Good morning, and welcome to the AZZ, Inc. Second Quarter Financial Year 2020 Financial Results Earnings 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, today’s event is being recorded. I would now like to turn the conference over to Joe Dorame. Please go ahead.

Thanks Dan. Good morning and thank you for joining us today to review the financial results of AZZ Inc. for the second quarter of fiscal year 2020 ended August 31, 2019. 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’d 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 Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended February 28, 2019. 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, let me turn the call over to Mr. Tom Ferguson, Chief Executive Officer of AZZ. Tom?

Thanks, Joe. Welcome to our second quarter fiscal year 2020 earnings call and I thank you for joining us this morning. We are pleased with the continued strong performance of our business groups in fiscal year 2020. We generated 6% revenue growth and 38% net income growth versus prior year. Operating margins improved overall to 9.4% in spite of about 1 million of tariff and FX impact on the Chinese project shipments during the quarter. Year-to-date, our business is tracking nicely ahead of our plans, which bodes well for the full fiscal year. Our Energy segment experienced a normally slow summer season, shipped another portion of the high-voltage bus Chinese orders, and regained operational traction in most businesses. While our Energy bookings were down 6% versus second quarter last year, we were lapping a quarter where we booked one of the large Chinese orders, so non-China related bookings are in the range we expected. The Metal Coatings segment experienced increased demand in the solar and petrochemical markets and contributions from the acquisitions completed earlier this year. The Metal Coatings team improved operational efficiencies as the usage of DGS which is our Digital Galvanizing System continues to grow in our galvanizing plants. We also experienced improved contribution from Surface Technologies, which now includes eight powder coating and plating plants. We also continued our emphasis on value pricing while we had lower zinc costs flowing through our kettles labor costs continue to rise as the craft labor market remains tight. Overall, we were able to drive net income up over 38% versus second quarter last year to $15.6 million. We continue to build on the positive momentum in the Energy segment with a strong backlog of more than $300 million. This sets the stage for solid performance in the back half of…

Thanks, Tom. For the second quarter fiscal year 2020, we reported net revenue $236.2 million, a $13.4 million increase or 6% greater than the second quarter of fiscal year 2019. Net income for the second quarter fiscal 2020 was $15.6 million, an increase the $4.3 million or 38.4% greater than the prior year second quarter. Reported diluted EPS rose 37.2% to $0.59, compared to $0.43 in the prior year second quarter. Q2 fiscal 2020, gross margins improved to 22.3% from 21.1% on a year-over-year basis, primarily on strong margin performance in the Metal Coatings segment. Operating profit for Q2 fiscal 2020 grew from $17.1 million in the prior year to $22.2 million in the current year, representing a 29.8% increase. Operating margins of 9.4% increased 170 basis points compared to 7.7% in the prior year. EBITDA for Q2 fiscal year 2020 increase 10.5% to $33.8 million compared to the second quarter of fiscal year 2019. In early October, we announced that we were rescheduling the conference call for our second quarter fiscal 2020 financial results and delaying the filing of our form 10-Q. The delay was the result of an extensive review of AZZ's historical deferred tax accounting practices. As part of the review which was concluded in early December, we identified several income tax accounting issues, requiring adjustments that's spanned several years going back to calendar year 2012. However, we determined that these areas were not material to any prior period financial statements and that the cumulative effect of correcting these areas in the current period was not material. Accordingly, we corrected the cumulative effects of these tax accounting errors in the second quarter of fiscal 2020, which resulted in a one-time deferred tax benefit of $1.4 million or $0.05 per fully diluted share. Earnings per fully diluted share…

Thanks, Paul. We are focused on improving productivity and efficiency throughout the Company, continuing to adapt our products to new market opportunities, and developing innovative solutions for our served markets. We remain committed to generating Metal Coatings operating margins in the 21% to 23% range and getting our Energy margins to above 10%. We are looking for acquisitions in the Surface Technologies arena that will generate 18% to 20% operating margins and greater than 25% EBITDAs. We have a very disciplined process for vetting opportunities now that we have built a core leadership team with deep experience in the surface finishing space. The second quarter performance continues to build confidence in our outlook for fiscal year 2020. Additionally, we have invested more heavily in talent acquisition, retention, training and development to ensure we have the talent necessary to sustain our growth plans. Strategically, our focus is on growing Metal Coatings organically and on executing our aggressive acquisition program. In Energy, we will continue to focus on reducing our exposure to the U.S. nuclear market, while maintaining emphasis on domestic opportunities in the electrical enclosure and switchgear businesses. And now, we will open it up for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Noelle Dilts with Stifel.

So first, I was just hoping that you could give us a little bit more detail on the acquisitions that you've completed within Metal Coatings, what those operations do, the expected and the expected revenue contribution? I know you said they'd be accretive, but a little bit more detail would be helpful.

Yes, I think we did two in the first quarter, which were one galv -- traditional galvanizing, Tennessee Galv. We also did the Cimcon or K2 Partners which had two facilities. And I guess what, -- the way I'd put it is galvanizing. We were traditionally targeting something in the $10 million revenue range. On the Surface Technologies powder coating side, they're smaller. So, we talked about eight facilities, but you'd probably be looking at, call it $3 million to $5 million in revenue for a facility, so much smaller and in just in scope. We typically aren't going to talk too much about individual deals just because we view our pricing as the proprietary. So -- but that hopefully that gives you some idea what we're talking about in terms of scope.

So then I was hoping we could just shift over to galvanizing, taking in a little bit more obviously with just, with zinc trends and maybe some of -- somewhat more favorable price cost dynamics. It does seem like you guys should see pretty significant benefit here over the next few quarters. Could you just speak to how you're thinking about those dynamics and how you're thinking about margins now relative to kind of some of the previous goals that you've talked about?

Yes, I think, we -- I like galvanizing at about 23%. I think the one cautionary note I'll give is, over the holidays, just given the level of absorption number of hours we can generate, the reduced number of actual working days. We tend to have a little bit of a negative impact on margins in the fourth quarter for galvanizing for those reasons. Offset to some extent by lowers zinc costs going through our kettles, but we're kind of down to a level now that of what's flown through there. I don't see that continuing to decrease a whole lot. Labor costs have been higher, but they've been stable recently. So, we've made quite a few adjustments late last year and early this year in terms of wages, we were paying to be able to attract the level of talent that we need in our facilities. So, I remain committed to 23% on the galvanizing side, but and the reason I stated that powder coating plating surface technologies are going to run lower than that. As those become a bigger piece of our business, they will provide a little bit of downside pressure to that 23% number and across the total metal coatings piece. We are targeting 18% to 20% on average. Some do better. Some do a little bit worse. It takes us a couple of quarters to get them fully integrated on the powder coating side. Whereas usually on the galvanizing side, it's almost immediate and it's just the difference in scale, the amount of operating capability we have in galvanizing, while we're still building it on the power coating plating side.

Okay. And then one more question, I'll get back in queue on galvanizing. Could you just -- nice volume there in the quarter. Could you speak to some of the verticals where you're seeing strength versus those that may be a little bit more challenged?

Yes, we've done well in solar, which has been extremely active. And I'd say petrochemical has slightly strengthened, which is good news. So particularly when you kind of look at a map of where a lot of our locations are in kind of the Southeast in Texas and Texas Gulf Coast. So that tends to be strong for us. And then just general industrial, we've done well, we still haven't seen tremendous investment in infrastructure, but in terms of roads and highways, although as you go around here in Texas, you see lots of them under construction. So, it's been general, but with heavy emphasis on solar and petrochemical having a lot of impact, positive impact for us. And I'd also say we're doing, what I view as a better job of going after new customers in some of these verticals, customers that we haven't done much business with if any. And being more creative and innovative and how we work with them. So, I think there is -- there are several things at play when it comes to solar and petrochemical.

[Operator Instructions] Our next question comes from Jon Braatz with Kansas City Capital. Please go ahead.

Just following up on the previous question. Was organic sales up in the quarter in Metal Coatings?

Yes, it was.

Yes, we actually call it out in the deck.

Yes. That's right.

I'm sorry, what?

It's actually called out in the deck. Where -- coating, where it says 1%.

Okay. And Tom, could you speak a little, you called out Specialty Welding a couple of times and reducing your dependence upon the nuclear market. Can you tell me exactly where that business is going? What end markets you're serving and sort of the growth opportunities beyond the U.S. and elsewhere in the Specialty Welding business?

Yes, that's a great question. We've mentioned it before we invested probably three or four years ago in Brazil in Canada. We continue to expand our Polish facility over in Europe. And so, we have a strong presence in Europe and we're picking up both refinery as well as waste-to-energy opportunities over there. When you come into Canada and Brazil, we're into our more traditional downstream refining, some FPSO work down in Brazil. So, it's mostly petroleum related and we are their premier provider of automated, high-end solutions particularly for things like coker drums, large refinery reactor vessels those kinds of things. So, we've done well in Canada. We've done well in Europe and we feel good about what's going on in Brazil. We also do very well over in India and we've recently expanded into China. So, it's almost all oil and gas petroleum downstream.

What is the competitive landscape and -- Specialty Welding like and when you look at the margins currently in that segment, how might that compared to where you think there could be in a couple of years?

Oh, boy, that's part of the issue. We're using union contract labor, which everybody knows what their rates are. So when you go to a refinery, they know what our labor costs are. Where we are able to improve price realization, if you will, is on the equipment side, and so the more of the specialty equipment, which is mostly were taken your common link and miller welding equipment and then heavily modifying it with controls, automation, things like that. So, that's where, as we can get more equipment on jobs particularly on these large international jobs, that tends to improve our margins. But labors, it's a season craft labor pipe fitters and welders. And so that's just kind of the nature of that market.

Our next question comes from John Franzreb with Sidoti & Company.

Good morning, guys. I apologize if you addressed these, I've been bouncing between conference calls, but regarding the tax rate, what should we think about the tax rate going forward, not only in this current year but into next year?

Well, obviously, this one was a little bit of blip in the second quarter, but I think for this full year you should probably be thinking about 22-ish. And the full year, the next year probably about the same. It may jump up to 23, depends what sort of issues come up next year and what makes itself available in terms of opportunities.

And regarding the spring turnaround season, what is the incoming order book tell you about how that shaping up at this point?

Yes, spring shaping up nicely. It is sitting here and knowing how we did for the fall is, puts us in an interesting situation, but spring look strong. We've had a lot of activity. There is some carryover in terms of some of the projects we had in the fall. That are going to do -- they'll do additional portions of equipment in the refineries, which to me bodes well. It says we performed really well for our customers and that's always a good sign when they're ready to sign up for repeat work in the next turnaround season. So, we are seeing some of that deferred maintenance, finally come into to being and I'd say the spring looks well, looks look strong for us.

And I think I mentioned that you mentioned in your prepared comments, an effort to reduce your exposure in the nuclear market. Are you doing something actively to reduce your exposure? Or are you just assuming that the other business is growing that business diminishes?

Yes, I'd say we've got two pieces that are -- well, there were three that we have two now that are exposed to nuclear. One is the Nuclear Logistics Inc business. We're pretty much just maintaining that business. We're not trying to pull away from any customers, so to speak. But we're also not seeking to grow it. So we're just maintaining. And then on the Specialty Welding side, we are actively focused on growing in the non-nuclear. So, I don't know that I'd say we're walking away from stuff, but we are definitely taking refinery projects in favor over and above nuclear.

Okay. So, its asset allocations in the welding side and just leaving that's NLI as is. Got it, got it. Okay, thank you for taking my question.

All right, thanks.

Our next question comes from Bill Baldwin with Baldwin Anthony Securities.

Can you offer us some color on like you're seeing in the domestic switchgear and enclosure markets at this point in time, I kind of what you are thinking is about the longer-term outlook looking out to the coming year?

Yes, I think in the switchgears kind of mixed in some of the larger stuff we're seeing good activity and some of the smaller stuff, it's less so. Our outlook is still positive. We like those markets. We've got two facilities focused on it in Fulton, Missouri and up in Oshkosh, Wisconsin. And so being able to leverage their capabilities those two facilities, we feel positions as well for that. So it's kind of I think the outlook as we go into next year, we're probably more positive than we are right at the moment. And in terms of the electrical enclosures, we feel really good about that. The market or the capacity has consolidated, so to speak, and we've participated in doing that with the, a couple of acquisitions over the last three years or so. That's strong. There is a lot of activity in the e-houses the data centers, the things like 5G. So, we're bullish on that and we feel well positioned. We're in Maryland, Tennessee and Kansas. So, we really don't get too much into the Gulf Coast, so not too much into the oil and gas space. We're mostly focused on the electrical utility the datacenters and pipeline activity.

Very good. Good insight there. And what's going on in the medium voltage bus business these days, Tom?

That's a, they had quite a bit of activity. They were exposed to the nuclear stuff that some of the plants, the one plant that decided not to go forward. And so, we've been moving that capacity into the more traditional utility in transmission distribution side. It's just, okay. It's not a great market. We're looking for more opportunities, if you will. It's not a big facility, but it's a nice facility and a really good workforce. So, we're trying to, I guess the best way to put it, we're trying to make lemonade out of lemons, but -- and we're looking for new opportunities, but it's not robust.

And your high-voltage business, can you give us some insight there is, to what that markets looking like?

Yes, we still have a lot of backlog in China. The President of that business would be flying back to China probably this weekend. But we also have picked up more domestic opportunities. So, we are seeing that activity. We like that domestic activity. And, so we feel good about that business. And we've got the facility in, up in Massachusetts. And it's a very nice facility and well positioned for the opportunities that we see out there right now and the ones we've been participating in. So, that's in a little -- that's an in much better situation than the medium voltage side.

And most of your international business right now on high voltage, is that the Chinese business, Tom?

Yes, that's pretty much it. We've got a joint venture in Saudi Arabia, but the activity there's -- it's a joint venture. So -- but the majority of our international backlog is high voltage bus in China.

Is there's a much opportunity to grow that business in Europe or…

It's a different market for us and just not -- we compete with the European high voltage bus providers in some of these other international opportunities, but we don't see a lot of opportunity in Europe to go in there.

Our next question comes from Noelle Dilts from Stifel. Please go ahead.

Did we lose her?

I think we might have lost her. [Operator Instructions]

She may have jumped on the other call. Okay, all right.

Okay, that'll end the question queue. And I'd like to turn it back over to Mr. Ferguson for closing remarks.

Thank you. Just a couple of comments before signing off, we answered a lot of good questions. So, while we remain committed to achieving the 21% to 23% operating margins for our Metal Coating segment, we're going to be very acquisitive as well, particularly in the surface technology space. Additionally, we're continuing to review our portfolio of businesses based on what is core versus non-core. AZZ's long-term success will announce any divestiture actions as they become likely and probable. So thank you for participating in today's call. We look forward to provide you an update on Q3 in just a few weeks. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.