Good morning, ladies and gentlemen and welcome to the AZZ Inc. Second Quarter Fiscal Year 2019 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. At this time, I would 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 second quarter of fiscal year 2019 ended August 31, 2018. As Denise indicated, my name is Joe Dorame, Managing Partner of Lytham Partners. On the call representing the company are Mr. Tom Ferguson, Chief Executive Officer and Mr. Paul Fehlman, Chief Financial Officer. After the conclusion of today’s prepared remarks, we will open the call for a question-and-answer session. Please note there is a slide presentation for today’s call, which can be found on AZZ’s Investor Relations page under Financial Information at www.azz.com. 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, 2018. 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 metal coatings 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 said, I would like to turn the call over to Mr. Tom Ferguson, Chief Executive Officer of AZZ. Tom?

Thanks, Joe. Welcome to our fiscal year 2019 second quarter earnings call and thank you for joining us this morning. As we had noted on the last call, we were hoping to maintain positive traction as we continue into 2019 fiscal year. We believe we accomplished that with solid double-digit growth for both top and bottom lines versus Q2 fiscal 2018. While we still have several challenges both within the business as well as outside, we have enough momentum to raise our guidance for the full year. We remain highly active on the M&A front as we look to strengthen our core businesses and ensure our current businesses are focused on their core activities. Metal Coatings had a good second quarter with record sales, while it continues to gain traction on several operational, procurement improvement and growth initiatives. Operating margins of 19% were negatively impacted by the high cost zinc flowing through our kettles, the disruption of consolidating two plants, some impact from higher direct labor wages and our efforts to regain market share in certain markets. We believe margins will show improvement in the balance of this year and while 25% operating margin is still our target for galvanizing, overall Metal Coatings will be somewhat less than that as Powder Coating is likely to make up the growing portion of the revenues. We continue to invest in digitizing our galvanizing plant so that we can improve our industry leading customer service and drive improved productivity with real time data. We call this initiative Digital Galvanizing System, or DGS for short and we now have DGS in all 40 of our galvanizing plants. We remain confident that continuous galvanized rebar and Powder Coating will continue to grow and also improve their margins in the coming quarters. The reorganization to improve…

Thank you, Tom. For the second quarter of fiscal year 2019, we reported net sales of $222.8 million, a $26.5 million increase which was 13.5% higher than the second quarter of fiscal 2018. Operating income for the second quarter of fiscal ‘19 was $17.1 million, which included a $1.3 million charge to consolidate two galvanizing plants on the Gulf Coast. This drove a slight decrease to operating income of $300,000 or 1.6%. Reported fully diluted EPS grew 13.2% to $0.43 compared to $0.38 last year and our backlog finished at $336 million, up 12% versus the second quarter last year. Our book-to-revenue ratio finished the second quarter at 1.14% compared to 0.97% in the second quarter last year. We expect to ship 54% of the backlog outside of the U.S. compared to 42% in the same quarter last year. Gross margins for the quarter were 21.1%, 120 basis points lower than the 22.3% margin for the second quarter of last year as we experienced the continued headwinds of realized zinc prices, increasing labor costs and the charges we took to consolidate the two galvanizing plants. SG&A finished at 13.4% of total sales compared to 13.5% from second quarter last year. And as a result, we generated second quarter operating margins of 7.7% compared to 8.9% in the second quarter of fiscal 2018. On a comparative basis, our quarterly interest expense rose 17% year-over-year or $580,000 mainly as a result of rising interest rates. Our effective tax rate improved to 19.6% compared to the second quarter rate last year of 28.7%, driven by the Tax Cuts and Jobs Act of 2017. Cash flows from operations improved by $14.7 million or 527% in the first half of fiscal ‘19 compared to the performance in the first half a year ago on higher…

Thank you, Paul. We remain cautiously optimistic about fiscal year 2019 and are gaining confidence in our outlook after two solid quarters of performance. We are narrowing our guidance for fiscal 2019 to the upside with earnings per share in the range of $1.90 to $2.25 per fully diluted share and annual sales in the range of $930 million to $970 million. We are experiencing generally improved market conditions and we feel confident about our organizational changes and realignment activities. Additionally, we are executing on our strategic initiatives to drive improved operational performance. We are pleased with the actions we've taken to manage our commodity costs and improved labor hiring and retention, as well as the positive impact of tax reform, both on our profitability and on the demand created by investments from many of our customers. We will continue to focus on driving performance in the balance of fiscal 2019 and positioning AZZ for a strong fiscal year 2020. With that, I'll open it up for questions.

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

Good morning, guys.

Good morning, John.

First on the Metal Coatings business, can you talk a little bit about how long it takes you to fully absorb price increases and decreases in zinc and when would that fully be reflected in the P&L?

It takes about six to eight months, John, and kind of the peak prices were in that first part of the year February, March. So that's why we’re pretty confident particularly with higher volumes we’ll start seeing that to get lower towards the end of this quarter and into the fourth quarter.

Got it. And your efforts to regain market share in metals, could you just describe what you’re doing there and what kind of timeline to get back some of the lost customers?

We feel like we’ve regained quite a few already. Our focus was in probably two or three regions where we felt like competitors that sort of had a free reign for a while as our operations were purely focused on margin. So, with the change in the sales force to really building out that professional sales effort getting them focused on really not just cost coverage, but building that value, the highly satisfied customer relationship, we’re making a lot of progress I mean – and you’ll see – I think you see it in our revenue already. We’ve still got a lot of ways to get away, I think we’ll be at that through the balance of this third quarter, but I would anticipate as we make the turn into January for the calendar year that we are going to be pretty comfortable that we are regaining most of what we lost and then we have started taking share in some of the other regions.

Perfect, okay. And on the energy side of the business, can you talk a little bit about the full turnaround season, I know the spring was relatively good for you, you had some deferred work that came back to market, it seems like fall is going to be equally as good if not better, can you just describe what’s driving that better than your expectations say a few months ago?

Yes, I think the ball is looking really good. Our challenge now is balancing resources. So we pretty much have as I like to say all oars in the water right now. So, our folks in the welding solutions business are trying to balance project teams and project engineers and quality folks. So, we are full on the typical industrial refinery side. Nuclear outages still haven’t been that robust, but that’s okay, we pretty much aligned our resources to be able to focus on higher industrial opportunities and we are seeing that pretty much across the globe, so in our Europe business, in our Latin America as well as in our Canadian business. So, we feel real good about this third quarter. And while on one hand, I kind of wish we had a few more resources, but on the other hand that would have probably made it tougher second quarter. So, we feel real good right now.

Just I thought you implied that your nuclear business second half was looking better relative to first half, is that not the case?

Well, there is two different pieces to our nuclear business. One is the welding solution piece, which is focused on the maintenance side and then there is the Nuclear Logistics Inc. which is more around components and parts and certification. And so they tend to run – while we use an integrated sales organization, they still tend to run a little different. So what we are feeling better about is that nuclear – that NLI business, they are focused on new opportunities, they are focused on their traditional batteries and things like that. So that’s where we think that utilities have probably cut about as much as they can in terms of their inventories and in terms of the components. So we feel better about that. We also feel better about some of the international opportunities we are seeing whereas traditionally we are almost totally focused the last year too on the domestic market. So that’s why we feel better overall on the nuclear side international and NOI.

Perfect. Thanks, Tom. I will get back to queue.

The next question will be from Noelle Dilts of Stifel. Please go ahead.

Hi, thanks. I wanted to dig into the labor side of things a little bit more, could you give us a better feel for which crafts are sort of in tight supply and if there is more or less tightness from a geographic standpoint if there any areas that are particularly difficult and if you could comment on if you are seeing any tightness in terms of welders, that would be helpful?

Yes, it’s got all of the above. I think you hit on all the points, Noelle. I will start with the welders we have got good access to craft. And so we have got probably enough craft right now to handle what we see in the third quarter. As we look forward, I’d say we are probably more worried about the supply of welders in outer years. So, we are working on better training programs working with the unions that we work with and try to make sure that we have got the best of the group available to us in a variety of ways. So we have renegotiated some of those union contracts for contractors and we feel fairly good right now with what’s available to us. In the metal coating side, it’s a different story. We have got some regional issues. I am not going to call out any specific ones, but we have competitors in almost every area as well. So, we have increased wages by $1 to $2 in those areas, one allow us to attract a little better quality of individual and two, to retain the folks, the experienced folks we have, most of that is unskilled to semi-skilled labor. So we had some issues in – but we’ve been able to fill our ranks pretty well. We’re doing job fairs, we’re getting more creative at how we recruit, how we bring folks in, how quickly we ramp them up, how do we get them oriented and then how do we evaluate and retain. So it’s – we’ve had to become more innovative in how we find unskilled and semi-skilled craft and we’re doing that in both the Metal Coatings as well as in the Electrical side, and we had success with those job fairs. So our Human Resources folks are getting a lot better at that and we’re getting a lot better at using the tools we need to bring folks in. I think there's going to continue to be some pressure, but on the other hand, I think we’re feeling good about how we’re able to drive productivity and efficiency uses as look forward. So, we’re not seeing a lot more pressure to increase wages because we’re not in some of the really high cost areas like California or up in the Northeast. So somewhere in the South and through the Midwest, we feel pretty good about the adjustments we’ve made and about the new techniques we’re using to find, recruit and retain folks.

Okay, thank you. That's very helpful. And then on – I was hoping you could expand a bit on the tariffs and steel in particular and where that’s kind of impacting you both directly and indirectly and how receptive the market has been in terms of pricing there as it relates specifically to raw material inputs?

Yes, great question. We – and it varies. I think in Metal Coatings most of the fabricators were dealing with have access to the steel they need, so we haven't seen much impact there and feel pretty good as we’re looking forward at least as we’re talking to the contractors and fabricators. When it comes to the electrical side, what – where we have seen some impact, we’ve had some tariff impact on our oilfield-related products particularly tubing. We’re working to mitigate that. It wasn’t enormous because its -- tubings are relatively small business unit for us, and two, they’re pretty adaptive and adapting. So, we feel good about their access to steel going forward for the tubular business. When it comes to the enclosures particularly there has been some cost increase in terms of steel plate and sheet metal particularly. We’ve been able to pass most of that through because it is project basis and so we've been able to get that into our bids in anticipation of the higher costs. So, we've not seen a lot of pushback from customers because a lot of our customers are experiencing the same thing. But we’ve had access to the plate and sheet that we needed just at a little higher cost, which has not been reflected in our margins as we‘ve been able to pass it through on a project basis. So not just as we kind of stated. It's something we’re paying close attention to where it could impact is China, one of the reasons we are moving to a WOFE in China instead of a JV was – in case the tariffs get worse or the trade situation with China gets worse, we want to be able to manufacture more locally and not have any impact on our margins on some of the projects we have in backlog. So, we feel – once again we feel good about the steps we’ve taken in the last few months and been a lot of hard work, in fact our legal and finance and business teams, but we think we’ve made the right steps particularly with the front page of the Wall Street Journal today talking about things getting worse with China.

Okay, great. And then one last one for me. Could you walk us through just on the galvanizing side some of the trends that you're seeing in terms of volume and some of the verticals in which you operate. So a little bit of a feel for what’s going on the solar, T&D, OEM et cetera?

Yes, Paul is going to respond to that.

Yes, well, good morning. So, the current trends are that we’re seeing upticks across almost every end-market that we’re addressing. We had some particular strength in agriculture and in the second quarter and in general industrial as well as the electric utility side, funny enough, pretty flat on construction, [which in high way] has got a tiny uptick and we are seeing good pickup in OE as an end market. So the interpretation on that is really the general economy is doing well, the uptick in agriculture, I would say, has to do with some of the anticipated possible issues in China as we are building up more storage for grains and some agricultural units also it’s that time of the year where this picks up as we head into the fall.

Okay, perfect. Thank you.

[Operator Instructions] The next question will be from Jon Braatz of Kansas City Capital. Please go ahead.

Good morning, Tom, Paul.

Good morning Jon.

Good morning Jon.

Just to follow-up on the galvanizing side of the business, was there some incremental acquisition revenue this quarter in the galvanizing segment?

Yes, there was. We bought Rogers Brothers which is – they have more spending than most of our other facilities. And so that’s been a nice addition, yes still relatively small. Paul could probably give you a little more color on it.

Yes, I won’t give you the numbers, but we did pick that up at Rogers Brothers, which was purchased in February at the end of fiscal ‘18 and then actually regarding the PCM on Powder Coatings side at the end of June fiscal ‘18, so you get an extra month, you get little extra month bonus there for you, Jon, in the second quarter. If you look there, yes, there was a pick up in organic.

Okay. Tom, from a bigger picture standpoint, we are hearing reports about things maybe slowing down in China for whatever reason. Just my question is how important is the Chinese market for you as you look forward 12, 18 months and maybe are you seeing any weakening either directly or indirectly, can you give us a relative sense how important the Chinese market might be for you?

Yes, we have got a very large Chinese backlog in our high voltage bus business up in Massachusetts, but those are long-term contracts, very well negotiated contracts between us and the customers. Those projects are necessary for China’s infrastructure. So we see those moving forward. Obviously we have got contractual terms that we believe are fair between us and our customers there. So, our backlog is in hand for the next year to 2 years for high voltage bus, so we are not too worried there and there is still other opportunities. So, we look for that to be okay. Like I said mostly by change from a JV to our own operation was to give us more control and flexibility if things should get worse where we would be able to manufacture more domestically in China without impacting our margins. On the other side, we have been making some entrees into the market with our welding solutions business and moving some resources in country. We don’t see that being affected as well. Part of it is we just want to make sure we have got equipment on the ground when those turnarounds come up for coker rebuilds, coker drum rebuilds and as well as for the nuclear side. So, we feel pretty well positioned there, something we have been working on for the better part of 3 years and getting that in place. So that we are not at the mercy of things getting hung up in customs, but it’s not for welding solutions, it’s not a huge part of the outlook for them.

Yes. Is the backlog in the bus business in China, can it be canceled, delayed, or can the terms change at all or the contract dates change at all?

There is clauses in there for cancellation and for the changing the order. Obviously, there could be impacts. We don’t feel that’s likely just given the strategic nature of those projects and we still do have good partners. In effect, we have taken our JV partner and convert them too, it’s still the source. And so we still feel very well connected in terms of how we are doing business there and the way we took these contracts was due to the strategic nature of these projects for the Chinese infrastructure. So, while, yes, there is always a chance there could be some changes, we feel fairly well protected, but more importantly, we feel like these are strategic projects that need to go forward. And by the way, the most recent award is the second largest hydroelectric dam in the world. And as you know, the Chinese like to put those records up. So, it makes us comfortable.

Okay. Alright, thank you very much, Tom.

Alright. Thank you.

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

Thank you. Well, thank you for participating in today’s call and we look forward to talking to you again at the conclusion of our third quarter and we hope that nobody is in the way of Hurricane Michael. And once again, thank you.

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