AZZ Inc. (AZZ) Q4 2020 Earnings Report, Transcript and Summary

Good morning, and welcome to the AZZ Inc. Fourth Quarter Fiscal Year 2020 Financial Results Conference Call. All participants will be in a 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.

Thank you, Andrea. Good morning, and thank you for joining us today to review the financial results of AZZ Inc. for the fourth quarter and fiscal year 2020 ended February 29, 2020. Joining the call today are Tom Ferguson, Chief Executive Officer; and 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 Securities and Exchange Commission, including the annual report on Form 10-K for the fiscal year ended February 29, 2020. 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 coating 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. In addition, AZZ's customers and its operations could potentially be adversely impacted by the ongoing COVID-19 pandemic. 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 out of the way, let me turn the call over to Tom Ferguson, Chief Executive Officer of AZZ. Tom?

Thanks, Joe, and welcome to our fourth quarter and full-year fiscal 2020 earnings call, and thank you for joining us this morning. With COVID-19 on everyone's mind, our top priority at AZZ is ensuring employee health and safety as well as supporting our customers during these unprecedented times. I'd be remiss if I did not express my great appreciation for the way our employees, families and partners have stepped up during the COVID crisis. While fear and uncertainty, we're running rampant around the world, I am extremely proud of the way our folks stepped up and got crews home from countries that had closed, realigned processes to ensure safe operation and took care of each other during this pandemic. I also want to thank our auditors, Grant Thornton, for their diligent efforts under difficult remote circumstances. We are truly grateful to be here today presenting our results on time. For fiscal 2020, total revenues grew 14.5% versus prior year, reaching a record $1.06 billion, with Metal Coatings revenue growing 13% to $499 million, and Energy revenue growing 16% to $563 million. I will get into the details of this as we go along. We are pleased to have completed our 33rd consecutive year of profitability, while achieving strong double-digit growth in revenue, operating income and cash provided by operating activities for the 2020 fiscal year. Our Metal Coatings businesses grew operating income on an adjusted basis to $107 million, an increase of over 39% versus fiscal 2019. We have a strong cash flow business that, in fiscal 2020, generated $145 million of net cash provided by operating activities, an increase of almost 30% versus prior year. For fiscal 2020, excluding one-time expenses, we delivered adjusted EPS of $2.71 per diluted share, an increase of more than 38% as compared to the prior year. We successfully completed the divestiture of our Nuclear Logistics, Inc. business, which we call NLI, at the end of our fiscal year. As we previously communicated, upon completing our annual strategic review of our businesses, it became apparent that NLI was not a core business and it was better suited being part of another company that had a stronger commitment to the nuclear market. We also took the opportunity to take a non-cash impairment of the majority of WSI's nuclear intangibles due to lower demand for most of their major nuclear customers, and the continued challenging outlook for the nuclear industry in the U.S. Overall, sales growth was driven by increased volumes and higher selling prices in our Metal Coatings segment, along with four acquisitions within Metal Coatings. The growth in Energy was driven by an uptick in the sales of our electrical products, highlighted by switchgear and e-houses. Also contributing to the topline growth in Energy was successfully shipping large international high-voltage bus projects in China and the completion of large international refining turnaround projects. Operating income grew as a result of increased operating leverage across both the Metal Coatings and Energy segments. Metal Coatings margins improved for the year, predominantly in Galvanizing. But overall margins for the segment were impacted by Surface Technologies revenue mix at somewhat lower margins. We remain committed to our strategic growth plan for the Surface Technologies business and driving meaningful margin improvement post COVID-19 crisis. In this regard, we recently closed one plating site without affecting our customers by integrating those operations into the remaining North Texas sites. In Metal Coatings, for fiscal 2020, we posted record revenues of $499 million and improved operating margins by 260 basis points to 21.6% as compared to 19% for the previous year. For reference, our Galvanizing platform exceeded operating margin of 23% for the year, primarily due to higher volumes of steel processed, lower zinc costs and maintaining above-average industry pricing by offering quality workmanship and outstanding customer service. Growth in our Metal Coatings business came from continued organic growth in Galvanizing and acquisitions for both Galvanizing and Surface Technologies. We remain committed to delivering meaningful returns on the investments made in our Surface Technologies business. During the year, we completed three acquisitions in Surface Technologies, giving us a total of seven locations as we consolidated two nearby facilities into one. Our Galvabar product continues to expand its market presence as more DOTs approve the product spec for bridge and highway projects across the United States. Admittedly, this process has been slower-than-anticipated and now somewhat impacted by the COVID-related lockdowns. Our Energy segment for fiscal 2020 grew revenue by 16% to $563 million, while increasing adjusted operating income by 34% and operating margins by 110 basis points over the previous year. Revenue growth was a result of the increased demand for our switchgear and e-houses in our Electrical platform and large shipments to China for high-voltage bus products. The Industrial platform completed large refining turnaround projects during the year, with a particularly large project in Canada. Although our Industrial business had a strong year internationally, our crews have not been able to deploy from Poland due to the COVID travel restrictions. Prior to the COVID-19 pandemic, fiscal 2021 was developing into another solid year for us with substantial momentum in all four business groups. Working on several key acquisitions, positive signals from our customers and their end markets and continuing to invest in key growth opportunities. Since the initial COVID-19 lockdowns, all of our Metal Coatings plants remain open, and while our Galvanizing plants continue to operate at pre-pandemic levels, some are beginning to see declines caused by various states' COVID-19 restrictions. The consolidated impact thus far has been moderate, and we continue to assess operations daily by leveraging our investments in the digital galvanizing system. Uninterrupted manufacturing operations continue within our Electrical platform as our end markets for switchgear, e-houses and bus duct remain good, while hazardous-duty lighting and tubular products are seeing lower demand due to lower rig counts and less activity in the oil patch due to lower oil prices. Our industrial field services platform has seen a shift in work originally scheduled for Q1, move into the summer Q2 as well as Q3 as refineries defer turnarounds. Collectively, the industrial platform shops are open and working, but very few crews are being deployed during the normally busy spring season. While we were able to get our crews home from international projects where those countries went on lockdown after our crews had deployed, we have little field activity going on internationally at this time. That said, let me just take a moment now and discuss the recent COVID-19 pandemic a bit more. Again, at AZZ, employee health and safety remains our top priority. We will continue to follow the recommendations and guidelines provided by the CDC and World Health Organization. We have ratcheted up our best practices around protecting employees from the spread of COVID-19 while in the workplace and have had very few cases. This includes following physical distancing, handwashing, sanitization and disinfecting guidelines for work areas. Most of our shops have high bays with good air circulation, which reduces the chance for viral droplets to dwell. We have had very few employees test positive for the virus and almost all have now recovered. AZZ produces products and services that are critical to operating and maintaining infrastructure. Our products and services are counted on to meet the needs of critical infrastructure throughout the United States as well as around the globe. For Homeland Security's Cybersecurity and Infrastructure Security Agency, AZZ is classified as an essential business in supporting the critical infrastructure needs in the United States. All of our manufacturing facilities remain open around the world and we are not facing any craft labor shortages at this time. Due to uncertainty associated with the recent COVID-19 pandemic on many of our end markets, we are currently discontinuing our previously issued fiscal 2021 earnings or fully diluted share guidance range of $2.65 to $3.15 as well as sales guidance range of $970 million to $1.06 billion. At this time, neither the duration or depth of this disruption can be accurately estimated. We have adjusted capital spending plans, operating plans and headcount. We've implemented a salary freeze on executive compensation and have taken other mitigating actions in response to the crisis. Our low debt level, combined with our consistent ability to generate cash, gives us the confidence that we can manage both debt and liquidity satisfactorily throughout fiscal year 2021 and beyond. We will provide an update during our first quarter 2020 earnings release for the period ended May 31, 2020. For fiscal year 2021, AZZ will continue to execute on strategic growth objectives that drive shareholder value. At our core, we are a metal coatings company and a manufacturer of products and provider of services that are critical to sustaining infrastructure. Our commitment to superior customer service is unwavering, our ability to deliver strong cash generation is based on initiatives that drive operational excellence, manage costs, ensure pricing discipline and receivables collection within our operating platforms. We are confident that our businesses remain vital to improving and sustaining infrastructure so we will use this time of global pandemic to position our core businesses to emerge stronger and better equipped to provide sustainable profitability long into the future. With that said, I'll turn it over to Paul.

Thanks, Tom. For the fourth quarter of fiscal year 2020, we reported net revenue of $245.4 million, a $42.9 million increase or 21.2% greater than the fourth quarter of fiscal year 2019. Net income for the fourth quarter of fiscal 2020 was a negative $10.6 million on a reported basis as we recorded some non-cash charges including a loss on sale of the Nuclear Logistics business of $18.6 million and an impairment of $9.2 million on nuclear assets in the Specialty Welding business. We've been talking about the secular decline in the domestic nuclear business for a while and exiting that business supported our strategy of focusing on core businesses. We also recognized a $1.9 million one-time tax expense stemming from the original purchase price tax treatment of NLI that was recognized in the fourth quarter as well. Without those charges, our net income for the fourth quarter would have been $12.4 million, which is a 39.3% higher increase than the fourth quarter in the last fiscal year. So when we refer to adjusted items in this call, they're related to these items. Reported diluted EPS for the quarter was a loss of $0.41 per share, but came in at $0.47 per share on an adjusted basis, which would have been 38.2% higher than the prior year fourth quarter. For the full-year fiscal 2020, revenues were up 14.5% compared to prior year and finished at $1.06 billion. Adjusted gross margins improved to 22.5% from 21.4% on the year-over-year on better margin performance across the board. Operating profit for fiscal year 2020 on an adjusted basis grew from $77 million in the prior year to $107.1 million in the current year, representing a 39.1% increase and driving higher operating margins of 10.1%, 180 basis points higher than the 8.3% margin in the prior year. EBITDA for fiscal year 2020 on an adjusted basis grew from $128.2 million in the prior year to $156.3 million in the current year, representing a 21.9% increase over the prior year. For the full-year, cash flow from operations grew by $33.3 million or 29.9% in fiscal 2020 compared to the prior year on strong net income and better working capital performance. Combined with the cash in the fourth quarter from the sale of NLI, we were able to reduce our debt to a total of $203 million, our lowest level of debt in many years, creating a very low debt leverage metric. We were able to walk into the new fiscal year with a strong balance sheet, very flexible financing, a supportive set of bankers and ample liquidity to push through these unprecedented times. During the year, we invested in the business with four acquisitions, now operating as part of the Metal Coatings segment. We also deployed capital for organic spend, are still giving back capital to shareholders in the form of dividends and had a small amount of share repurchases, which are now suspended as we marshal our liquidity. Going forward, we have the ability to throttle back cash outflows, and have already taken steps to do so. With that, I'll turn it back to Tom. Tom?

Thank you, Paul. While we have discontinued our guidance, let me give you some key indicators that we are paying particular attention to. For the Metal Coatings segment's Galvanizing business, we are carefully tracking fabrication and construction activity, particularly through the normally active summer months. For Surface Technologies, we are primarily focused on determining when our top customers will be, either reopening their operations or getting back to normal production. For the Energy segment's Industrial group, we are seeking to determine when Europe and India will normalize their travel restrictions and how is the fall turnaround schedule filling in, in the U.S. For the Electrical group, we are carefully tracking proposal activity, particularly since we need proposals to turn to orders during the summer to provide sufficient backlog for many of our BUs for the balance of the year. For tubing and lighting, which make up a small portion of our Electrical group, we are looking for signs of life in rig activity but have already taken significant realignment actions. Finally, for corporate, we have very good cash management processes and have further tightened our oversight on cash flow indicators and customer credit. Post COVID-19 crisis, we remain committed to our growth strategy around Metal Coatings and achieving 21% to 23% operating margins, including a growing contribution from Surface Technologies. For Energy, we will continue to focus on our core businesses and seek to divest things that are not core to our future strategic interest. While most of our Energy BUs are experiencing a relatively small level of disruption due to the COVID crisis, we are taking this opportunity to right-size operations and align them with expected demand post crisis. We have run numerous models around downside and even severe downside scenarios and do not currently see any whereby we do not maintain a reasonable level of liquidity. The first quarter will be a difficult compare to Q1 of fiscal year 2020 due to realignment expenses, disruption to the spring turnaround season and the distractions associated with managing through the COVID-19 issues, but the diversity and scale of our Galvanizing operations are providing a very sustainable level of income and cash flow. Our Electrical businesses, for the most part, have good backlogs to work with. While our Industrial businesses carry a certain amount of fixed cost, the majority of their craft labor pool is variable. And finally, our cash management discipline, credit line with first tier banks, low debt levels and ability to react quickly to the changing market dynamic positions as well as during these uncertain times. With that, we'll open it up for questions.

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from John Franzreb of Sidoti & Company. Please go ahead.

Good morning, guys. Thanks for taking my question. I want to start with the backlog. It's down 27% year-over-year. Can you talk a little bit about what the order profile was like? I mean, I realized it's the end of February, that number is as of – so I'm kind of surprised it was down so much. What's happening there? And can you talk a little bit about how the order tempo has gone in the following two months, I mean, going two months into the first quarter, so we should have a good idea of what it's looking like as things progressed and as far as COVID is concerned?

Yes, a couple of things there, John. One, most of the backlog reduction is because of shipping those big Chinese high-voltage bus orders. As a matter of fact, I'd say the vast majority of it. We've had relatively normal bookings activity in the other Electrical businesses in terms of e-houses and switchgear. Obviously, we've been off in tubing and lighting, but particularly in tubing. When it comes to the bus businesses, we've been picking up a pretty good amount of service work in medium-voltage bus, which is an interesting dynamic and something that we had been more focused on. So it's good to see some of that happening. On the high-voltage bus side, we've been picking up some decent domestic U.S. orders, which tend to be more profitable. So obviously, it doesn't take as much of that backlog to as it would from China to make up the same level of profitability contribution. But it has been a little slower as we've gotten into the year, as you would expect. A lot of customers have, as we have, reduced the access to their facilities. So our sales folks have been in contact by email and telephone. Proposal activity has been good, but not a lot is closing because you just don't have teams getting together, project teams able to get together. But the indications – I won't say they're strong, but I'll say they're encouraging. We just like to be able to get in more direct contact with our customers to give us a better feel. That's why we say, as we kind of finish up this quarter and get into the summer, we're expecting and what we're hearing from customers, particularly on the transmission distribution, electric utility, solar side is that there's still pretty good project activity to look forward to.

Okay. Could you just give me a sense of when you talk about deferred turnaround jobs, I guess, I want – there's two pieces I'm curious about here. How much of deferred revenue are we talking about from Q1 into Q2 and Q3? And how much – have you experienced any cancellations, I guess, is the other part of the question. Could you just address those two issues, and then I'll get back into queue.

Yes, John. I don't think we've had any significant cancellations. Almost everything we've had is just deferrals. So we had some things that were teed up for the spring that have now either pushed into summer or fall. And I want to give you the context of that. As you know, normally, during the summer, you'd have refineries running all out to produce gasoline and jet fuel during the heavy vacation travel season. That obviously is not the way things look right now. And also in terms of utility outages, we're not sure. We're hearing there's going to continue to be activity. But when it comes to the turnarounds, we see some of this – we're being told that some is pushing into summer. Everything else is teeing up for what could be a really, really big fall. My caution there is that we only have so many project managers and so many project engineers. So we can only deploy while we can get access to more direct labor and craft labor. We can't replicate or replace the spring with the fall season. So we're looking at that fairly significant downside. We're not going to recover this whole spring season. We've got a handful of crews deployed in the U.S. and Canada and Brazil. We've got no crews deployed in Europe. But our plants are, which is a relatively small piece of the industrial revenue stream, but all of the operations are actually open and have orders that they're processing through the shops in Atlanta and in Poland. So it's just a real mixed bag. It's not going to be a real good year for industrial. So we've taken some realignment activities, and we'll look at some more as things play out, which is why I mentioned a good bit of what our fixed cost is hard to get at. We can get at the labor portion very easily because the vast majority of it is contract labor for the projects. So that's how we're managing that.

Okay. Thanks. I'll get back into queue. Thanks for taking my questions.

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

Hi guys. Good morning.

Good morning.

Congratulations on the good year. So I guess, first, I wanted to dig into Metal Coatings a bit more. And perhaps you could give us just some thoughts on the key end markets there and discuss a little bit where you think things might be a little bit more resilient and those markets that are more vulnerable. And I don't know if this is something that you've done, but if you look at the last kind of down cycle in the market on the Metal Coatings side, any things that are really notable in terms of how the business is different today versus then?

Yes. I think a couple of things. One, we came into the quarter – our Galvanizing folks, particularly, were pretty excited the first couple of weeks of March, and then realized they were in for a battle in the quarter. The good news is fabricators are active. They're telling us they've got plenty of backlog to work on. So while we've been slowed a little bit just with the increased cleanliness, sanitation, physical distancing, protocols, staggering shifts and breaks and things like that. It's slightly impacted our productivity. We're not down that much, maybe in the 5% to 10% range across Metal Coatings, more in the Surface Technology side because they've got a handful of large customers that are more in the trucking, airline, interiors, things like that, which are more impacted. So which is why we took more aggressive well, we haven't taken any realignment action in the Galvanizing side. We have taken some in Surface Technologies and closed a plant and took advantage of the CARES Act to furlough some folks or quite a few folks. And so we've taken those actions. So that's how we buffered the reduced volume impact in the first quarter. The outlook in terms of solar, construction, I mean, here in Texas, you can't drive two blocks without seeing a road construction crew or utility construction crew. And interestingly enough, petrochem, the chemical side, not the refinery side, our Galvanizing folks are seeing projects continuing there, and hearing that we need to stay ramped up. In terms of T&D, solar, very active and the fabricators, unlike the refiners and some of the utilities and EPCs are still seeing – our sales folks are still getting in to see them. We're not encouraging it too much, but we just have a lot more access and a lot more communication. So that's why we're feeling pretty good as far out as we can see. And so if we look at the last time we had a significant downturn, I think it was – and obviously, this one is more artificially driven. Last time, it was more market-driven, and so it's difficult to compare. But we were looking at 7% to 10% downside in revenue. Last time, we did not respond as quickly on the cost side. Also the last time, zinc costs were relatively high, and we were not able to get our prices up as quickly as we needed to. As we've noted this time, we're coming into this with strong value pricing and continually reducing zinc costs. So Metal Coatings, as we talk about, it's our backbone. I like all our core businesses, but when it comes to AZZ, we look at our – particularly, our Galvanizing folks are feeling better than, I would say, the vast majority of industrial folks out there.

Thanks. That's very helpful. And I appreciate the comments on pricing there. That was really the second topic I wanted to discuss. Obviously, in any sort of tough environment, pricing is one of the things that we start to see where we start to see competition. Are you experiencing any pricing competition yet on either the Energy side of the business? And it sounds like at this point, Metal Coatings is holding up, but curious if you're beginning to see any pockets of softness?

Yes. I mean, first, on the Metal Coatings side, I think we've done a great job of – with the digital galvanizing system, the communication, the information flow, the value we can bring to customers. Just one a side note, we didn't intend this when we developed DGS, but we've almost eliminated the human interaction element of receiving and shipping steel into most of our plants. So the vast majority of our plants are using DGS and we just don't have to have that human interaction with the truck drivers and delivery folks that we used to. And customers are appreciating that. So I think we're delivering the scale, the value, the service. When we survey customers, which we do regularly, we are just getting really, really high marks. And when we have a problem, it gets all the way up to the senior executives in that division very quickly, and they respond to it. So I think that's a differential versus three or four years ago. In Electrical, I won't say we're seeing very significant pricing issues in most places. It's the way we're positioned. We kind of have our customers wind out. Where we are probably seeing some, to some extent, would be in that medium-voltage bus sector. There's just not enough demand for the capacity in that particular piece. In the high-voltage, we've got the plant up in Medway. China is still working on the orders and backlog, and in Medway, though, it doesn't take a whole lot to keep them busy. So we have not seen very much pricing pressure. In oil patch, yes, we're seeing some pricing pressure. There's just way too much capacity out there. So fortunately, it's a small piece of our business. Does that help, Noelle?

It does. Great. Thank you so much. And I'll get back in queue. Thanks.

[Operator Instructions] And our next question comes from DeForest Hinman of Walthausen & Co. Please go ahead.

Hi. Thank you. Just some clarification and a couple of questions. On the down 5% to 10% range on the Galvanizing business, is that what we've experienced through March and April?

Yes. That's probably right in that range. And once again, heavier on the Surface Technology side, less so on the Galvanizing side.

And then any commentary on the April and March trends within the Energy business percentage-wise?

We're working off a backlog. So the shipments is more impacted by the scheduling of the backlog. So it's less about the demand at the moment other than in the oil patch side. So what we're really looking for is to fill in our capacity for the second half of the year. Activity is good and we're not concerned at this point about things, projects not closing, but we are wanting to be careful. So we're just being careful with that. And we'd like to see some of that close so that we know we've got that backlog to sustain the Electrical through the second half.

Okay. And then when we think about...

One good piece of news here is many customers have sent us letters and notified us that we're – our Electrical businesses are essential to them. So that bodes well. That says they're paying attention. They know that we need business, we need orders, so that we're not just essential, but that we're still sustainable, if you will.

Okay. And then on some of the turnaround portion of the Energy business with the spring turnarounds. Can you kind of give us some color in terms of the dollar amounts in terms of the change in terms of expectations? This is a seasonal business, but the crews aren't there, it sounds like a pretty sizable revenue impact. And if we're keeping them on payroll for some of the project managers, probably a pretty meaningful margin impact as well. Is that business – ballpark, is that down 50%, 60%, 70%, 80%? How big of an impact is that?

I think looking at – yes, it's down very significantly in the spring. The issue, though, is that's not going to carry through for the full-year, as I mentioned. Some of this, we have the unusual situation with projects pushing into the summer where we would normally have almost nothing going on at least in the Northern hemisphere. And so looking at this is to ballpark it, maybe – go ahead.

40% to 50%.

For the quarter?

For the quarter.

Okay. Go ahead.

Yes. So as we take a look at it, DeForest, it's for that one section of the business, 40%, maybe 50% down. But again, as Tom talked about, that's while this is getting pushed into the second or third quarter, it's a highly variable cost business because the craft labor that goes out in the field, we get mostly out of the union halls. And so there's a lot of variable cost in there. You're right, we do keep some of the supervisors and the managers, as Tom talked about, but we're able to variabilize that cost an awful lot. So if there's one section for the first quarter that is going to be affected, that's probably the biggest area in the whole company.

Okay. I think in the past conversation, we had said that, that Specialty Welding business does about $180 million of sales. So just – how much Specialty Welding was in, like, let's say, the first quarter of last year, revenue-wise.

We don't break those.

We don't break that out within Energy, but the $180 million for the year that you're using is probably not bad for the year.

Okay. And then you spent some time talking about working on some acquisitions. Is that on pause currently?

Yes. That's one. We usually buy through relational situations, particularly on the Metal Coatings side. And so our relational business development folks are, all two of them, are sidelined. They're in contact by phone and email and all that. So we're keeping the balls in the air, keeping them active, looking forward for the opportunity to get together face-to-face and get some things done. We don't see anything happening on that during the summer, just the way this thing is kind of stacking up. So we'd look to get active again in the fall. We are active on – I'm not going to specify what we're divesting at this point, but we are actively investigating a couple of divestitures as well. So we are keeping the M&A team busy. But yes, we got to get everything from onsite due diligence and the kinds of things that would normally transpire are deferred right now probably until the fall.

Okay. That's helpful. And can you update us in terms of how we're looking at the private placement notes moving into a short-term debt? We have an environment where liquidity is at a premium. Are we thinking about refinancing that? Or are we planning on rolling that into the revolver or something else? Can you just give us some color there?

Yes. DeForest, when we originally set that up and renewed it a few years ago with the bankers, the idea in mind was that we were going to utilize the unused capacity inside the revolving credit facility to take that up in about 10 months. And if need be, the other piece of that revolver that we have is an accordion feature that could take it up another $150 million if we need to. But at the moment, we've got plenty of liquidity in that revolving facility in the original plan and what we're going to stick with is the $125 million going into that.

Okay. That's helpful. And just so everyone understands, in terms of the priorities for free cash flow allocation. I think you answered it to some extent, but can you just walk us through the top three priorities for free cash flow?

Well, I'll give you a general outline. CapEx, of course, we're going to keep our people safe. We're going to keep our customers safe. We're going to keep our supplier safe. So we'll continue to do our safety CapEx. And we'll be tighter as the year goes on, but we'll keep an eye on a monthly basis on what's going on with cash flow in CapEx. In terms of dividends, you'll see that we just announced our dividend. That's going to be payable near the end of May. We believe that it's important to continue to demonstrate our belief in our liquidity and to take care of the shareholders. Share repos are suspended for now as we lay out, and as I said earlier. Tom answered you on acquisitions, and we will continue to marshal our cash after that.

Yes. The key time for us will be this summer as we start to get the indicators for how the fall and the second half is looking. And then we'll revisit our cash deployment.

Our next question comes from John Franzreb of Sidoti & Company. Please go ahead.

Yes. I want to get a better sense of how much oil and gas exposure you have in the two segments. Can you just walk us through how that finished maybe for last year?

Well, I think as we've said, the two oil patch-related businesses in the Energy segment are sub-10% in total of their revenues and obviously down from even that at this point. And reasonably profitable, but historically. In the Metal Coatings side, we're not that exposed to the oil patch. We're a little bit exposed to some here in Texas, where we have quite a few galvanizing and powder coating facilities. But it's still somewhat de minimis. It's 2% or 3% maybe. It's just not a big – that's not a big factor for us.

Okay. All right. And also, thinking back to the just reported numbers, revenues were up 21% and really roughly up 20% in both segments. But the gross margin was essentially flat. Why was that the case?

Gross margins were actually up a little bit than when you get to an adjusted basis.

Adjusted?

Well, yes. But those are non-cash charges that we took out and part of it – there was a small part of it.

Yes. Some of the non-cash impairment on the nuclear side hit gross margin. So we had some – some of these non-cash write-offs were above the gross margin line.

Okay. I thought I kind of pulled that out, but all right. Especially with your comments on pricing, I was kind of surprised that you wouldn't get better gross margin leverage. I was just wondering if I was missing something else there.

On the Galvanizing side, the gross margins are improved. On the Surface Technology side, because we started to experience that lower volume, they got impacted as we came into January. They were already – even though COVID-19 had not been too widely discussed, they were already seeing customers pull back. So they lost some of their absorption during a little in the last couple of months of the fiscal year. So but yes, Galvanizing was strong and continued strong throughout the year.

Yes, there might have been a little bit of – there was a little bit of mix too with the Chinese stuff coming through.

On the Energy side.

Yes.

Okay. And when you talk about realignment that you're going to do within the firm, can you just provide some more color, maybe I missed it. What are you realigning exactly?

Well, what we're doing right now is just the first quarter. So you think about we don't have that many turnarounds going on. So the industrial side has taken some realignment actions. And some are what we would call more permanent reductions in force. But quite a few are just furloughs. So they're being furloughed until August 1, where the CARES Act money runs out. So giving folks an opportunity to go take care of themselves, collect unemployment, collect the $600 a week CARES Act money. So that's happened. Relatively low-cost to us. Pretty much pays for itself in the first half of the year, if not more. Some of that will continue to be a benefit as the year goes on because we will, like I said, for the more permanent riffs. One of the things we are doing and now that we've got the books closed, and we'll be spending more time looking at what is the total impact of all of these realignment actions and things that we're looking at. And I just needed to get our Chief Accounting Officer and his team off of closing the books, and then we'll dig into this and try and if we can, frame it better than, obviously, we would can talk about that with more specificity. Almost everything we're doing right now has a payback during the first half of the year, so pays for itself within the first two quarters, and it definitely has a benefit for the full-year. In the oil patch-related businesses, we did in fact shuttered a site. Skeleton crew to keep it safe, maintain it, ship things out of inventory. We have not closed anything other than the one site in Surface Technologies where we closed it and integrated all of its operations into the other sites that we have in North Texas. We've riffed or furloughed – I'm going to scope this in real broad terms just because we still have actions under way, but talking 150, 200 people. And we will continue to adjust capacity as we have a better line of sight to demand in each one of the business units. And including that our Galvanizing folks are great at flexing their capacity up and down as they see demand day-to-day, week-to-week. So those are the kind of actions we're talking about.

Okay. And regarding China and maybe any other operations you have in the Asia Pacific region. It's reopening. How has that impacted the revenue? And what are your thoughts about that going into the first quarter, that whole side of the world?

Yes. We didn't know why things had slowed up in China in December or in that fourth quarter for our bus business. Clearly, there were some underlying reasons why it had slowed up in which we became aware of, I think, in late February, early March. So they're kind of back to business as usual. We had a couple of lines energized on one of the projects, which makes for nice videos and things like that. Pretty much normal, almost everybody back to work in our China offices and our service people. So it's back to normal and so we'll continue doing two things. One, continuing to ship that backlog as we are now in the first quarter. We lost a little bit of traction early in the quarter. But it's pretty much normal now and going forward. And then as well as doing the installation and service work, which is what we have the technicians in China to do.

Great. Thanks for the color. I appreciate that.

[Operator Instructions] And our next question will come from Bill Baldwin of Baldwin Anthony Securities. Please go ahead.

Thank you, and good morning Tom and Paul.

Hey Bill.

Could you kind of indicate what the important drivers are to your medium voltage bus business? What are the drivers of that business? Things you need to see to see a pickup in that business?

Yes. I think two different things because they're two different animals. The high-voltage, you're looking at power gen projects in that kind of space. So you either need expansion or some new project activity. Or replacing old high-voltage bus lines or replacing old technology. So that tends to be – for us, that tends to be up in the Northeast. It's an expensive solution, the high-voltage side. So it tends to be Canada and up in the Northeast. And over in China, it's on those big hydro projects, so in vertical applications. In the medium-voltage, we need substations. We also need some power plant either revamps or new construction, which is why we've pivoted to the service work because we can go out and replace existing lines or repair and upgrade existing lines. So to be honest, we don't see much that's going to make that real attractive this year. So we have taken some – sadly, during these times, we had to take some reductions in force and furloughs to align the capacity. We just don't see much out there during the first half and really – that's about it. Right now, that's our line of sight for the first half of this year.

Tom, do you have a medium-voltage bus business in Europe and/or the Middle East? I know you had a joint venture operation at one-time that you were talking about getting up and running, I think, over in the Middle East. I believe it was based around the bus business.

It is. It's mostly high-voltage bus in Saudi Arabia. We have a joint venture there. There's a facility under construction. We have had medium-voltage bus orders there, particularly when they have emergencies. So we still have some activity. We still have some ongoing efforts going on, and our focus is on finishing up the joint venture construction of the facility so that we can service that within the region. And that will service more than just Saudi Arabia, but it'll service the Middle East region. And so you're absolutely right, Bill. We don't talk about it that much because it's been relatively quiet. And things have been moving slow in the Kingdom of Saudi Arabia in terms of getting things permitted and finished out. But we do look forward to that as things normalize.

Well, that's right. I mean they got a major industrialization program, it sounds like, going on over there with all that money they raised. So perhaps that will impact your business in a positive manner, intermediate term, long-term.

No. You're on it, Bill. That's a good one. We probably don't talk about it as much because it's, not that it's been inactive, it's just been in the background.

Now is Europe medium-voltage bus? Is that exported out of the U.S.? Or do you have facilities over there that manufacture those products?

No. We don't have anything in Europe. We export from here. That's been – it's pretty inactive right now, just given the value of the dollar to the euro and the shipping costs. So that's really been slow. And of course, right now, they're all – most of those countries are shut down due to COVID lockdowns.

Well, as they get up and running again, looking at those markets intermediate to longer term, does it make sense for you to have manufacturing facilities somewhere in Europe to serve that market?

Well, we've got the industrial facilities in the Netherlands and Poland. So we always look at that. Every time we look at our strategies, we take a look at, okay, where have we already got boots on the ground, so to speak, in infrastructure, and we prefer to build around those. So as we get to our strategic review process this fall that it's always a line item that we end up discussing. So we'll have our marketing folks take a look at how the market is stacking up over there.

Okay. Thanks for your time

All right, Bill.

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

Thank you, and thank you all for joining us. I would like to just give a shout out of appreciation to all of our corporate and field accounting folks. It's nice to actually report on time and have a nice clean close. So I thank them. And we'll just continue to focus on reporting our quarters, communicating as much as we can. If we need to, in between quarters because we are in quickly changing environment because of the COVID-19 pandemic. So I thank you all for joining us during these crazy times and look forward to talking to you, if not sooner, at least at the end of May or after our first quarter closing. Thank you.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.