Tom Ferguson - President and CEO Paul Fehlman - SVP of Finance, CFO Tim Pendley - SVP, COO, Galvanizing Joe Dorame – IR, Lytham Partners.

John Franzreb - Sidoti & Company Missa Sangimino - Stifel.

Good morning, and welcome to the AZZ Inc. First Quarter of Fiscal Year 2018 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [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..

Thank you, Denise. Good morning and thank you for joining us today to review the financial results of AZZ Inc. for the first quarter of fiscal year 2018 ended May 31, 2017. As Denise indicated, my name is Joe Dorame. I’m with Lytham Partners and we are the Investor Relations consulting firm for AZZ Inc. With us representing the company today is 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 Web site at azz.com or numerous other financial Web sites.

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, 2017.

Those risks and uncertainties include, but are not limited to, changes in customer demand and response to products and services offered by the company, including demand by the power generation markets, electrical transmission and distribution markets, the industrial markets 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 political stability and economic conditions of the various markets that AZZ serves, foreign and domestic; customer requested delays of shipments; acquisition opportunities; currency exchange rates; adequate financing; and availability of experienced management and employees to implement the company’s growth strategies.

The company can give no assurance 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, I would like to turn the call over to Mr.

Tom Ferguson, Chief Executive Officer of AZZ.

Tom?.

Thanks, Joe. Good morning, and welcome to our fiscal year 2018 first quarter earnings call. As I’d indicated on the last earnings call, we had a very strong comparison in last year’s first quarter and we do not see a similar strength coming into the first quarter of fiscal 2018.

On the positive side, we opened a new powder coating facility in Crowley, Texas during the quarter and last week completed the acquisition of Enhanced Powder Coating which will expand our Metal Coatings portfolio. Consequently, we have renamed our galvanizing services segment to AZZ Metal Coatings segment.

This segment is gaining earnings traction in spite of continued pricing pressure in the market. Their operational improvement programs are beginning to show results and should assist them in returning to their traditional industry leading operating margins despite higher zinc costs.

We believe this Metal Coatings segment is positioned to have a stronger back half of the year due to signs of improvement in silver activity, strengthening transmission and distribution markets and expanded margins driven by operational improvement activities and the impact of new growth initiatives in powder coating and the newly opened continuous galvanized rebar plant in Catoosa, Oklahoma.

We remain committed to implementing a digital environment in our galvanizing plants; however, we have delayed this program to ensure our focus remains on customer satisfaction and margin improvement in executing on the growth initiatives.

We see benefit in the digitalization initiative and plan to reinvigorate this important initiative later this year. Our legacy Electrical platform struggled more than anticipated during the quarter. We are taking the necessary actions to improve operating performance including focusing our outside consulting resources more towards these businesses.

The bus systems business unit is still facing uncertainty from the Westinghouse bankruptcy, so their weaker than normal results were expected. The lighting and tubular businesses that are exposed to the oil patch activity have both stabilized and are profitable, but they have a small impact on our energy results.

Our remaining electrical BUs, however, struggled to perform efficiently on their backlogs and by and large generated significantly lower margins than they did last year.

It’s important to note that we have only scratched the surface on our planned operational improvements for the year, so will be spending a required time with this platform and their business units to drive these initiatives and ensure they obtain their cost savings targets.

Our industrial platform also struggled through the quarter and encountered continued low refinery turnaround activity, continued uncertainty in much of their nuclear market and saw the normally high profit international jobs push out into future quarters.

This business typically wins at least one large project during a quarter and that did not happen in Q1. We had three of these large projects identified going into the quarter but we lost one, had one pushed into spring of next year and another delayed for at least a year.

As a result, this left the industrial platform with significantly lower revenue than in first quarter of last year. The bright spot was NLI as they had a very solid operating quarter versus prior year as they achieved their forecast and set themselves up for a good year depending on what happens with their Westinghouse business.

This segment also continued the integration of the nuclear sales team to both WSI and NLI. We believe we have appropriately sized NLI for a $40 million to $50 million revenue run rate and that it will be a sustainably profitable business in the current nuclear market environment.

Regarding M&A, we did not complete either of the two acquisition deals we expected to close within the first quarter but have now closed one last week and should close one or two more very soon.

Looking forward, we have reaffirmed our fiscal 2018 guidance of EPS in the range of $2.60 to $3.10 and our revenue in the range of 880 million to 950 million. We see the pieces falling into place which gives me confidence for a stronger second half of our fiscal year. Additionally, our operational improvement initiatives are gaining momentum.

Our new growth initiatives in Metal Coatings are taking root and we are seeing improved activity in our core galvanizing markets despite pricing pressure from normally disciplined competitors. Consequently, we believe Metal Coatings will finish fiscal year 2018 well ahead of last year.

While the legacy Electrical platform struggled in the first quarter, we believe they have the backlog and improvements in place to perform as well as they did last year. Our expectation is that the industrial platform should outperform the prior year due to an improved level of international activity.

The risk for this year center around the uncertainty related to the Westinghouse bankruptcy and the future [Indiscernible] in some of their nuclear sites.

Our ability to drive operational improvements in the Electrical platform to offset backlog weakness in the enclosure business is for the second half and a somewhat improved level of refining turnaround in the fall versus last fall, as well as the ability of our Metal Coatings segment to continue its self-help improvement programs to regain margins and take back lost market share.

With that, I’ll turn it over to Paul to talk about our financials..

Thanks, Tom. For the first quarter of fiscal year 2018, we reported net sales of $208.6 million, a $34.1 million decrease or 14.1% less than the first quarter of fiscal 2017. Net income for the first quarter of fiscal 2018 was $13.2 million, a decrease of $7.8 million or 37.1% less than the first quarter of the prior year.

Reported diluted EPS fell 37.4% to $0.51 and our backlog finished at $331.6 million, down 6.4% versus the first quarter last year, as our book-to-bill ratio finished at 0.93 compared to 1.03 in the first quarter last year. We expect to ship 41% of the backlog outside of the U.S. compared to 25% in the same quarter last year.

Gross margins fell to 23.6% from 26.1% in the first quarter year-over-year and SG&A despite lower spend finished at 13.1% of total sales compared to 11.9% in first quarter last year, driving the first quarter operating margin of 10.5% compared to 14.2% in the first quarter of fiscal 2017.

Our effective tax rate improved to 29.3% compared to the first quarter last year of 31.6%. Cash flow from operations fell by $25.7 million in the first quarter of fiscal 2018 compared with the performance of the first quarter a year ago on lower net income and higher working capital.

As for our first quarter segment results, as Tom mentioned in his prepared remarks, first quarter revenues in our energy segment were down 15.7% to [$116.5] [ph] million compared to the first quarter of the prior year, while operating income dropped 54.2% to $8.6 million compared to prior year first quarter as gross margins in the segment fell to 21.2% in the first quarter compared to 26.1% in Q1 of the prior year.

Operating margins for the first quarter were 7.4% compared to 13.6% in the prior year period.

In our AZZ Metal Coatings segment, formally the Galvanizing Services segment, first quarter revenues fell 11.9% to $92.1 million compared to the first quarter last year, while operating income fell 12.6% to $21.2 million compared to the same period last year.

Operating margins finished at 23.1% for the quarter, down just 10 basis points compared to Q1 in the prior year. On a sequential basis, however, revenue was up 12.8%, operating income was up 15.7% and operating margins improved 58 basis points compared to the fourth quarter of fiscal 2017.

Looking forward, although we had a challenging cash flow quarter in Q1, we’re taking the necessary actions for improvement in the coming quarters.

We have seen these seasonal swings in the past and have overcome periodic shortfalls in operating cash flow by continuing to focus on working capital fundamentals, mainly collections and inventory management.

Our balance sheet remains strong and we’ll continue to support growing our operating platform as evidenced by the recent acquisition of Enhanced Powder Coating, Ltd., our continued investment in organic growth and several operational excellence initiatives. With that, I’ll turn it back to Tom for concluding remarks.

Tom?.

Thanks, Paul. To reiterate, we remain committed to our guidance. While our organic growth initiatives we’ve taken longer than anticipated to develop, we believe we are becoming even better positioned for the next few years as industrial markets rebound and both our growth and cost improvement initiatives are fully executed.

We are focused on improving our cash flow, driving our initiatives and capital deployment more effectively and completing value-adding acquisitions more aggressively. Thank you. Now we’ll open it up for your questions..

Thank you, Mr. Ferguson. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. Your first question will come from John Franzreb of Sidoti & Company. Please go ahead..

Good morning, Tom and Paul.

How are you doing?.

Good morning, John..

My first question is it seems like a few large projects you expected to hit last quarter didn’t book and one’s lost and two are delayed for quite some time. Your backlog’s down yet you maintain the guidance going forward.

Why did you do that? What do you expect to accelerate in the coming quarters?.

John, I think the big thing was we just fell way short in the Electrical platform of our operational improvement initiatives. We have traction. We’ve had a couple of great folks working as full time consultants for us that helped me fix the old pump division [Indiscernible], so very confident of their ability.

We’ve targeted $7.5 million of savings in that group. We generated 0.5 million and yet we’ve got solid line of sight how to get that 7.5 million. So we expect a lot more momentum on that as the months roll on and we expect to get that full 7.5 million.

Additionally, the galvanizing – we have a quarterly meeting at the end of every quarter and this is the first time I’ve seen our galvanizing/Metal Coatings folks optimistic for basically the first time in a year. They’re seeing activity out there, industrial spend.

Sometimes we kind of like to see zinc cost increase if we think we can push through price and hold that. So really looking at those things as our positive. The big unknown is really around Westinghouse but for the most part, the signs have been positive there recently.

And then on the industrial side, we’ve been quoting a lot of large international jobs which tend to be more profitable and we’re quoting at an unusually high rate. So we think that positions us well to make our guidance this year..

Okay, all right. I guess two follow-ups; one on the electrical side of the business, the 16% you’re down year-over-year. You kind of mentioned several items.

Can you kind of quantify what impacted you most in the quarter itself on a year-over-year basis?.

John, can you be a little more specific? Restate the question. I want to make sure I fully understand what you’re saying..

Yes. You were down roughly 16% year-over-year.

Can you kind of talk about how much it impacted the segment the most, the pieces that hurt you most on a year-over-year basis?.

Actually it was kind of across the board there with – Tom had mentioned the one big piece that didn’t come through and then there was just a few other pieces throughout – spread out amongst the different parts.

We’re still talking energy, right?.

Right, just the energy segment..

Again, as he said, the good news was NLI was in good shape. That’s in the press release. We also saw that some of the smaller businesses did well. So it’s going to be on the bus side enclosures..

I think the big issue was industrial. If you looked at first quarter last year, it was a huge quarter for them that we haven’t seen that kind of quarter in WSI for years. So they had a boomer of a first quarter which made it a tough compare and then they had a relatively weak spring outage season this year.

So it’s just simply the differentials between a boomer of a quarter and a moderately okay quarter. That’s a big thing. When you look at the other electrical pieces, it was a mix. This is – we said medium voltage bus miss, which we understood. But a couple of the other business units, it was just purely focused on the operational side.

And so we’ve aggressively reengaged to get them shipping stuff at the margins that they’ve bidded at..

And you mentioned zinc earlier. Zinc prices have been volatile throughout first half of the year. If I remember correctly last quarter, you were talking about trying to push pricing up.

Can you talk a little bit about the impact of the zinc right now on your pricing and margin profiles in Metal Coatings?.

John, Tim Pendley is here, so we’ll let him answer that..

Hi, Tim..

Hi, John.

How are you doing today?.

All right..

Zinc right now is running at $1.26, $1.27 up from the low of $1.11 earlier in the year. The overall demand should keep us in that $1.26 to $1.35 range. And the impact is with that we do believe we can continue to push pricing up to cover the cost and the cost of that zinc..

And in that kind of pricing environment, can you reclaim the margin profile of Metal Coatings in the 25% range that you used to be able to do or is it still pressured by the volume and you can’t get there?.

No. We believe we still get to that 25; combination of improved pricing, the initiatives we have going on for continuous improvement should all help go after that 25..

Okay. Let me get back into queue, guys. Thank you..

Thanks, John..

[Operator Instructions]. The next question will come from Missa Sangimino of Stifel. Please go ahead..

Hi. This is Missa on for Noelle Dilts. So just first a quick question on the galvanizing side. So you’ve talked about expectations of accelerating infrastructure spending sort of in the back half of the year.

So I guess where are you expecting this growth to come from and is it at all dependent on the passage of a federal infrastructure stimulus bill? And I guess just what are your sort of longer term expectations for infrastructure into fiscal '18 and into '19?.

This is Tim. When we talked about the improvements we’re seeing – on infrastructure, we’re seeing improvements not just in highway but also in transmission and distribution. In addition to that, we’re starting to see a little solar pick up here and there. And so overall we’re kind of pushing in those directions..

Missa, I also – non-res construction spend is actually already up and trending up. Unfortunately for us, we’ve got a cluster of sites that are in the somewhat depressed areas of Louisiana, South Texas and Oklahoma due to the oil patch activity.

But overall in other parts of the country we’re seeing good pick up in that non-res construction that’s driving steel to be galvanized. So that’s why we’re feeling better about the outlook..

Okay, got it. So essentially just a pickup in non-res but not necessarily dependent on anything coming from say like a larger public spending bill coming through..

We still hope for that for the longer term but we’re not counting that as part of our guidance for this year..

Got it. Thanks. And can you just give us – you mentioned electrical transmission and distribution.

Can you give us kind of an update on what you saw during the quarter and sort of how you think this will trend throughout the year?.

We saw increased spend and I think that’s going to continue for the balance of this year.

It’s particularly affected our switchgear business where we’ve got good backlog, it’s affected our galvanizing or Metal Coatings business and we’re seeing that continuing probably throughout next year from what we’re hearing from utilities, and that just bodes well for us.

And of course when we see some solar pickup, as Tim referred to, that’s got a lot of hot-dip galvanizing to it, so we’d like that.

Transmission and distribution, it’s affected our electrical and that’s why we got to perform on the backlog in our switchgear and our bus businesses because they’ve seen that pickup but we haven’t driven in the margins on it. So we anticipate that will continue for us..

Great. Thanks. And then just on the energy side, you’ve talked about expectations for some of your other energy markets improving. Can you just provide a little bit more detail here? Actually I guess you sort of already answered that..

I can expand that..

Yes, that would be great..

Well, we haven’t gotten in that electrical segment particularly – Electrical platform particularly, any of the Middle East emergency type work, even the normal work which usually helps our high voltage and our medium voltage bus businesses, we see some movement in Saudi Arabia which should bode well for us.

We have our one joint venture facility under construction which we can open up this calendar year. So we see that as some of the movement and that’s been some of the shortfall in our backlog in a couple of the businesses. On the enclosure side, there’s too much capacity in enclosures right now and not enough demand.

But we don’t have huge amounts of capacity in that area and we’re positioned pretty well. So we still like that business. Our enclosure is still very profitable. But that is where we’re chasing opportunities and we happen to get into new types of enclosures and new initiatives to try to rebuild some of that backlog..

Great. Thanks. And then just one more question on the M&A side. So obviously you completed the acquisition of the Powder Coating facility just a few days ago.

So I guess, first, can you give us a sense of what this is adding to the full year guidance? And then two, you’ve sort of talked in the past about adding some additional – maybe more traditional electrical deals that are currently in the pipeline.

So I guess can you kind of give us a sense of where your appetite for M&A is sort of directed and anything you can give us sort of around – I guess anything around timing or any additional color there would be helpful?.

I think on EPC, we usually don’t talk too much about the details because we are in a competitive situation. But we look for that to add maybe $0.03 or $0.04 to what we were projecting which given the wide range of our guidance doesn’t really move it a whole lot.

On the EPC side, we’re continuing to pursue a couple of other bolt-on type galvanizing powder coating acquisitions that we would hope to close one or two of those during this second quarter if not shortly outside of it.

And then we are looking at a couple of the electrical type businesses and I don’t want to specify anything just because they’re – we just don’t want to signal what we’re interested in right now but we’ve got a couple. Chances are we won’t close both of them. We’ll probably close one given our normal hit rate.

So we’ll be able to talk more about those hopefully by the end of this quarter on the next earnings call. We’re not getting outside of our core markets of electrical or galvanizing on that account..

Got it, that’s helpful. Thanks so much..

The next question will be follow up from John Franzreb of Sidoti & Company. Please go ahead..

Yes. Let’s stick with the EPC acquisition.

Tom, can you talk me through its customer base? Why would somebody maybe saying something or outsource something to an individual facility versus doing it in-house?.

EPC has a lot of certifications in the aerospace type field. They’re one of the few that has those certifications. So they pick up quite a bit of the airline components, if you will, because of those standards that they can meet that others can’t. And then they also have – they do other powder coating of a very high quality certification type level.

So it’s not your normal mom and pop sitting out there with a sprayer. And those are the kinds of things we’re looking at. The powder coating facility we opened in Crowley is to do ground line coatings, to do bigger things that the normal powder coaters can’t do.

To me it’s not so much the technology, it’s the quality programs, the certifications that we meet, the standards we can comply with or the size of things that we can do that quite often others can’t do. So those are the areas that we’ve pursued both internally as well as looking for acquisitions. Tim’s sitting here if he wants to add to it..

John, I think overall the reason why we’re getting into this is it helps spread out our platform. Right now powder coating by far carries a much bigger market share than galvanizing does in the overall market. So this helps us increase that footprint.

Then it also – galvanizing with powder coating is a very superior product and this gives us that capability..

Is it also a higher margin profile than your traditional galvanizing business?.

No, it’s in the same range and probably better than some of the other powder – and that’s part of our difficulty as we go look at powder coating acquisitions as a mainstay of our portfolio is a lot of them don’t come anywhere close to our margin profile. So that limits the field. Those are the kinds of things we’re looking for.

We’ve committed to not damaging that margin profile for our Metal Coatings business and we’re committed to that..

Good. That’s helpful.

The 7.5 million in savings that I think you said we’re going to achieve by year-end, is that entirely in the energy segment or is that spread across both segments?.

That’s just the energy segment piece. Tim’s got his own operational improvement activities. He’s got an executive focused on that and they’re driving on that hard as well. But they’re just more around ensuring we can remain price competitive and yet still generate the 25% margins that we’ve targeted in that business.

So his is around ensuring he can compete at 25% levels. And on the electrical side, primarily it’s around driving out operational inefficiencies, debottlenecking processes, buying things better, leveraging our spend across the platform and then driving efficiency and productivity through those business units by leveraging their back office.

It’s a plethora of things and yet it focuses on really just driving cost savings. And then if we get any volume, those efficiencies will drive through and then improve margins overall for the energy sector..

Got it. Perfect. Thank you very much, guys. I appreciate it..

The next question will be a follow up from Missa Sangimino of Stifel. Please go ahead..

Hi, again. So just a quick follow up. So you talked last quarter about petrochemical activity picking up.

So can you give us an update sort of on how this impacted the quarter, what levels of activity you’re seeing today and just sort of how this is impacting capacity and pricing in the market in general?.

Yes, we’ve seen an increase in that activity but along the Gulf Coast of Louisiana, Gulf Coast of Texas. There’s still quite a bit of galvanizing capacity throughout there, so there hasn’t been – while the activity’s up, it hasn’t been enough to kind of suck up all of the capacity in the area.

So we’re still competing to fill our plants in Louisiana, Mississippi and Texas. But it’s better than it was..

Great.

And then I guess just given that we’re sort of halfway through the first year of a new administration, just an update on sort of where you think solar could go and I guess just what you have in terms of your expectations for that market?.

On solar, the subsidies are still in place. They had been put in place I think about a year ago. There was a law where some of the developers were looking at is there enough customer base. And of course natural gas power plants can be thrown up quickly as long as there’s pipeline access, they’re very effective and very efficient plants.

So now what we’re seeing though is the reengagement of some of these solar projects that have kind of gone on hold and they’re coming off hold. I don’t know that – given the fact that subsidies are in place for five years, so they still got I think four years to run approximately. There’s not a lot that’s going to change that.

So when you’re in sunny areas of Arizona and West Texas and places like that, it’s a good alternative. The technology has become more cost effective on a cost per kilowatt hour basis. In terms of the long-term portion of the power generation base, I’d hesitate to make a forecast on that.

Right now we’re just looking at it and how it’s looking for this year and for this year it’s looking fine..

All right, great. Thanks..

[Operator Instructions]. At this time, I show no additional questions. We will conclude the question-and-answer session. I would like to hand the conference back to Tom Ferguson for his closing remarks..

Very good. Thank you for participating in today’s call and we look forward to talking to you again at the conclusion of the current quarter. Again, thank you and have a great day..

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