Tom Ferguson - President and CEO Paul Fehlman - SVP of Finance, CFO Joe Dorame - IR, Lytham Partners

John Franzreb - Sidoti & Company Noelle Dilts - Stifel, Nicolaus & Company,

Good morning. And welcome to the AZZ Inc. Second Quarter of Fiscal Year 2018 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note 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 second quarter of fiscal year 2018 ended August 31, 2017. As Denise indicated, my name is Joe Dorame. I’m with Lytham Partners and we are the Investor Relations consulting firm for AZZ Inc. On the call representing the company are Mr. Tom Ferguson, Chief Executive Officer; and Mr. Paul Fehlman, Chief Financial Officer. After the conclusion of today’s prepared remarks, we will open the call for a question-and-answer session. 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 other financial websites. Before we begin with prepared remarks, we would like to remind everyone certain statements made by the management team of AZZ during this conference call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Except for the statements of historical fact, this conference call may contain forward-looking statements that involve risks and uncertainties, some of which are detailed from time-to-time in documents filed by AZZ with the United States Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended February 28, 2017. Those risks and uncertainties include, but are not limited to, changes in customer demand and response to products and services offered by the company, including demand by the power generation markets, electrical transmission and distribution markets, the industrial markets and the hot-dip galvanizing markets; prices and raw material costs, including zinc and natural gas, which are used in the hot-dip galvanizing process; changes in the political stability and economic conditions of the various markets that company 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, I would like to turn the call over to Mr. Tom Ferguson, Chief Executive Officer of AZZ. Tom?

Thanks Joe. Good morning and welcome to our second quarter earnings call of fiscal year 2018. While we entered the second quarter seeing signs of market improvement and some new opportunities. We are quickly impacted by the announcement of the VC Summer Nuclear plant closure and the depth of the impact of the Westinghouse bankruptcy. We then closed out a tough quarter with the impact from Hurricane Harvey in four of our facilities in the Houston and Beaumont areas. And despite these disruptive events, I'm proud of our people and our leadership team that pulled together to assist those impacted by the Hurricane and also supported the leadership changes we made during the quarter. As we noted in our recent release, our new guidance for fiscal year 2018, the hurricane have significantly disrupted our outlook for turnaround in the fall season which is normally a strong period for our industrial platform. While we anticipate a strong spring season for fiscal year 2019, we did take the opportunity to complete a thorough evaluation of our businesses and realigned our industrial support functions to better reflect the demand for our domestic business over the next few quarters. As well as continue sluggish activity in the nuclear sector. This platform was negatively impacted by both Westinghouse bankruptcy and the VC Summer closure. But we are pleased to see continued commitment to the Vogtle nuclear project. We strengthened our sales effort during the quarter to ensure executive level coverage among our key customers and support the international opportunities we see on the horizon. We are confident our industrial platform is well positioned to realize significant growth opportunities for fiscal year 2019. Our metal coatings margins showed a continued improvement in Q2, and we remained highly focused on driving volumes to improve operating margins. The Enhanced Powder Coatings acquisition has been fully integrated. The business is performing well and should contribute nicely to the second half of this fiscal year. Our new powder coating facility recently opened in Crowley and the Reno facility we opened last year are also gaining traction. We are pleased with an increased level of activity from the solar market and see this is a real positive development for the balance of this fiscal year and into fiscal year 2019. Unfortunately, we've not seen a significant growth in petrochemical activity along the Gulf Coast, an area now impacted by the hurricane. The rising cost of zinc has created both challenges and opportunities so we've added resources to improve our commodity procurement as well as support our operation improvement efforts. Tim Pendley also made some changes to strengthen the senior leadership team during the quarter to ensure focused on both the core galvanizing business and simultaneously pursuing the new alternative metal coating as well as continue as galvanize rebar initiatives. Our legacy Electrical platform which is normally been a stable performer has struggle to absorb the impact of Westinghouse bankruptcy and VC Summer closure. The disruption impacted customer service on other projects and several projects that were scheduled for Q2 delivery have now pushed out to the third quarter. Additionally, we recently had other operational issues developed so we made a leadership change and appointed Ken Lavelle as new President and General Manager of the Electrical platform. Ken was previously working for AZZ as a consultant for more than a year, so he was able to move quickly to reinvigorate these businesses. Additional, Ken made some other leadership changes that will ensure this platform quickly returns to their normal operating performance levels and with the strong reselling effort to ensure its customer progress and growth. The Electrical platform had the solid backlog and should benefit from the new switchgear products and market opportunities that the recent acquisition of power grid systems brings to the table. We are confident we'll see a return to normal operating and contribution levels as we enter the 2019 fiscal year. While we are disappointed with the results of the second quarter, we believe our leadership has reacted as quickly and effectively as possible to regain positive traction going into the second half of fiscal 2018. The projects that pushed from Q2 into Q3, the newly acquired businesses and the impact of the new leaders will provide the momentum we need to finish the year on a positive note and more importantly position us for a strong fiscal year 2019. Furthermore, we'll continue to focus on improving cash flow and pursuing a very active M&A pipeline. With that I'll turn it over to Paul who will talk about our financials.

Thanks Tom. For the second quarter of fiscal year 2018, we reported net sales of $190.4 million, a $4.6 million decrease or 2.4% less than the second quarter of fiscal 2017. Net income for the second quarter of fiscal 2018 was $8.3 million, a decrease of $1.7 million or16.9% less than the second quarter of the prior year. Reported diluted EPS fell 15.8% to $0.32 and our backlog finished at $331.2 million, down 6.1% versus the second quarter last year, as our book-to-bill ratio finished at 1.0 compared to 0.99 in the second quarter last year. We expect to ship 42% of the backlog outside of the U.S. compared to 27% in the same quarter last year. And for comparative purposes, please remember that the second quarter last year included $8 million of realignment charges primarily in metal coating. Gross margins rose to 21.8% from 21.5% in the second quarter year-over-year primarily from the charges taken to cost to good sold in the second quarter last year for realignment of $6.7 million. SG&A finished at 13.9% of total sales compared to 13.8% in the second quarter of last year, which also included a $1.3 million of realignment charges driving the second quarter operating margin into 7.9% compared to 7.6% in the second quarter of fiscal 2017. Our effective tax rate for the quarter was 26.9% compared to the second quarter rate last year of 10.4% which of course was effected by the charges taken for realignment last year, reducing our tax rate in the second quarter. Cash flow from operations fell by $21.6 million in the second quarter of fiscal 2018 compared to the performance in the second quarter a year ago on lower net income and higher working capital. As for our second quarter segment results, second quarter revenues in our Energy segment were down 6.4% to $91.4 million compared to the second quarter of the prior year, while operating income fell to 0 compared to $8.2 million in the second quarter last year as gross margins in the segment fell 16.4% in the second quarter this year compared to 24.2% in the second quarter of the prior year. Operating margins for the second quarter were 0% compared to 8.4% in the prior year period. In our AZZ Metal Coatings segment, formally the Galvanizing Services segment, second quarter revenues rose 1.6% to $99 million compared to the second quarter last year, while operating income rose 55.7% to $23.4 million compared to the same period last year, primarily on the $7.3 million in realignment charges taken in the segment last year. Operating margins finished at 23.6% for the quarter, up 820 basis points compared to Q2 in the prior year also on the effective charges taken within the last year. On a sequential basis, revenue was up 7.6%, operating income was up 10.2% and operating margins improved 57 basis points all compared to the first quarter of fiscal 2018. Looking forward, although we had a challenging cash flow quarter in the second quarter and the first half of the year, we’re taking the necessary actions for improvement in the coming quarters. As I stated in the last quarter's conference call, we have seen these seasonal swings in the past, we have overcome shortfalls in the operating cash flow by continuing to focus on working capital fundamentals. Our balance sheet remains strong and we’ll continue to support growing our operating platform. As announced last week, we adjusted our fiscal year 2018 guidance with EPS to be in the range of $1.80 to $2.30 per diluted share and annual revenue to be in the range of $825 million to $885 million. Lastly, our Board of Directors has approved the quarterly cash divided in the amount of $0.17 per share. The dividend is payable on November 1st, 2017 to shareholders of record as of the close of business on October 18, 2017. With that, I’ll turn it back to Tom for concluding remarks. Tom?

Thanks Paul. To reiterate, we remain committed to driving operational excellence throughout the company. While our organic growth and operational excellence initiatives have taken longer than anticipated to develop, we believe we are becoming even better positioned for the next few years as industrial market rebound and both our growth and cost improvement initiatives are fully executed. We are focused on improving our cash flow, driving our initiative and capital deployment more effectively and completing value adding acquisitions more aggressively. Thank you. And now we'll open it up for your questions.

[Operator Instructions] Thank you, Mr. Ferguson. And your first question will be from John Franzreb of Sidoti & Company. Please go ahead.

Good morning, guys. I guess I want to start with the revised guidance from last week. This is a litany of items that are impacting the P&L from hurricane to low nuke volume to turnaround of activity to low spending in Saudi Arabia coating markets, project activity. Can you kind of walk us through which one is hurting you the most? And maybe relative impact, give us a sense of magnitude here and the timing of when do you expect these things to turnaround come back if at all?

Sure. Okay, John. Where to start? Let's go with the hurricane effect, the hurricane effect to the remainder of the year. First of all, as you know, we had headwinds in the turnaround market, refinery turnaround all year and including some time prior to the year, effectively what happened with the hurricane turning to is that many of the refineries get shut-in, they have opened back up and they are running flat -out, to take advantage of the crack spreads, of the refinery spreads that they are getting but also there would be effect with many of them sent me their maintenance crew from plant to the north down to plant in the south to turn to get them up and running very quickly and do whatever repairs needed to be done. Effectively what we've seen is that big jobs that we had in backlog have pushed out into next year which we refer to both in the earnings release and in the guidance last week. So that's got a profound effect not only on the industrial business for the second quarter at the end of the year but also into the remainder of the year. And we do expect and we have been working with many of the refiners on scheduling stuff into the first quarter of next year. We would expect that to be a good turnaround season first quarter of next year, our first quarter of the fiscal year next year. In terms of the effect of Westinghouse and the cancellation of VC Summer, that's more of an issue of VC Summer, we did not expect to be cancelled that quickly, we were waiting to hear, we were doing work and we had backlog on that particular job that has now received a stop orders. So that has effect on the outcome for the rest of the year as we no longer be booking that work and we will be executing on the backlog in there. The rest of Westinghouse, the effect on the nuclear market and our shop floor basically that it had an effect on the nuclear market so we've seen a lot of work not only VC Summer but also related items in total and actually some other customers get delayed on the shop floor so it help tie up some of the shop floor so work wasn't really done on some other areas possibly a little bit of inefficiency on the floor but also shortened up what we were expecting in terms of revenue in the second quarter and that has effected to the back half of the year with VC Summer being gone. We spoke a little bit on the -- last week about the stuff in the Middle East typically by this time of year we would expect to see some emergency work being done in the Middle East primarily in our maybe voltage bus side or high voltage bus side that didn't materialize this year so that had a little bit of drag versus what we are expecting and then I think the last one probably would be operational efficiency. Again part of that is part of the VC Summer job. But we also had a few things in our electrical group where stuff wasn't shipping as quickly as we were hoping for. You see that we've actually made a change there and got Ken Lavelle in-charge of electrical going forward. Tom, anything to add to that?

No. I think that about covers it, if you kind of break it down it's probably a third related to nuclear and things going on in related to nuclear and Westinghouse and VC Summer, about a third related to refinery turnaround being pushed out which also affects some of our galvanizing opportunities in petrochemical, due to the lack of craft labor to do a lot of the work. And then about a third just operational things that we got to stay focused on and it mostly impacted us in Q2, but we'll see improvement as we go forward. So it's kind of the rough cut of data at a high level.

Okay. That was helpful. Now the change in management bringing Ken to the top on Electrical, could you just discuss what the problems you are having there? The kind of the impact they had and what you expect from that unit going forward?

Yes, I think on the Electrical side, as you know it's been a steady performer for us. We've committed to get it to 15% EBIT margins and be able to sustain that, drive cash flow and we just didn't feel like we were getting the traction in either the operational side that operational improvement, operational excellence nor we were seeing the domestic sale organization particularly improving and take advantage of market opportunities. So we expect -- we were getting some of the international growth in terms of -- at least in China and but that's been very selective. So it's kind of across the board just not making, getting the traction that we had expected particularly and it manifested itself this year when we also had some disruption so getting seasoned executive like Ken in place. He fixed bigger business than this for me in the past. There is a comfort level that we'll make progress quickly and quite frankly we are already seeing the some improvement in their KPI, key performance indicators that would give us confidence that we are gaining the traction that we had expected.

Okay. One last question and I'll get back into queue. Switching to metal coatings. Can you quantify the downtime that these facilities had on the quarter? How much that impacted EBIT for the segment? And will there be any spillover into Q3 because outside I mean look the margin profile for the segment is pretty good even with the downtime.

Yes. It didn't have much impact. I mean even though it was three galvanizing site they really down for a few days in the quarter. So there is fairly minimal impact on Q2. All three sites are up and running now, all three galvanizing sites and as you know we've got a pretty extensive network of galvanizing sites throughout Texas and Louisiana so any work that was there we were able to move instead of get it done. The problem we are facing going forward is that all the activity related to rebuilding after the hurricane has sucked up a lot of the labor in the region and so while we are seeing a little bit of positive impact it's not really not -- it's kind of inconsequential in the overall scheme of things on our second half, at least in terms of metal coating. But the impact in Q2 our lighting business was actually had a big backlog that shipped in the last week of the quarter, so they were impacted probably for us more than the metal coating impacted us. Fortunately, that backlog was -- that's what part what we are talking about is shipping in Q3.

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

Thanks guys, good morning. Just wanted to dig into your guidance a little bit more. Can you give just some thoughts on the guidance range that you provided and how you are sort of thinking about what would lead you to result to be more at the low end of guidance versus coming in at the higher end?

Well, look, I mean we've taken pretty balance look and a very wide look at everything that we take this down about low end. I'd say Noelle that you would probably have to deal with more operational issues if we were to wait and getting stuff out that we are planning and getting out this year from our own work or for our own reason or if any of these jobs continue to slide out into the next year by week, by month, by a quarter whatever. I'd say that the biggest risk would be that we have projects pushed out not on our making but also the primarily of our customers making. You can also have the possibility of the downturn on the metal coating side, we seemed to be looking lot more rosy on that -- look forward look there though I think that's going to be big risk. And then we are keeping a very close eye on everything going on inside Westinghouse and we don't believe that we have a whole lot of downside there but if something negative would happen if all sudden we will be careful that might have an effect on it, so it would take us down --our figures very likely. Tom, anything you add to that on the downside?

Yes. I guess I am probably looking at it little differently than Paul. I still view the some of the receivables and things we've got related to the Westinghouse bankruptcy on the nuclear projects, that's how I factor my downside. I think the operational things as Paul mentioned, it's true, they could slip, I think we got better handle on those projects though and while they move by week to week or month, we are tracking those a lot closer in our monthly reviews. But I would agree metal coatings as you know has no backlog so while they are feeling more optimistic for the back half of the year that's always the potential they just don't find the volume or the things like solar suddenly dry up again. That's been factored in but generally I think our metal coatings folks are being fairly positive about the leadership changes that have been made and the traction they are seeing in some of their sites related to either infrastructure spent or even though that's not huge but there are still some positive in certain market. And then I do think we will see as we get through the hurricane impact on the Gulf Course there are still opportunities. So I am kind of balanced in my view but I am looking to -- for me what we really got to manage tightly is how we handle Vogtle and how we make sure we don't get too far out our SKUs on receivables going forward with that and make sure that we can collect -- and then on the projects we just got to manage better than we have and I think we've got the right focus now so I am more confident that we will stay on that.

And then just reminding I guess of your nuclear exposure is it at this point is it still more concentrated around NLI or is there I mean should we think about also being a pretty substantial piece of what I think of as a legacy electrical business?

It's mostly NLI and the -- it's our bus business; it had quite a bit of per bus work for those two nuclear sites.

Okay. And then your seasonality obviously historically the third quarter has normally been significantly more stronger than the fourth quarter given strength of turnaround activity. With the push out that we are looking at now are we kind of looking at a flatter trend for the remainder of the year maybe you can just give us some thoughts there?

Well, I mean given that the seasonally strength typically comes from WSI. We -- I am not sure we got so much flatter because there is actually sale we expect more in the third quarter than the fourth quarter even things are pushing a bit. You should still see that seasonality in there, maybe it's little bit depressed from where it was but I am not going to call too much there.

And we have follow up question from John Franzreb of Sidoti & Company. Please go ahead.

Yes. In the press release, if I recall, you mentioned something about some restructuring you did at WSI in the quarter and also invested in the selling organization at WSI. Can you talk a little bit about those items and whys and the targets there?

Yes. I think in terms of -- I'll call it back office support to support function for WSI. One, we've done some things to streamline how they do business going forward and they made some steps last year in that direction. But they were still structured for about 20% more volume than what we currently have. So we are kind of walking a fine line of wanting to take out some back office headcount and yet knowing we've got a bring spring or fairly confident at this point we've a big spring coming because of the -- either the orders we've already booked or the things that the customer meetings on major projects we've been having so. So we kind of walk that fine line, you are talking 20-ish kind of people, so decent amount in a business that has 200-- well above 200 or 250 people. I think that's -- and then in terms of -- what was the other part?

In terms of the size of the realignment fairly small, the other thing you invested in the selling group --

Yes, the selling organization, one of the things we've talked about this in the past, WSI. They got the good solid sales force that we built over the last three years and we are pretty comfortable with -- when they are calling our corrosion engineers and maintenance engineers, but one of the things that given this cycle in refining where we used to benefit in my former life, was having those executive level relationship where we can really demonstrate and sell our value. So in September we brought in a very experienced couple of resources with a great track record. So not a huge shift but definitely one that we are looking for helping us sell that value because we are not the low priced solution, and just in this kind of cost sensitive nature of the refining market where it's purchasing has a little more sway than engineering at this point. So but also going forward it's just good for us to have those relationships. I think it helps us understand what the market is going forward, gives us better information, market -- on what's are the turnaround, when are they going to shift, when are we going to get more of them and because we've been somewhat uncomfortable that we haven't been able to forecast the level of turnaround activity that would impact our WSI business. So it was related to that but you are talking about a couple a resources.

Okay. And I guess against those puts and takes how should we be thinking about the SG&A line going forward or at least in the second half of the year relative to the first?

Yes. So because of some of the work that was done there that actually should have a positive effect on SG&A line, all other things being equal on the second half versus the first half so that's part of why if you do the math on the full year guidance that's why we would expect some improvement in the second half.

Okay

One of the reasons.

Yes, I guess because some of the sales and leadership and we call it reinvestment of some of while we took out.

So yes so is it net zero or net positive, just want to make sure I got it right here.

Well, yes, its net positive in that, it's a reduction in SG&A, across -- everything will be done across the platform, or across the new platform.

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

Thanks. I couldn't stay away. So just going back to your comments on kind of have struggling to forecast of the refinery turnaround market, you certainly aren't alone. Can you talk a little bit more about how you are thinking about -- if you are -- you started more certain on 2019, what's giving you some of the confidence, why do you think we will continue to see some of these turnaround being pushed out and just some thoughts on if you believe that the refiners are just figuring out ways to kind of run at acceptable levels without going through some of these larger full scale turnaround.

Yes. I think what gives me confidence is the opportunities we are chasing. We got a couple of mega projects that we are highly confident of. I am not going to mention the customers' name. We don't want that kind of news public but we are feeling really good about the opportunities that we are chasing that we are having the typical pre meetings because lot of these -- we've got bill markup, we got a start on our planning for these projects already to get them kicked off and call it March in next year, in the beginning of spring. So that's what gives us confidence and it's both domestic and international. I don't know -- so we are not counting on the general refinery turnaround trend changing, but we are more looking at what opportunities are we confident of at this point in the cycle and what significant meetings are we having and so we are looking at more just our own stuff. In terms of can they run longer? I think what we is kind of seeing thing fray a little bit that would indicate that bigger turnaround had to start happening for us. It's really around the coker drums, the age of the coker drums, when do they start experience cracking and given the nature of how important cokers are to sophisticated refining operations, we think that bodes well for us as we look into the next year not just in this frame but as you look into the fall. So for us, we are just seeing the sign that got to start doing larger repairs and on their cokers and coker drums which is where we look to.

Okay, that's really helpful. Second, I know you talked about some of the areas you are starting to see some improvement in the galvanizing business as it relates to volume. But could you touch on the terms that you are seeing and the extent on the terms you are seeing in the electric transmission business?

Yes. We are seeing some strength, we talked about this before is the switchgear, switchgear is still very healthy business, transmission and distribution is still healthy. Enclosure, it is still challenge area across the board I think you can get plenty of read throughout the market on that. And bus duct, as far as for us there is a lot of -- still lot of international demand for the high voltage bus duct. And we are looking to pick up more work in medium voltage although we have some opportunities there but that's pretty much to run down in our businesses, I can't stop at mention our specialty lining business is continuing to show health and coming back and I applaud the work that they are doing as well as our tubing business is plodding forward and they are really managing that business well and so we are happy with what's going on there.

And ladies and gentlemen, this will conclude our question-and-answer session. I'd like to hand the conference back to Tom Ferguson for his closing remarks.

Thank you for participating in today's call. We look forward to talking you again at the conclusion of what we hope is a better quarter in Q3. Again, thank you and have a great day.

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