Good morning, ladies and gentlemen, and welcome to the AZZ Inc. Third Quarter, Fourth Quarter and 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. 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 fourth quarter and fiscal year 2018 ended February 28, 2018. As Denise indicated, my name is Joe Dorame. I’m with Lytham Partners and we are the Investor Relations consulting firm for AZZ Inc. 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’s a slide presentation for today’s call, which can be found on AZZ’s Investor Relations page 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 hot-dip galvanizing markets; prices and raw material costs, including zinc and natural gas, which are used in hot-dip galvanizing process; changes in the political stability and economic conditions of the various markets 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. Good morning and thank you for joining our year-end fiscal 2018 earnings call. Just a heads up, I’m going to be on this Page 3 for a while. A lot of my comments are going to be addressed to it, so just want to let you all know. It was a challenging year compounded by financial restatement efforts over the past several months. Unfortunately, the situation limited our ability to communicate publicly since our second quarter earnings call. So for today’s call, we have published a presentation to help explain the complexity of issues we dealt with during fiscal year 2018, and also that further supports the guidance for fiscal year 2019 that we are issuing today. We are glad to have the year, as well as the restatement behind us. During this quiet period, we have worked to ensure our businesses hit the ground running coming into fiscal year 2019. We did navigate a wide range of challenges during the year, many of which were market-related, but some that were operational. Refinery turnarounds last spring were light, but this was dramatically compounded by the impact of Hurricane Harvey on the fall turnaround season. We are a soft nuclear power generation market turned into in effect of hurricane level impact on our businesses once Westinghouse Electric declared bankruptcy in March. During the third quarter, the magnitude of the impact going into the fourth quarter as well became more evident. The bankruptcy itself negatively impacted several businesses within our Energy segment, but then the VC Summer Nuclear construction project in South Carolina was cancelled in July of 2017. Additionally, the Vogtle nuclear project in Georgia changed engineering firms away from Westinghouse, which resulted in some order cancellations. Also, during Q3, our partner for Water Jet Peening, Mitsubishi Nuclear decided…

Thanks, Tom. Turning to Page 9. For the full fiscal year 2018, we reported net revenue of $810.4 million, which is a $53.1 million decrease, or 6.2% less than fiscal year 2017. Net income for fiscal 2018 is $45.2 million, a decrease of $16.1 million, or 26.3% less than the prior year. Reported diluted EPS fell 26.4% to $1.73 on a GAAP reported basis, compared to $2.35 in the prior year, a drop of 26.4%. Fiscal 2018 gross margins fell to 19.8% from 23.8% on a year-over-year basis, primarily as revenue from the Energy segment fell during the year and overhead costs remained, while these costs rose in the Metal Coatings segment. SG&A finished at 13.8% of total sales, compared to 12.3% in the prior year on one-time non-recurring costs and slightly higher corporate costs, driving the fiscal operating margin for the year of 6.0%, compared to 11.5% in the prior year. Our effective tax rate for the year was negative 46.2%, compared to last year’s rate of 28.2%. As we booked a net gain of $23.7 million mostly from reevaluation of the deferred tax liabilities under the new Tax Cuts and Jobs Act of 2017 passed in December, the net effect of the cut was to add $0.91 to our earnings per share for the year. Without the rate, we would estimate we would have had raised around 30%-ish for fiscal 2018. On Page 10, as you can see, there are many adjustments fee income during the year. Although the Tax Act created a $0.91 benefit for the year, there were several one-time non-recurring charges totaling about $0.72 of negative impact to the year. All told, these one-time has created total of about $0.38 of benefits to the full-year. Fully applied to the GAAP number of $1.73 for the…

Thanks, Paul. On page 15, we’re cautiously optimistic about fiscal 2019 and have started off in Q1, even a little better than we had expected to. Our guidance of $900 million to $960 million in revenue and $1.75 to $2.25 in EPS is a significant improvement from fiscal 2018. With the restatement now behind us, we do need to regain momentum and rebuild confidence in some of our leadership teams. We believe Metal Coatings will have stronger revenue due to inflation, our stronger selling effort and improving markets. We need to continue to focus the Metal Coatings team on driving operational excellence initiatives, enhance customer focus to generate the cultural and financial impact necessary to grow market share and expand margins. For the industrial platform where we have very stable and capable leadership, we’re seeing stronger turnaround activity and very active international markets that should help us offset the weak nuclear market. The Electrical enclosure market has improved. New management is quickly gaining traction, which gives us confidence in our ability to execute to their fiscal year 2019 plans. The Electrical platform overall will have a full-year of benefit from the Powergrid and Lectrus acquisitions. On page 16, while we have started the first quarter well, we’re still climbing out of the tough year, including the distractions of the restatement. As we look to adjust guidance, we’re looking at the following segments. For the industrial platform, we want the opportunities we’re currently bidding on for the fall turnaround and outage season to convert into orders or firm commitments. We’ll be looking for the Metal Coatings team to execute their critical initiatives to their commitments early in the year and to push price to offset the inflationary impacts of zinc and direct labor. We’ll be looking to see recruiting and retention, particularly in Metal Coatings improved. Additionally, Ken Lavelle, President and General Manager of the Electrical Systems Group has hired several new leaders in his group. And we need to ensure they sustain a positive traction they’ve gained over the past couple of months over the remainder of the year. So while we believe we have taken the steps necessary to effectively deal with the risk within our control, we’re carefully monitoring the external risk indicators. And with that, we’ll open it up for questions.

Thank you. We’ll now begin the question-and-answer session [Operator Instructions] And the first question will come from John Franzreb of Sidoti & Company. Please go ahead.

Good morning, Tom. Paul, nice to have you guys back.

Hi, John.

Thank you, John.

Couple of questions, I guess, I’m going to start with the guidance. It’s actually better than expected on the top line. So I want to go through a little bit in detail yes. Firstly, how much of acquisition-related revenue is built into your top line guidance? And while I’m talking about revenue, should we expect a similar normal distribution on that revenue being heavily weighted in Q1 and Q3?

Yes. I think the – we did, because we have closed on the Lectrus deal in March. We have embedded that in our guidance, as well as rock as Rogers Galvanizing. We don’t have other anticipated acquisitions embedded in that at this point. So we’re able to do in our normal galvanizing type acquisitions, thePowder Coatingwould be incremental to this. I’m looking at Paul to answer the question on Q1 and Q3.

Yes. So, none of this is going to be relatively industrial. So...

Yes.

…we’re not going to look for that sort of a cyclical turn on 1 and 3. The galvanizing is little flatter than that, probably down a little bit in Q4 reduction, especially Metal Coatings business. So, look, the incremental based on this, I believe is about 25ish, there’s a little – did you hear more John and yes, you would look for pretty fair margins out of these businesses off the bat. We’re already happy with the electric system. We’re very happy with what we’re seeing out of the spinner up in Illinois, which is Rogers Brothers. And so, yes, we have pretty comparable margins.

Perfect, okay. And on the gross margin profile on the electrical side of the business. Is there contracts that is still working through that has lower margins that are working against you in the near-term. Can you kind of talk about or maybe is it you’re – you mentioned a competitive landscape was a problem. When does the margin profile come closer to historic trends on that business?

Okay, good. Good question, because we’re – that’s part of what’s going on with that margin ramp up is that, on the Energy side, especially Electrical, there were some jobs taken that were at some challenging margins and that’s really where the market was at that point. We saw a market – the challenging market last year as there was lot of capacity in certain areas, especially enclosures. We – you’ll probably see those starting to turn up, I’ll say, towards the end of the year, probably third quarter, and you’ll see them ramp for the next – well, probably into 2019. I’m not going to give you the exact ramp dimensions there, but yes, you’re calling it right, which is they’re lower right now. And that’s part of what you’re seeing is the dynamic between the higher revenue and – I mean, a bit lower margin than you might expect on the guidance. We also have some larger ones that we’ve taken in China, and we’ll see how those come out with the margins, and I think that covers it pretty much.

Yes. I think, that is one of things on the China’s stuff. We’re in final negotiations on a couple of large projects and those aren’t in our backlog yet, but we do have a good handle on what the margins would look like and assume and we’re successful as we anticipate. So once again, those are some of the things that have made us a little hesitant about embedding that in our guidance as it currently stands.

Okay. And one last question, and I’ll get back into queue. What kind of tax rate are you assuming in your guidance?

We’re going to about 23.5.

23.5. Okay, guys. Thanks, I’ll get back in.

All right.

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

Hi, guys, good morning.

Good morning.

Good morning.

So first of all, a bit of a housekeeping question. Paul, you talked about the Energy margins and the Metal Coatings margins being 0.4% and 21.7%, respectively. Do you have an adjusted number there, because it does look like some of those one-time charges fell into the segment allocations?

Yes, I do actually – let me grab those right. Let me answer that in just a second. So I’m just going to hand that to him.

Yes.

You can ask next question.

Sure. So basically, part of why I was asking that question is, first off, we started with Metal Coatings. You guys called out a number of factors that sort of impacted the margins year-over-year, obviously, price cost across labor. And I think to some extent internal investments and some of what maybe went on in terms of some of these changes around management perhaps there’s a little bit of a cost there. But can you help us understand kind of how those impacted margins year-over-year on – in terms of order of magnitude? And then just give us some thoughts on how to think about margins as we move into 2019, given that with a lag associated with zinc, it looks like that should be a drag in the at least first couple of quarters of the year, but maybe you should start to see a relief as you get into the latter part of the year?

Yes. I – that’s a good set of questions there. I think, as we look at it and I’ll try to put it in context. Yes, we’re – we do believe we’re – it’s going to take us a little while to get back to – we’re still committed to getting back to, hopefully, close to 25%, that’s going to take us a while. We would hope to be in the 21%, 22% range this year based on what we viewed as kind of a dismal fourth quarter, where we did get with the higher zinc cost as it was flowing through our kettles and it moved too slowly on price. And then the factor that I think has been impacted this a little longer than anybody realized was the inflation very effective over the tight labor market. So we’ve had to beep up our recruiting and retention programs, particularly around direct labor graph. So that, that all takes, as we’re now in the first quarter, we feel like those things are – have taken root. So that you’ll see us bounce back to the more normal 21%, 22% and then we’ll build off of that as the year goes on, but it’s going to take us most of the year to really see that acceleration beyond that.

Okay. And then, Ken, – that was helpful. Sorry, Paul.

Okay.

No. So you’re right. That had actually true pulling up the …

Okay.

…the margin right now.

Yes. So that was helpful in understanding how to think about the coatings business margin moving forward. Can you kind of give us some thoughts on energy as well just – I mean, I know you’ve kind of discussed that in the first question – with the first question, but kind of how to think about the cadence of margins as we move through the year?

Yes. I think as we look at it, if you take the industrial pieces of energy, usually, we’re heavy into the spring turnaround season..

Right.

So their margins bump up nicely and then, of course, their best quarter is usually the third quarter. So that, that lumpiness that is caused by the industrial piece. The electrical – it’s going to take us a little while. We – we’re very pleased with adding that third facility with Lectrus on the enclosure side, but we still got some backlog to work through during the first-half of the year and we’re doing some pretty aggressive things to integrate those three plants. So that we can leverage our overhead structure of the back office and drag on operational excellence and procurement across the all three sites. So, once again, that kind of stacks up towards the latter-half of the year, and that, that has a – right now that’s part of their margin drag. Powergrid. and our Fulton, switchgear business, they’ve got a decent backlog and it’s okay backlog, we’ve just got to perform to it. Interestingly enough, two of our bright spots although relatively small are the lighting and tubular business, which have gotten out of the blocks really well and also lighting, particularly, in spite of the Hurricane did really well last year. So those differences we’re feeling they’re in full swing right now. Then talking about high voltage bus, what we’re really looking for is to get these Chinese orders in, so that we’ve got those $4 million backlog and – but it’ll take a while. We’ve been doing some engineering work on it, but we’ve got to ramp up the production. So kind of, once again, back-end loaded. On the medium voltage bus, the main difference there is, they won’t have the negative impacts of their projects that are related to VC summer and Vogtle. So…

Great.

…so their margins were stabilized. What we’re working on there is to fill that gap in their backlog from that. So, long answer to say really by third quarter, we ought to be seeing that ramp back to something that’s more normal work.

Okay. Thanks. Yes.

Yes, the answer is on the other side. It looks like for the full-year, the Energy would be more like around 3.2% and Metal Coatings wouldn’t change for us maybe [indiscernible]. So as you can see, the vast majority of the charges were overrun on the Energy sides.

Yes. Okay, perfect. That’s helpful. All right. And then just given these headwinds that you’ve experienced in nuclear over the past year. Can you give us some sense of just how you’re thinking about your remaining nuclear exposure and sort of the percentage of revenues exposed to that market? And then when you look at that exposure, whether it’s in the best product or at NOI, how are you thinking about that remaining exposure, which pieces are maybe more vulnerable to this continued decline in the market versus which pieces are a little bit more stable?

Yes. I think, whereas if you go back and just talking about kind of the general exposure, we would see – we – we’re not really chasing anything on the nuclear side on the electrical piece other than light and switchgear stuff like that. So now this falls almost purely to the industrial platform piece. And was – we don’t want to beat it up too much, but we had a lot of their growth opportunities going forward out of the Water Jet Peening initiatives. Those were $10 million, $12 million projects and we were structured to do a couple of them a year. So that’s a gap, we – that we no longer count on.

Okay.

So, maybe as I know the nuclear turnarounds, it’s really, they’re chasing some international stuff, the domestic piece. It may only be about $15 million or so for us out of what used to be $40 million to $50 million.

Great.

And if you look at NOI, we’ve really structured it from $40 million to $50 million. And we think that’s sustainable, because they really are in the after-market, supplying components. So we think we’ve got them about where they’re going to be able to sustain now that probably say on the lower-end of $40 million to $45 million is where they’re going to be able to sustain it. Hopefully, that gives you the color you’re looking for.

Yes, it does. And then one last question for me. How should we think about CapEx on a go-forward basis?

I think it should be here more than prior year, we posted just short of 30 last year. We’re probably set for 30 to 35. And we’ll be careful about during the year and keep a very close eye on it goes up and down. And meaning that if the market does demand in certain areas like that Tom mentioned Water jet Peening, if we do need a second plant this year, we can certainly deploy that. But I would say, we’ve been very measured and careful in the last year with the CapEx and certainly deployed enough. And as we’ve said in the past, our maintenance is 20, 25 a share, so pretty tight there.

And I just want to add to that. I’d say, keep in mind, our GalvaBar plants about half of what our full-blown galvanizing plant will be. So if we did do that, it would all hit this year just we get it rolling towards the end. Two, we do think we’ve found some procurement leverage on our CapEx side, particularly around the maintenance capital for metal coatings. So we’re feeling a little more confident that, we can get more bang for the buck, so to speak, given our emphasis now on how we buy a lot of those capital items.

Got it. Thanks.

Oh, did I say water jet peening initiatives with GalvaBar?

Yes, GalvaBar, sorry.

Okay, thanks.

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

Good morning, Tom and Paul.

Good morning, Jon.

Tom, you talked a little obviously, there are some industry headwinds and so on. But you also spoke about some internal changes, sales organization changes and exit, I guess, ops or changes and so on. Were those – how disruptive were those changes? And do you have all the changes that you’re contemplating in place? And do you expect some more sort of organizational changes in 2018?

Yes, we – couple of things. One, the disruption occurred last year as we were scrambling trying to respond to some of the market conditions and not getting the traction on in procurement and operational excellence. I think, I’m sort of looking at a good part of the metal coatings team and I’m very confident that the changes are behind us that they’ve already gained traction quickly and really drive a discipline around those organizational changes and improving processes. And we think we see a lot of upside now. And as I mentioned, we did take out about $2 million of overhead expense in those fairly senior positions. And with minimal disruption, far less than maybe even I was concerned about and they’re nodding at me. So, I feel good about that. On the electrical side, Ken Lavelle had been in place as a consultant, so it was a pretty smooth transition. And – but as he has made changes in the plants, online metal coatings where the vast majority of matter of fact all the promotions, all the positions were filled with internal candidates that had been in our succession planning process. On the electrical side, we had to bring in some outside folks. And so, there’s always the risk that we selected. We like to think we all. But it – I do feel good about, Ken Lavelle, who is well known for 25 years and nobody is capable of. And he’s surrounded himself with a couple of folks that he used to work with, or at least one and actually a couple. So he’s got more of a mixed bag. It’s partly the folks he knows probably folks that come in from the outside. I feel good about the changes. The disruption was in changing that some of those business level general managers. But they completed two acquisitions in the year, and I don’t think we could have done that without a solid team that was in place. And I think they’ll continue to improve, which is also why I – I’m – as I told in awhile I’m more optimistic about the latter-half of year, as all these things really sink and gain traction.

Okay. Then secondly, when you look at the turnarounds, the upcoming turnaround season, can you talk a little bit about the number of turnarounds that you may be looking at, the scope and size of the turnaround and maybe the margin opportunity in the turnarounds versus maybe last year or the year before?

Yes. I think, compared to last year, we had a – we started off with a soft spring season and without one of the large mega international opportunities, so it was a soft spring as you all know coming out of the gate for us. We’re 2.5 months into the first quarter, so we can’t hide the fact. We know how it’s going and it’s going well. We picked up a couple of large international jobs. Rich gives us some tailwinds and we perform well on those. I’m a little hesitant to talk about margins. I know what our customers getting upset that we think we’re doing something to them back. The international jobs going to be a little more profitable in the domestic, because there’s more risk to the world as we deploy resources out of Poland, out of Brazil, out of Canada, out of the U.S. In the domestic refinery turnarounds, there was a nice pick up as they had delayed those during – because of the hurricane. So we got a nice pickup, and they tend to be nicely larger than a lot of the small emerging jobs. So – and we – and yes, we picked up some nice emerging jobs in the quarter as well. Our hesitancy is, we thought we had – we were seeing good activity for the fall before and we’ve just become a little more conservative in our outlook. So we’re going to wait and see those either turn into orders, engineering work or firm thermal commitments, because we were still getting firm commitments on the spring as late as February. So you could look – we could look to August before we’re really able to commit firmly about how the fall seasons look.

Okay, okay. One last question, Paul, the restatement process cost a lot of money on non-recurring expenses, so to speak?

No.

Okay.

They need to be so flipping to say no. But the – I’d say, the vast majority there were a couple of small pieces here and there, but the vast majority of it was once done internally and I have talked to the team they did it.

Okay. Thank you, Paul.

Yes, I’d say, I’d reinforce that, it’s our internal team pretty much worked around the clock to get a lot of this done. And so we’re very staring what outside consultants. We used them where we needed – where we needed some knowledge and input, but not to do with the majority of the work.

Okay. All right. Thank you.

You’re welcome.

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

Yes. I guess, I’m struggling with the margins in the Metal Coatings business. 2018 was 21.7%, 2017 was 21%, but you had the spike in zinc that hurt the 2018 numbers. Now when I look at the zinc charts here, the worst was about – I don’t know 1.63, 1.64 in January and February. So I’m wondering the timing of how you incurred those costs, you incurred them quickly, or is Q1 of 2019 when you’re going to hit the bulk of those costs, or is there some kind of supply agreement that you don’t get hit with the most. Can you kind of walk me through how should we be thinking about, especially now we’re down to $1. 38 in zinc?

Yes.

I just want to understand how that flows through? When is the worst of it and when do you start to see any benefits?

Yes, I know we use FICO counting on that – but the – so I think a couple of points I want to make. One, in past run ups, we were able to have committed a good bit of the zinc at lower prices that flow through into our kettles as much as six months worth of inventory in our kettles as we saw the run up. So we were actually as we were able to push price as back in those 25%, 26%, 27% margin days. This time for a variety of reasons, we didn’t get a good buy end point to do that. We did at a certain point lock-in about four months worth of demand, but not a real favorable costs just to kind of normalized cost. So I think, I want to say in Q4, we had about $1.30 flowing through our kettles. So we’d seen a good bit of that impact in the fourth quarter. We were able to push prices as we came into Q1. Just a general inflationary attitude, it’s – there’s a lot of our customers have seen and been exposed to some of the pushing price was a little easier, as well as I do think the structure we have in place is able to – sell value better than we were before. So this cycle, I think, we get back to fairly normal – not the fairly normal 25% margins we used to see, but to fairly normal 21%, 22% margins we – that we see in the last – most of the last six or seven quarters.

Right away here in Q1?

Yes, right, and we got two months behind us. So…

Great.

…we sort of we know where we’re at.

Okay. And for the balance of the year as you know, as the zinc prices have been coming down, would you expect the margin profile to improve?

I’m going to be a little across this, because I see – we’re getting couple of more customers on the loans.

All right.

But we love to say that we’re providing a value to be able to hold the prices that we put out there. And if we’re able to do that, we’ll see some margin appreciation as the year goes on.

Okay.

And we do have a lot more focus on how we buy and how we move between our facilities. And so in terms of premiums and transportation costs and things like that, I think, we’re already doing a better job and I feel confident that we’ll continue to do that.

Okay. Thanks for that clarity. I appreciate it.

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.

I don’t have a whole lot. I think I had done a lot of talking on this call. And it’s upward, we’ve wrapped up. I want to thank you all for joining us. Hopefully, you liked the first presentation we’ve done since Paul and I’ve been here. And hopefully, that provide some color and gave you some specific facts that were helpful. I look forward a lot to just in a few weeks having our first quarter earnings call and hopefully, been able to demonstrate that we’re back on track and putting up the kind of numbers that we would feel a lot better with. So with that, I thank you all, and have a good rest of the day.

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