Good morning, and welcome to the AZZ Inc. First Quarter Fiscal Year 2022 Financial Results Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Joe Dorame with Lytham Partners. Please go ahead, sir.

Thanks, Chad. Good morning, and thank you for joining us today to review the financial results of AZZ Inc. for the first quarter of fiscal year 2022 ended May 31, 2021. Joining the call today are Tom Ferguson, Chief Executive Officer; Philip Schlom, Chief Financial Officer; and David Nark, Senior Vice President, Marketing, Communications and IR. After the conclusion of today's prepared remarks, we will open the call for questions. Please note, there is a slide presentation for today's call, which can be found on AZZ's Investor Relations page under latest earnings release presentation at www.azz.com. Before we begin with prepared remarks, I'd like to remind everyone certain statements made by the management team of AZZ during this conference call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Except for the statements of historical fact, this conference call may contain forward-looking statements that involve risks and uncertainties, some of which are detailed from time to time in documents filed by AZZ with the Securities and Exchange Commission, including the annual report on Form 10-K for the fiscal year ended February 28, 2021. 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 shipment; 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 be potentially 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, let me turn the call over to Tom Ferguson, Chief Executive Officer of AZZ. Tom?

Thanks, Joe, and welcome to our first quarter fiscal 2022 earnings call, and thank you for joining us this morning. Suffice it to say that we feel a lot better about this first quarter call than we did at this time last year. Overall, sales improved 7.8% versus the prior year to $230 million, although up 14.6% when adjusted for the divestitures. Metal Coatings turned in another excellent quarter with sales up 7.3% to $128 million and Infrastructure Solutions up 8.3% to $102 million and over 23% up when adjusted for the divestiture of SMS. The higher volumes resulted from strong operational performance and improved activity in most of our served markets. I will get into the details of this as we go along. We are pleased to have completed another strong quarter of performance and we continued to generate strong cash flow during the first quarter, while also returning capital to our shareholders. We generated net income of $22.3 million and EPS of $0.88 per diluted share, both representing over 300% improvement versus the prior year's first quarter. Our businesses leverage the realignment actions taken last year to improve operating margins while maintaining their focus on providing outstanding quality and service to our customers. We also benefited from lower interest expense while incurring a 25.5% tax rate for the quarter. In line with our strategic commitment to value creation, we repurchased over 125,000 shares for $6.3 million and distributed $4.2 million in dividends. In Metal Coatings, we posted sales of almost $128 million while achieving operating margins of 24.7%, resulting in an operating income being up over 25% from the previous year. The margin improvement was primarily due to driving operating efficiencies and productivity while realizing improved pricing in the face of rising zinc, labor, and energy costs. We remain committed to delivering on the investments made in our Surface Technology business, and we're pleased to see most customers beginning to return to pre-COVID levels of demand. Our Metal Coatings team continues to demonstrate their ability to perform and deliver great results. Our Infrastructure Solutions segment, which was severely impacted by the COVID pandemic particularly in the first quarter of last year, demonstrated its resilience as they improved sales to $102 million or up over 23% when considering the impact of the SMS divestiture. The team delivered operating income of $9.6 million or 9.4%, up dramatically versus the prior year. The segment benefited from its realignment actions from last year while building on synergistic opportunities between EPG and WSI. They are focused on strategic selling initiatives and are well positioned to deliver a strong fiscal year 2022. For fiscal year 2022, while COVID continues to generate some uncertainty in certain sectors, with our strong performance in the first quarter and due to seeing more opportunities than risks the balance of this year, we are tightening and raising our guidance. We anticipate sales to be in the range of $855 million to $935 million and EPS at $2.65 to $3.05. Metal Coatings is continuing to focus on sales growth, including leveraging our spin galvanizing operations at several sites, operational execution, and customer service as labor and operating expenses due to material cost inflation are increasing. Our Infrastructure Solutions segment has seen more normalized business levels and enters Q2 with some momentum in their bookings activity. Our WSI business has seen good results from the expanded Poland facility, although globally the business continues to experience some intermittent project delays due to COVID outbreaks at certain customer sites. The Electrical Platform is focused on operational execution and growing its e-house and switchgear businesses. We anticipate continuing to benefit from low interest rates and should experience a lower tax rate for the remainder of the year. For fiscal year 2022, AZZ will continue to execute on our strategic growth objectives to drive shareholder value. Our commitment to superior customer service is unwavering. Our ability to generate strong cash flow is based on initiatives that drive operational excellence, manage costs, ensure pricing discipline and emphasis on receivables collection within our operating platforms. We are confident that our businesses remain vital to improving and sustaining infrastructure, so we are actively working to position our core businesses to provide sustainable profitability long into the future. And with that said, I'll turn it over to Philip.

Thanks, Tom. In the first quarter of our fiscal year 2022, we reported improved sales of $229.8 million, 7.8% higher than the prior year first quarter where we had sales of $213.3 million. Net income for the quarter was $22.3 million, an increase of $16.8 million compared with the $5.5 million in net income for the first quarter of fiscal 2021. The company's earnings per share was $0.88, more than 4x the $0.21 earned and generated during the first quarter of last year. For the first quarter gross margins, they were 25.2%, a 540 basis point improvement over the first quarter of 2021. The improvement was a result of our businesses most impacted by the pandemic returning to more normal operations and continued strength in our Metal Coatings segment. First quarter operating income of $30.7 million improved $16.4 million or up 114.5% compared with the prior year. Our operating margin was 13.4%, 670 basis points better than the 6.7% recorded in prior year's first quarter. Interest expense for the quarter of $1.7 million was 35.6% lower as we realized interest savings on our $150 million senior notes that we refinanced last year and upsized by $25 million. First quarter income tax expense was $7.6 million, and the effective tax rate was 25.5%. The current quarter effective tax rate was significantly improved over the 45.8% effective tax rate realized in the first quarter of last year, driven mainly by our improved earnings in the current quarter. At this time, without consideration of the potential impact of tax law changes, we estimate our full year tax rate will be roughly 23%. Next, I'll cover the results of operations within our Metal Coatings and Infrastructure segments. Our Metal Coatings segment generated first quarter sales of $127.7 million, a 7.3% increase over the $119 million reported in the first quarter of last year. Metal Coatings segment operating income of $31.6 million was $6.5 million or 25.9% higher than the first quarter of 2021. Metal Coatings operating margins were 24.7%, 360 basis points improved over fiscal '21 first quarter and 60 basis points improved over the first quarter of fiscal year 2020. The business continues to thrive and has effectively managed rising costs of labor, zinc, energy, and most other consumable costs with operating efficiencies, increased productivity, and value pricing. In addition, the business segment is benefiting from the January 2021 purchase and full integration of Acme Galvanizing in Wisconsin. Our Infrastructure Solutions segment generated sales of $102.1 million, a $7.8 million or 8.3% increase over the $94.3 million in sales during the first quarter of last year. On a pro forma basis, excluding sales related to our divestiture of Southern Mechanical Services from our Industrial platform, Infrastructure Solutions segment year-over-year sales increased 23.4%. Our Industrial platform sales improved year-over-year as personnel are now able to access customer locations. However, this market continues to work through stricter cross-border requirements when traveling to customer locations to perform their field services. As a result of strong actions taken by the management team during the early stages of the pandemic last year, operating income for the segment increased to $9.6 million for the first quarter as compared to the $1 million loss in the first quarter of last year. We believe the actions to divest noncore businesses in FY '20 and '21 as well as making some difficult personnel decisions during fiscal '21 will continue to benefit the Infrastructure Solutions segment on a go-forward basis. The Infrastructure Solutions segment generated gross profits of $22.3 million, which reflected a $9.7 million increase over the prior year. Gross margins were 21.8%, well above the 13.3% realized during last year's first quarter. I will now turn to our balance sheet and liquidity. Net cash provided by operating activities for the 3 months ended May 31 was $11.1 million compared to net cash used in operations of $11.2 million in the prior year first quarter. The increase in cash provided by operating activities in the current quarter is primarily attributable to strong net earnings. The company, due to cyclicality in certain platforms of our business, typically draws cash during the first quarter and generates positive cash flows for the remainder of the year. This first quarter was no different as we observed a net decrease in cash of $2.4 million. However, the current quarter use of cash represented a $7.8 million improvement compared with the first quarter of the prior fiscal year. Capital spending in the first quarter was $7.5 million compared with $10.8 million invested in capital during the first quarter of the prior year. Our current capital expenditure estimate of $35 million is consistent with the past couple of years. At May 31, our outstanding debt was $185 million compared with $219 million outstanding at the end of the first quarter last year. During the past quarter, we continued to generate strong cash flows that allowed us to continue to reduce debt. During the quarter, we continued to repurchase shares under our November 2020 $100 million share repurchase program. During the first quarter, we invested in repurchasing $6.3 million or 126,000 shares of our common stock. We declared and will pay a quarterly dividend. Lastly, this week we entered into a new 5-year credit facility with our bank group. Our previous arrangement was to expire in March 2022. Our credit facility capacity remains at $600 million with the following transaction highlights. We reduced our revolver from $450 million to $400 million to reduce costs associated with unused line fees. We increased our accordion to $200 million from $150 million to retain full capacity. We improved pricing levels of borrowing by 12.5 basis points and reduced unused line fees by 7.5 basis points. We retained our leverage ratios at 3.25:1 and our interest coverage ratio at 3:1. We are excited with the banks we have partnered with and look forward to improving our utilization of our credit facility as we remain active with acquisition opportunities, and we continue to repurchase shares of our common stock under our $100 million existing buyback program. We remain well within all boundaries of our existing debt covenants and continue to strengthen our liquidity and will continue to evaluate our capital structure as we further execute and implement upon our strategic plans.

Thank you, Philip. Here are 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, material and labor cost inflation, and progress of infrastructure legislation. For the Surface Technologies platform, we are primarily focused on expanding our customer base and benefiting from improved operational performance. For Infrastructure Solutions, we are off to a decent start with turnaround and outage activity having returned to a more normal level, and the fall season currently looking to be good as long as international customers are impacted by further COVID-related restrictions. The electrical platform is benefiting from T&D and utility spending and growing data center and battery energy storage activity. Finally, for corporate, we have completed the strategic review of infrastructure solutions and are now focused on pursuing specific areas of opportunity. As we have noted previously, we are having regular meetings with the Board, and we anticipate being able to provide more detail in October. We remain committed to our growth strategy around Metal Coatings and achieving 21% to 23% operating margins, with galvanizing performance being quite steady as we continue to improve Surface Technologies. We will remain acquisitive, particularly in galvanizing. For Infrastructure Solutions, we will continue to focus on profitable growth in our core businesses. Our segment's business units should benefit from more normal turnaround and outage seasons and a solid market for transmission and distribution utility, data center, e-houses, and switchgear. And with that, we'll open it up for questions.

And the first question will come from John Franzreb with Sidoti & Company.

Yes. I'd like to start with the potential divestiture in Infrastructure Solutions. You've had to review it. I wonder if you could just give us some color on how active the market is? What's the likelihood of it being sold as one unit? Any more color you can provide given we've been initially told about this in November, so that would be helpful.

Yes. I mean, as you can imagine, we're not going to get into any specifics at this point, but we have half a dozen active opportunities for divesting portions, if you will, but also for acquiring more Metal Coatings business units and particularly around the galvanizing side. So we're pursuing all of that. And I don't want to speak for the Board as we'll have an upcoming meeting in the next few weeks.

Any talk about a timeline to help us out?

As I noted, I think we'll be ready by October to give some specifics or make some announcements.

Great. Great. And can you talk a little bit about zinc pricing? In your prepared comments, you mentioned that you had price increases in Metal Coatings. How does that play out for the balance of the year?

Yes. Usually, we're mostly tracking just zinc. But right now, we're tracking basically all. All of our expenses are up, and the same for our customers. So we've been able to push pricing in line with those costs. We anticipate we should be able to maintain that as we don't see any reduction in cost anytime soon. And I think we track the zinc LME and it is projected to remain fairly stable at this point, but it's at a relatively high level compared to the last couple of years. So we're pretty confident that we can continue holding the value pricing levels that we've achieved.

Okay. And just switching to or back to, I guess, Infrastructure business. How should we think about the bookings in the backlog for the quarter? It's flat sequentially. Help us with some thoughts on what's going on there, what the business environment looks like?

Yes. I think on the electrical side, we're winding down the backlog that we had in China, but we're seeing really good opportunities in the transmission, distribution, and the utility sectors around switchgear in the enclosure space. So we really like that. And while we don't talk much about the oilpatch pieces anymore, that's also improved. So pretty much all the pieces are doing well. All the business units within Infrastructure Solutions are profitable and generate pretty positive cash flow. So we're feeling good about that. This is about the time we start to book some business for the fall turnaround season. So we're seeing good quoting activity and feel pretty good about almost all elements of that business at this point.

And the next question will be from Noelle Dilts with Stifel.

I was hoping that you could comment a little bit just on labor. Obviously, throughout the industrial world and beyond, we're hearing that it's just tough to find the folks that you need and that labor is becoming more expensive. So could you just expand on what you're seeing on that front? And to what extent you're seeing any wage inflation?

Yes, we're seeing both sides of that. So we've had to increase our recruiting activities just to fill slots and get labor in. We've done that, but also to accomplish that, we've had to increase starting wages in specific plants because there's just pretty big differences in labor availability and the cost of that labor between municipal metropolitan areas. So we've got, I'd say about half of our facilities have had to increase those starting wages to attract people in. We've been fairly successful. We're having to use more contract labor in certain locations just to be able to handle our backlog. So we've tried to focus on maintaining our lead times, keep attracting labor, and just have a steady stream of that. But we have seen in states that have done away with the unemployment premiums, labor becomes pretty quickly more readily available. But quite often, that's slightly higher or somewhat higher starting wages.

Okay. That's helpful. So then shifting over to just specifically with Metal Coatings, a couple of questions here. First, just with these extreme increases in steel prices, how are you expecting that will impact fabrication activity? And are you seeing it yet? And then if you could give us a bit of a rundown on the trends you're seeing in the end markets, like OEM, industrial, construction, utility, etc., including solar? That would be helpful.

Sure. We're seeing some projects be delayed because of the cost and also availability of steel and other construction materials. While we've seen some delays, we aren't seeing a whole lot of cancellations. But obviously, some of these projects are becoming less viable as the costs continue to escalate. So it's kind of back to, I'd say, most of the country we're – at least most of the U.S., we're seeing those projects move forward, and there seems to be optimism among most of our OEM and fabricator customers. When it comes to the different markets, we've seen – on the Metal Coatings side, we've seen a lot of activity in ag, recreation, as well as the bridge and highway activity. Industrial has been solid. We've even seen some petrochemical activity for the Metal Coatings side. So generally, all markets are up somewhat, and some are just extremely active. The recreation piece probably surprises us more than anything, but it's just been very, very bullish. When it comes to transmission distribution, we're seeing a lot of activity. I think there's another several years of spending anticipated as the grid gets renovated. When I think electric utilities, we've seen a reasonable spend and continue to see power generation, particularly the solar stuff has been good and looks to continue that way. I don't know if, David, you want to add anything to that?

Yes. No, I think those are the main drivers of the Galvanizing and Metal Coatings markets. And we've seen some folks returning back to normal production too on our Surface Technology side. And of course, those are very mixed markets.

Right. Okay. Just a follow-up there. In terms of where you are seeing cancellations – or I'm sorry, delays and again, not a whole lot of cancellations, but is there a specific vertical where you're seeing that more, or is it kind of consistent across most of these markets?

It's fairly consistent. And generally, there are – in the fabrication markets, it's a whole host of different things. But I have to say, most of our customers remain optimistic for the year. So generally, we're feeling really good about the outlook at this point across almost all the verticals.

Okay. Okay. That's great. And then I just wanted to go back to John's first question about the strategic review. But the way I read the information, obviously limited in your presentation today, it sounds like you've at least determined that there's a portion of Infrastructure Solutions that you're viewing as core and a portion that you're viewing as noncore that you might look to divest? Is that the right way to think about this? It doesn't sound like you're looking at divesting the entire division?

No, that’s a good question. And we are continuing, as Tom had noted in his comments that we've kind of completed our initial reviews and had discussions at the Board level, and we're continuing to evaluate a number of different transactions and opportunities. And so you'll see as we proceed through the next quarter.

But let me jump in. I don't think we intended to preclude anything. All options are still on the table.

Next question will come from Brett Kearney with Gabelli Funds.

Sure. Just want to ask on the Metal Coatings side, it sounds like the funnel of potential acquisition opportunities is fairly robust. Just curious on site access to be able to, I guess, further those relationships and conduct the diligence that you'd like to? And then also kind of maybe how you're balancing opportunities to deploy capital on that side relative to your share repurchase authorization?

Yes. I think we are finding it's easier to travel and easier to get in, in a lot of cases, some of the owners are now more open to visitation. And so our business development teams are getting back on the road. There's still some areas, particularly as you get outside the U.S., where there's some restrictions. But for the most part, within the U.S., we're now able to make those visits and have made several either people visiting us or us visiting others. And I anticipate that's just going to get easier as time goes on. At least as time goes on, we'll see what happens with the Delta variant. But when it comes to capital allocation, I'm going to let Philip speak to that because right now, we have access to all the cash we need to for the whole gamut of capital deployment activities, including the acquisitions we're looking at. At the end of the day, we've got about $750 million of credit available to us when you count the senior notes and the revolver and the accordion. So – and that debt is relatively inexpensive right now. So we're able to look at basically everything at the moment. But Philip, do you want to add to that?

Yes. No, I think I would just add in on the share repurchase program. We see value in returning capital to shareholders at this time. And as Tom explained, we've got a really strong balance sheet at this point in time. And so we're able to leverage that balance sheet through stock buybacks as we continue to evaluate our opportunities on the acquisitions. Should we enter into a larger transaction, then we will reevaluate our share repurchase program at that time.

And the next question will be from DeForest Hinman with Walthausen & Company.

First off, on the margin performance in the Metal Coatings. It's above our long-term performance range, 24% for the last couple of quarters. Do you foresee that in the current environment being maintained at this 24% or above?

We're sticking to our committed range of 21% to 23% because there's a couple of things that will go on the balance of this year. I think our galvanizing margins are in pretty good shape. We should be able to hopefully hold price and manage through our efficiencies and productivity to offset the cost inflation. But Surface Technologies is – will increase its share of our revenue in the Metal Coatings side. So – and it does have somewhat lower margins. So I'm pretty hopeful we can stay at the top end of that 21% to 23% range for the balance of this year as the team continues to manage value pricing versus the inflationary cost. So yes, we talked about that the fact that we've exceeded the 23% for 2 or 3 quarters now, so.

Okay, that's helpful. Can you provide more details on the spring turnaround season regarding work on pressure vessels, specifically concerning the extended intervals between maintenance? Once we start these projects, are we seeing an increased scope and a higher number of hours worked on the vessels? Additionally, with regards to the fall turnaround, are we feeling more optimistic as well?

Yes, that's exactly what we've been observing. The interesting aspect for us is that in the spring, we have noticed smaller jobs that have been expanding in scope. Additionally, we have encountered more urgent work than we typically experience. Unlike prior years, we did not see any large international mega projects. Therefore, this year has primarily involved smaller projects along with significant shop work at both our U.S. facility and our newly expanded facility in Poland. This is promising, and we are also identifying bigger opportunities in our bids. I believe that due to deferred maintenance and the disruptions caused by COVID, we are likely seeing these scopes expand more than usual.

Okay. That's helpful. This was mentioned by a couple of other analysts, but let me ask the question in a different way. Regarding the strategic review of the Infrastructure segment, could one of the outcomes possibly be no additional divestitures within that segment? You noted the improved outlook for nearly all the businesses in that segment.

I think that there are some things we need to streamline. So businesses, we've viewed internally as noncore for some time now. So I don't think I would say that there's not going to be any activity. There's going to be some divestitures. And as I mentioned, we haven't precluded anything we can do for the whole segment, although we do like those – most of those businesses, and their positive EBITDAs for us. So – but I think there's just – we've got to focus better and so action a couple of things at the very least.

Okay. And then just for clarity, there were some comments as it relates to capital deployment around the share repurchase. Just can you update everybody in terms of potentially doing divestitures of businesses, are we precluded at some point from buying back stock? Or are we in a program-based repurchase authorization that we can buy during that period of time?

Yes. I think a couple of points there. On the first point with our new credit facility, there's baskets and limitations that are pretty large. So based on our leverage ratio, we're not limited from repurchasing shares except for what we've announced our limitations would be. So we'll continue to do that. We do that under a 10b5-1 plan so that we can kind of manage that through open and close cycles. And then like I said earlier, based on acquisitions and any potential divestitures, we'll reevaluate how we're deploying that capital over time.

But also, we still have — we have lots of room within the current authorization to continue buying back shares too.

Okay. And as it relates to capital deployment on the M&A side, I think you mentioned this, but I just want to make sure we're clear. In terms of the capacity and the new revolver and the accordion in future, that would be enough available capital to purchase anything we'd like to look at, and there's no need to issue equity for any type of deals that we're looking at.

No, we're in really good shape. While we have a really active pipeline of acquisition opportunities, all we could pretty much fund the entire pipeline with our existing credit lines.

Okay. And then can you just update us on the covenants that are on the new revolver from a debt-to-EBITDA perspective, I think you're at 3.25 on the old one.

Yes, we're still at 3.25. We've retained in line with our senior notes that we refinanced last year. So our leverage ratio is 3.25:1. Our interest covenant is 3:1. And then there are some restrictive baskets related to acquisitions that we have to go back into the bank group if we did large enough transactions to notify them. But generally speaking, we have lots of room under our new credit facility.

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

I just want to thank everybody for joining us this morning, and we look forward to completing our second quarter and hopefully having another positive outcome and another good call. So thank you for your input and questions. And we look forward to talking to you at the end of the second quarter.

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