Good day, and welcome to the AZZ, Inc. Third Quarter Fiscal Year 2020 Financial Results Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, today’s event is being recorded. I would now like to turn the conference over to Joe Dorame. Please proceed.

Thank you, Sarah. Good morning and thank you for joining us today to review the financial results of AZZ Inc. for the third quarter of fiscal year 2020 ended November 30, 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 the 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 to Mr. Tom Ferguson, Chief Executive Officer of AZZ. Tom?

Thank you, Joe. Welcome to our third quarter fiscal year 2020 earnings call. Thank you for joining us this morning. We are pleased with the continued strong performance of our business groups in fiscal year 2020 as a direct result of successfully implementing our strategic growth initiatives. We generated 22% revenue growth and 43% net income growth in the third quarter versus the prior year. Operating margins improved overall to 11.5% with strong performance by both business segments. Our energy segment experienced a strong fall turnaround season and continued shipping to Chinese high voltage bus orders. Our energy team did a good job of focusing on operational execution for improved margins. Our bookings in the third quarter of $264 million were up 25% year-over-year, driven by improving market conditions in welding solutions, electrical enclosures, and domestic high voltage bus. We continue to build on the positive momentum in the energy segment with strong third quarter bookings of $134 million, an increase of 32% versus last year. The Metal Coatings Segment experienced increased demand in the solar and petrochemical markets and contribution from the acquisitions completed earlier this year, resulting in improved volumes across most of our regions. We experienced continued revenue growth from our Surface Technologies Group, which now includes eight powder coating and plating plants. On a consolidated basis, we were able to drive operating income up over 47% to $33.4 million versus the third quarter of last year. The metal coating segment, revenue increased over 20% and operating income of $27.3 million was up 49% versus the prior year. Operating margins increased to 21.1% compared to 17% in the third quarter of fiscal year 2019. This improvement was due to lower zinc costs flowing through our kettles value pricing and the contribution from our emphasis on operational improvement, offset somewhat by the growing impact from Surface Technologies, which currently operates at a lower contribution margin level. The Metal Coatings team improved operational efficiencies as usage of DGS, which is our Digital Galvanizing System continues to be implemented throughout all of our galvanizing plants. We remain the industry leader in North America with 41 galvanizing plants. We're pleased to be gaining meaningful traction in our new Surface Technology businesses, powder coating, plating, and Galvanized Rebar. This gives us growing confidence that our investments will yield positive financial performance in the years to come. Overall, our energy segment had a very good quarter with operating income of $17.4 million, an increase of 51% over the prior year, demonstrating great leverage on the 23% revenue growth. Our energy segment’s electrical platform continues to focus on operational execution and improving customer service. While some of their electrical markets particularly for electrical enclosures are improving compared to last year, our lighting and tubular products are seeing reduced demand due to slower upstream production activity. During the quarter, we booked a nice domestic order for high voltage bus. We are especially pleased with the demand for specialty welding solutions both domestically and internationally, particularly as our investments in Europe, Brazil, and Canada have positioned us to participate in these opportunities and reduced our dependence on the U.S. nuclear market. Our upgraded Welding Technology is earning us large new opportunities, and our teams are performing extremely well, which will help us maintain our differentiation in the downstream markets. Just to recap how we're doing year to date, overall our revenue was up 12.7% and net income up 37% versus the prior year. Our Metal Coatings segment has completed four acquisitions resulting in the addition of one Galvanizing plant and five Surface Technology plants. Year-to-date, our metal coatings revenue is up 11% and operating income up 30% versus the prior year, driven by both organic and inorganic growth. Our energy segment’s revenue is up 14% and operating income up 33% versus the prior year, driven by growth at welding solutions and China high voltage bus projects. We will continue to focus on AZZ’s core strengths of customer service, productivity, and operational excellence. Looking forward, we're maintaining our previously issued fiscal 2020 guidance of earnings per share in the range of $2.60 to $2.90 per diluted share, and annual sales in the range of $1,020 million to $1,060 million. And with that, I'll turn it over to Paul Fehlman. Paul?

Thanks, Tom. For the third quarter of fiscal year 2020, we reported net revenue of $291.1 million, a $51.6 million increase, or 21.6% greater than the third quarter of fiscal year 2019. Net income for the third quarter of fiscal 2020 was $22 million, an increase of $6.6 million or 43.1% greater than the prior year third quarter. Reported diluted EPS rose 42.4% to $0.84, compared to $0.59 in the prior year third quarter. Third quarter fiscal 2020 gross margins improved to 23.1% from 20.8% on a year-over-year basis, primarily on strong margin performance in the Metal Coating segment. Operating profit for Q3 fiscal year 2020 grew from $22.8 million in the prior year to $33.4 million in the current year, representing a 46.8% increase. Operating margins of 11.5% increased 200 basis points compared to 9.5% in the prior year. EBITDA for Q3 fiscal 2020 increased 34.4% to $46.8 million compared to the third quarter of fiscal year 2019. As for our year-to-date results, year-to-date through the third quarter of fiscal 2020 we reported net revenue of $816.5 million, a $91.9 million increase or 12.7% greater than the same period in fiscal year 2019. Net income for year-to-date in the third quarter of fiscal 2020 was $58.9 million, which was an increase of $16.5 million, or 39% greater than the same period in fiscal 2019. Reported diluted EPS rose 38.3% to $2.24 compared to $1.62 in the same period of fiscal 2019. Year-to-date fiscal 2020 gross margins improved to 22.8% from 21.4% on the year-over-year basis while operating profit for year-to-date fiscal 20 grew from $63.6 million in the prior year to $86.6 million in the current year, representing a 36.2% increase. Operating margins of 10.6% increased 180 basis points compared to 8.8% in the prior year. For the year-to-date, cash flow from operations grew by $14 million in fiscal 20 compared to the prior year, as a result of higher net income offset slightly by higher working capital year-to-date. We continued to invest in the business in the third quarter with one acquisition now operating as part of the Metal Coating segment and is expected to be accretive to the segment this year. We’ll continue to seek more opportunities like these to continue to profitably grow our Metal Coatings offerings. As you can see, we're also still deploying capital for organic spend and are still giving capital back to shareholders. With that, I'll turn it back to Tom. Tom?

Thanks, Paul. In closing, 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 will continue to acquire galvanizing businesses and look for acquisitions in the Surface Technologies arena that will generate 15% to 20% operating margins, and greater than 25% EBITDA. We have a disciplined process for vetting opportunities and have built a core leadership team with deep experience in the surface finishing space. The third quarter performance continued to build confidence in our outlook for fiscal year 2020 and beyond. 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. We've also increased our emphasis on environmental sustainability. We will be making significantly more information available to our investors in this regard. 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 increasing emphasis on domestic opportunities in the electrical enclosure and switch gear businesses as well as growing our welding solutions internationally. And now, we will open it up for questions.

Our first question comes from John Franzreb with Sidoti & Company. Please go ahead.

Good morning, Tom and Paul. How are you doing?

Good morning, John.

John, hi.

I guess I want to start with the high voltage bus business in China. Could you kind of remind me the duration of that project and how the...

Yes, John we’re kind of losing you there. We got some interference on your phone, but to answer what I think you asked, it’s actually several high voltage bus orders in China. They are spread over a couple of years. So we still you know, we've shipped a good chunk of that backlog. We still have some of it left that will go into the next fiscal year, and then we'll be providing support for that even beyond next fiscal year. So and then of course, we're looking to hopefully book some more opportunities. And as I mentioned, we also booked a nice domestic order, which tends to help us in our Medway facility.

Got it, And I apologize for the interference. And switching over to the Metal Coatings side, how much is Surface Technology of total quarterly revenue, either on a percentage basis or total?

It's below 10%, likely around 5% or 6%, possibly up to 7%. This is partly due to recent acquisitions we completed during the quarter and some we finalized as we entered the quarter, which will have an increasing effect moving forward. On an annual basis, we expect it to remain between 5% and 10% as we transition into next year.

All right, got it Tom. And one last question. Tax rate’s been jumping around. Can you kind of help us out there on what we should expect not only for this year but into next?

Right. So the third quarter here, this is a return to provision adjustment for the tax return. So that drove it up a bit. That's just kind of a normal occurrence late in the year. In any tax cycle for the year, we're going to leave it about where we were for the last call, which is 22% to 23% for the year and that hasn't moved. So you were under in the second quarter. You're a little bit over in the third year over in the third quarter. But we still expect that 22 to 23 for the full year, John.

Got it. Thanks, guys. I'll get back into the queue.

All right.

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

Hi. Thanks and good morning. Congrats on a good quarter.

Good morning.

Morning. So I was just hoping that you could comment a little bit on how you're thinking about the Metal Coatings margin profile moving forward. You know, give us a little bit of a sense of how to think about those investments that you're making in the galvanized rebar and Surface Technologies and kind of when you think they'll start to roll off, so how to think about the margin profile as we head into the fourth quarter and next fiscal year? Thanks.

Yes, Galvanizing still constitutes the majority of the segment. We've mentioned that it's been maintaining in the 22% to 23% range. While we are targeting our surface technology acquisitions to reach near 20% over time, it takes longer to improve margins in this area compared to Galvanizing, where we have significant operational capabilities to implement quickly. We aim for margins above 15%, with the goal of getting closer to 20% in the future. In the fourth quarter, surface technology will still be a relatively small part of the segment, so we expect the margins to be similar to those of the third quarter. Paul, do you want to add anything?

Yes, Noelle, they've been performing well as Tom mentioned earlier. We incurred some costs in the third quarter, some of which are likely one-time expenses as we integrate these businesses. He accurately identified the percentages, and I anticipate we will see similar results in the fourth quarter.

And Noelle, I'll add one thing on that. We learned in the quarter that as we approach the late fall and winter season, it tends to be a slow period for some of these powder coating and plating businesses. Therefore, it is likely a better time to purchase them in the spring and summer. As Paul mentioned regarding some of the costs associated with buying during the off season.

Thanks. That's helpful. And you guys talked about some of the end-market verticals that exhibited strength in the quarter, solar and petrochem in particular. Could you expand upon what you're seeing in some of the other markets and how you're thinking about them into 2020? And also on the 2020 and 2021 outlook, curious how you're thinking about solar given some of the uncertainty around the tax credit.

Yes, I believe that the industrial markets, including construction and bridge and highway sectors, have been relatively strong in our Metal Coatings segment. As we expand into other Surface Technologies, we are entering more of the OEM markets, which should have a growing impact and are looking promising for next year. Our team is optimistic about solar; however, this sentiment is specifically tied to our customer base serving that market. Regarding the overall tax credits and their potential impact, we still need to see how that unfolds, but currently, our customers seem quite positive for the upcoming year. We also anticipate sustained activity in the petrochemical sector and would welcome increased spending on infrastructure, especially for bridge and highway projects. Our forecast suggests that the outlook will be similar to this year, which wasn’t particularly strong but not negative either. Overall, as we assess the current quarter and look ahead to next year, I would describe the state of our industrial markets as solid—not overly robust but also not weak; they are trending normally.

Okay, great. And then just one last question from me. Any comments on how the spring turnaround season is shaping up at this point?

Yes, it looks really solid. Some of that, I mentioned some of the technology we've deployed, and it's been very well received in the marketplace. So there's some continuing, or, some things from the fall that are going to start again in the spring. So, we're feeling really good about that spring season coming up.

Great, thank you.

Our next question is a follow-up from John Franzreb with Sidoti & Company. Please go ahead.

Yes, just to follow up on Noelle's question on the spring turnaround season, would you expect the spring season to be as good or better than the full season coming off this? We really have strong one this fall, or, just on a relative basis, how should we think about it?

We are optimistic about our performance. However, I want to be cautious because we don't have any major projects like we did in the fall, which are expected to be lined up for this spring. So while the activity is very strong, it may not match the fall’s level, but it should be better than last spring.

So perfect. Tom. That's great. And when I think about the high voltage bus duct domestic job that you just got, is it fair to assume that duct job would be a higher margin business than the Chinese high voltage were?

Yes, that's a good assumption.

Okay. All right. I guess that's just for me Thanks, guys. Appreciate.

Our next question comes from Bill Baldwin with Baldwin Anthony Securities. Please go ahead.

Thank you. Good morning. Tom, could you remind me again what's your differentiating core competencies are in the specialty welding segment of the market that you're doing so well in? What are the core competencies of AZZ there that differentiate you from the competition?

We have the most extensive track record when it comes to handling large and complex projects like coker drums and large reactor vessels. Our expertise in welding technology and our team's experience make us stand out significantly in the critical areas of refinery operation. This is our area of strength worldwide. We have consistently invested in advancing our technology. We take standard welding equipment from companies like Lincoln and Miller and customize it with our controls and video equipment before deployment. Our distinctive advantage lies in this customization and our extensive experience.

Okay, thank you. And could you comment on what the outlook looks like for the markets for your electrical enclosure and your switchgear business. You know what you're seeing out there looking out over the next year or so?

Yes, we have three facilities serving the enclosure market located in Chattanooga, Millington near Baltimore, and Pittsburgh, Kansas. We are positioned in the Midwest and East Coast, and these markets are strong with a solid customer base. Many major companies have purchase or supply agreements with us, so we expect a solid to fairly good performance next year. This is partly due to our presence and the improvements we've made to our operations while focusing on customer satisfaction. For switchgear, the larger products from Fulton are performing well, and we have a strong backlog as we enter the year, with plans to continue growing in that area. The smaller products are a bit softer but still acceptable.

What drives that smaller switch gear market, Tom? What are the main applications there?

It's that the industrial stuff instead of the utility grade.

Okay.

Yes, yes. So that's, that's where we get into a much broader set of customer opportunities, but it tends to drive off of off of that industrial spend.

We just need a better spending on the manufacturing side of the economy, it sounds like there.

We do. We need to have a little pick up there. We were doing good coming into this this past year, but coming into this year, it's a little bit softer.

Right. Okay. Thank you much and good job with what you guys are doing there.

All right, appreciate it, Bill.

Our next question is a follow up from Noelle Dilts with Stifel. Please go ahead.

Thanks. I just was wondering if you could comment on the lighting and tubing businesses. You know, with those businesses continuing to face new challenges, how are you thinking about those operations as a part of our portfolio from a strategic standpoint?

Our lighting business transitioned to LEDs early in the development cycle, around 2013 and 2014. We have strong technology and a solid application base, which have allowed us to expand our market beyond just the oil sector into areas like food processing. We remain optimistic about this segment, as we have a good cost structure and have increased our international presence to seize new opportunities. Despite a slight dip in volume, our lighting business remains very profitable. On the tubing side, while it's not a large part of our business, it has strong historical roots for our company. Our team in that area is excellent, and we're only a few million dollars in incremental volume away from achieving significant profitability. I have positive feelings about both businesses because I trust the operating teams and believe they are well positioned. Any increase in activity in the oil sector would positively impact our tubing business. Overall, I feel confident about the future outlook, as both segments are focused on enhancing profitability.

Okay. It makes sense. And then quickly, could you comment on what you're seeing in the electric transmission and distribution markets both with on the galvanizing side and then with some of the switchgear equipment and enclosures?

Yes. It's stable, albeit perhaps slightly declining as we look ahead in the galvanizing sector. However, we have a wide customer base and are pursuing various opportunities. The electrical sector remains strong, and we anticipate that will continue. We also believe there is significant potential for growth in the T&D market for electrical enclosures and switchgear.

Great, thank you.

All right.

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

Thank you, Sarah. I think just a couple of comments. We covered most everything between our scripts and the questions, so but just a reminder; we're committed to driving 21% to 23% operating margins for that Metal Coatings segment, inclusive of whatever acquisitions we do, and as we continue to grow the surface technologies piece. So, we're going to remain acquisitive. And then we are continuing to review our portfolio of businesses and decide what is core, not core, as we look forward. So we'll continue to keep you informed as we make decisions there. Thank you very much for participating in the call and look forward to talking to you in just a few months about our full year and Q4.

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