AZZ Inc.

Good day and welcome to the AZZ Inc. first quarter of fiscal year 2021 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. 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 Dorme. Please go ahead.

Thanks, Sarah. Good morning and thank you for joining us today to review the financial results of AZZ Inc. for the first quarter of fiscal year 2021, ended May 31st, 2020. Joining the call today are Tom Ferguson, Chief Executive Officer, and Philip Shlom, Interim 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 is a slide presentation for today's call. which can be found on AZZ's Investor Relations page under Financial Information at www.AZZ.com. Before we begin with prepared remarks, I'd like to remind everyone certain statements made by the management team of AZZ during this conference call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Except for the statements of historical fact, this conference call may contain forward-looking statements that involve risks and uncertainties, some of which are detailed from time to time in documents filed by AZZ with the Securities and Exchange Commission, including the annual report on Form 10-K for the fiscal year ended February 29, 2020. Those risks and uncertainties include, but are not limited to, changes in customer demand and response to products and services offered by the company and 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 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. In addition, AZZ's customers and its operations could potentially be adversely impacted by the ongoing COVID-19 pandemic. The company can give no assurance that such forward-looking statements will prove to be correct. These statements are based on information as of the date hereof, and AZZ assumes no obligation to update any forward-looking statements whether as a result of new information, future events, or otherwise. With that, let me turn the call over to Tom Ferguson, Chief Executive Officer of AZZ. Tom?

Thanks, Joe. Welcome to our first quarter fiscal 2021 earnings call. Thank you for joining us this morning. Let me first start by saying that COVID-19 is still very much front and center for all of us and was the single largest event affecting our Q1 results. Our top priorities at AZZ continue to be ensuring employee health and safety while supporting our customers during these unprecedented times. As an essential infrastructure manufacturing company, all of our facilities were allowed to remain open and did so. I am extremely proud of the way our folks managed through this crisis during our first quarter and took care of each other and our customers during this pandemic. We are truly grateful for everyone's efforts that allowed us to continue safe operation of all of our plants worldwide. For the first quarter of fiscal 2021, total revenues contracted 26.2% versus the same quarter prior year, totaling $213 million, with metal coatings revenue declining slightly, 2.6%, to $119 million, and energy revenue declining 43.5% to $94 million. I will get into the details behind each segment's performance as we go along. We entered Q1 back in March with great enthusiasm, just as the pandemic was beginning to reach our shores here in the U.S. By April, when we announced record sales and strong adjusted earnings for fiscal 2020, we made the decision to suspend fiscal 2021 guidance and cited the uncertainty COVID was creating on both segments, metal coatings and energy. In particular, we pointed out uncertainty in the spring refining turnaround season, business disruption associated with our high-voltage bus orders in China, and overall weaker demand as customers implemented capital spending and social distancing guidelines. Normally a strong quarter for us, our first quarter ended up being as, or perhaps even more, challenging than we had imagined. Refiners shut down production, delayed both capex and maintenance spend, and essentially took a pass on the spring turnaround season. International travel was restricted, and businesses significantly slashed capital spending. As a result, our revenue declined 26 percent in the quarter, while net income slid to $5.5 million, or 21 cents per diluted share. I wouldn't normally call a 2.6% reduction in our metal coatings business a bright spot. However, with the backdrop of this challenging market, I say we perform much better than many probably expected. Sales totaled $119 million for the quarter as compared to $122 million for the same quarter a year ago. Our galvanizing team, in particular, was able to benefit from lower zinc costs while maintaining above average industry pricing by offering outstanding quality and outstanding customer service. While overall margins in the segment declined 300 basis points to 21.1%, galvanizing actually finished above 23%, pretty close to where they finished last year. The overall decline in our metal coatings margins was due primarily to lost operational efficiencies within our surface technologies plants, as some had to shut down due to a temporary loss in volume from customers. We remain committed to our strategic growth plan for the surface technologies business and driving meaningful margin improvement post-COVID-19 crisis and are also seeing improving market conditions as most customers have now reopened. Our energy segment, first quarter fiscal 21, revenue decreased 43.5% to $94 million, resulting in an operating loss of $1 million as compared to $12.6 million positive in the same quarter a year ago. As I mentioned previously, the decline in revenue was a result of a lack of spring refining turnaround season, delays in both shipments and service work resulting from COVID-related international business restrictions, and overall weaker demand for electrical products. While our industrial platform shops were open and working, very few crews were deployed during the normally busy spring seasons. In some cases, we had to get our crews home from international projects in countries that went on lockdown after crews had already been deployed, which caused additional expense and disruption. Due to the prolonged uncertainty associated with the recent COVID-19 pandemic on many of our end markets, we cannot actually provide an update at this time to our previously suspended fiscal 21 earnings guidance range of $2.65 to $3.15 per and sales guidance range of $970 million to $1 billion, $60 million. Neither the duration nor depth of this disruption can be accurately estimated at this time. We have adjusted capital spending plans, operating plans, and headcount and have taken other mitigating actions in response to the crisis. Our low debt level combined with our consistent ability to generate cash gives us the confidence that we can manage both debt and liquidity satisfactorily throughout fiscal year 21 and beyond. We hope to be able to reestablish our financial guidance as we get to the back half of this fiscal year. In the interim, we will work to provide as much context to our outlook as possible. So in that regard, the summer is a normally slow season for our industrial platform, and shipments remain slower than normal for electrical as many customers have not returned to normal operations yet. Our metal coatings business is operating at a fairly normal level, although there are restrictions in some of the states we operate in. We are also experiencing additional expenses. We work to keep our facilities clean and safe so our employees remain healthy and productive. We are confident that our businesses remain vital to improving and sustaining infrastructure, so we will use this time of global pandemic to position our core businesses to emerge stronger and better equipped to provide sustainable profitability long into the future. With that said, I'll turn it over to Philip.

Thanks, Tom. I'd like to begin by also thanking our employees for supporting the business as we remain fully operational throughout the first quarter and initial peak period of the COVID-19 pandemic. I'll start by discussing the first quarter fiscal year 2021 financial results, and then we'll provide an update on our liquidity given the importance of maintaining a strong balance sheet in this environment. For the first quarter of fiscal year 2021, reported revenues of $213.3 million or 26.2% below the prior year first quarter revenues of $289.1 million. We believe the decrease was attributable to the multifaceted impact of COVID-19 that it had on our business, our customers, and our suppliers. Net income for the first quarter of fiscal 2021 was $5.5 million, a decrease of $15.8 million or 74.2% below prior year's comparable first quarter Reported diluted earnings per share of 21 cents was 60 cents lower than the 81 cents achieved in a strong prior year first quarter. Q1 fiscal 2021 gross margin was 19.8%, 310 basis points lower than the 22.9% in the first quarter of 2020. Q1 fiscal 2021 operating income of 14.3 million was 16.7 or 53.8% lower than the prior year first quarter. Our operating margin for the first quarter was 6.7%, 400 basis points lower than the 10.7% in the prior year first quarter. On reduced pretax earnings, income tax expense of $4.7 million was $1 million lower than the $5.7 million recognized in the first quarter of the comparable prior year. However, our effective tax rate for the quarter increased to 45.8% compared to 21.1% in the prior year first quarter. The increase in our effective tax rate is associated with the establishment of reserves for uncertain tax positions related to research and development tax credits, as well as incurring operating losses in foreign jurisdiction in which we were not able to recognize the benefit for U.S. tax purposes at this time. I will now turn to the results of operations within our metal coatings and energy segments. In our metal coating segment, comprised primarily of our galvanizing solutions, surface technologies, and galvabar businesses, We generated first quarter 2021 reported revenues of $119 million, which were $3.2 million below the $122.2 million in revenues recorded for the first quarter last year. Metal coating segment operating income of $25.1 million was $4.3 million, or 14.7% lower than the $29.4 million achieved in the same quarter last year. Segment operating margins were 21.1%, down 300 basis points as compared to 24.1% in prior year first quarter. While the galvanizing solutions gross margins exceeded 23%, the overall reduction in operating margins in the segment was due to lower productivity and higher costs of remaining open during the pandemic in the surface technologies business, which is more significantly affected by temporary closures or significant slowdowns due to the pandemic. Partially offsetting these higher costs was the favorable impact of lower zinc costs flowing through our kettles in the galvanizing solutions business. In our energy segment, reported revenues of $94.3 million were 72.7 or 43.5% lower when compared to the $167 million generated in the prior year first quarter. As Tom had mentioned, our industrial solutions platform was impacted significantly as domestic and international customers shut in operations, and several countries restricted travel. The energy electrical group was impacted by lower incoming bookings and worked down backlogs while customers adapted to the pandemic. As a result of the unprecedented market conditions, the energy segment incurred an operating loss for the first quarter of $1 million compared with operating income of $12.6 million in the prior year first quarter. Energy segment gross profit of $12.6 million was $20 million below the prior year first quarter. Gross margin was 13.3% compared with 19.5% in the prior year as a result of the COVID-related disruption in the segment. Segment operating margins in the first quarter were a negative 1.1% compared to 7.5% in the same quarter last year and was mostly attributable to the loss of the spring turnarounds within our industrial solutions platform. This is a cyclical business with a typically strong first quarter that carries into June of each year and then again peaks in our third quarter. I will now turn to our balance sheet and liquidity discussion. The company typically experiences negative cash flows during the first quarter. This year was no different. However, net cash used in operating activities during the first quarter improved 6.7 million from a use of cash in the current quarter of 11.2 million compared with our use of cash of 17.9 million in the prior period. Capital spending in the first quarter was 10.8 million compared with 4.7 million last year. The company continues to fund growth initiatives, ongoing safety, and maintenance-related capital spend. Our net debt position at the end of the first quarter was $219 million, $78 million or 26% lower than the $297 million at the end of the prior year first quarter as we continue to generate strong cash flows from operations. In light of COVID-19, we assessed our liquidity position, and while not all-inclusive, we have taken the following actions. We did not draw down on our revolver to place cash on our balance sheet. We did temporarily suspend payments on our revolver. We elected to accumulate cash in the quarter, which we are now utilizing to repay borrowings. We did not repurchase shares in the quarter. However, we intend to again evaluate share purchases in quarter two under our current share repurchase program. We continue to pay dividends to our shareholders, and we remain diligent surrounding customer credit and collections. As a result of our diligence, we have been able to navigate through our traditional negative cash position in the first quarter and COVID-19 without any significant deterioration to our strong balance sheet. We remain well within all boundaries on our existing debt covenants and continue to reduce uncertainties within our balance sheet and evaluate our capital structure. I'll now turn it back to Tom for his closing comments. Tom?

Thanks, Phillip. Just as I did on our previous earnings call, I want to share with you some key indicators that we are paying particular attention to. For the metal coating segment, fabrication activity remains solid in Q2, but we are seeing some reports of steel shortages. Within our galvanizing business, we are carefully tracking steel fabrication and construction activity. Zinc costs remain low, and the cost of zinc in our kettles continues to drop. For surface technologies, we are primarily focused on getting back to normal production levels with both existing and new customers by the end of Q2 fiscal 21. Within the energy segments industrial platform, we are seeing the fall turnaround season beginning to fill in, particularly in international markets. We're carefully monitoring the COVID situation in the states with large refining capacities domestically. Currently, we are in the normal seasonally slow summer months and still have travel restrictions in some countries. For the electrical group, we are carefully tracking proposal activity and expect bookings to increase in the second quarter and beyond, which should provide sufficient backlog for many of our business units in the back half of the year. For tubing and lighting, which make up a small portion of our electrical group, we are looking for signs of life in rig activity, but have already taken significant furlough actions. Finally, for corporate, we have very good cash management processes and have further tightened our oversight on cash flow indicators and customer credit. Currently, we are not seeing any slowdown in customer payments. Post-COVID-19 crisis, we remain committed to our growth strategy around metal coatings and achieving 21-23% operating margins, including a growing contribution from surface technologies. We believe galvanizing would tend to run to the high end, if not above the 23%, while surface technology should be able to consistently generate 15-20%. We were initially operating surface technologies somewhat separate from galvanizing to ensure the new facilities could be incubated without distracting the galvanizing team. They are now operating fully on Oracle, which allows full integration with the galvanizing plants fairly easy. We believe the integration will now allow the outstanding galvanizing resources to be brought to bear to increase sales penetration, drive operational efficiencies, and leverage the seasoned business development resources that they have. For energy, we will continue to focus on our core businesses and seek to divest things that are not core to our future strategic interests. Most of our energy business units are experiencing a relatively modest level of disruption due to the COVID crisis, and we are taking the opportunity to right-size operations and align them with expected demand post-crisis. We have run numerous models around downside and even severe downside scenarios, and do not currently see any whereby we do not maintain a reasonable level of liquidity throughout the year. The diversity of our customer base and scale of our galvanizing operations are providing a very sustainable level of income and cash flow. Our electrical businesses, for the most part, have fairly good backlogs to work with, but customers are delaying deliveries to some extent. While our industrial platform carries a certain amount of fixed costs, the majority of their craft labor pool is variable. And finally, our cash management discipline, credit line with first-tier banks, low debt levels, and ability to react quickly to the changing market dynamics positions us well during these uncertain times. We will remain active in the area of M&A with activities that support our strategic growth initiatives, particularly in metal coatings. While pandemic-related deal travel was restricted in Q1, we do see improving conditions and have an active portfolio of opportunities to pursue. With that, we'll open it up for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question will come from John Franzrup with Sidoti & Company. Please go ahead.

Good morning, everybody. Good morning, John. I'd like to start with the energy segment. Last quarter, you indicated that there were jobs that were being deferred into the second quarter and actually also into the third. I wonder if you can give us an update on those jobs that were deferred from Q1 into Q2. Are they still happening? Also, are your expectations that with those jobs being pushed to the right, that energy revenues will be kind of flattish sequentially? And if so, have you taken enough costs out to keep the business in the black?

Yeah, you've got a couple of things there, John. One, you know, we did have on the industrial side jobs. There's only a few active projects going on right now because of the continued travel restrictions in a lot of areas. Places like India haven't really, we're hoping that by the end of the summer they open up. There's some activity there that we would hope to be able to deploy to. So it has pushed to the right. It's kind of pushing to the end of Q2 and And as I mentioned, for Q3, for the fall season, it is starting to fill in, particularly internationally. Domestically, with the rise in COVID cases, we're watching carefully to see what refineries decide to do for the fall. So we don't have any really good indication of which way that's going to go domestically, but good news on the international front. On the electrical side, they've had orders push in terms of deliveries because Customers aren't deploying inspectors. Customers aren't making decisions on accepting final deliveries, things like that. So that continues to push. So I think I should have, and maybe Phillip knows, but sequentially for energy, I think we'll do a little better than Q1. But versus prior year, probably a little lower than prior years on the energy side. And we're still looking at costs and we're still realigning things. We've taken quite a bit of action, 10% to 15% on the headcount side in the energy piece, some on the surface technology, mostly furloughs while we wait for large customers to reopen their plants, which is starting to happen. So we feel fairly good that on the metal coating side, particularly surface technologies, by the end of the quarter, things will be fairly normalized again. That's the indication we're getting from customers that they're starting to ramp their production back up in some key areas. So And we will continue to look at the cost side if we don't see the backlogs improving. So we're committed to do that.

Okay, fair enough. And you mentioned that the metal coatings is operating at, I think you said, normal or close to normal levels. What's driving that? Can you just provide some coloring? What's good in metal coatings?

You know, it's – I think on the – The galvanizing side, it's that diversity of locations and customer base, over 3,000 customers that we deal with. It's kind of a normal season. We've got areas that are slow and other areas that are really, really active. Here's the good news. The fabricators right now are pretty busy and continuing on with projects. I noted their biggest concern is access, you know, steady access to steel supply. On the solar side, we've seen really, really good activity there. Those projects are continuing, and we've got a good position there. And then we've seen good activity in the transmission pole market. So where it's fallen off is, you know, things that we don't, I mean, they're a decent part of our business, but stadium construction and that kind of thing, walkway rails, and that stuff's a little off. So a real mixed bag, but overall we feel pretty good. And the customers are saying as long as they can get steel, their projects are going to continue. Solar's going to continue. A highway bridge, at least in most parts of the South, is continuing. That's our concentration of galvanizing plants is somewhat to the East, but mostly in the Midwest, upper Midwest, over into the Rockies, out to Nevada and Arizona, and then down through the Southeast and Texas. You know, we're just positioned pretty well where most of those states, even though they're seeing, like here in Texas, a rise in COVID cases, you still see tons of road crews out there. And most cities in the states are repairing stuff and continuing on with projects while there's still not tremendous activity on, you know, a lot of cars on the road. So those things, that's why we're fairly normal, I guess you'd call it.

Just to follow up on that last thought, Tom, I'm based in New York City. I don't have a good sense of what's going on down there with the rise in COVID cases. Is there any discussion or thoughts about potential business disruptions, or is it more likely that it seems like you and your customers are going to push on through this?

Yeah, I think we're seeing that we're going to push on through. The one concern would be if If we see in what's normally the busy driving vacation summer months, if the refineries aren't seeing that demand for gasoline grow, then do they pull their turnaround? That's really our only concern. The rest of it, businesses are focused. They're moving forward. Construction's going on. You see crews everywhere. So we feel pretty good about that in the states we're located in. So it's maybe kind of peculiar to us, but it's our geographic positioning for galvanizing that makes us feel different.

Okay, guys. I'll get back into queue. Thank you. All right.

Thank you. Our next question comes from Noelle Diltz with Steeple. Please go ahead. Hi, guys. Good morning.

Hey, Noelle.

Morning. Morning. So I just had a few questions. kind of more focused on metal coatings, you noted that the pricing was pretty strong in the quarter. So I was sort of curious if there's any way you could kind of parse out for us, you know, what volume looks like versus price, just trying to get a sense of how that trended. And then secondly, just given, you know, the differing margin profile galvanizing versus surface technologies, if you could kind of review, you know, how the size of those two businesses at this point.

Yeah, I think when you look at our volumes, they were pretty good. And price was off just slightly. And that's, you know, partly just given the continued low level of zinc cost. And so we've adapted that a little bit in a few areas. We have some pricing agreements that are tied to the LME. So that's where we had some price reduction. You know, we're talking... I think, 10 or 20 basis points. It just wasn't that much. So we feel like prices held very nicely in the majority of our business. Volume's off just slightly. Most of the volume was off in surface technologies, but I've got to be careful there because we had just acquired some of those sites at the beginning of last year. But even the sites that we already own, that's where we did have a fairly significant reduction in business. And that's mostly... The kind of things that aircraft interior parts that we powder coat, truck and trailer components that we powder coat, bed frames and things like that, that's where things were off. That's where the volume was off. So it was more on the powder coating plating side. We see that picking back up now. And as those customers have gone back into production, not at the same level as they were pre-COVID, obviously with the lower demand for aircraft interior parts and stuff like that. Truck and trailer was already off anyways. That's where we've been off. Everywhere else is pretty normal demand on galvanizing and then on the surface technologies. It just represents a bigger piece of that business, but it's still 5% of 5% to 7% of the overall metal coatings volume is surface technologies. Does that help?

It does. And then just kind of sticking with metal coatings on the margin profile, you know, margins came in a little bit better than we were expecting. Can you just speak to how you're kind of thinking about that coming in, heading into the second quarter, given, you know, again, you've got a little zinc coming through? you know, volume coming back a little bit. Just kind of curious how you're thinking about that coming into the second quarter.

That's a great question because I'm so pleased with what that team's done. I don't want them to get big heads, but using the digital galvanizing system, DGS, we've gone to kind of touchless receiving in most of our plants so we don't have to be, you know, face-to-face contact with drivers and delivery people and suppliers. So that's, it's interesting. It made us more efficient because you don't have all that interaction going on. But more importantly, we had record zinc productivity through our kettles, which I attribute to the focus of our teams. It's interesting as even though they're trying to operate very safely and maintain their distance as much as possible for COVID reasons, it's made them very, very, it's made us safer, which is beneficial. And it's also, we've had access to, in some cases, better quality of labor, which has helped us. Whereas, you know, a few months ago we were scrambling to hire anybody that could sign an application, quite frankly. So our labor is improving, or the quality of our labor is improving. And then DGS has given us that information set that allows us to react quicker to chemical composition inside the kettles and the acid tanks and things like that. So I think we can sustain these margins. It's, you know, our focus will be on maintaining price by providing outstanding service and which DGS is helping us do. Our rebuilt sales force that we put in place a couple of years ago under this management team is doing a great job. They can't get face-to-face with customers, but they are in constant contact. And so I feel good about it. I would hope that as we get through the second quarter, we may even be able to drive those efficiencies and productivities even a little bit better as a as the cost of zinc keeps coming down in our kettles as well.

Okay, great. That's helpful. I guess two last questions. First, you know, it's been a few years since we've been talking about infrastructure stimulus. It seems to kind of be back in focus with the elections. Could you just remind us, you know, where you feel you have the most exposure to a potential infrastructure bill?

Yeah, I think when you look at our plants in the upper Midwest, so up in You know, Indiana, Illinois, Minnesota, Wisconsin, those states are some good opportunities, just the bridge and highway. But almost throughout where we operate, bridge and highways, like here in Texas, need a lot of work. They're getting attention. But we've got ancient bridges out there in a lot of areas. So any kind of help from an infrastructure bill that focuses on On bridge, highway, roads, not sure. Airports would be great because they tend to use a lot of galvanized steel, but not sure where that might play. And then in a lot of the water system stuff, not tremendous activity there, but somewhat. Okay. I'm thinking that, well, in transmission distribution, our grid still needs a lot of work. And then the other place is getting Wi-Fi to a lot of these remote areas. So the poles that go into that is all good activity. And that also helps our electrical side because you get some data center work out of that as well. So That's where we'd be looking for it, bridge highway, T&D, in terms of the grid, and in terms of building out that internet Wi-Fi network.

Great. That's very helpful. Thank you.

Again, if you'd like to ask a question, please press star then 1 on your touch-tone phone. Our next question will come from DeForest Tinman with Walthausen and Company. Please go ahead.

Hi, thanks for taking my questions. You talked a little bit about the turnaround activity quotes going up, some of the crews getting booked internationally. Can you just give a little bit more color in terms of what that means? I know COVID is still a concern of everyone. Did the refiners or the projects become a a necessity in terms of them being done. Like it's a critical thing that needs to be done so that work can be done if social distancing is maintained and, you know, certain amount of protective equipment is in place and a scheduled turnaround is in fact, you know, high probability of becoming revenue or is it still up in the air in terms of, you know, being able to get those crews on the ground and do the work.

Yeah, I think a couple of things there. One, the things we work on, coca drums, reactor vessels, that's where our critical service value add is really where our technology comes into play in a big way. These are huge investments for refiners and oil companies, and so they are going to maintain them. They also can become safety hazards at a certain point. So they're definitely going to maintain them. And the question is, and quite frankly, a lot of them had been pushing their turnarounds on some of these components for a while already. So I think we're in a situation. It's only a matter of are they going to pull them down in the fall or are they going to wait until the spring? I think in most cases it's one or the other. There's one school of thought that says, well, why not pull them down? Demand low so they don't need the production. So pull them down, maintain them. They're good for three to eight years after that. So why not do it? On the other hand, it's like, well, but if you're margin constrained anyways, why not wait? and save the maintenance costs. So those are the two schools of thought. I think every oil company is probably making those decisions around their particular set of conditions. Internationally, our only concern is where we do a lot of work up in Canada, down in India, for instance, over in Southeast Asia. It's just a question of whether They allow the travel. The one difficulty is on some of these sites where they're not in highly populated areas, they have to have work camps. And so, you know, obviously with work camps, you get concerned about the social distancing and the number of people in a, you know, in effect a Quonset hut. So I think It's just tough. I wish we could give you more color on it. We're seeing good quoting activity. We're seeing lots of the upfront work that usually goes on that would preclude a good fall. But that's just kind of where we're at. I think that's about as much color as I can give you. We should know, usually these things, if they're going to go in the fall, we'll know by the end of July or middle of August when they start doing the engineering work and getting this to, a lot of these jobs takes two to four weeks to do the prep work, to get the equipment ready and all that. So we anticipate within a, over the next four weeks or so, we're going to have a much better idea how that fall is stacking up.

And to some extent, does that give you more confidence if that does firm up with the ability to get... Oh, absolutely.

Absolutely. We already feel fairly good about the international piece of the fall. For the fall, we're really just monitoring the domestic piece because that's where we have a lot of resources and assets to get deployed.

I think just to add something on there, Tom, too. Tom spoke about our work share program furloughs and rifts. So we had taken personnel actions to put some people on the sidelines during COVID, and we pulled some of those employees back as the clothing activities come up.

Okay, and I think to answer this question, but just so we're clear on the metal coating piece, it sounds like zinc side really good towards the higher end of the margins. Surface technology was not running some of the facilities in the first quarter, but activities ramping up and now they're running. Zinc costs falling. Should we be thinking that margins are going to be even better sequentially in the second quarter?

That's a tough one to call because you've got a lot of moving pieces. Volume can move pretty easily on us. Even though we can take out, we can adjust our direct labor, the fixed costs are still there. If we stay pretty sequentially flattish, I'd probably feel pretty good with Zinc costs continuing to go down, productivity continuing to improve, but probably running into some price pressure. It's just we've got a lot of customers out there that we want to take great care of and make sure we help them survive. So I'd anticipate a little more price pressure going forward, but we'll continue to drive productivity.

Our next question is a follow-up from John Frim's UpGrab with Sudoti & Company. Please go ahead.

Hey, John. Just firstly on the tax rate, can you talk a little bit about what we should expect in the current quarter and for the balance of the year?

Yeah, in the current quarter you saw in my remarks that the tax rate was significant because of the reserves we took for the research and development tax credits. When you look at the whole year, we should be pretty close to our statutory rates, you know, 21% federal and call it 3% international, but state rates. So somewhere in that 24% range is our best estimate at this point.

Okay. All right. And when we think about the balance sheet, can you talk a little bit about What your thoughts are as far as the revolver continuing the dividend in capital spending for the balance of the year? Just some more balance sheet discussion.

Yeah, let me take that backwards. On capital spending, we have several large growth initiative projects that we've been funding. So we're going to be in the same neighborhood as we have been, maybe slightly higher this year in capital in the low to mid-30s as far as capital spending. When you look at our revolver, we continue to pay down our debt. We have our senior notes coming due in January of next year, and we sit on floating LIBOR right now. So we're borrowing somewhere in the 1.4% to 1.6% rate on our revolving credit facility. But we are looking at that mix between fixed and variable as we look forward. So we're evaluating our capital structure right now.

And it's likely we'll replace the bonds that come due in January with a fixed piece.

Okay. And the dividend, do you feel that's secure?

Yeah, we like paying the dividend. If you kind of go through it, we're funding our own infrastructure to continue to improve our competitiveness. Paying a dividend is very important to us. then we can pay down some debt and we are going to look at reducing dilution by buying in some stock based on offsetting our employee stock programs. So, you know, that's kind of our priorities.

That's all on the table. Okay. Okay, Tom, thank you very much. All right, thanks. Thanks, John.

Our next question is a follow-up from Noel Diltz with Stateful. Please go ahead.

Thanks. Just a housekeeping question. First, I was curious how you're thinking about CapEx for the remainder of the year as well as the tax rate.

Yeah, the CapEx, we're going to run kind of mid-30s with about 24 million normal maintenance and safety capital and about 10 to 12 million of growth capital on things that we'd invested in or committed to invest in coming into the year. So those were already underway when COVID hit. We still feel good about those investments. It's a spinner plant in Houston, which is just great galvanizing work for us. And then we have to move our facility to expand it, which is good news, over in Poland to house our resources and to upgrade our technology while we're doing it. So those two were growth projects that were already underway coming into the year. And then we're expanding kettle capacity in a couple of plants that have more opportunities than they've got capacity right now. So that's kind of how that sits. Phillip, on the tax rate?

Yeah, on the tax rate, I guess I just explained it to John, but I think we're going to, you know, we're looking at the full year similar to your recent estimate at 23 to 24 percent as we go through the rest of the year. The impact we had this year, this quarter from our tax items will balance out over the course of the year.

That's right. It should be, you know, one quarter adjustment catch up.

Great. Thank you. Sorry if I missed that. All right. No problem.

Our next question comes from Sam Robotsky with SER Asset Management. Please go ahead.

Yes. Good morning, Tom. Hey, Sam. I've been a shareholder of AZZ since it was Aztec. So I've seen a lot going on. Tell me, your backlog, which is reduced 31.6, how much are you bidding for out there? And the competition, are the prices lower on the bids from your backlog currently?

Yeah, a couple of good questions there. One, bidding activity is pretty good. On the electrical side, which is where we would look to rebuild backlog, and it's pretty good. What we're not seeing is projects closed because a lot of these engineering firms are still working remotely on some of these big projects. My perception is eventually they've got to get the team in a room to make a multi-project. Million-dollar decision not just about buying our equipment but about moving some of these projects forward so so quoting activity is good and Particularly on a year-over-year basis we we are not And part of what's coming down in the backlog is that China stuff that shipping and will continue to ship Which quite frankly is relatively low margin. So I So actually on the pricing side, we're hoping to replace that work with higher margin backlog as some of these electrical jobs finally book. We're not losing that many. We're kind of winning our normal share. We just aren't seeing enough clothes and orders placed. But the activity is there, so I feel pretty good about it.

But the prices that you're bidding are not lower than than the other uh your competitors because you you you can't bid in order to be profitable and uh you you you're you're not matching any lower costs is that a fair assumption it's it's some somewhat fair uh

You know, we've got these several different business units, and so on the oil patch side, we are absolutely trying to bid to a lower market price because of the lower demand. That's a relatively small piece of our business, but it was relatively high margin, so it has an effect. On the electrical side, if you look at enclosures and switchgear, generally the price levels are holding. Partly because the underlying raw material costs have remained pretty stable. So, generally, I'd say our prices where we're bidding are holding up reasonably well. We do adjust our price if, you know, on projects that are attractive to us. And this is where I'm hedging a little bit. Some of our business units will bid a little lower to get load if they look out in the fall and say, we just don't have enough demand. We don't have enough load to fill our capacity. They will, on a project-based basis that fits their need, they will drop the price to try to make sure they win that. So we're battling this out in about a dozen different business units. When I talk about prices being fairly stable, I'm talking about the aggregate, but we've got a dozen different battles going on every day right now. We do allow some flexibility to try to fill in gaps in their demand and to ensure that they take some strategic projects with customers that we either want to break back into or that we've had long-term strong relationships with. So in the aggregate, we're good, but we're battling where we need to with the price levels we have to match to.

Okay. Now, as far as the number of employees at the present time, we're in July. Has that increased from May 31st? And where do we – and I guess – It's all dependent. Is it dependent on COVID or getting contracts? So could you sort of compare the number of employees that you have that are not furloughed as of today compared to the May 31 period?

I'm not sure. I'll give you a general sense because we were taking actions during Q1, and so I I'm just struggling to compare that number, but we probably, 70% of the people were furloughed, so available to be called back in August as we see demand fill in and projects fill in, and we have been calling some of those back early where plants needed them and businesses needed them. We maintain our core group on the industrial side because that's engineers, project managers, quality people, very seasoned folks. And so we need them to be involved in the quoting process to ensure that fall fills in. So we're down, including furloughs, we're down about 10%. But we would anticipate up to... 200 to 300 of those, hopefully, you know, being called back in surface technologies, electrical and industrial, as we see that, you know, the third quarter start to fill in with backlog and demand, and hopefully earlier. Appreciate it, Sam.

This concludes our question and answer session. I would like to turn the conference back over to Mr. Tom Ferguson for any closing remarks.

All right. Thank you, everybody, for joining us this morning. We will attempt to provide more color, perhaps on a more regular basis as we go forward between now and the next earnings call, as well as talk more about some of our strategic activities. So I'm hoping that you will hear from us, whether press release or setting up an interim call if we have the opportunity before we talk to you at the end of the second quarter. With that, appreciate your support and listening. Have a good day.

Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.