Joe Dorame - IR, Lytham Partners Tom Ferguson - CEO Paul Fehlman - CFO

John Franzreb - Sidoti & Company Schon Williams - BB&T Capital Markets Brent Thielman - D. A. Davidson Noelle Dilts - Stifel

Good morning and welcome to the AZZ Inc First Quarter of Fiscal Year 2017 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note that this event is being recorded. I would now 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 first quarter of fiscal year 2017, which ended May 31, 2016. As Denise indicated, my name is Joe Dorame. I’m with Lytham Partners, and we’re the investor relations consulting firm for AZZ Inc. With us on the call, representing the Company are Mr. Tom Ferguson, Chief Executive Officer; and Mr. Paul Fehlman, Chief Financial Officer. At the conclusion of today’s prepared remarks, we will open the call for a question-and-answer session. If anyone participating on today’s call does not have a full text copy of the press release, you can retrieve it from the Company’s website at azz.com or numerous financial websites. 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 29th, 2016. 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 electrical 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 the hot dip galvanizing process; changes in the economic conditions of the various markets the company serves, foreign and domestic; customer requested delays of shipments; acquisition opportunities; currency exchange rates; adequate financing; and availability of experienced management 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?

Thank you, Joe. Good morning to all of you on today’s call and we thank you for your continued interest in AZZ. I hope everybody had a great Independence Day. I am very pleased with our solid financial performance for the first quarter of fiscal 2017. Top-line revenue was up 6% over the first quarter of fiscal 2016 and we achieved over 5% growth in EPS as compared to the strong first quarter of the prior fiscal year. Upon completing the successful first quarter of the new fiscal year, we see mixed market dynamics that present a combination of challenges as well as opportunities. Despite the volatility of recent international events, and the U.S. election year, we feel confident in our strategic plan to grow our operating platforms in a fiscally responsible manner by investing in our key initiatives to drive organic growth and operating excellence. We remain focused on growing internationally and deploying capital resources that will position AZZ to continue executing on our growth and performance plans. Given the current market dynamics, I am very pleased with the results from our acquisition of PEI at the start of the quarter, our electrical platform of the energy segment. Further, despite headwinds in certain markets, we posted solid bookings of $250.5 million, which were up over 16% compared to the first quarter last year. This created a record backlog of $354.2 million at the end of the quarter, which is up $35.3 million or over 11% compared to last year’s first quarter. In our galvanizing business segment, we continued to face some challenges in the oil producing areas of the Gulf Coast but made progress on improving pricing both in acquired and legacy plants during the first quarter. This is helping to drive a higher sequential operating margin. As I’ve discussed before, we continue to make progress on several technology and operational improvement initiatives that we believe will drive future organic growth and value in our galvanizing business. Turning to the energy segment, first quarter orders grew almost 18% compared to the same quarter last year. This was primarily due to a combination of the PEI acquisition and strong international business in our electrical platform. Despite relatively flat sales in energy, both gross and operating margins grew steadily at over 4% each in spite of mixed market conditions overall. Both our top-line and bottom-line in energy were negatively affected by the wildfires in Canada that caused us to demobilize from a relatively large welding overlay project at very end of the quarter. Looking forward, our galvanizing segment still faces headwinds on the Gulf Coast related to the impacts of sluggish oil and gas spending, but we are gaining strength in other sectors including bridge and highway construction, recreations and electric utilities to help offset some of the current headwinds. We are particularly pleased with the continued improvements in operating margin in the segment and expect those to continue to grow through the rest of the year and regain historical norms. The outlook for our energy segment is positive. Refinery utilization rates remain relatively high and the continued deferred maintenance is causing more unplanned outages, resulting a quick turnaround or emergency work that helps us fill our capacity. We’ve also benefited from strong international opportunities in driving a higher backlog. While domestic utility infrastructure spending is still somewhat muted, we have a strong backlog to work with due to the consistent performance of our sales team and expanded international efforts. We remain focused on establishing international joint ventures to provide broader market access to mitigate any softness in the North American market. Further, the acquisition of PEI should allow us to leverage the combined product portfolio of enclosures across a broader market area. Again, I am pleased with the solid quarter and believe we have the leadership team, products and services, and balance sheet to generate above market results for a long time. We will continue to focus on leveraging the ground taken by strengthening our sales teams, focusing on cost control, and on maintaining a healthy M&A program, while seeking to better focus our platforms on their core products and markets. We remain committed to getting our platforms to a more focused core of activities, but do not need to do any fire sales of assets. We are reaffirming our guidance for fiscal year 2017 with EPS in the range of $3.15 to $3.45 per diluted share and revenues in the range of $930 million to $970 million. This guidance is exclusive of any divestitures or acquisitions. Now, I’d like to turn it over to Paul Fehlman to cover the financial highlights.

Thanks Tom. For the first quarter of fiscal year 2017, we reported net sales of $242.7 million, an increase of $13.8 million or 6% over the first quarter of fiscal 2016. Net income for the first quarter of fiscal 2017 was $21.1 million, an increase of $1.1 million or 5.7% over the first quarter of the prior year. Reported EPS grew 5.1% to $0.81 and our backlog finished at a record $354.2 million, up 11.1% versus the first quarter last year, as our book-to-bill ratio finished at 1.03 compared to 0.94 in the first quarter last year. Gross margins grew to 26.1% from 25.9% in the first quarter year-over-year, and SG&A finished at 11.9% compared to 11.5% for the first quarter last year, driving the first quarter operating margin of 14.2% compared to 14.4% in the first quarter of fiscal 2016. Our effective tax rate of 31.6% remained relatively steady compared to the first quarter last year rate of 31.7%. Cash flow from operations more than doubled year-over-year rising 104.1%, as we continue to focus on cash performance. As for our first quarter segment results, first quarter revenues in our energy segment were up 0.8% to $138.1 million, compared to the first quarter of the prior year, while operating income grew 4.4% to $18.8 million compared to prior year first quarter as gross margins in the segment improved from 25.2% in the first quarter last year to 26.1% in Q1 of the current year. In our galvanizing segment, first quarter revenues grew 13.8% to $104.6 million compared to the first quarter last year, while operating income rose 10% to $24.3 million compared to the same period last year. Operating margins finished at 23.2% for the quarter, up sequentially for the second consecutive quarter as we continue to see positive margin improvement in galvanizing. We continue to leverage our ability to generate cash and our strong balance sheet to support growing our operating platform as evidenced by the purchase of PEI during the first quarter as well as our continued investment in organic growth initiatives. So with that, I’ll turn it back to Tom for concluding remarks. Tom?

Thanks Paul. The key takeaways I’d like to leave you with are these: We have a solid balance sheet and strong cash flows; a great portfolio of products and services, significant international growth opportunities and a talented and seasoned leadership team. We will continue to focus on growing our galvanizing business, both organically and through targeted acquisitions. We will continue to expand the presence of our electrical businesses internationally, both directly and through joint ventures. We are now benefitting from our accelerated emphasis on operational excellence and customer service at both WSI and NLI. As I have stated before, we’re not a quarter-over-quarter business due to the impact of refinery turnaround and power plant outage cycles as well as the dependence of some of our businesses on large projects. So, please keep in mind that Q2 is not usually a strong quarter for us, particularly when compared to Q3. We expect a solid year in fiscal year 2017 with earnings skewed to the back half of the year. We will continue to leverage our expertise as a solutions leader in protecting metal and electrical systems to drive infrastructure. And with a good pipeline of acquisition targets, we are looking forward to continued growth in our businesses and greater impact from our new growth strategies for the balance of fiscal year 2017. Now, we will open it up for questions.

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

I guess the first thing I would like to address is the wildfires in Canada. How much revenue was lost there? And should we view that as lost revenue or deferred revenue; what would we capture in the second quarter?

I’d consider it more deferred for the most part, but it was a couple of million dollars and probably a couple of cents EPS in impact. And the problem was just the way it occurred, we weren’t as -- usually we would be able to redeploy assets but because we’ve had to demobilize and keep them available, we weren’t able to do that in this case.

Okay, great. And last conference call, you kind of talked about expectations for the third quarter turnaround season, maintenance schedule is going to be a little bit longer, and basically that’s how it was shaping up then. Is that still the case or is something changed in the customer floatation activity?

We’re still looking at a real strong turnaround season in the fall. I think it’s stacking up that way; all of our quotations are stacking that way. We’re actually hoping we can pull some up, just a little bit and push them out, just so that we can handle more activity, and we did see some things delay from the spring season into the fall. Normally, I guess in old times that might have been good news for us though because we were already relatively booked up for the fall; those are opportunities like I said we’re hoping they move outside of the fall. But, it doesn’t seem to matter, whether it’s the power generation side or refining, but it’s looking good. And then, the other good news for us is some of that is pushing into next year. So, some of these delays could actually help us better level out our resources. So, we’re feeling very positive about the fall season.

When you say next year, you mean into Q1 of next year?

Yes, early part of Q1 in next year.

Great, okay. I will get back into queue and let someone else going. Thank you.

And the next question will come from Schon Williams from BB&T Capital Markets. Please go ahead.

Can we talk about I guess galvanizing margins, so incrementals on a year-over-year basis had been weak but I think that’s more been the acquisitions down in Texas, trying to get those kind of fully baked into the numbers and make some improvements there. But, I just want to make sure I understand kind of all the moving pieces because it still sounds like you’re guiding for some improvement as we go forward, and I just want to understand, can you talk a little bit about -- are the acquisitions still a little bit of a headwind; where are we in terms of the price cost dynamic on zinc and just a little bit more color there would be helpful.

Yes. I think we’re making progress on the acquired assets. The only concern we’ve had is that a lot of those assets were in the Gulf Coast oil producing areas that have been affected economically. So, while we’re gaining traction in operating performance, we’re not seeing -- we’ve reached a point where they’re now reasonably profitable but they are still off of our legacy norms. So, we look for that to continue, we would like to see a little more volume, and that will come with economic improvement. On the other hand, we are looking to -- we are seeing better or improvement in pricing versus the cost of zinc. And so, we’re encouraged by that. I think as we continue to add services to our business as we continue to focus on operating efficiency and effectiveness and as we continue to provide a higher level of service to our customers, we’d like to think we’re earning that price differential or price improvement. And then, the other thing we are looking at is as we try to get a better handle on how long the impact on the economy and oil producing areas is going to affect us, we are looking at a couple of sites we can refocus towards some of the growth initiatives that we need resources and assets to be able to do, to move more quickly. So, those are the things we’re focused on. And we still see real positive trends towards getting the overall back to the historical norms by the end of the year.

And when you say historical norms, you’re talking about the operating margins closer to that kind of 25% or so?

Yes, 25.

Okay. And then, seasonally, galvanizing actually was a little bit weaker than what I would have expected. I mean normally going into this quarter, you’d see a bump of as much as kind of 5% to 10%; you got a little bit less than that. I mean are you -- I don’t know, would you basically kind of still point back to the Gulf Coast regions, some of the tepid demand there or was there anything else that changed in the quarter for you?

Yes, the other impact we had was a little longer winter in Canada and the north. So, a couple of weeks of longer winter, it has an impact on us. And so, we did see that in addition to some of the softness, softness in the couple of areas along the Gulf, and a lot of the heavy rain as well. While we’re happy to kind of not have drought conditions here in Texas and along the Gulf, it was a little more raining than we anticipated. So, we did have some sites particularly down in the Houston area that were impacted, even a little bit up here in North Texas. So, we’re looking at real heavy rainy season, a little bit longer winter -- I’d say that’s the vast majority of the impact.

Thank you. Our next question will come from Brent Thielman of D. A. Davidson. Please go ahead.

Tom with issues in Canada, were overall WSI sales down from last year?

Slightly, I think it was just slightly because we had improvement on the SMS side of that industrial platform, if you will; and WSI was lapping in just a huge quarter last year.

Okay. And then on the backlog at quarter-end, how much of that do you expect to burn through this fiscal year?

We should be burning through approximately 75% to 80% of that, some of it is longer dated.

Got it, and then one more if I could. Could you give us an update on what you’re seeing kind of developing on the power generation market? I think you mentioned was slower on the U.S. side, maybe a global perspective as well, that would be helpful. Thank you.

Yes, I think a couple of things. If you take on the galvanizing side, we do well when there is a lot of solar work and we do well if there was any coal fired plants do, but we’re not anticipating any of those in the near future. But solar, even though the subsidies were re-approved, I think that actually kind of slowed things up a little bit. We anticipate that kicking in as the year goes. And so, we look for that to be good as we get deeper into the year, into the second half. On the other utility spending, it’s continuation of gas turbine stuff, and that’s been okay for our enclosure businesses, the transmission distribution’s been okay. I think the nuclear spend -- maintenance activities have been okay, and that’s been fine for kind of the book-to-ship stuff at NLI, it’s been fine for the turnaround season for WSI. But, we’ve still got some activity going on at the two new nuclear plants in the U.S. that have just been kind of slow. And so, we’ve not seen that activity. And then they were couple of new announcements of nuclear plant closures that are way down the road. So, it doesn’t have any short-term impact on us. But, I think just that -- so, while we feel good about where we’re positioned in the nuclear sector in the short-term, I think where some of these other activities -- we’re just keeping an eye on them; they don’t impact just right now. We do see transmission distribution improving; it should be stronger in the third quarter, which helps our galvanizing business as well as helps our bus and switchgear businesses.

Okay, great. Thank you.

Hopefully, I didn’t confuse you too much with that.

Got it.

[Operator Instructions] The next question will come from Noelle Dilts of Stifel. Please go ahead.

First question, can you just give us a sense of organic growth in the quarter in energy and galvanizing?

Sure. On the energy side, you are really just talking about PEI being in versus being out. Bookings clearly still would have been up organically; sales would have been off a few percentage points organically; OI would have probably been about what it was, about even. Galvanizing, a little bit different of a story; we’re seeing up organically there single digits, but got up organically there and the good news is obviously pricing was up organically.

And then, can you just give us some incremental thoughts on power electronics, just how you’re thinking about accretion for the year?

We don’t want to go through specifically into that. First quarter, I mean other than it is expected to be accretive for the year, I think in the past, maybe including all the stuff included with acquisition costs with purchase price accounting, it was still a nickel to $0.10; we talked about that before.

And then, just in terms of NLI, [ph] again just kind of how you’re thinking about the business now; I know we’re looking at, I think ideally a smaller kind of but more profitable operation this year. We were talking somewhere in $30 million to $40 million, I think in revenues in fiscal ‘17. And can you just give us some thoughts on that and then on how we should think about the margin profile of that business, as we look at ‘17 and into ‘18?

I think the revenues are likely to be stronger than that just because we came in with the good backlog and call it the book-to-ship orders in spite of the fact there is not a lot of big projects out there, the book-to-ship type orders are coming in at a fairly normalized level. So, we’re actually feeling better about the revenues for NLI [ph] for the fiscal year. And we’re also feeling better about the margins. I think the margins, because we are getting some of that book-to-ship, we don’t have the lower margin big Westinghouse projects in there that we had last year, which was $25 million of backlog. But we’ve been able to replace -- well not so much to replace but we’ve been able to now put the business on an even footing. It’s not going to be all that far off of the margins for the energy sector, as we continue on.

And our next question will come from John Franzreb of Sidoti & Company. Please go ahead.

Just in regards to M&A, it sounded like that you may be a little bit more active in your head than I would have thought because I would have felt we’re going through a period of digestion having made three acquisitions in the past year. Is that the case that you still have a full plate or not or you want to take a step back and fix the margins in U.S. galvanizing and things like that first?

Yes, I think we have a full pipeline on -- heavily focused on the galvanizing side. I would say that we’ve got a lot of resources focused on improving their U.S. galvanizing margins and operating performance. And we’re seeing the progress, and we’re doing not as fast as we want to see it but we’re seeing the progress. And like I said, I think some volume would help those a lot. The acquisitions we’re looking at are actually a little more widespread. So, we’re not looking as aggressively in the Gulf Coast because we now have -- as we look out at North American map, we don’t see much white space in the Gulf Coast area, now that we’ve made the U.S. Galv acquisition. We’re looking in other parts of the country. And so, if you look at our pipelines, it’s full of things that are in areas where we haven’t acquired anything in a little while and other services that we’ve continued to talk about that we want to get into. And we won’t close all those deals; we don’t have deal fever. So, we’re not going to overstretch our resources. I will say that Tim Pendley and his team have done a nice job of building their bench and building some internal capabilities, so that they can pursue the M&A activity pipeline that we have in front of them, effectively.

Now, does anything fundamentally prevent you from looking at galvanizing opportunities in Europe?

Nothing prevents us from doing it; we do kick the tire on some stuff over there once in a while and we have in the past 12 months. But it’s got to fit our profile, it’s got to be something we know we can come in and add value to and quite frankly, it’s got to be big enough that it gives us some critical mass. So, we would not typically -- since we don’t have anything there, we wouldn’t go look for a one site type of deal. So, it’s going to be have to be multi site; it’s going to have to be scalable; it’s going to have to be something where you are more confident that we can support and do something there. And so, we are very, very careful versus buying a mom and pop here in the U.S. where we’re going to kick the tires and have plenty of infrastructure to support it. So, we’re looking at them.

And also, in your comments you talked about the guidance, you’re doing the caveat about excluding acquisitions or divestitures, we’ve just covered the acquisition side I think. The divestiture side of that comment, I mean there has always been a small noncore business that’s been vented over the years. You’ve had ample time to kind of review the Company pipeline. Is there anything else that you consider divesting besides maybe that small business or is that it’s not even on the table anymore?

Well, we’ve identified a couple of things as non-core and we’ve also said, we’re not -- that doesn’t mean we will action it -- those things immediately. So, I want to be very careful what -- but we do have more than one small business that we view as non-core. And given the right opportunity, having said we we’re not looking to do fire sales but given the right opportunity, we’re going to clean up the platforms.

We’ve made this statement, John; we’ve made this before, even as recently as last call, saying we’re going to take a hard look at our portfolio this quarter. We always take a look at our portfolio performance. If we find the right combination of things going forward in terms of right fit for somebody else if that’s the case, that’s fine; there is nothing that we’ve announced so far but we are always taking a look at both acquisitions and divestitures. That’s just a constant as we’re trying to maintain that good balance on the portfolio.

Yes, we really do want to get more focus on electrical, more focus -- I mean it’s -- I’ll say energy is where we’re looking and we’ve got to get more focus across those energy platforms.

Perfect, I understand. And one last question, I was just wondering in the quarter, the first quarter, were there any kind of one time professional fees or anything you want to bring to our attention or was it just a perfectly framed quarter?

I think you might be referring to the corporate expenses being up a bit. We had a couple of different things happenings, and one of those we did have some fees from prior acquisitions that manifested themselves in the first quarter this year that weren’t there last year. We also have a couple of other things, equity based comp is up simply because our equity has been doing well. And as old stuff rolls off, especially the old SARs and getting to our RSUs and we replaced those with, they are occurring at a higher rate simply because the price lift, the stock is up. The other one is that we’re happy about more of our people participating in our employee stock purchase program, which also drives little bit of that year-over-year. This is really a combination of lot of different pieces, nothing -- no one big thing that’s to call out.

And we did plan for it, so.

Okay, just checking. Alright, thank you for taking my questions.

The next question will come from Schon Williams from BB&T Capital Markets. Please go ahead.

Alright, thanks for taking my follow-up. Tom, you’ve talked for a couple of quarters now about looking at JVs on the energy side. And, I’m just wondering, is that -- have you not find the right partner on that side yet, is it -- I don’t know, is it a long and tedious process where you start negotiations and two years later, we get kind of a result. I just wanted to kind of see, are you telegraphing that you are kind of opened something or is there something that we should be expecting maybe more kind of near-term that’s already in the works?

Yes, these are things we’ve been working on. And we reach a point where it’s time to announce and we don’t want to announce them to the market and give our competitors a heads up on these things until we have to. So, yes, these activities are reaching ahead; they are reaching a fairly near-term point where we should be able to announce some things.

And then, to switch gears a little bit, just any thoughts on CapEx guidance for the year? CapEx came in a little bit hotter than I expected, kind of Q1, just wondering kind of annual run rate $40 million, is that what you’re thinking or was there something leftover with Reno that hit the quarter? I just want to get a little bit of guidance around expectations for the full year.

No, nothing really with Reno there; I’d say the guidance would be higher than last year. We’ve got a lot of things that we’re taking a look at or investing in that would be more along organic growth line, so some product extensions, new products that take little bit of an investment now, and will be of the same sort of or better returns than lot of the acquisitions. So, we’re pretty high on a couple of these things.

And that would be more, when you say new products that would be more focused on the galvanizing side?

Yes, more focused on galvanizing. We’ve got some on the WSI piece, but I’d say the heaviest concentration is on the galvanizing, the new services products, technology that we’ve been talking about, plan of the future kind of things. And so, we feel good about these things as we’re continuing to set ourselves up for sustainable long-term top and bottom-line growth on the organic side.

And what, just in terms of a reasonable timeframe; I mean, you’re getting some traction from some of the new services there, but I mean what inning are we in, in terms of seeing that hit the income statement? Are we still -- are we half way through or we still early, what’s kind of your timeline there?

Yes. We’re in the second inning. We’ve got a lot of things underway; we’ve got lot of things that -- we’ve got resources now deployed to; we’ve made some investments. Some of the acquisitions we’re working on will help accelerate some of these things in terms of other services. But, yes, second inning. We’re very early. And we look to make a lot of progress to balance this year.

And at this time, we will conclude the question-and-answer session. I would like to hand the conference back over to Tom Ferguson for any closing remarks.

Great, thank you. I’m confident we will make progress on the M&A front, while improving the structure and focus of our operating platforms, as we execute in fiscal year 2017. And I look forward to discussing the impact of these activates when appropriate. Thank you for participating in today’s call. We look forward to talking with you again at the conclusion of the current quarter. Again, thank you and have a great day.

Thank you, sir. Ladies and gentlemen, the conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.