AZZ's (AZZ) CEO Tom Ferguson on F1Q 2015 Results - Earnings Call Transcript

| About: AZZ incorporated (AZZ)

AZZ Incorporated (NYSE:AZZ)

F1Q 2015 Earnings Conference Call

June 27, 2014 11:00 ET

Executives

Joe Dorame - Lytham Partners, Investor Relations

Tom Ferguson - Chief Executive Officer

Paul Fehlman - Chief Financial Officer

Analysts

John Franzreb - Sidoti & Company

Schon Williams - BB&T Capital Markets

Brent Thielman - D.A. Davidson

Noelle Dilts - Stifel

Jon Braatz - Kansas City Capital

William Tichy - Beddow Capital

Bill Baldwin - Baldwin Anthony Securities

Operator

Good morning, and welcome to the AZZ First Quarter Fiscal Year 2015 Financial Results Conference Call. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Joe Dorame of Lytham Partners. Please go ahead, sir.

Joe Dorame - Lytham Partners, Investor Relations

Thank you, Laura. Good morning and thank you for joining us today to review the financial results of AZZ Incorporated for the first quarter of fiscal year 2015 ended May 31, 2014. As Laura indicated, my name is Joe Dorame. I am with Lytham Partners and we are the Investor 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 United States Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended February 28, 2014.

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 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 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. 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?

Tom Ferguson - Chief Executive Officer

Thanks, Joe. Good morning to all of you on today’s call. We thank you for your interest in AZZ. Financial results for the quarter were as anticipated with revenue hitting record levels at $216.1 million on the strength of the full quarterly contribution from WSI as compared to just two months in last year’s comparable quarter.

Quoting activity in our Energy Segment has increased at most businesses and supports our continued confidence that the latter half of this fiscal year will be good within our Energy Segment. Our industrial platform gained momentum, particularly in the petrochemical and refining markets. And our electrical platform faced mixed markets, but saw growth in enclosures and switchgear. Our nuclear platform continued to face market headwinds, although we saw an uptick in the number of outages. They were a shorter duration and smaller scopes than expected due to budget constraints and continued uncertainty in the industry.

Activity in the Galvanizing Services Segment is approaching more historical operating levels after experiencing severe winter conditions. We are also expanding the focus of our Galvanizing Services Segment to include other metal finishing technologies that we expect will create new growth opportunities and also enhance our industry position as the leading corrosion protection solutions provider in North America.

I would like to make a couple of statements regarding the executive management change from this past Wednesday. I felt like it was time to make a change in the senior leadership of our Energy Segment and these decisions are always difficult, but I am very excited about the opportunity to step back in to an operationally focused role for the remainder of the year, because I strongly believe I can drive the key strategic initiatives international expansion and operational performance quickly and effectively. I would like to clearly emphasize that my decision to make a change in the senior leadership team was not driven by the outlook for results in fiscal year 2015, but rather I have a clear vision for the approach and the speed of execution we need and I believe that the company is better served by having me directly drive those initiatives for the short-term.

The current platform leaders are good executives with extensive industry experience and have a great deal of confidence that they can execute the growth initiatives they are undertaking. Given the additions we have made to the corporate team and the CFO with the COO roles and my extensive experience and expertise with these businesses and markets, I am confident I can balance my time and energy leading the Energy segment while still being able to fulfill my Chief Executive Officer duties and remain accessible to our investors.

We have completed our strategic assessment of our business and determined where we want to grow AZZ’s business over the next several years. We have strengthened our corporate financial and legal capabilities and also brought in two seasoned general mangers for NLI and our Rig-A-Lite lighting business and are already seeing the improvements. For the first quarter the Energy segment recorded revenues of $130.5 million and operating income of $13.8 million and an operating margin of 10.6%. The segment ended the quarter with a backlog of $309 million which includes all products and services offerings, the margins were impacted by pro-project execution on a couple of large orders and lower sales on our nuclear – in our nuclear platform.

AZZ Energy revenues were up by $34 million compared to the first quarter of fiscal 2014 which is an increase of 35% year-over-year. The Aquilex SRO acquisition which was rebranded as WSI contributed $73 million of revenue for the quarter. Excluding the Aquilex SRO acquisition year-over-year revenue was up by $2.6 million. Operating income for the first quarter was $13.8 million compared to the $13 million for the prior year, an increase of 5.9% year-over-year. The contribution from the Aquilex SRO acquisition was $6.8 million for the quarter. We are seeing strength in the North American oil and gas and petrochemical markets. Inquiries are up for our products in the pipeline and petrochemical markets. Domestic power generation continued to weak especially the nuclear market. The nuclear industry continues to withhold spending due to the effects of low natural gas prices and anticipated spending requirements for Fukushima related updates. Further the North American transmission and distribution market outlook remains shaky for the year. Internationally our service offering is benefiting from our sales efforts in Brazil and Europe. The power generation market in the Middle East continues to be strong and nuclear market in China is showing signs of recovery. We anticipate a record year for the Energy segment based on a strong backlog and inquiry levels for the first quarter.

For galvanizing for the first quarter, our Galvanizing Services segment recorded revenues of $85.6 million and an operating income of $22 million yielding an operating margin of 25.7%. Revenue for the segment was affected by the continued softness in the electric utility market primarily related to solar projects, but on a positive note revenue was up sequentially 10.4% over the prior quarter with operating income up 17.4%. Year-over-year, revenue was down 1.3% and operating income was up 2.3%. That included some non-recurring adjustments that Paul will be discussing shortly offset by some incremental overhead costs.

Demand in petrochemical markets continues to grow. Sales were up year-over-year offsetting the seasonally weaker bridge and highway market and the previously mentioned soft electrical utility market, improvements in our agricultural related sector remains solid along with the OEM and construction markets. We anticipate a strong finish to fiscal year 2015 based on a strong petrochemical sector and anticipated improvements in the electrical utility and bridge and highway markets.

With that let me now turn the call over Paul Fehlman for a more detailed review of our financial results. Paul?

Paul Fehlman - Chief Financial Officer

Thanks Tom. For the first quarter of fiscal 2015 we are reporting record revenues of $216.1 million and an EPS of $0.58 as compared to $183.2 million in revenues and EPS of $0.57 for the same quarter last year, bookings were $200.2 million this quarter compared to $181.7 million in the first quarter of fiscal 2014. Revenues were up 18% primarily on the extra month of results for Aquilex SRO, which was acquired one month into the first fiscal quarter of 2014.

Our backlog at the end of the first quarter grew to $309 million, reflecting a book-to-bill ratio of 0.93 for the quarter and does include all of the WSI acquired backlog and we have made the adjustment for the first quarter of last year to show all of WSI at that time. Gross margins for the quarter finished at 25.6% while SG&A fell to 12.7% of sales driving a 12.9% operating margin for the first quarter of fiscal 2015, down 20 basis points compared to the first quarter of fiscal 2014.

Now, it should be noted that we have disclosed one non-recurring item during the quarter on the table attached to the press release from this morning, namely a benefit of $2.4 million related to the settlement of insurance for business interruption from the fire at our Joliet facility. The settlement was included in gross profit within our Galvanizing Services Segment and drove $0.06 of earnings during the quarter making our adjusted EPS $0.52 per share as disclosed in the table.

The table also lists the non-recurring items from the first quarter of fiscal 2014, which included losses related to the fire at our Joliet facility, but also affected gross profit in the Galvanizing Services Segment, as well as expenses related to acquisitions that drove higher SG&A costs and general corporate expense, and finally, gains from the settlement of a lawsuit, which was shown on the face of our financials in other income net, which was below the operating income line that’s part of the Galvanizing Services Segment. When netted together, earnings per share for the first quarter of fiscal 2014, without these non-recurring items, would have been $0.56 compared to $0.57 per share reported in that period.

Our cash flow from the operations for the quarter was $12.1 million, down around $28 million versus the first quarter of fiscal 2014. The year-over-year comparison on that cash measure was tough, mainly due to the high amount of working capital acquired during the first quarter of fiscal 2014 in the Aquilex SRO deal, but flushed from the balance sheet during that same quarter.

Based upon the evaluation of information currently available to management, we continue to anticipate our fiscal year 2015 revenues to be in the range of $850 million to $900 million and for earnings to be within the range of $2.40 per share to $2.80 per diluted share. We continue to be optimistic about our future as we have positioned the company to provide a sustainable platform of expanded product and services offerings both domestic and international.

With that, I will turn it back to Tom for concluding remarks. Tom?

Tom Ferguson - Chief Executive Officer

Thanks, Paul. We envision ourselves to be the innovative solutions leader in protecting metal and electrical systems used throughout the world’s infrastructure. We believe we are well-positioned to continue to expand on this vision as we proceed through 2015 and confident in our ability to grow our businesses profitably. The completion of another successful quarter, the financial strength of the company and a great team of employees with capable leadership is reflected in the confirmation of our guidance.

As we look ahead, we will continue to focus on aggressively expanding our businesses both domestically and internationally. We hope to have some M&A announcements in the second quarter that will provide solid evidence as to our commitment to broadening our Galvanizing Services portfolio, market expansion and improving the focus within our Energy Segment.

We will continue to leverage our expertise in our internal spirit of innovation to enhance our position as the solutions leader in protecting metal and electrical systems that drive infrastructure. We have the people, the capital and the reputation to deliver the necessary solutions to meet our customers’ needs and expectations. I am appreciative of the efforts of all of our employees and their continued commitment to operational excellence and to the success of AZZ.

I am encouraged that we have the solid portfolio of products and innovative technologies to successfully compete and attract larger market share. Going forward, we will continue to leverage our sales teams across our Energy Segment businesses in North America, aggressively expand our business internationally, streamline our platforms and grow our galvanizing business both organically and with targeted acquisitions. We reiterate our commitment to continue to grow this business and to do it in a manner that is both physically responsible and drives value for our shareholders. We are excited about the opportunities in the remainder of fiscal year 2015 and beyond.

Thank you for your participation today. And now, I would like to open it up for any questions.

Question-and-Answer Session

Operator

Thank you. At this time, we will begin the Q&A session. (Operator Instructions) And our first question comes from John Franzreb of Sidoti & Company.

John Franzreb - Sidoti & Company

Good morning guys. Can you hear me?

Tom Ferguson

Yes.

John Franzreb - Sidoti & Company

Okay. I guess my first question is could you talk a little bit about the changes and methodology you made to the backlog. You restated last year’s first quarter, but why wasn’t the WSI backlog included in the fourth quarter results and how does that bleed off differently than what your previously reported backlog was?

Tom Ferguson

So, right, actually in the fourth quarter and in the 10-K we did lay out the addition of WSI and the effect that it had at the end of the year and explained during I think the call last quarter that originally there was a belief when the business was acquired, that it was very short-term in nature. What we have found through time is that there is a lot more project. We are going on in there. And we choose to do what we feel is a more proper show of the backlog of the entire company. And so we have put the WSI in there. It had been called out in prior quarter. So, it’s not being there and we just think it’s a better presentation to put it all in.

John Franzreb - Sidoti & Company

Paul, does that backlog have a duration of less than a year or greater than a year?

Paul Fehlman

It’s – well, it’s a mix as many things are. There are few things that go out greater than a year, but most of it is.

John Franzreb - Sidoti & Company

Okay. Tom, you mentioned that in the galvanizing business, you are looking to expand into other metals, could you just elaborate a little bit on that and would that change the margin profile of galvanizing?

Tom Ferguson

One, I don’t want to talk about some of the things we are working on just yet, because we are in the middle of some opportunities. What I will state is that the kind of the businesses we are looking at are within the margin profile that you have come to expect for galvanizing.

John Franzreb - Sidoti & Company

Okay.

Tom Ferguson

We don’t want to change that.

John Franzreb - Sidoti & Company

Okay, great. Sorry, I guess this is coming via M&A and it’s not a Greenfield kind of an operation?

Tom Ferguson

Yes. I mean we are looking at M&A, we are also looking at some Greenfields and we would rather not signal were those are at just yet.

John Franzreb - Sidoti & Company

Okay, that’s fine. One last question I will get back into queue. You mentioned the headwinds on the nuclear side could you talk about the outages expectations? You said you mentioned shorter durations, so could you kind of just provide color on your expectations for outages this year versus a year ago? And you said the revenue was light can you just kind of talk about the revenue expectations in nuclear for the second half of the year when we have the second half of the outage season?

Tom Ferguson

Yes. I think what we saw and we have been saying it last year, there was expectation, there is more planned outages in U.S. nuclear for this year and for the most part those outages as occurred and it was 36 or 38. So, the number was there greater than last year, but they were very – they were relatively short in duration and because of that they didn’t get into broad scopes that would normally involve our WSI nuclear business. It had a less impact on our NLI business, because those are components that can be staged and available. As we look forward, the outage that the fall outage season, the inquiries are kind of normalized. As we look forward, there is a smaller number planned. It’s too early to call whether those scopes are going to be bigger or not. So, we remain somewhat hopeful that they will be, but we are not going to be surprised if they are not.

John Franzreb - Sidoti & Company

Okay. Thank you for taking my questions. I will get back into queue.

Tom Ferguson

Okay.

Operator

And our next question comes from Schon Williams of BB&T Capital Markets.

Schon Williams - BB&T Capital Markets

Hi, good morning.

Tom Ferguson

Good morning, Schon.

Schon Williams – BB&T Capital Markets

I wonder if maybe just to turn back to galvanizing could you just maybe give a little bit more color on the year-over-year deterioration in the margin profile there? I know in the release you cited mix and maybe some overhead costs, but I just – I want to get a sense of kind of stripping out the effect around Joliet, just what type of kind of core margin should we be expecting from this business? Should we be expecting kind of that mid to high 20s kind of range or is this kind of the new normal in terms of the low margin profile?

Tom Ferguson

Yes. No, it’s not the new normal. We expect the margins to rebound. It’s just a lot of the fabricators coming out of the winter, the extreme winter, we are a little slower to ramp up than what we have, I guess, what we would normally have expected or hoped. So, part of its volume and then part of it are these cost issues, some of which we have got initiatives to better manage and improve. Some of which were things like the depreciation expense for Joliet that’s now back in our numbers, but we will also now have even though the facilities we officially had its re-grand opening last month. So, we anticipate those volumes to normalize from Joliet to offset that depreciation expense, so now not the new normal. We expect this business the normal to be what it’s been historically.

Schon Williams - BB&T Capital Markets

Okay, that’s helpful. And then switching gears a little bit on the NLI and WSI side, I mean, it sounds like you have some new management at least within NLI. You talked about opportunities on the international side. Can you just give us a little bit of an update on just what are you guys doing kind of on the day-to-day basis to where are the opportunities on the international side? What is it that we should be looking for is for milestones in the next kind of 6 to 12 months of action that you guys have taken to grow that business? Can you just help us get a sense of what you are doing maybe behind the scenes that are not necessarily visible to investors?

Tom Ferguson

Sure. I think the GM we brought in was a really seasoned Nuclear General Manager out of heavy equipment type of background, with a good, solid background in project management in nuclear requirements. I was just out there, took a plant visit last week. And I can tell you just visibly the place looks better. You feel – call it a little pep in their step among the folks or just it shows better, they are getting better organized, not a knock on the former GM, but I think we just needed to make the change to move it forward to position it for a higher level, higher standard of performance. And to drive that project management and to expand the opportunities that you are looking at. So, there is obviously – there is 100 or so nuclear plants in the U.S. We have got to go after and find other OEMs to work with so that we can manufacture their equipment form or certify it.

We have got it – we have to quickly improve our capabilities for seismic testing and things like that. We have got capability, but we have got to update that. None of these things are super capital intensive, nor do they take very long, but when we wanted to get the new GM in place to establish his vision for where they need to go. He has done that very quickly. We had to review – we approved him moving forward in things. And also they are expanding their base beyond just nuclear electrical generating plants to other Department of Energy opportunities, so which expands their base. And then we are looking at the international and we have done some good work already there. I obviously want to name who our reps are, but we have already made progress internationally.

Schon Williams - BB&T Capital Markets

Alright, that’s helpful. And then maybe just touching on the subject in terms of capital expenditures, can you just talk about what your budget is for the year for CapEx, I mean, obviously Joliet fully behind you, what are your expectations for the year?

Tom Ferguson

We are still sticking into the – I think the range that we gave was 350 for the year.

Schon Williams - BB&T Capital Markets

Okay, thanks guys.

Operator

And the next question will come from Brent Thielman of D.A. Davidson. Please go ahead.

Brent Thielman - D.A. Davidson

Good morning.

Tom Ferguson

Good morning.

Brent Thielman - D.A. Davidson

At WSI, as we think about kind of that fall turnaround season hitting in fiscal Q3? Is what we saw in Q1 kind of a reasonable revenue base that we should be thinking about based on kind of what you are seeing today?

Tom Ferguson

That should improve. We are – while the nuclear side is less certain for us as I just mentioned, the sales force build out in North America for refining is good. And also the international sales build out has occurred. We are doing – we see lots of opportunities in Brazil that we are already participating in. So, our quoting activity for the WSI business is up on all fronts except kind of stagnant on nuclear.

Brent Thielman - D.A. Davidson

Okay, that’s helpful. And then on the same question I guess as regard to our margins, you are kind of 9.5% this quarter at WSI, what’s the potential for that business to get to the higher end of the range that’s kind of been talked about the 12% level this quarter or do you think that’s more likely beyond this fiscal year?

Tom Ferguson

I think we are certainly heading that direction by the end of the fiscal year possibly achieve it. I think that there is a lot of things going. You tend to see higher margins internationally and we are starting to see more of the international business coming through Brazil and some of the European operations, so certainly heading in that direction. And I think look we are getting into double-digits and we will have some amortization dropping off and some other things, but for the most part, that’s driving operational excellence and then getting the volume in the higher marginal international business is what’s important to us and that’s our focus. So, I am hoping to get there to 12% by the end of the year, but if not as we go into the next year.

Brent Thielman - D.A. Davidson

Okay. And then you made some comments on the T&D side of things between energy and galvanized and I think on one hand, you sort of said things looked a little shaky North America for this year, but on the other I guess in galvanizing you thought things might get a little better, can you just kind of help me understand what you are thinking on the utilities side for this year I guess more specifically T&D?

Tom Ferguson

Well on the – what we are hoping to get better on the electrical utility side for galvanizing is the solar, the gas fired turbine plants that could be combined cycle plants things like that. We are hoping that some of that starts to open back up again not so much on the transmission side anyways maybe a little on distribution. So we – I think like a lot of folks we are not seeing the transmission poles the way we may have historically. And I don’t know that that’s going to change that’s why we referred to it as shaky. But that’s not necessarily needed for us to achieve our outlook.

Brent Thielman - D.A. Davidson

Okay. And I guess one more on that end and this maybe early to ask but I saw Meyers Structures is acquired this morning by Trinity and I think in at least the past it was a reasonably sized customer to the galvanizing business given Trinity has some galvanizing operations, is there anyway to kind of help us understand how large that customer is for you and what level of risk there maybe?

Tom Ferguson

Well, probably let me they are a good sized T&B was good sized customer and we see this as a positive. Trinity is a good company. They are a good customer. They do have some galvanizing, but we see this as a good thing. I guess I will leave it at that.

Brent Thielman - D.A. Davidson

Okay. Fair enough. Thanks guys.

Operator

(Operator Instructions) And our next question will come from Noelle Dilts of Stifel.

Noelle Dilts - Stifel

Thanks. Good morning.

Tom Ferguson

Good morning Noelle.

Noelle Dilts - Stifel

So Tom, it sounds like you have this very strong vision for where you are looking at the E&I business going over the next few years, I think you touched on a couple of those things, you touched a bit on NLI and talked a little bit about Brazil, but I was hoping you could go just a little bit further into that vision and where you are really hoping to – how you are really hoping to grow over the next few years?

Tom Ferguson

Well, I think I come out of a background of various operations sales or strategic direction. It kind of all fits in my – on my resume so to speak. But I guess after reiterate I believe in a very strong customer focused sales organization on the energy side both domestically as well as internationally, forming up with those right international partners and we are in discussions with quite a few most of which I know quite well from my history. Getting those – that sales and service capability established internationally so that we are as not as dependent on the economic cycle of just within the U.S. That’s really where a lot of the focus is going.

When it comes to the – so on the energy side I think we have got a very good set of service solutions. I don’t think we have done as well marketing those as we could have and part of that is just building out a very strong sales organization to make sure we have got those relationships and that we are able to demonstrate our value add. So and then I am very committed to a very high level of service for our customers. We want to be reliable on time. We want to have the highest quality level we possibly can. And then we want to drive our technology so that we can deploy our solutions faster, more reliably, more consistently on a global basis. So globalization is a big part of it but also driving that operational platform and sales relationships and customer satisfaction domestically as well.

Noelle Dilts - Stifel

Okay, great. A quick question on galvanizing just as you look out here again a bit more of a strategy question but are you looking with your figures still kind of sticking towards the slight preference towards Canada in terms of acquisitions or do you also see just in terms of geographic expansion any opportunities in the U.S.?

Tom Ferguson

We see opportunities in the U.S. We – as I have referred to you it in the past. Tim Pendley we have got a map and where if there is right space we want to look if there is a potential acquisition. We want to talk to them and see if we can do a deal. If there is nobody, if we do deal within the area then we want to look at a Greenfield. And obviously Greenfields take a little longer, but as we did in Arizona, they can be highly successful and we have got a very good track record for that. So obviously into the white space Western Canada, Northwest, North anywhere we can find a spot to fill out and for the right ensure that we have got the right customer base and commitments to generate the returns that we expect and that were committed to.

Noelle Dilts - Stifel

Okay. Thank you.

Operator

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

Jon Braatz - Kansas City Capital

Good morning guys. Tom, you had mentioned in your commentary that there were a couple projects that were – had some execution issues, if I understood that correctly, what can you tell us about that and how significant were they?

Tom Ferguson

They were – I don’t want to give a specific margin number on a couple of jobs. I think these were jobs that had been talked about last year that were delayed in NLI and I think the expectation was that we are going out at reasonable margins. The jobs went out, they didn’t have a lot of margin. And the WSI was kind of the same thing. So these were whether it was – I will hone in on project management. I think that’s an area where we have and we are bringing in the resources to significantly and this was a problem we had when I took over pump division at Flowserve. We have got to build out that ability to project manage because we got good engineering capabilities. We got good sales capabilities on our nuclear platform. So it comes right down the project management and execution. And I think as we have dug into it, there is just opportunity to improve our execution which will make perhaps your customers and the bottom line is it will significantly increase margins and more consistently on projects because we do some quite well, but we have got to shore up that process. I think the GM we have brought in and the executive we have put over the nuclear platform, that’s their task right now and making get that done pretty quickly.

Jon Braatz – Kansas City Capital

Paul, you think - okay, go on.

Paul Fehlman

Let me just jump in one thing on that too. Just to be clear I mean we saw a couple of projects there in the nuclear platform that was the performance numbers were in the first quarter they are done. We don’t see other ones in the future like that at this time.

Jon Braatz – Kansas City Capital

That was what I was going to ask you, Paul. Okay. Tom you talk about maybe some additional – some M&A activity, when you look at your balance sheet now you are about one-to-one debt to equity, how far are you willing to stretch the balance sheet, how far you think the bankers would allow you to stretch the balance sheet and any thoughts on that at the moment?

Tom Ferguson

I think we are looking at some acquisitions. We are also looking at a divestiture. So I mean as we look at this we don’t look to change that debt to equity a whole lot. But also we are not talking huge deals. I mean if we were going talk big deals, we would probably we would signal that. We are talking about kind of things we can tuck in, maintain our stride and handle with our existing cash flows. So that’s just to be clear.

Jon Braatz – Kansas City Capital

Okay. You don’t want to talk any – you don’t want to make any comments about what you characterize as a divestiture?

Tom Ferguson

No, not at this time, I think all these things are ongoing negotiations that we have got NDAs on. We don’t want to violate our commitments.

Jon Braatz – Kansas City Capital

I understand and lastly is Joliet back to…

Tom Ferguson

Now let me say one thing. We are not talking major these are not major.

Jon Braatz – Kansas City Capital

Okay. One last question is Joliet back to full capacity?

Tom Ferguson

It’s fully opened it at about 75% of capacity.

Jon Braatz – Kansas City Capital

Okay.

Tom Ferguson

There is still room to fill that up which is why I am confident we will get that depreciation covered.

Jon Braatz - Kansas City Capital

Okay. Alright, thank you much.

Operator

And our next question will come from William Tichy of Beddow Capital.

William Tichy - Beddow Capital

Good morning.

Tom Ferguson

Good morning.

William Tichy - Beddow Capital

So I have had my question answered, so that’s good.

Operator

(Operator Instructions) And we do have a follow-up question from John Franzreb of Sidoti & Company.

John Franzreb - Sidoti & Company

Okay. Tom on your international growth strategy could you just remind us how much of revenue was outside of North America and what you envisioned the optimal target that should be going forward?

Tom Ferguson

Well, I guess there is a couple of different I mean – because we do export and we are 75-25. I don’t have specific target in mind because I think each one of these I want to look at is particular reason like Brazil we look at as we want to go into Latin America because we see that’s an ongoing market set of markets that fits our product portfolio and our service portfolio. But then each one and we are going to look at as a specific case what’s strategically we want to go there, can we generate the return and make these things accretive. That’s – so we got a couple of layers of criteria. But I see it become in 30%, 35% of our business over time and I will leave that over time kind of general.

John Franzreb - Sidoti & Company

That’s fine. That 25 you just referenced, does that include Canada or not?

Tom Ferguson

It does.

John Franzreb - Sidoti & Company

It does. Okay. That’s it I guess I will take the rest of my questions offline. Thank you very much guys.

Operator

And the next question is another follow-up from Noelle Dilts with Stifel.

Noelle Dilts - Stifel

Thanks again. And I was just hoping you guys could go into what you are seeing in petrochem in a bit more depth and then also where you are kind of how you are thinking about that market over the next few years on the I guess on the UNI side I was curious if the increase in switchgear and enclosure sales that you mentioned is kind of tied to some of those facilities. And then just kind of the if you can even give us the growth rate that you are seeing in galvanizing related to petrochem that would be great?

Paul Fehlman

Trying to figure out where to start on that.

Tom Ferguson

We – petrochem we have that has been the enclosures and switchgear benefited from the petrochem pipeline build out as well. So it’s kind of oil and gas if you want to use that as a better umbrella. So we have seen those opportunities I don’t have at my finger tips what the percent of that – of their growth has been from that. Galvanizing it’s definitely double digit, but high-mid double digit growth coming out of petrochem year-over-year in galvanizing.

Noelle Dilts - Stifel

Okay and then I think there has just been – in talking to other folks exposed to this market it just sounds like there is different expectations for how long this cycle is going to be what are your thoughts do you think this is kind of 2014 through 2016 type of opportunity or just how you are thinking about it?

Tom Ferguson

We are looking at definitely call it two to five years. We feel fairly good about it. And also we are driving initiatives to do some different things and offer some additional services. So we don’t want to be totally dependent on just the market growth.

Noelle Dilts - Stifel

Okay. Thanks.

Operator

And your next question comes from Bill Baldwin of Baldwin Anthony Securities.

Bill Baldwin - Baldwin Anthony Securities

Yes. Good morning.

Paul Fehlman

How are you Baldwin?

Bill Baldwin - Baldwin Anthony Securities

Good morning. Tom or Paul could you offer some color as to what you think the overall kind of blended margin, operating margin for your energy systems business you had eventually look like what that should look like down the road?

Paul Fehlman

We did put out some numbers in our guidance on the energy side at the beginning of the year and we are solving for those.

Bill Baldwin - Baldwin Anthony Securities

Okay. So, that’s already out there, is it Paul?

Paul Fehlman

That’s already out there, Bill. We can get that for you, but…

Bill Baldwin - Baldwin Anthony Securities

I was just looking beyond this year, if you are looking – as you look out in growing that business?

Tom Ferguson

I mean, we are still looking at M&A. Yes, we are looking at low double-digits. We have been saying the 12 on WSI.

Bill Baldwin - Baldwin Anthony Securities

Right. I know that the old legacy E&I business used to have margins a little bit in high double-digits?

Paul Fehlman

That’s the reason for the consternation here is that we have – although we have gone to our planning cycle, we haven’t announced publicly where we think we are going with this and it has a lot to do with the different mix of the businesses.

Bill Baldwin - Baldwin Anthony Securities

Exactly, exactly. I know it’s a blended type situation that makes it difficult, but I thought I would ask the blended question rather than just the individual components, maybe it’s a little early to be talking about that right now?

Tom Ferguson

It’s a little early to go beyond this year.

Bill Baldwin - Baldwin Anthony Securities

Okay, okay. We will just leave it then with your current guidance and...

Paul Fehlman

We will answer your question next time.

Bill Baldwin - Baldwin Anthony Securities

Okay. Thank you, guys. Thank you.

Tom Ferguson

Thanks Bill.

Operator

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

Tom Ferguson - Chief Executive Officer

Thank you from participating in today’s call. We look forward to talking with you again at the conclusion of this current quarter and hopefully all of you have a great day. Thank you.

Operator

The conference is now included. Thank you for attending today’s presentation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!