AZZ Inc.

Good morning and welcome to the AZZ Inc. first quarter fiscal year 2022 financial results conference call. All participants will be in a 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. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Joe Dorman with Lithium Partners. Please go ahead, sir. Thanks, Chad. Good morning, and thank you for joining us today to review the financial results of ADZ, Inc. for the first quarter of fiscal year 2022, ended May 31, 2021. Joining the call today are Tom Ferguson, Chief Executive Officer, Philip Shlom, Chief Financial Officer, and David Nart, Senior Vice President, Marketing, Communications, and IR. After the conclusion of today's prepared remarks, we'll open the call for questions. Please note there is a slide presentation for today's call, which can be found on AZZ's Investor Relations page under Latest Earnings Release Presentation 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 AZV with the Securities and Exchange Commission, including the end report on Form 10-K for the fiscal year ended February 28, 2021. Those risks and uncertainties include, but are not limited to, changes in customer demand and response to products and services offered by the company, including demand by the power generation markets, electrical transmission and distribution markets, the industrial market, and the metal coating 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 AZV serves, foreign and domestic, customer requested delays of shipment, acquisition opportunities, currency exchange rates, adequate financing, and availability of experience, management, and employees to implement the company's growth strategies. In addition, AZZ's customers and its operations could be potentially 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, and welcome to our first quarter fiscal 2022 earnings call, and thank you for joining us this morning. Suffice it to say that we feel a lot better about this first quarter call than we did at this time last year. Overall sales improved 7.8% versus the prior year to $230 million, although up 14.6% when adjusted for the divestitures. Metal coatings turned in another excellent quarter with sales up 7.3% to $128 million, and infrastructure solutions up 8.3% to $102 million, and over 23% up when adjusted for the divestiture of SMS. The higher volumes resulted from strong operational performance and improved activity in most of our served markets. I will get into the details of this as we go along. We are pleased to have completed another strong quarter of performance. We continue to generate strong cash flow during the first quarter while also returning capital to our shareholders. We generated net income of $22.3 million and EPS of $0.88 per diluted share, both representing over 300% improvement versus the prior year's first quarter. Our businesses leveraged the realignment actions taken last year to improve operating margins while maintaining their focus on providing outstanding quality and service to our customers. We also benefited from lower interest expense while incurring a 25.5% tax rate for the quarter. In line with our strategic commitment to value creation, we repurchased over 125,000 shares for $6.3 million and distributed $4.2 million in dividends. In metal coatings, we posted sales of almost 128 million while achieving operating margins of 24.7%, resulting in operating income being up over 25% from the previous year. The margin improvement was primarily due to driving operating efficiencies and productivity while realizing improved pricing in the face of rising zinc, labor, and energy costs. We remain committed to delivering on the investments made in our surface technology business, and we're pleased to see most customers beginning to return to pre-COVID levels of demand. Our metal coatings team continues to demonstrate their ability to perform and deliver great results. Our infrastructure solution segment, which was severely impacted by the COVID pandemic, particularly in the first quarter of last year, demonstrated its resilience as they improved sales to $102 million, or up over 23% when considering the impact of the SMS divestiture. The team delivered operating income of $9.6 million, or 9.4%, up dramatically versus prior year. The segment benefited from its realignment actions from last year while building on synergistic opportunities between EPG and WSI. They are focused on strategic selling initiatives and are well-positioned to deliver a strong fiscal year 2022. For fiscal year 2022, while COVID continues to generate some uncertainty in certain sectors, with our strong performance in the first quarter and due to seeing more opportunities than risk the balance of this year, we are tightening and raising our guidance. We anticipate sales to be in the range of $855 to $935 million and EPS at $2.65 to $3.05. Metal Coatings is continuing to focus on sales growth, including leveraging our spin galvanizing operations at several sites, operational execution, and customer service, as labor and operating expenses due to material cost inflation are increasing. Our infrastructure solution segment is seeing more normalized business levels and enters Q2 with some momentum in their bookings activity. Our WSI business is seeing good results from the expanded Poland facility, although globally the business continues to experience some intermittent project delays due to COVID outbreaks at certain customer sites. The electrical platform is focused on operational execution and growing its e-house and switchgear businesses. We anticipate continuing to benefit from low interest rates and should experience a lower tax rate for the remainder of the year. For fiscal year 2022, AZZ will continue to execute on our strategic growth objectives to drive shareholder value. Our commitment to superior customer service is unwavering. Our ability to generate strong cash flow is based on initiatives that drive operational excellence, manage costs, ensure pricing discipline, and emphasis on receivables collection within our operating platforms. We are confident that our businesses remain vital to improving and sustaining infrastructure, so we are actively working to position our core businesses to provide sustainable profitability long into the future. And with that said, I'll turn it over to Philip.

Thanks, Tom. In the first quarter of our fiscal year 2022, we reported improved sales of $229.8 million, 7.8% higher than the prior year first quarter, where we had sales of $213.3 million. Net income for the quarter was $22.3 million, an increase of $16.8 million compared with the $5.5 million in net income for the first quarter of fiscal 2021. The company's earning per share was $0.88, more than four times the $0.21 earned and generated during the first quarter of last year. For the first quarter gross margins, they were 25.2%, a 540 basis point improvement over the first quarter of 2021. The improvement was a result of our businesses most impacted by the pandemic returning to more normal operations and continued strength in our metal coating segment. First quarter operating income of $30.7 million improved $16.4 million, or 114.5% compared with the prior year. Our operating margin was 13.4%, 670 basis points better than the 6.7% recorded in prior year's first quarter. Interest expense for the quarter of $1.7 million was 35.6% lower as we realized interest savings on our $150 million senior notes that we refinanced last year and upsized by $25 million. First quarter income tax expense was $7.6 million, an effective tax rate of 25.5%. The current quarter effective tax rate was significantly improved over the 45.8% effective tax rate realized in the first quarter of last year, driven mainly by our improved earnings in the current quarter. At this time, without consideration of the potential impact of tax law changes, We estimate our full-year tax rate will be roughly 23 percent. Next, I'll cover the results of operations within our metal coatings and infrastructure segments. Our metal coating segment generated first quarter sales of $127.7 million, a 7.3 percent increase over the $119 million reported in the first quarter of last year. Metal coating segment operating income of $31.6 million was $6.5 million, or 25.9 percent higher than the first quarter of 2021. Metal Coating's operating margins were 24.7%, 360 basis points improved over fiscal 21's first quarter, and 60 basis points improved over the first quarter of fiscal year 2020. The business continues to thrive and has effectively managed rising costs of labor, zinc, energy, and most other consumable costs with operating efficiencies, increased productivity, and value pricing. In addition, the business segment is benefiting from the January 2021 purchase and full integration of Acme Galvanizing in Wisconsin. Our infrastructure solution segment generated sales of 102.1 million, 7.8 million, or 8.3% increased over the 94.3 million in sales during the first quarter of last year. On a pro forma basis, excluding sales related to our divestiture of Southern Mechanical Services from our industrial platform, Infrastructure solutions segment year-over-year sales increased 23.4%. Our industrial platform sales improved year-over-year as personnel are now able to access customer locations. However, this market continues to work through stricter cross-border requirements when traveling to customer locations to perform their field services. As a result of strong actions taken by the management team during the early stages of the pandemic last year, operating income for the segment increased to $9.6 million for the first quarter, as compared to the million-dollar loss in the first quarter of last year. We believe the actions to divest non-core businesses in FY20 and 21, as well as making some difficult personnel decisions during fiscal 21, will continue to benefit the infrastructure solution segment on a go-forward basis. The infrastructure solution segment generated gross profits of $22.3 million, which reflected a $9.7 million increase over a prior year. Gross margins were 21.8%, well above the 13.3% realized during last year's first quarter. I will now turn to our balance sheet and liquidity. Net cash provided by operating activities for the three months ended May 31st was $11.1 million compared to net cash used in operations of $11.2 million in the prior year first quarter. The increase in cash provided by operating activities in the current quarter is primarily attributable to strong net earnings. The company, due to cyclicality in certain platforms of our business, typically draws cash during the first quarter and generates positive cash flows the remainder of the year. This first quarter was no different, as we observed a net decrease in cash of $2.4 million. However, current quarter use of cash represented a $7.8 million improvement compared with the first quarter of the prior fiscal year. Capital spending in the first quarter was $7.5 million compared with $10.8 million invested in capital during the first quarter of the prior year. Our current capital expenditure estimate of $35 million is consistent with the past couple of years. At May 31st, our outstanding debt was $185 million compared with $219 million outstanding at the end of the first quarter last year. During the past quarter, we continued to generate strong cash flows that allowed us to continue to reduce debt. During the quarter, we continued to repurchase shares under our November 2020 $100 million share repurchase program. During the first quarter, we invested in repurchasing $6.3 million or 126,000 shares of our common stock. We declared and will pay a quarterly dividend. Lastly, this week we entered into a new five-year credit facility with our bank group. Our previous arrangement was to expire in March 2022. Our credit facility capacity range is $600 million with the following transaction highlights. We reduced our revolver from $450 million to $400 million to reduce costs associated with unused line fees. We increased our accordion to $200 million from $150 million to retain full capacity. We improved pricing levels of borrowing by 12.5 basis points and reduced unused line fees by 7.5 basis points. We retained our leverage ratios at 3.25 to 1 and our interest coverage ratio at 3 to 1. We are excited with the banks we have partnered with and look forward to improving our utilization of our credit facility as we remain active with acquisition opportunities and we continue to repurchase shares of our common stock under our $100 million existing buyback program. We remain well within all boundaries of our existing debt covenants and continue to strengthen our liquidity and we'll continue to evaluate our capital structure as we further execute and implement upon our strategic plans. With that, I'll now turn it back over to Tom for his closing comments.