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

John Franzreb - Sidoti & Company Noelle Dilts - Stifel, Nicolaus & Company Jonathan Braatz - Kansas City Capital William Baldwin - Baldwin Anthony Securities, Inc.

Good morning, ladies and gentlemen, and welcome to the AZZ Inc. First Quarter and Fiscal Year 2019 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. [Operator Instructions] Please note that this event is being recorded. At this time, I would 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 2019 which ended May 31, 2018. As Denise indicated, my name is Joe Dorame. I’m with Lytham Partners and we’re 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. Please note there’s a slide presentation for today’s call, which can be found on AZZ’s Investor Relations page at www.azz.com. 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 28, 2018. Those risks and uncertainties include, but are not limited to, changes in customer demand and response to products and services offered by the company, including demand by the power generation markets, electrical transmission and distribution markets, the industrial markets and the metal coatings markets; prices and raw material costs, including zinc and natural gas, which are used in the hot-dip galvanizing process; changes in the political stability and economic conditions of the various markets that AZZ serves, foreign and domestic; customer requested delays of shipments; acquisition opportunities; currency exchange rates; adequate financing; and availability of experienced management and employees to implement the company’s growth strategies. The company can give no assurance that such forward-looking statements will prove to be correct. These statements are based on information as of the date hereof and AZZ assumes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise. With that said, let me turn the call over to Mr. Tom Ferguson, Chief Executive Officer of AZZ. Tom?

Thank you, Joe. Welcome to our fiscal year 2019 first quarter earnings call, and thank you for joining us this morning. As we’ve noted on the last call, we were hoping to regain positive traction to start the new fiscal year. We believe we accomplished that with solid double-digit growth for both top and bottom lines. While we still have several challenges both within the business as well as outside, we're off to a solid start. We’ve fully integrated Rogers Brothers Galvanizing that we acquired in February into our Metal Coatings segment. The integration of the Lectrus facility in Chattanooga, Tennessee into our electrical enclosure platform within the Energy segment is well underway. We remain highly active on the M&A front as we look to strengthen our core businesses. Metal Coatings had a very solid first quarter with record sales. While it continues to gain traction on several operational and procurement improvement initiatives, it also had operating margins improved to 21.9% versus 18.5% in Q4 of fiscal year 2018. We remain confident that continuous galvanized rebar and powder coating will continue to grow and also improve their margins in the coming quarters. The reorganization to improve our value-added selling efforts are complete and the new structure has been widely embraced. Due to the higher demand in the labor markets, we selectively increased wages beyond our normal annual merit process to improve retention and hiring at several galvanizing plants. In spite of a tight labor market, these changes allowed us to attract higher skilled direct labor, which help to improve volume throughput, productivity and efficiencies at these plants. The Energy segment experienced strong refinery turnaround activity both within the U.S and internationally. The nuclear sector continues to be challenging, but we’ve right sized our operations to work through this environment. The electrical platform saw some improvement in activity levels, but continue to face a tough pricing environment in some of its businesses. Tariffs had only a minor impact on this segment in the first quarter, but steel prices are increasing. During the first quarter, we felt it was prudent to take some additional reserves based on collection risk for some of the previously shipped medium voltage bus product for the [indiscernible] nuclear plant project. We had strong bookings in the first quarter, particularly for a high voltage bus business. Overall, we're seeing improved demand in most of our energy segment businesses. As we look forward, we see solid demand at most of our metal coatings plants as fabricators are busy in most regions. While we've increased prices based on the higher zinc and direct labor costs, we expect to see the highest cost zinc flowing through our kettles over the next several months. We are focused on improving productivity and efficiency, while also continuing to increase price realization to offset these increased costs. While tariffs have not had any significant impact on demand, we've seen some projects using imported pre-galvanized steel assemblies, which circumvent the steel tariffs and reduces our participation on these petrochemical and solar projects. Currently this is only a small impact to our metal coatings segment, but we're monitoring this carefully. We did close a small underutilized plant during the quarter bringing our network of operating plants to 43. Additionally, we're looking to other galvanizing plants where we might have significant capacity overlapping markets that have little potential for demand growth. On the other hand, we're also more aggressively defending some markets where competitors have attempted to take market share by focusing more on customer satisfaction and value selling. As the year progresses, we're beginning to see increased demand for GalvaBar and have began looking for a site to build our second facility to support future growth. Powder coating demand is growing for both of our plants, helped by our improved selling efforts. Our energy businesses full-year outlook is solid, although Q2 is when we see the normal seasonality caused by lower turnaround and outage activity in the summer months. We are seeing an improved level of refinery turnaround activity for the fall firming up, but we remain cautious regarding nuclear outages. While tariffs and trade disputes have not had a dramatic impact on our energy segment at this point, we anticipate that steel prices will continue to increase for electrical businesses and experienced some skilled craft worker shortages that will continue in some areas. With that, I will turn it over to Paul Fehlman to discuss the financials in more detail.

Thanks, Tom. For the first quarter of fiscal year 2018, we reported net sales of $262 point million, a $57 million increase which was 27.7% higher than the first quarter of fiscal 2018. Net income for the first quarter of fiscal '19 was $15.7 million, an increase of $3.7 million or 30.3% higher than the first quarter of last year. Reported fully diluted EPS grew 30.4% to $0.60 compared to $0.46 last year and our backlog finished at $329.7 million, up 7.6% versus the first quarter last year. And on a sequential basis, backlog was up 24.2% compared to the fourth quarter of fiscal '18. Our book-to-bill ratio finished the first quarter at 1.22 compared to .94 in the first quarter last year. We expect to ship 43% of the backlog outside of the U.S compared to 41% in the same quarter last year. Gross margins for the quarter were 22.4%, 70 basis points below the 23.1% margin for the first quarter of last year. SG&A finished at 13.4% total sales compared to 13.3% for the first quarter of last year, primarily as a result of adding for businesses through acquisitions since the first quarter of last year, taking some bad debt reserves paying just under $2 million in special retention bonuses and issuing a new rewards and recognition program for all employees and implementing facility specific ranges for a portion of our lowest paid employees funded by part of the savings from the Tax Cuts and Jobs Act of 2017. We generated first quarter operating margins of 9% compared to 9.8% in the first quarter of fiscal '18. On a comparative basis, our quarterly interest expense rose 14.2% year-over-year or $478,000 as a result of higher debt balances and rising interest rates. Our effective tax rate improved to 22% compared to the first quarter rate last year of 28.4%, again driven by the Tax Cuts and Jobs Act of 2017. Cash flow used in operations improved by $4 million or 21.8% in the first quarter of fiscal 2019 compared to the performance in the first quarter a year-ago on higher net income. As for our first quarter segment results, first quarter revenues in our Energy segment were up 29.8% to $147 million compared to the first quarter of the prior year, while operating income rose 48.4% to $10 million compared to prior year first quarter as gross margins in the segment remained flat at 20.1% year-over-year. Operating margins for the first quarter were 6.8% compared to 5.9% in the first quarter last year. On a sequential basis for the Energy segment, revenue was up 42%, operating income was up [indiscernible] and operating margins improved 455 basis points compared to the fourth quarter of fiscal '18. In our AZZ Metal Coatings segment, first quarter revenues grew $115.3 million -- grew to 115.3 million, a 25.2% increase compared to the first quarter of last year, which was a new quarterly record for the Metal Coatings segment. Operating income grew 18.6% to $25.2 million compared to the same period last year. Operating margins for the segment finished at 21.9% for the quarter, down 120 basis points compared to 23.1% during Q1 in the prior year. On a sequential basis, however, revenue was up 18.6%, operating income was up 39.9% and operating margins improved 340 basis points compared to the fourth quarter of fiscal 2018. With that, I will turn it back over to Tom for his concluding remarks. Tom?

Thank you, Paul. We remain cautiously optimistic about fiscal year 2019. And in spite of having started off in Q1 even a little better than we had expected, we're maintaining our guidance for fiscal 2019 with earnings per share in the range of $1.75 to $2.25 for fully diluted share and annual sales in the range of $900 million to $960 million. We're experiencing generally improved market conditions and we feel confident about the organizational changes we've made and the initiatives we're driving. We're pleased with the actions we've taken to manage our commodity costs and improve labor hiring and retention as well as the positive impact of tax reform both on our profitability and on the demand created by investments for many of our customers. We're continuing to monitor tariffs and trade negotiations closely as these may influence commodity inflation as well as our customers demand. As turnaround demand for the fall firms up, the trade situation becomes clear and assuming another solid performance in Q2, we will revisit guidance as we approach the next earnings call. With that, I will open it up for questions.

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

Good morning, guys. Nice quarter.

Good morning.

Good morning.

I guess, I would like to start off with some comments you made last quarter about deferred jobs. It looks like the order intake was really strong this quarter. For all the jobs that were deferred in the second half of fiscal 2018, were they realized this quarter or is there still some you expect to get within the next quarter or two?

We shipped a lot of it. We still have some left and some of these would drift into Q2 and maybe a little into Q3.

Okay. And turnaround activity was really good for you for the quarter. Could you just remind us how much of your business is directly tied to the seasonal turnaround market?

Yes, it is interesting. Over the entire year, it's probably about 20%, but in the first quarter it's a little higher. It is mostly the welding solutions business and that’s affected by refineries. And of course we did have a little bit -- we had a weaker nuclear outage season which was fortunately more than made up for by the refineries.

Okay. And on the SG&A line in the first quarter, $35 million was nearly $10 million jump from the February quarter. Can you just kind of walk through what happened there?

Sure. Yes, we had several pieces on the SG&A that’s still through this. We acquired four businesses for us which [indiscernible]. We had about a $1.5 million of the bad debt reserve that Tom talked about briefly. We also had the addition of the different added bonuses and the acclaimed project which is something that is rewards and recognition program that we put some money into in advance of starting the program. So all that stuff together probably was about seven of the variance. The rest of it is going to be basically related to the normal growth. Not sure it would be -- that the -- the accrued bonus, right. So that would have been quite a bit of it in the first quarter too. As the timing works out, we accrued bonuses and then we don’t pay them until with enter the first quarter, but you will see a little bit of a jump in the first quarter before those end up pushing out.

So on the $1.5 million of that is -- that being the bad debt portion is what you would say is kind of a nonrecurring number. The rest will continue to fall through the balance of the year?

Well, I’m not sure -- no, no, because again we’re setting up a special program, right and we had some one-time bonuses relating to the payout on this -- on the tax.

Yes, and also the -- part of it was first quarter last year we didn’t have to accrue very big bonuses and this year we did accrue kind of full bonuses, if you will, because we had a good quarter which worked well for the year normally in terms of bonus payout. So we were kind of lapping about a bad accrual quarter for -- because we do have -- basically every employee is on the incentive program.

That’s certainly a positive read through Tom. So, I actually -- I will jump back into queue and let somebody ask some questions. Thank you.

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

Hi. Thanks. Good morning.

Good morning.

Good morning.

So just -- I just wanted to start with a couple of housekeeping question. So, first just could you give us organic growth in the quarter given that you did complete those four acquisitions in the last year?

I will actually go the other way around. The revenue in the first quarter of '19 for the businesses that weren't there a year-ago is about $60 million in revenue.

Okay, perfect. That’s helpful. And then when we look at this -- the $40 million project award in China, can you give us some thoughts on how to think about the duration of that contract and the margin profile?

The way it is set up right now we are expecting that will make our full shipments this fiscal year. And we under the same expectations that expect by the end of fiscal '19 -- sorry, fiscal '20 that will be done with the project. Now it's always subject to movement and change by the customer, that’s the way the current schedule is laid out.

Okay, perfect. That’s helpful. So then just kind of shifting into, I guess, higher level questions, but you look at the results in the first quarter came in obviously well ahead of consensus. Can you give us a sense of maybe where there was -- how results compared to your internal expectations, maybe where there was outperformance. And I’m asking this question to lead into my second question which is you reiterated guidance, how do we think about kind of some of the key factors that would help you get to the high-end of guidance you guys talked quite a bit about, what you think about as some of the downside risks, but I would be curious to think about how you think about the pathway to the high-end?

Yes, Noelle, I think we were a little above expectations, which of course is why we were also able to invest some in retention and trying to improve productivity which would play out over the next few quarters. So while we were somewhat ahead we did reinvest a little bit. On the other hand, I think the terms of what’s going to drive us to the top end or above, it's as we look at Q3 the fall turnaround season as that really firms up if we see kind of the same spread of refinery projects that that we saw both internationally and domestically that right now we kind of got that into the nominal numbers. So if it's strong as Q1 that will give us some confidence. Two, we are driving towards the top end of the range, we remain cautious about any fallout from the tariffs. So we’re really looking at external issues more than internal issues when it comes to galvanizing. And on the electrical side we’ve been able to price in a lot of the cost increases on zinc and direct labor, but the steel -- and we did already have priced in on the electrical side most of the steel. But as those prices continue to escalate, we are a little concerned whether we can keep up with pricing, so as that starts to play out and firm up, that will give us a lot more confidence towards the upper end. And then we would love to see some nuclear outages. We’ve got it in at a nominal number for the year. So any kind of activity will be beneficial for our NLI welding solutions business.

That makes sense. So extending on the turnaround side of it, just curious to what extent you think the strength in refinery turnaround in the quarter was somewhat of a catch up from deferred work following the hurricanes or do you think it's kind of just getting back to normal demand patterns as we move past that event?

Yes, a couple of things there. One, there was some catch up and -- but on the international side that was -- those were projects that weren't affected things in Mexico, in Asia, so we look for that to continue. Of course, the megaprojects we just like to see some solid projects and right now we’re bidding quite a few things which gives us some confidence. In terms of the other -- whether it's going to continue, we -- what we found on some of these turnarounds as we got into them, the deferred maintenance had created some issues for some of our customers, where there was more repair needed than what was expected. So I think that kind of gives us also confidence in the fall that refinery start, they obviously talk to each other. So we would hope that the message is it's time to get into some of these vessels and coker drums and things like that. So while, I think there was catch up, I'd say it was probably two thirds, which is they're back into a normal refinery turnaround schedule.

Okay. And then I will ask one more question and get back in queue, but you talk quite a bit about having to increase wages and to help retain labor in galvanizing. I guess, this in my view, kind of begs the question, we're seeing kind of some of this labor tightness even without sort of a really robust downstream market. How are you thinking about thinking ahead around how to retain labor and kind of the cost of labor as we move forward over the next year and half, two years?

Yes, I think a couple of things. One, the reason we put -- a lot of times, people are leaving not because of the $0.25 or $0.50 an hour. They’re leaving because they don’t feel recognized. They -- we are putting a lot more focus on getting them in, getting them experienced in -- particularly in the galvanizing shop, so they understand what the job really entails so that we don't have that early attrition a month after they are hire on. And we did have a lot of that, so we're hiring better. We spent -- we’ve invested in how we hire, how we recruit, how we onboard, how we train. Two of the rewards of recognition program was something been able to put $200, $250 of benefit into each employees account, if you will, and that’s something we will continue to use for ongoing rewards recognition as we try to drive up and improve value focused culture. And we -- but we're expanding our recruiting efforts and -- but we’ve also raised our expectations. One of things that happened, I will give you just one example, we had a plant that was down to about 54 people. They had plenty of steel on the yard, plenty of business as we increase the wages, we were both hiring as well as took care some folks inside the plant, we not only got to I think it was 86 people, so we had a great shipment quarter in that facility, but productivity went up 47%. So it's not just that we are filling it with warm bodies. We are actually hiring, training, on boarding better and seeing that flow through in productivity and efficiency and that's helping us to keep up with some of the cost increases.

Great. Thank you.

[Operator Instructions] The next question will be from Jon Braatz of Kansas City Capital. Please go ahead.

Good morning, Tom, Paul.

Hi, Jon.

Paul, I think you mentioned that $15 million were from acquisitions this year. How is that split between coatings and energy?

I’m going to say that’s going to be about two thirds. Let me see real quick. Yes, I think mostly it's going to be in energy.

Yes.

Mostly in energy? Okay. Okay. And Tom, you mentioned that one of things that would get you to top -- get you to the top end of the range would be turnarounds or -- turnarounds or closures in the nuclear business. And I guess my question is at this time as we sit here on July 4 basically, would you not know by now whether there's going to be some shutdowns and maintenance work or how much of a heads up do you get for that type of work?

It's one of the interesting things. We’ve got a very good opportunity management process and system and tool, and our sales force is on top of that. What we’ve seen from refinery is they’ve really shortened their decision process of -- that’s why I say we’re coating a lot of stuff, we see a lot of activity. We would really like to see that firm up and turn into some engineering orders. And -- but we’re kind of this was the same trend that we had coming into the -- this spring cycle. The only difference being we did have a couple of very large projects where we did have the engineering orders on them. In this case, we are doing some of that work and that’s where we have to do the markups and you get into a lot of advanced engineering. So we feel pretty confident right now about what we're seeing. So as long as there's not hurricanes or things like that, we feel pretty good about where we're at us as we are looking at the fall.

What -- I guess more specific, what about the nuclear outages? Do you see much -- you get much of a heads up there? Because I think you were just referring to refinery.

Yes, I was. The nuclear side, yes, we usually do get more of a heads up because you do have more planning. When you’re going to go in the containment, we're seeing kind of the same -- to give you an example, I think there was about $12 million of work-related our kind of welding solutions over the last few months and we probably got over half of it. So it's still pretty depressed. There is -- we would love to see a couple of things happen. Unfortunately, usually, if that does, it means that something has gone wrong. So we're not wishing that on any of our nuclear customers. But, yes, we are just not that -- we're not that excited about it, but we’re scrambling to try to fill our capacity with industrial stuff, both refinery as well as some petrochemical and we’re reaching out on some other things.

Okay. Paul, one last question. I don’t know, maybe I missed it on the prepared comments. Did you break out galvanizing -- the increase price versus volume? Did you talk about that?

No, we didn’t talked about that. But give me one second. If you have another question and I will give you some generality.

He is looking something up.

I’m good for now.

Okay. I will call it out in a second.

Okay.

The next question will be from Bill Baldwin of Baldwin Anthony Securities. Please go ahead.

Good morning, Tom and Paul.

Good morning.

Tom, can you -- can either you or Paul offer some color looking at longer-term with things, lest I’m assuming major impact from tariff on your cost or demand? And over the next 12, 24 months what’s your target -- targeted levels would be for operating income, margins in the energy segment? Where do you think that business can go to once you get some of the projects at your backlog so forth so on?

Yes, I think that’s on the energy side, particularly around electrical where we do have backlog and there's more project activity. So as we get some of the lower price stuff out of our backlog as this year goes on, we would say we see and I think we’ve said this before, we are really focused on returning the electrical margins particularly back towards the 10% -- north of 10%, hopefully up to 15% EBIT. But we’ve got ways to go. We are seeing some demand improvement, it's still early. The China stuff is okay margins, so and we’re still bidding a lot of that activity. Most of that will be manufactured in the U.S., some of it in China. So, I think we see that return in that 12% to 15% range as we get out of this year and into the next. In terms of the welding solutions, it all comes down to absorption and activity level. So as far out as we can look, we know they have to maintain the refinery. It's harder to predict the nuclear side. So we continue to see those margins. When we have decent demand, they can be around 10%, high single-digit. If we don’t see the demand, they kind of go the way it did last year. We’ve taken about as much cost out of the -- we’ve adjusted the cost structure about all we can over the last year in -- on that industrial piece of energy. We would -- we’ve structured NLI, the nuclear component piece for around that $40 million of volume that that we’ve talked about it does nicely at that level. So we would love to see kind of just any continued activity on the nuclear side. In terms of Metal Coatings, we still are ramping up the investments in powder coating and GalvaBar, so that’s a little bit of a drag on the total margins, but we are still committed to getting those back to 23% to 25%, particularly as the investments start to pay off more and we continue to grow them and also as we continue to drive price realization on the galvanizing side, which we're very comfortable with the improvement in sales coverage. We’ve seen the focus on value and then also the focus on being able to control our costs around procurement and productivity and efficiency. So our operational improvement activities in galvanizing give us confidence. We are going to return to those margins as long as we can maintain the volume.

Okay. Good insight there, Tom. With the -- is there any color you can offer, are there any particular initiatives that are ongoing on the legacy E&I benders [ph] or legacy electrical benders, with the new head of that operation now having been in there for a little while? Are there any thing that you can talk about [multiple speakers]?

He's sitting here, but I’m not going to let him talk. He's rebuilt that team, we’re pretty satisfied -- we do have some new general managers in the fold, very confident with what they bring to the table. They’re also driving on operational improvement procurement savings. The big thing is they’re doing that I’m excited about as we get probably 12 to 15 months out is fully integrating those three enclosure plants in terms of how they operate in back office and driving efficiencies across all three of them. So I think that’s going to give us -- it gives us more offerings, more standardization, better operating efficiencies. So I’m pretty excited about what that’s going to bring. We would love to see some demand improvement and as that comes we think we're well-positioned to take advantage of it. I also think what they're doing on switchgear side of the business, great opportunities between -- with the acquisition of Powergrid. That gave us some different offering, some smaller offerings that fit nicely with what we do in our traditional switchgear business. So both innovation, broader offering and then sharing capacity between the two locations which really helps improve our absorption and ensure we're leveraging the resources in both of those plants. And then finally I have to talk about our international growth in this and our lighting business, we're pretty excited about. We’ve completely converted over to LED, driving hazards [indiscernible] even though it's a fairly small business for us and they still kind of recovering their offices from the hurricane Harvey in Houston. And -- but they’re -- we are really excited about the enthusiasm and energy, the expanded sales coverage and the expanded offering they have. So we still like that electrical business and feel like Mr. Lavelle has got it going in the right direction with an improved team and a lot of focus on improved customer satisfaction and driving operating efficiencies.

Super. So you’re pretty well staffed out on the sales side then, Tom, in that segment?

We are. We feel good about the sales structure. They’ve -- he has put a couple of really seasoned leaders in key roles. We feel strong about what we are internationally, but domestically he has made a couple of changes around switchgear and the overall electrical side, which gives us more and more depth, broader sales coverage and more -- technically more face time with customer. So we feel pretty good about that and it's been a while coming, but we feel like we’re where we need to be now and feel good about our ability to sell our value.

Very good. Very good. On the coating side briefly, if we can be, I guess, I know time is getting away, but what's the status there as far as finding a new person a head of that operation? What -- kind of how you’re thinking there on your time schedule and how you’re approaching that?

I'm pretty happy. I’m pretty happy right at it. I’m looking at a lot of that senior around the table. I’m not …

But we [multiple speakers] why.

Well, it's -- and we’re -- we’ve got some strong candidates internally that I feel real good working with that team and -- so right now I’m very comfortable with it, and we've got such a good, strong team at corporate in terms of the functions and finance and legal and IT and it just -- it makes me feel comfortable that I can spend time on the coating side. And I have found so much energy. We just had an extended leadership meet -- team meeting and now lot of energy, lot of enthusiasm and a lot of great ideas that we’ve just got operationalized. So for now and probably the balance of this fiscal year you're probably looking at the leadership structure we're going to have.

Right. Fair enough. And last question with your active M&A program, is your coatings business at a point in time or does it make sense to begin to look outside the U.S and Canada for that business, I mean, as far as growth through acquisition?

You know, we’ve -- we continue to have outreach to the Europeans to Latin America. We have the three facilities in Canada so we've maintained contact with other folks up there in Canada. I don't know that I'm ready to call that ball yet, but -- because, we still have a lot of things that we're focused on and opportunities in -- domestically, but so it's priced still a little bit early. I'd say we will …

Right. Fair enough.

… we will take advantage of opportunities. We have, because we got several of them lined up in the pipeline.

Are you still see good domestic -- I mean, potential domestic activity? Then on the M&A side, in the coating business?

Yes, there's still several sites out there. We are very active talking to them and I won't say we’re trying to push them too hard over the goal line, but yes, we -- we are very active and have really good relationships.

Okay. And last question, housekeeping. You mentioned -- I didn’t quite get it down, Tom. You mentioned some impact potentially on your solar galvanizing business because of some type of import. Import of what kind of product, I think that’s just on a …?

[Multiple speakers] some of the solar components are coming in pre-galvanized out of Asia, probably most in China. So there's some of that, there's more of it. It's coming in pre-galvanized, there was a project that just went pregalved imported. So we obviously -- that's top of mind, so it's not a huge impact, it's just something we’re monitoring closely. And if tariffs get higher that could be a way that some folks can circumvent.

Right. Okay. Thank you very much for your time.

Let's go.

[Operator Instructions] The next question will be a follow-up from John Franzreb of Sidoti & Company. Please go ahead.

Yes. Just sticking a little bit with the galvanizing business. The op margin profile and the narrative on zinc prices, can we just about that for a second because as long as I’ve been covering the company, it seems like it's kind of the changing over the years where at one point higher zinc prices were good and one point higher zinc price is not bad. Can you just walk us through what the impact of the zinc is having on the margins? And how we should be thinking about the swing in the commodity costs going forward?

Yes, I think there's a couple of things. One, when -- it's not so much zinc price is going up. What we probably like is volatility. And as volatility and zinc prices go up and we’re able to raise our prices and if we can hold those that our margins tend to -- they kind of pop nicely, so just to put it in perspective. So when we see this trying a longer upward trend and of course we -- on average we probably got about six months of zinc in our kettle, so it takes a little while for the higher zinc cost to flow through. And we monitor that, we model it, and it's not that we are unaware of it. We know the cost of each one of our kettles. And then we try to push prices much as we can as much as the market will bear. As that then flips over and starts to trend back down and it's subject to market conditions, but if we're able to hold that price, then you see the margins kind of trend back up very quickly. So it's really the volatility that I think as I would define or I don’t know if Paul wants to add something to that.

Yes, Jon, look I mean in the past, if you go way back to the past and follow the movements on zinc, it's been lot more spikey than this, to Tom's point, a lot more volatility. This particular increase has had a very long duration and it's moved quite a lot if you take a look at the cost per pound over the last couple of years. So it's a very different situation. It's typically in the past it was prices will go up, it's going to be sticky downward, and that's where we’ve made some robust margins in the past. It's a different situation now and we could talk about it more offline if you like to, but that’s pretty much the difference.

Yes, and I also say that in past if you get back over the last 10 years, there were a couple of good buy-in points where it had dipped enough that but committed four to six months of demand and then benefited in margins from that. The way this has gone. We saw we had one buy-in opportunity. Quite frankly, we probably bet -- that I’m wrong. So we try not to do that [indiscernible] and because we haven't have the obvious dip that we saw that it was just a temporary fall off. It's been more kind of steady state. And for those of the things that I think if you look over as Paul was talking about historically over the last 10 years with margins got up to north of 25%, 26%, 27%. There is where you had some really low cost in the kettle. And prices had increased enough that it stayed sticky, and you saw those margins go up.

I need to clear one -- go ahead with your question and then I need to clear the one from Jon Braatz.

Okay. I’m just kind of reconciling a six months worth of inventory or kind of cost visibility on a business that's not backlog driven mostly just in time. I would think you would have better pricing unless, of course, the competitive environment or there's so much capacity out there that it's just hindering you from doing that.

Yes, I think in most of our markets. We’ve got one to multiple competitors. So and if you think about it for a small one plant business owner, whether they’re making $0.5 million or a $1 million, it's -- they’re going to be probably slower to raise prices then, so we try to drive that, but it doesn’t always stick in and also their cost and their kettles could be a little different than the cost in our kettle. So it's only one of the cost components and so yes, we push it hard with our new sales organization. We feel like we can push it even harder, because the focus for us is the value we offer, the dependability to quality, the service and we’re trying to push that even more aggressively as we know the zinc in kettle is going to continue to increase in cost for the next few months and then it flips over and goes the other way.

Okay. All right, Tom. Thanks for your update. I appreciate it.

Paul, you want to …?

Yes, and then the one left over from Jon on price volume variance. The year-over-year in the first quarter in galvanizing was let’s just calm and then fussy it up a little bit and say on a volume basis it was mid high teens and then on price basis it was low mid single digits. Okay. And [indiscernible].

Thank you. And ladies and gentlemen, we will conclude the question-and-answer session. I would like to hand the conference back over to Tom Ferguson for his closing remarks.

Thank you, Denise. Thank you for participating in today's call on a shortened trading day. We look forward to talking to you again at the conclusion of our second quarter. All of us here at AZZ was you all a safe and happy fourth of July Independence Day celebration. Thank you.

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