB&T Capital. Please go ahead.

Hi, good morning.

Good morning Schon.

Good morning Schon.

I wonder if we can maybe dig in a little bit on the galvanizing margins, kind of came in well below our expectations and pretty big variance versus kind of where we were even in fiscal Q2, I wondered if – I don’t know, can you walk us through all the moving pieces and maybe kind of a rank order or quantify how much of either the sequential change or the year-over-year change, how much of that was integration costs related to the Texas assets, how much of that was potentially priced down in the big market, if we can just get a little more detail on kind of all the moving pieces there, that will be helpful?

Yes. We will take you through – we are not going to go all the way down and do it, Schon, but as we said, the integration and the initial performance of the acquired six plants through the Gulf Coast region, pretty important. As we made the acquisition in June, we had pretty good initial performance there, but this typical of any integration where you get to see kind of what you have got once you take them on during the first two months and then you start implementing those changes, spending some money, making some management changes during the next three months as we got into the initial stages of bringing those on. As far as quantification, we won’t to get into specifically what the margins were at those six plants. But I will say that that would be the number one reason why you saw the margin dilution year-over-year, quarter-over-quarter. As far as the costs go, those get rolled into that margin dilution, if you will or the lower margins of the six acquired plants. So that would be why there may have been a step down quarter-over-quarter just at the acquired plants. We do feel like that’s going to come back though middle of next year I would say, when we hit about the one year anniversary of those plants that will be achieving AZZ like margins on that. As far as the pricing headwinds go, that’s really a lot harder to quantify specifically. It does have an effect. It is a mixed bag between the different markets that we serve, but I would say that would be number two in line to what we experienced with the dilution from the initial six plants. Tom, anything to add to that?

Yes. I think we have expressed our caution about the manufacturing economy in – along the Gulf Coast. And as we have also talked about, we were anticipating some large petrochemical refinery projects that might offset some of the risk on upstream side. And it’s not so much that our business in galvanizing was focused on upstream, it’s just the overall fabrication manufacturing market along the Gulf, it’s somewhat impacted from Oklahoma through Texas and Louisiana. So we have got some customers that their volumes are down and it’s not that we have lost market share, there are just – their volumes were down. So I would say, while our volume overall is up, we have had to give some on pricing to sustain that volume. And we will probably continue to do that to a point. We don’t want to give away price anymore than we have to, but with the lower zinc prices, that the entire industry is experiencing that kind of lead you to people can afford to lower price without sacrificing the mom and pops can lower price without sacrificing too much income. So that’s just kind of the market, it gets messy. We feel good about it overall. We have got a lot of good things going on. I will take the blame for probably loading our galvanizing guys up with maybe two or three too many balls in the air, and we will manage that better as we go forward. But we do want to continue to grow it through technology for the longer term to be able to sustain our business and our market share and real market share. We want to use that technology to help us improve our margins in the longer term. And then we want to continue with the acquisitions. And we don’t have any Greenfield – any additional Greenfields are on the horizon right now. But we like the idea that we can get into whitespace and get an AZZ flag planted from time to time. So as I said, we had a whole lot of moving pieces in the third quarter and probably a few more than we are used to handling. That’s why I think Paul cautions that being too specific on anyone point because to me it was kind of we jelled with a lot of things in the quarter.

And just so I am clear, is the pricing concessions that you are seeing on the zinc side are coming from the – is that more focused in the Gulf region or are you seeing it kind of across your footprint?

I would say it’s across the footprint and some competitors are very good at pricing discipline. We tried to maintain our pricing discipline, but obviously in a somewhat stagnant to even weak manufacturing market arena. You kind of see it everywhere. Well, you can’t see in every region, but in different spots.

Alright. Thanks, guys. I will get back into queue.

And our next question will come from John Franzreb of Sidoti & Company. Please go ahead.

Good morning, guys.

Good morning.

I would like to start with the guidance. It’s a pretty wide range for one remaining quarter. And I was wondering what are the puts and takes that take you from one end to the other of that range that we should be aware of?

Yes, I think there is a couple of things. One, we still have that Westinghouse backlog at NLI, that’s got some decent margin in it. And we are still worried about whether that goes or not. I know we sound like a broken record on it, but you know that just gives us a little pause, because it can move the number a few points. So, the other is we talk about – we just talked about galvanizing pricing for instance. And the markets just we are continuing to maintain our revenue, but well, I will give you a better way. We don’t know a few days extra of lost production due to winter can move that. So even though our galvanizing business is fairly stable as you look at it year-over-year in the winter months, because we now have more facilities up in Canada and things like that or if we have the big hard freeze in the North Texas like we had last year that can just impact us. And because the margins are so significant in galvanizing, few extra days has a big impact on us. So, we are just cautious about that. The last thing we want to do is put out guidance and then have to come back and two weeks before the end of the quarter and tell you. So, those are the big things. Everything else is kind of puts and takes and normal puts and takes, and that’s about it. Paul, did I miss anything?

No, I think it’s kind of our normal approach to this is that we don’t want to disappoint that there are a lot of different moving pieces. I think you are absolutely right with what you called out. And couple of days here and there does make a tremendous amount of difference as we have seen. That’s it.

Okay, that was fair enough. Significant success on the OpEx line, down $1 million or so sequentially and more so year-over-year, could you just give us a little bit more color on what you are doing there? And I am assuming that it’s sustainable going forward.

Yes, boy, I could point to a lot of different things. It’s really small pieces aggregating everyday all the way through professional services, significant reduction in professional services year-over-year, which we had actually called out last year as well. We continue to make headway on that. We continue to – well, there were a lot of things that we called out last year that we were using services to help us improve things. We have gotten traction on those improvements. We took a charge last year for realignment to take some costs out and you are seeing the fruits of that this year. So, it’s a lot of little things adding up. Now, we closed an operating site in enclosures to consolidate operations, leverage that operating platform, so little bit of administrative management cost that comes out there. For us, it’s a continual exercise, and we try to – we just look at it as normal part of the business, we don’t want to be known as a serial restructurer. We just want to manage our business. And we do that by being running as lean as we can and keeping an emphasis on everybody we add in the SG&A has to bring value. So, that’s just our focus and that’s our mantra. And I think you are seeing that’s why to me, it’s sustainable. We would like to continue to beverage sales volume up while not adding SG&A. On the other hand, we are investing in as we mentioned some of the sales resources where we could get high value market share. So, we have done that. At the same time, we brought the cost out, yes.

Okay. One last question, I know you are taking share back in the welding side of the business. That’s great. This new sales initiative seems to be playing out nicely. What are you hearing about customer spending times though in the spring in light of high refinery utilization? What kind of color you are getting from the customer base in the refining market?

It’s mixed. The good utilization rates I think can remain high with given refinery margins at the moment and as they are being projected forward. The good news for us is the maintenance they are having to do is bigger, because they have waited so long on a lot of this. And when they are doing maintenance, it’s big. They are taking on some of the bigger things and that tends to be more of our sweet spot. So, we are getting close to I would say having regained the market share of years past and then we will get into a normalized kind of refined – turnaround cycle, if you will. On the other hand, we have got some good things going on internationally. We also have some new technologies we have been rolling out on the welding side that I think will help us offset whatever happens with turnaround cycles. So, what we are hearing is really mixed. And that we are not feeling too nervous about it because there is enough activity and it’s enough for the right kind of activity that we think the spring will be okay for us.

Perfect. Thank you for taking my questions guys and thank you.

[Operator Instructions] The next question will come from Brent Thielman from D. A. Davidson. Please go ahead.

Hey, good morning.

Good morning, Brent.

The backlog growth, is that isolated to particular area or kind of widespread across the energy platform?

I would say that electrical is probably the biggest area of growth for backlog right now. Yes, we have won some nice jobs in our enclosures, bus and both high voltage and medium voltage bus businesses. So, I would say it tends to be there, because we don’t measure, we don’t track backlog in galvanizing. And the backlog in the WSI tends to come and go over a quarter or so. So, it really is with those electrical businesses and while the volume in the oil impacted businesses is off, it’s really nice in those pure electrical businesses.

And what kind of projects are those that you are winning?

You know, I don’t want to get into too many specifics, because we have customer confidentiality, but we have won some nice strangely enough, not an NLI, but we have won some nice nuclear jobs in the electrical businesses. We have won – the T&D is okay. Our enclosure businesses are doing well. We have won some international stuff in China that some nice projects. We have been well-positioned there for a while in the economy. All the things going on in China have not impacted those. Those are things that are sitting in our backlog that are firm jobs. And so it comes back to everything that’s playing for us is the stronger – the improved international sales emphasis, the broadening our market penetration in some of these sectors. It’s paying off for us in that legacy electrical.

Okay, great. And then on WSI, obviously, you saw it’s an uptick in turnaround activity here in Q3. When you kind of take a look back was it in line with your internal expectations or were you expecting more that may fall more into the spring? I know you talked about this a little more in the previous question, but just trying to understand that a little more?

If we only had one significant job and it was an international one that moved in the WSI front. The rest was we had a pretty good visibility coming into the quarter. We knew we were going to be busy. We were actually kind of happy one job pushed out and because it allowed us to keep resources on a couple of other jobs that were really good for us. And what’s happening is and this is, I do know if it’s typical for other companies but as WSI gets on to these sites and because they deferred maintenance, these jobs are going from a few hundred thousand dollars up into the millions because they are finding so much stuff that has to be done once we are on site. So – but we are kind of to the point where we just – that’s just what’s happening and we expected. So I can’t say it was just pointed because the team was basically chock-a-block full. I don’t think we had any project managers, any project engineers, any supervisors sitting on the sidelines in the third quarter. So it would have been tough to handle very much more.

Okay, great, understood. And then Paul is it possible in galvanizing to kind of breakout of what the impact of pricing was on growth in the quarter and sort of matter of points or percentage points against you or for you?

Yes. Getting back to the first question from the call today, probably not going to go down into that level of detail and spike out the percentage points on…

Well, because it’s messy. It’s a volume, price, zinc costs kind of – there is too many variables to pinpoint it. But without giving away information, we may not want to give away. Yes. It’s – but just pricing headwinds and we anticipate those are going to continue partly because of the low price of zinc, so everybody’s costs are down in the tendency in this kind of a market where there is not robust demand is to compete more on price and we don’t like to do it, we don’t set our prices essentially. We compete side-by-side with whatever the competitive situation is in the market. And that’s the other problem we have on quantifying it for everybody is basically, we have 42 different pricing philosophies going on every single day based on their demand, based on their – what they have got out on their yard, based on what their sales force is telling them is out on the horizon. So we fight that battle at each location every day. And so while we can actually track a lot of it, and we can – we trend it, I am just hesitant to pinpoint what the exact impact was with price.

Okay, I appreciate that. And then I guess just back on the Gulf Coast commentary with galvanizing business, what types of projects are you really seeing to pullback in, in particular?

I think I would have to say it’s more of the overall activity, I mean we have seen a pullback in Oklahoma, which for us is heavy oil patch related, not necessarily pure oil patch. But as the economy goes, we have seen the refinery and offshore business, which is very nice business for us because offshore platforms are very aggressive environment. And we have seen a pullback on that, which relates to the production side. So and then we continue to see the big petrochemical refinery jobs that we thought were going to come in, haven’t come in. And because of that, there is a little extra capacity sitting there in Louisiana particularly that’s come about because of that expectation. And we are pretty diversified, everyone of our plants does anything from – well, not everyone, but a lot of them will do polls, will do stadium bleacher seating things like that. So it’s a broad mix of business. And we go chase other things, which may – may or may not as profitable as some of the project activity. But just overall, the market is not robust, it’s we are scrambling in the Gulf.

Understood. Thanks for your time.

And the next question will come from Jon Braatz of Kansas City Capital. Please go ahead.

Good morning Tom. Good morning Paul.

Hi Jon.

Tom you have done a very good job of increasing your international business and gain market share and winning some new projects. But obviously, there is a lot of turmoil in the international markets, China and oil prices coming down. When you look at the international markets broadly speaking in the macro environment, are you seeing any change in the opportunities for you, any change in demand and so on, I guess obviously you have been gaining share but are you seeing may be some headwinds developing in that market?

I do want to be cavalier about this, but we really are not seeing that. And I would have to say it’s because we are such a niche player in what we do. So whether it’s high voltage, gas insulated line or medium-voltage bus or the things that we are – the WSI stuff, a lot of their welding solutions, as I have talked about in the past, what’s happening is you have got these coker vessels coming up for their first maintenance cycle. And so even though Brazil may be a mess, they have still got to maintain their equipment. And so in each of those three areas from the – on the electrical side to the welding side, we are not impacted so much by the overall turmoil going on in China or even Saudi Arabia for instance. And we are pursuing, while we are pursuing opportunities in those areas, we have not seen the volume of those opportunities fall off, but it’s only because we are in such a niche. And if they need our products, they need our products, there is other people that supply them, but those types of projects are going forward. So we remain – we are very vigilant about are we are seeing quoting activities reduced or things like that. Fortunately, we did put in salesforce.com so that we can track our opportunities better on a company wide basis. And we are just not seeing – I mean my sales guys would probably shoot me because they say they are scrambling every single day, but we are not seeing the opportunity levels falloff, so.

Okay. Turning to NLI, can you talk a little bit about maybe the progress you are making there or the upside opportunity and where NLI might stand in relationship to where you wanted to – where you wanted to be?

Yes, it’s – we talked probably too much about the big project, nuclear backlog, the Westinghouse stuff…

Beyond Westinghouse…

Yes. Exactly, their on-time deliveries are up to over 90%. Their quality has dramatically improved. The sales force is first here. We got a shot at everything that we should get a shot at. We will see continued margin improvement. The issue we face with that business is for us, it’s a business that we can only grow so much because we don’t have any other synergies with that business on our other business units. So for us going forward, it would be a nice decent margin business. We are running it the way we need to run it. So it is where it is. And so as we look at it, but we don’t have any leverage points to where we can grow it. And there is not a whole lot of new project activity out there as you can imagine. So it’s a tough market for somebody who is only in a small portion or serves a small portion of it like we do.

I know it’s not. It’s not big revenue generator but is there something that would be part of your long-term plan going forward?

Paul is sitting over here laughing. So, I am going to let him answer.

Jon, you know, we constantly evaluate our portfolio and our assets – the available assets on the market. And as we have said many times before, we won’t comment on any specific business in that regard, but we are constantly evaluating where we are.

Thank you for your standard comments.

You are welcome, sir.

Alright, thanks.

I will say something though Jon that we are very focused on, we have basically been here a couple of years now and we are very focused on cleaning up our platforms and making sure we have got the right businesses going forward that we can bring more value to or real value to. And so that’s why we are clearly, we can’t see anything specific about NLI. What we can talk about is we understand. We are couple of years in now. This is at the point where we have got to have the business units we want on the platform going forward. And so we are heavily into the middle of that stuff.

Yes, Jon, I will say this. I mean, I will echo what Tom said is that the business is in much better shape. Many, many things have improved there. And so we have taken the time. We have taken the effort. And it’s a real – it’s a very good story compared to where you might have seen it when you came on here as well as when we came on here. So, hats off to the team there.

Yes.

Okay, thanks so much.

Our next question will come from Bill Baldwin of Baldwin Anthony Securities. Please go ahead.

Good morning.

Hi, Bill.

Excuse me. Tom, you have mentioned that you are beginning to see some improvement in the domestic electric utility markets. Could you kind of comment on what product categories that impacts you and how visible you think this improvement might be as far as looking out into 2017?

Yes, I think for me I am kind of glad we are in these niches. It’s like our medium voltage bus business we are seeing. They have got some nice orders in the nuclear arena. It’s different than the nuclear side that the NLI deals with, but we have seen some of the – our enclosure businesses are doing fine. They are pretty well full so to speak. Our switchgear business, we have done some operational improvement. I think their customer satisfaction levels are up. They are benefiting from that both in orders as well as hopefully in margins going forward. And then our high voltage bus business, the gas insulated line stuff, which tends to kind of run feast to famine, even they have had some opportunities in North America recently, which is for the last couple of years, it’s almost been all international for them. So it’s those products.

Pretty much across the board then?

Yes, for our electrical guys, it’s pretty much across the board. I think that stuff is doing well.

Good job.

I give our sales team credit there – our folks that work with the reps. And I do think our focus on operational excellence is starting to pay off. It’s when you are delivering on time, you are giving the customer a quality product, they are paying attention and of course we go to keep that up.

No, I understand that. But do you think this – I mean, do you think this represents market share gains for you in some of these product areas or is this just business coming down the pipe that wasn’t there before?

It’s a good question. I think at our next quarterly I will make sure that the leadership team there has that answer. Right now, I can’t say. And part of that my reason is I am just not recalling, they actually have a draft on it and we could get that back to, but I just can’t recall what it showed last time, whether it’s market share or whether it’s just we have got more quoting activity, because there is more….

Right.

But we would be happy to find that out, because it’s a standard thing to look at in there versus loss, versus their win rates and all that.

And second and final question, with these lower zinc prices we have been seeing that are pretty substantially down over the last few months, when do you think that will begin to cycle through your income statement these lower zinc costs?

Yes. I think as we get into the middle part of next year or middle part of this year, middle part of this calendar year.

Calendar year?

Yes.

Okay. Well, good job. Thank you.

I appreciate it.

The next question will be a follow-up from Schon Willians of BB&T Capital. Please go ahead.

Hey, guys. Just a couple of quick ones here. Any impact from – I know you guys had a lot of storms in the region there over in December over the holidays. Any kind of negative impact or I don’t know maybe any impact on maybe some of the galvanizing business as we move into the next couple months from rebuilding?

We may have lost a couple of days. I think some of it was maintenance and some of it was may have been weather-related. But it’s just – we may have a freeze coming here in DFW over the weekend. So as you know, we aren’t real prepared for this thing, but that’s how we see. We are no better – well we maybe as accurate as weathermen, I don’t know. We are kind of forced in unless it’s a big widespread long freeze, it’s probably pretty normal as we look at it year-over-year on a year-over-year basis. But from these storms, I would say any effects would have been more on our customers…

Okay, that’s helpful. And then Paul can you – what was the ForEx effect in the quarter, I don’t know if you have the – I don’t know either revenue or operating income impact of both?

It was de minimus as you saw they are below the line, fall out was almost nothing and our number one exposure, we are pretty well balanced around the world because we still do a lot of our contracts in the U.S. dollars. But we have done a good job of matching up say in our euro expense matches up pretty well with our cost of doing business in the very good Poland-based group of welders that we have with WSI. Our main exposure is to Canada, Canadian dollar obviously has moved down steadily, but we have been able to manage that pretty well. So it has had a very big impact. The biggest thing you will see is on the translation exposure inside the comprehensive income.

Okay. And then I noticed accounts payable popped pretty good in the quarter on a kind of sequential basis, what’s – I don’t know anything unusual there?

It’s pretty similar to the same sort of seasonal pop we saw on the third quarter last year. Also I noticed that we added three plants – sorry, we added six plants in the – during the quarter that would have – I am sorry during the second quarter that would show up here as higher levels than you are probably expecting at the end of third quarter. So we have taken on these extra balance sheets, you are going to see more activity going on. Backlog is up, there is more stuff going on. But again, it’s followed kind of a seasonal pop that we saw happening third quarter last year as well. So there is a big ramp going on now.

Okay. And then last one for me. Any guidance on the tax rate, it seems to be kind of consistently coming in at kind of low end of your – I think your 28% to 30% range, I don’t know any thoughts on the final quarter and maybe as we move into kind of fiscal ‘17 to fiscal ‘18?

We will be ready to talk about tax rates when we bring out the guidance for the next year and talk specifically about that. As far as the rest of this year, I will say this probably – you will probably see it continuing on about where we are now.

Okay that’s helpful. Thanks guys.

Thanks Jon.

And this will conclude our question-and-answer session. I would like to turn the conference back over to Tom Ferguson for his closing remarks.

Thank you. I am confident we will make progress on the M&A front while improving the structure and focus of our operating platforms as we get into fiscal year 2017. And I look forward to discussing the impact of these activities as well as continued progress in our business as it’s appropriate. Thank you for participating in today’s call. We look forward to talking with you again at the conclusion of the current quarter. Again, thank you and have a good day.

Ladies and gentlemen, the conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.