Good day, and welcome to the AZZ Inc. Third Quarter Fiscal Year 2022 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 with Lytham Partners. Please go ahead, sir.

Thanks, Rocco. Good morning, and thank you for joining us today to review the financial results of AZZ Inc. for the third quarter of fiscal year 2022, ended November 30, 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. 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 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. 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.

Thanks, Joe, and welcome to our third quarter fiscal 2022 earnings call, and thank you for joining us this morning. We continue to gain momentum in the third quarter, and completed our fifth consecutive quarter of solid performance after the disruptions from COVID in the first half of last year. I especially want to thank our employees who show up every day and do their job well. Their perseverance continues to allow us to achieve these kinds of results. Consolidated sales of almost $232 million improved 2.3% versus the prior year or 4.1% when adjusted for the divestiture of SMS last year. Metal Coatings generated another excellent quarter, with sales up 15.4% to over $133 million, and Infrastructure Solutions sales down 11%, at about $99 million. Sales in AIS were impacted by labor constraints, COVID-related material shortages, and COVID issues at some customer sites, which I will describe further during this call. We are pleased to have completed another strong quarter of performance. We continue to generate solid cash flow and returned capital to our shareholders during the third quarter. We generated net income of over $21 million and EPS of $0.85 per diluted share, reflecting the resiliency of our businesses and the dedication of our people. Our businesses leverage the realignment actions taken last year to improve profitability, while maintaining their focus on providing outstanding quality and service to our customers. We also benefited from lower interest expense and a lower tax rate of 22% for the third quarter. In line with our strategic commitment to value creation, we repurchased over 148,000 shares for $7.6 million, and distributed $4.2 million in dividends. In Metal Coatings, we achieved 24.5% in operating margins on sales of $133 million. This resulted in operating income being up over 14% from the previous year. The margin improvement was primarily due to driving operating efficiencies in productivity, while realizing improved pricing in the face of rapidly rising zinc, labor, and energy costs. In spite of the ongoing challenges of COVID, our team succeeded in completing the acquisition of Steel Creek Galvanizing in South Carolina. This site was completed in 2019 and includes a lot of automation, making it the newest and most modern in our fleet. Our team is excited about the growth opportunity it presents in a region we were not present in yet. Our Metal Coatings team continues to demonstrate their ability to perform and deliver great results, while managing labor shortages and the increasing costs. Our Infrastructure Solutions segment demonstrated continued profitability improvement in the quarter leveraging the cost reduction actions that they took last year. We were down about 8% when considering the impact of the SMS divestiture. The Infrastructure Solutions segment delivered operating income of over $9 million with operating margins improved 140 basis points to 9.3% as compared to the prior year. The segment did face growing labor constraints and delays in materials due to supply chain disruptions resulting from COVID, including components from customers. One WSI international project was significantly impacted by a COVID outbreak, which was managed well but resulted in lower profitability. We remain focused on strategic selling initiatives across both the electrical and industrial platforms, and we believe we are well-positioned to finish this fiscal year well. For fiscal year 2022, while COVID continues to generate some uncertainty in many sectors, given our strong performance in the first three quarters and due to seeing more opportunities than risks for the balance of this year, we're tightening our EPS guidance. We anticipate annual sales to be in the range of $865 million to $925 million, and EPS at $3.00 to $3.20 per diluted share. We do not anticipate any material impact in the fourth quarter from the recently announced acquisition as we're focused on integration these first couple of months. Metal Coatings is continuing to focus on its sales growth, including leveraging our spin galvanizing operations at several sites, operational execution and customer service as labor and operating expenses increased due to inflation. Our Infrastructure Solutions segment is cautiously optimistic as it enters the fourth quarter, with some momentum in bookings activity, particularly in the electrical platform. Our WSI business is seeing good results from the expanded Poland facility, although internationally the business continues to experience some intermittent project delays due to COVID outbreaks at some customer sites. The electrical platform is focused on operational execution and growing its e-house and switchgear businesses. Due to the project extensions from the third quarter, we expect a better-than-normal performance in the fourth quarter. I will note that our outlook for the spring turnaround season is quite good based upon the level of quotations, but we remain cautious due to the ongoing battles with COVID outbreaks at customer sites. For the balance of fiscal year 2022, AZZ will continue to execute on our strategic growth initiatives to drive shareholder value while positioning for a strong start to fiscal 2023. Our commitment to superior customer service is unwavering; our ability to generate strong cash flow is based on initiatives to drive operational excellence, tightly manage costs, ensure pricing discipline, and emphasize the importance of receivables collection within our operating platforms. We are confident that our businesses remain vital to improving and sustaining infrastructure, so we continue to drive profitable growth and enhance shareholder value. With that said, I'll turn it over to Philip.

Thanks, Tom. Bookings or incoming orders in the third quarter were $248 million, a $53.6 million or 28% increase over the third quarter of the prior year. Our bookings-to-sale ratio remained consistent with last quarter at 107%, and well above the book-to-sales ratio of 0.86 for the same quarter last year. As Tom had alluded to, we have seen consistently strong markets for our Metal Coatings segment and continued to experience improving markets in our Infrastructure Solutions segment. Third quarter fiscal 2022 sales were $231.7 million, $5.1 million or 2.3% higher than the prior year third quarter sales of $226.6 million. Year-over-year, for the third quarter, Metal Coatings segment sales were up $17.8 million and were partially offset by lower sales in the Infrastructure Solutions segment mostly in the industrial segment where we took significant actions to restructure the business in the middle of last year. The business generated gross profit of $57 million compared with gross profit of $54.7 million in the third quarter of the prior year. Our gross margin was 24.6% for the third quarter compared to gross margin of 24.1% in the third quarter of last year as business in both segments continue to improve. Operating income for the quarter was $30.1 million compared with $27.9 million in the third quarter of the prior year, a $2.2 million or 8% improvement year-over-year. Our earnings per share was $0.85 cents, or $0.09 higher than last year's third quarter reported EPS to $0.76 and adjusted EPS of $0.80 in the prior third quarter. The prior year was impacted by a loss on the divestiture of Southern Mechanical Services or SMS. Our third quarter EBITDA was $39.8 million and was flat compared with EBITDA in the third quarter of the prior year. Year-to-date sales through the third quarter of fiscal 2022 were $678 million, a 5.4% increase from last year's third quarter. Excluding the impact of SMS divestitures, sales would have increased 8.6% year-over-year on a pro forma basis. Fiscal 2022 year-to-date net income is $62.4 million, which is $38.9 million or 166% above the prior year-to-date reported net income of $23.5 million and $23.1 million or 58.9% above the adjusted net income from the prior year-to-date period. We deployed $19.1 million in capital investments and anticipate capital investments of roughly $32 million this year, slightly below our previous estimate of $35 million; supply chain constraints have continued to impact and delay the timing of our planned capital expenditures. We repurchased $7.6 million in outstanding stock during the quarter and year-to-date have repurchased 712,000 shares or $28.9 million. We declared and continued to make quarterly dividend payments. Through the nine months ended November 30, 2021, cash flows generated from operations was $49.7 million, down $9.7 million or 16.4% from the same period in the prior year. Operating cash flows were positively impacted by the higher earnings but were more than offset by higher receivables, increased sales, and increased inventories primarily as a result of higher zinc costs and our metal coatings. We continue to remain active on the merger and acquisition front and completed the acquisition of the galvanizing operation in South Carolina that will expand our Southeast footprint and should be accretive during the first year of operation as Tom had noted earlier. I'll now turn it back to Tom for his final thoughts.

Thank you, Philip. Here are some key indicators that we are paying particular attention to. For the metal coating segments galvanizing business, we are carefully tracking fabrication and construction activity and material and labor cost inflation as well as OSHA's COVID vaccine mandate. For the surface technologies platform, we are primarily focused on expanding our customer base and benefiting from improved operational performance. For infrastructure solutions, domestic turnaround and outage activity has returned to a normal level. The spring season is currently looking to be good, although we remain cautious due to COVID particularly for international customers. The electrical platform is benefiting from transmission distribution and utility spending, and growing data center and battery energy storage activity. In regards to the strategic review of infrastructure solutions, and our stated desire to become predominantly a metal coatings company, we have meaningfully advanced our work on a couple of strategic options that are designed to achieve this commitment. Unfortunately, due to related NDAs, we are not able to comment further at this time. We remain committed to our growth strategy around metal coatings and achieving 21% to 23% operating margins with galvanizing performance being quite steady while we continue to improve surface technologies. We will remain acquisitive, particularly in metal coatings and hope to complete one more acquisition before the end of this fiscal year. For Infrastructure Solutions, we're focused on profitability and cash flow. This segment's business unit should benefit from more normalized turnaround outage seasons, and a solid market for renewables, transmission and distribution, utility, battery energy storage, data center e-houses, and switchgear. We did issue our first ESG report this past quarter, and will continue to pursue improvement in these areas. And finally, our normal cadence would be to issue guidance for fiscal year 2023 later this month, but we will not be doing so. While we are committed to providing sales and EPS guidance, we may not be in a position to do so until our work on the strategic options can be factored in. With that, we'll open it up for questions.

Thank you. We will now begin the question-and-answer session. Today's first question comes from John Franzreb with Sidoti and Company. Please go ahead.

Good morning, guys, and thanks for taking the questions.

Hi, John.

First, I'd like to start with the zinc prices in the quarter. I've noticed, properly, it looks like zinc spiked to a five-year high, but are you able to realize some pricing? Maybe it would be helpful to just kind of review when does that higher price roll through your P&L or how are you able to realize pricing in such a difficult operating environment?

Yes, a couple of things, John. One, we normally have about six months of inventory in our kettle, so we were probably at a relative high inventory level as we came into the last fiscal year. So, as we're now in the part of the year where those zinc costs are increasing every month, rising towards current LME, yes, that will just continue every month. We naturally adjust prices, we do surcharges, and we have a variety of tools that we attempt to use to offset that.

Okay, got it. So, you'll be absorbing some of the higher pricing in the coming months; you didn't hit the full impact in the third quarter, right?

No.

There's an increase in zinc costs each month as we progress through the current fiscal year. This will continue as we move closer to the current LME. We regularly adjust our prices and implement surcharges, utilizing various methods to mitigate this impact.

Yes, it rises over the six-month period and depends kettle-to-kettle or location-to-location.

Okay, got it. All right. And how much of revenue was deferred in the Infrastructure Solutions business from 3Q into 4Q?

I don't know that we have a real specific number on that, because it's project-related, and some of these turnarounds just extended, but you know, it's a few million.

Okay, all right. You mentioned that the spring turnaround season is looking promising. How does this compare to last year as opposed to the previous quarter? How is it looking in that regard?

Yes, it looks nicely improved over last spring.

Okay, great. And I guess just one last question on the acquisition of Steel Creek, how much in revenue that business still generates annually?

It's only a couple of years old. So, it was still ramping up. When you figure new facilities take three to four years to ramp. It's about 50%, to 60% of where it should be. But it's a big facility. So, we were anticipating it becoming more than our average. It will be on the higher end of our normal scale.

Okay, can you remember what that scale is?

Well, you take our revenue and divide it by about 40. And this will be on the higher end of that, so it is a big facility with the largest kettle in the region.

Okay, all right, guys. Thanks. I'll get back into the queue.

All right.

And our next question today comes from Noelle Dilts with Stifel. Please go ahead.

Hi, guys. Thanks for taking my questions. First, I was hoping you could kind of walk through the end market trends that you're seeing for metal coating, utility, solar, industrial infrastructure, etc., just to help us give us a feel for how things are trending here in the late part of the fiscal year and into next year? Thanks.

Yes, Noelle. This is Dave. I'll take that one. And we certainly continue to see strong indicators from the renewables market, particularly the solar market, a lot of work going on there. Our OEM market remains strong and we also continue to see good growth from the overall construction market. So, those are all doing quite well. And then, last but not least, of course, the Utility segment, particularly the transmission poles and such continue to remain strong, and we look for continued strength into the next fiscal year.

Okay, great. And then, you're seeing some of the steel producers talk about putting new mills in the U.S., do you think that will have any impact on the addressable market for you or because of the aftermarket aspect of your galvanizing not so much? Just curious how you're thinking about that?

Yes, I think I'd say that we still view that as a positive because the more steel that's produced locally and used locally and fabricated locally, the better it is for us, and shortens lead times and cycle times and gives access to what currently is a constrained market for steel. And so, I think we generally view it as a positive, but obviously, these things take a while to build, so we don't anticipate much benefit anytime real soon. So, we don't have that factored into next year.

Okay, great. And then, last question, could you give an idea of whether you have assessed the COVID-related inefficiencies and if so, do you have an estimate of how much that might be affecting your margins at this time or for the quarter?

Yes, I think when we look at metal coatings, they've got a lot of, I want to be careful how I say this, but they do a nice job of managing their labor force, they can use temps and probably more readily than where we need skilled craft. So, I think they flexed it, but it still had a headwind just because on any given day right now, with Omicron, you can have sites with 75%, 80% site with five people out. So, we're having to work extra overtime. I hesitate to put how many basis points of margin, but generally it's probably a 50 to 100 basis points of headwinds that the team has managed through and continues to hit us. On the Infrastructure Solutions side, it is more. They tend to be bigger sites, and also WSI deploying to customer sites. It’s slowed projects and so a lot of this stuff that's going on now we're pushing things from third quarter into fourth quarter. Well, as those things extend, it's a lot of labor that's got to be moved. And on the one project we had the international project with the issues in Q3 was really we had to bring in a lot of extra craft to be able to finish the project because we had a lot of craft sitting in the hotel quarantine. So, I'd say for them, I'm going to go with probably 100 basis points of headwinds that they were challenged with in the quarter.

Okay, perfect. That helps a lot. Thank you.

Today's next question comes from Brett Kearney at Gabelli Fund. Please go ahead.

Hi, guys. Good morning. Thanks for taking my question.

Good morning, Brett.

I was curious on the Steel Creek acquisition, if you could talk about just geographically the opportunity set that opens up for the company in the Southeast region. And then also how obviously at a high level that state amongst many others is very hot labor market, curious how the labor dynamics set up at the newly acquired facility given the potential ramp and positive growth outlook you all are seeing in that region?

Yes, Brett. It's located on the border of South Carolina and North Carolina, allowing us to target the entire market. Our nearest facilities are in Bristol, Virginia, and Nashville. This new location provides us with a strategic position in between. We typically consider a radius of 100 to 150 miles around our facilities in areas we've previously not served. Although the labor market is competitive, we are primarily focusing on unskilled material handling and semi-skilled roles, supported by extensive recruiting resources that a stand-alone facility may not have. We also have sales operations in the region, providing us with more opportunities on both sides by enhancing capabilities and increasing manpower. We can share certain resources, like office manager support, to help get the facility operational quickly and enable it to meet our expected performance for a facility of that size.

Terrific. Thank you so much.

And ladies and gentlemen, the next question is a follow-up from John Franzreb with Sidoti & Company. Please go ahead.

Yes.

Hi, John.

Just regarding the potential divestiture, is that still on target to be done by the end of this fiscal year? I guess that's the first thing I was curious about.

You know, John, I'm not proven terrible at handicapping these kinds of things. So, I'm going to stick with my no comment. And then, just refer back to that we're not comfortable giving guidance for next year for that reason.

Is there any possibility that you might keep some of these businesses? Perhaps it would be better to manage them in-house for the time being?

Well, that's a tough one. I think we have multiple options. But I think these businesses need to be invested in and as I look at that, are we the best ones to be able to invest in the long term and to give both people and investors opportunities to benefit from that? I still have to say, we're probably not the best owner if you will. But do we like these businesses? We really do like these businesses, and we like what their potential is going forward. So, I'm going to give you kind of a half answer, a non-committal answer on that one.

Now just I was curious, and regarding the backlog and the relative strength now what's the ratio of the backlog right now? Is it falling into the first half of fiscal '23? Or is it extending beyond that?

Our typical lead time for the electrical platform side of our business is usually around three to six months. It has extended a bit due to supply chain issues, but we are seeing a good increase in our backlog for both our enclosures and switchgear business. Even our smaller electrical businesses have seen some growth, though they are minor in comparison. This increase in our overall backlog is somewhat offset by a significant decrease in the backlog in China, which was over $100 million in Q1 of 2020 and is now down to around $16 million. So, when you look at our total backlog, you can see a nice increase in the electrical platform, countered by the decline we've experienced in China quarter-over-quarter.

But John, I will add that while the lead times are less than what they were for China, they're probably 25% longer due to availability of materials and including customer supplied stuff. So, that's impacting our enclosures and our switchgear probably more so than the other business units within the electrical platform.

Got it. Thanks for the color, guys. I appreciate that. Thank you.

All right. Thank you.

Thanks.

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

All right, well, thank you all for joining us this morning. We look forward to talking to you in April and reporting on the full year in the fourth quarter. So, once again, we anticipate hitting our guidance, and thank you for joining us.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may disconnect your lines, and have a wonderful day.

Thank you.