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Edited Transcript of AZZ earnings conference call or presentation 20-May-19 3:00pm GMT

Q4 2019 AZZ Inc Earnings Call

Fort Worth Jun 26, 2019 (Thomson StreetEvents) -- Edited Transcript of AZZ Inc earnings conference call or presentation Monday, May 20, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joe L. Dorame

Lytham Partners, LLC - Managing Partner

* Paul Wesley Fehlman

AZZ Inc. - Senior VP of Finance & CFO

* Thomas E. Ferguson

AZZ Inc. - President, CEO & Director

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Conference Call Participants

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* John Edward Franzreb

Sidoti & Company, LLC - Senior Equity Analyst

* John S. Sturges

Oppenheimer & Co. Inc. - Director of Investments

* Jonathan Paul Braatz

Kansas City Capital Associates - Partner and Research Analyst

* Noelle Christine Dilts

Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst

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Presentation

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Operator [1]

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Good morning and welcome to the AZZ Inc. Fourth Quarter and Fiscal Year 2019 Financial Results Conference Call. (Operator Instructions) Please note, today's event is being recorded. I would now like to turn the conference over to Joe Dorame, managing partner of Lytham Partners. Please go ahead, sir.

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Joe L. Dorame, Lytham Partners, LLC - Managing Partner [2]

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Thank you, Rocco. Good morning, and thank you for joining us today to review the financial results of AZZ Inc. for the fourth quarter and fiscal year 2019, ended February 28, 2019. 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 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 United States Securities and Exchange Commission, including the annual report on Form 10-K for the fiscal year ended February 28, 2019. 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 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 of 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 Mr. Tom Ferguson, Chief Executive Officer of AZZ. Tom?

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Thomas E. Ferguson, AZZ Inc. - President, CEO & Director [3]

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Thank you, Joe. Welcome to our fourth quarter and full fiscal year 2019 earnings call, and thank you for joining us this morning. We had to delay our earnings release announcement due to the need to clarify final results. With the recent implementation of ASC 606 accounting standard, the interpretation of the company as a material weakness had to be worked through the appropriate channels. This resulted from converting our revenue recognition policy to be in line with ASC 606 coming into the fiscal year.

We also chose to implement electrical projects to assist us in complying with ASC 606 since the percentage of completion accounting rules would apply to a much larger portion of our shipments. This added some complexity on our reconciliation processes that took several months this year to address. We are confident that our financial results for fiscal 2019 are properly stated at this point with the audit completed. We are confident that our financial processes are far stronger today, and we should be able to clear the material weakness later this year.

Moving on to review of our fiscal 2019 financial results. On one hand, we are pleased to achieve our 32nd year in a row with profitability to generate $89 million in free cash flow, which is an increase of 81% year-over-year. Fiscal 2019 was the year of recovery as we improved our sales by 14% and operating income by 59% versus prior year.

During the year, we experienced a resurgence in demand for our galvanizing services, refinery turnarounds and international products for the Energy segment in both electrical and industrial. And on the other hand, the fourth quarter results were below our expectations, which are attributed to 3 things. The first and most significant was the delay of the first phase of a large high-voltage bus order for China. This delay resulted in about $12 million of shipments and the associated income pushing into Q1 of this new fiscal year. Our welding solutions business had several opportunities lined up for Q4 but too many pushed into fiscal year 2020, and one large international customer decided to just patch their vessels for a short-term fix.

Finally, while we continue to gain traction in the Metal Coatings business, the high-cost zinc took longer to clear our kettles than we anticipated. While we had generally good demand that many galvanizing plants at few of our larger sites with higher cost zinc inventory actually experienced reduced demand. The higher volume of the other sites was not able to offset this margin impact.

Despite the challenges in Q4, we did make progress in several key areas. Our realignment efforts in the industrial businesses have positioned us for improved margins in fiscal 2020, and the renewed emphasis on customer service has resulted in a good pipeline of opportunities for both the spring and fall outage seasons.

The nuclear sector seems to have stabilized as we are beginning to see better opportunities for both WSI and NLI. Our international expansion efforts in South America are finally beginning to pay off as we have both traditional refinery activity and also offshore opportunities. The business activity in Europe has been very robust, and we have undertaken planning for the expansion of our Radom, Poland facility to accommodate this demand.

Our electrical businesses have a solid backlog and strong pipeline of opportunities. The enclosure facilities are working well together, and we are leveraging our 3 plants in Maryland, Tennessee and Kansas to pursue a wider range of opportunities. The switchgear businesses are experiencing positive momentum and synergies resulting in sharing new business opportunities and best practices as we are able to pursue a wider range of projects with plants in both Wisconsin and Missouri.

Finally, our Metal Coatings business is benefiting from the reorganized leadership team that under Bryan Stovall, who took over in late October, is driving collaboration, teamwork and emphasis on customer service across all the regions. Bryan has risen through the ranks over his 25-year career with AZZ Galvanizing and has a demonstrated track record of developing high-performing teams, exceeding his objectives and creating outstanding value for our customers and AZZ.

The new digital galvanizing system, which we call DGS, is gaining adoption throughout the galvanizing plants, which will result in virtual elimination of paper throughout the plants. DGS will ensure we can drive and sustain productivity and efficiencies to significantly improve and maintain our margins while also providing a more consistent level of customer service across all of our plants. We also continued to rationalize our galvanizing footprint by closing 2 plants in areas that could be served by other AZZ sites. Additionally, we are gaining traction with our Galvabar product, which is growing market acceptance as we work with state DOTs to change their design standards and pursue strategic relationships with major rebar suppliers.

Our powder coating initiatives are also bearing fruit, and we believe the addition of the 2 facilities from K2 Partners will give us the scale and key resources we need to accelerate both growth and profitability in this area.

While much of fiscal year 2019 was spent reorganizing and building out new systems and processes, we believe particularly now that zinc costs have been reduced, we have positioned ourselves to both grow and significantly improve our margins in fiscal year 2020.

Since we're almost at the end of our first quarter of fiscal 2020, we are seeing stronger markets for almost all of our products and services. The industrial businesses are seeing normal spring turnarounds and outages. They are also anticipating a stronger-than-normal fall season as we are actively negotiating several large opportunities, which bodes well for their year.

Our electrical BUs have the benefit of strong backlogs, particularly in high-voltage bus and an improving pipeline of opportunities for most of the other electrical business units. Our focus in fiscal 2020 is on executing on their backlog, improving margin significantly and finding synergies across their enclosure and switchgear platforms. They are currently shipping the delayed Chinese product as well as working on the others in their backlog. All of this bodes well for working back towards double-digit operating margins in electrical once the current backlog clears during the balance of this year.

Metal Coatings also recently completed a nice add-on acquisition, Tennessee Galvanizing in Chattanooga, which gives us more spending capacity and some new processes as well. We like the geographic position of these businesses and the expertise they bring in these areas. Galvanizing will be focused on driving margins back towards the 22% to 24% level while continuing to grow.

In fiscal 2019, they demonstrated we could grow share even while closing 2 plants. We will seek to minimize distractions in fiscal 2020, and let this team focus on sustaining our growth through outstanding customer service and generating significantly improved profitability. AZZ Surface Technologies, which is what we are calling our Galvabar and Powder Coating platform, will be focused on continuing to gain market acceptance for Galvabar and integrating our Powder Coating and plating facilities operationally to improve our service and profitability. We will be pursuing additional accretive acquisitions for both galvanizing and surface technologies while the Energy segment business is focused on improving profitability and pursuing profitable organic growth opportunities. And with that, I'll turn it over to Paul Fehlman. Paul?

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Paul Wesley Fehlman, AZZ Inc. - Senior VP of Finance & CFO [4]

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Thanks, Tom. For the full fiscal year 2019, we reported net revenue of $927.1 million. The $116.7 million increase were 14.4% greater than fiscal year 2018. Net income for fiscal 2019 was $51.2 million, an increase of $6 million or 13.4% greater than the prior year. Reported diluted EPS rose 13.3% to $1.96 on a GAAP-reported basis compared to $1.73 in the prior year.

Fiscal 2019 gross margins improved to 21.4% from 19.8% on a year-over-year basis, primarily on recovering the Energy segment margins. Operating profit for fiscal year 2019 grew from $48.2 million in the prior year to $77 million in the current year, representing a 59.5% increase.

Operating margins of 8.3% increased 230 basis points compared to 6% in the prior year. Our effective tax rate for the year was 18.7% compared to last year's rate of negative 46.2%. In fiscal year 2018, we booked a net gain of $23.7 million in tax, primarily as a result of the reevaluation of the deferred tax liabilities under the Tax Cut and Jobs Act of 2017 (sic) [Tax Cuts and Jobs Act], which passed in December of 2017. Without the change, we would estimate that we would have realized the tax rate in 2018 of about 30.5%.

As for our segment results, full year revenues in our Energy segment were up 15.6% to $486.8 million compared to the prior year of $421 million. Much of the increase in sales can be attributed to several factors Tom already discussed, improved turnaround activity in the U.S. refinery market, increased international projects and an increase in our electrical business. Energy segment operating income increased $33.1 million when compared to the $1.8 million loss in the prior year, which included pretax charges in that year of $15.3 million during the year as we impaired certain long-lived assets and notes receivable. Gross margins in the segment improved to 20.6% in fiscal '19 compared to 14.9% in the prior year. Operating margins for 2019 was 6.4% compared to negative 0.4% in the prior year.

In our Metal Coatings segment, fiscal 2019 revenues rose 13.1% to $440.3 million compared to a prior year at $389.4 million, while operating income declined 0.9% to $83.6 million compared to the $84.3 million in the same period last year. The decrease was due primarily to higher zinc and labor costs that were not fully offset by the increase in pricing.

Operating margins finished at 19% for the year, down 270 basis points compared to the 21.7% for the prior year. Cash flow from operations increased by $35.8 million in fiscal 2019 compared to prior year on a higher net income and improved working capital requirements.

Page 11. Free cash flow increased $39.8 million on improved operations and lower CapEx spend compared to prior year. In total, we generated cash flow in excess of net income at 174% compared to 109.1% in the prior year.

Despite the challenging year, we continue to achieve our goal of free cash flow in excess of net income once again. And as you can see in fiscal 2019, we were focused on working capital and CapEx spending. At this point, we would expect spending in 2020 slightly above the spend in fiscal 2019. However, we always have the ability to ramp up in certain areas. If the operational metrics signal, it's time for additional capital investment. With that, I will turn it back to Tom. Tom?

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Thomas E. Ferguson, AZZ Inc. - President, CEO & Director [5]

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Thanks, Paul. In closing, we are focused on improving productivity and efficiency throughout the company. Given the headwinds we have faced, it has taken us longer than anticipated to recover in our Energy segment from the impact of the decline in the U.S. nuclear sector as well as to stabilize our metal coatings organization and regain the discipline to deliver consistently high operating margins as well as focus on organic growth.

During the year, we had to make several senior leadership changes and realign several businesses to improve operational performance, and we believe we have emerged stronger and much better position to generate consistent operating results going forward. We are reaffirming our fiscal 2020 earnings [prove] fully diluted share guidance range of $2.25 to $2.75. We are also reaffirming our fiscal 2020 annual sales guidance range of $950 million to $1.030 billion. We believe we have taken the necessary actions to improve operating performance and look to improve market dynamics. We are very optimistic for our improved fiscal 2020. And now we'll open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Today's first question comes from John Franzreb of Sidoti & Company.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [2]

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Guys, I have one solid -- clarification, how much revenue was actually deferred from fourth quarter projects into the first quarter? I didn't quite hear you on that one.

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Paul Wesley Fehlman, AZZ Inc. - Senior VP of Finance & CFO [3]

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Well, on the -- we mentioned the one, $12 million portion of a China project for the electrical side. We didn't really give any exact numbers on the industrial piece, but it was in the $10 million-plus range.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [4]

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So you're talking north of $20 million has been deferred into Q1?

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Thomas E. Ferguson, AZZ Inc. - President, CEO & Director [5]

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That's correct.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [6]

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Okay, just want to make sure. Got it. And on the zinc demand -- I'm sorry, the zinc -- on the galvanizing demand side, you said it was weaker than expected, and you saw incurring higher zinc cost. Can you talk to both pieces of that? Why is demand weaker, and how come it's taking you so long to kind of run through some of that higher zinc?

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Thomas E. Ferguson, AZZ Inc. - President, CEO & Director [7]

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Yes, I was trying to be specific. It was weaker at certain of our large multi-kettle plants that still had a lot of high-cost zinc in their kettles, whereas we had anticipated that would have cleared by -- as we went through Q4. So what cleared was that higher-cost zinc in those plants and -- so some of the lower-cost zinc in other plants was actually off a little bit. So it was just a shift in -- it's probably not well understood but across our 40-plus plants, zinc is coming in at different price points at different times during the year. And we always look at a weighted average in hindsight for the most part, but in this case, we had some of that really expensive $1.60 zinc. It was clearing kettles in a handful of large plants in the fourth quarter. Keeping in mind, we had an overall impact year-over-year just on zinc cost of over $20 million.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [8]

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$20 million occurred in '19 versus '18?

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Thomas E. Ferguson, AZZ Inc. - President, CEO & Director [9]

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That's correct.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [10]

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Got it. Got it. Okay. Could you just -- I guess on the SG&A line in the quarter, it seemed like it was, well, somewhat higher than what I expected. Are there any professional fees or anything running through that line because $29 million, $30 million versus a year ago, it's $27 million, and again, $27 million in November quarter on lower revenues. Is this something I should be cognizant of what's going on in the SG&A line? And I'll go back in the queue.

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Paul Wesley Fehlman, AZZ Inc. - Senior VP of Finance & CFO [11]

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Sure. Okay, John. A couple things there. We did have higher professional fees on the corporate side. We had some higher SG&A fees or cost, I should say, in the field that had to do with the acquisitions that had been made year-over-year but also, the professional fees and the bonuses paid to our employees were much better in fiscal '19 than it were in fiscal '18, which was not a terribly satisfying year.

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Operator [12]

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(Operator Instructions) Today's next question comes from Noelle Dilts of Stifel.

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Noelle Christine Dilts, Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst [13]

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So first, just starting with -- going back to the zinc question. Now that you've kind of looked at your -- the kettle cost across your various plants, how are you thinking about zinc moving forward and generally kind of the cadence of margin improvement as we move through the year? And then the second part of that is could you give us an update on some of the trends you're seeing in the key end market verticals for the Metal Coatings business?

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Thomas E. Ferguson, AZZ Inc. - President, CEO & Director [14]

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Yes. Noelle, I think the zinc is now much lower in our kettles. We've taken the opportunity to go ahead and lock in some of our projected demand at these lower zinc costs and make sure that we stay below budget, if you will. So we see that continuing, and the zinc's been harboring in the low $1.20s to low $1.30s plus premium. So we feel pretty good about how it's kind of stabilized. We also feel a lot better about one of the benefits of DGS. We did a much more real-time feel for what our actual zinc inventory costs and our kettles and how much weight of steel is going through our plants. So it's a lot more visible to us looking forward than where it used to, it was a -- kind of looking in the rearview mirror. So we feel good about our ability to look forward and judge how zinc's moving. We feel good about the value we're bringing, so we're holding price and even where we've had labor cost increases, continuing to push price where we can. But we are all -- are also focused on not losing market share again, which is what was going on 18 months or so ago. And then I'll let Paul talk about the markets.

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Paul Wesley Fehlman, AZZ Inc. - Senior VP of Finance & CFO [15]

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As far as the end markets, we -- electrical utility industrial have been particularly strong for us year-over-year, and we expect those to still be positive trends. Waiting for bridge and highway will grow as the galvanized rebar does. OEMs are kind of flat going forward until a few things resolve in that market and -- but we see petrochem as being flat to challenged.

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Noelle Christine Dilts, Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst [16]

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Okay. That's helpful. And then just as you look at moving the galvanizing margin from, say, the high teens in fiscal '19 to more of the 24%, 26% range. Can you give us a sense of -- just thinking about the buckets of that improvement, how much of it is the kind of zinc headwind, you talked about that a little bit. How much of it is labor, how much is it -- of it is getting through DGS and kind of the maturation of the Surface Technologies business? How do we think about which are the most important levers moving forward?

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Thomas E. Ferguson, AZZ Inc. - President, CEO & Director [17]

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Yes, I think that -- I won't say they're almost equal. I mean part of what we're trying to do is make sure that our customers are having a consistently outstanding experience so that we can hold price. Two, I think we've gone through in terms of labor cost. We've made some significant increases in the early part of last year just to be able to get labor in the door. That's kind of settled out now, and we've not -- we're not still -- we still need labor, but we're finding it at the levels we're at right now, so there's no surprise in this year. So there's going to be -- and also I think DGS has given us the opportunity to improve both labor productivity as well as what we're looking at in terms of how quickly we can move and process orders and process information, as I mentioned, looking forward, which I think gives the team a much better chance to maintain productivity, to maintain their efficiencies. So I'm going to say that it's about a quarter holding price. I'll give probably a quarter of it to maintaining that labor productivity and efficiencies, managing our overtime as well as continuing to get labor in the door. And then the biggest singular piece is just the zinc that's at a much lower cost as it's flowing through our kettles now, but 40%, 50% of what we're looking at. So continuing to manage that, as I -- placing some smart bets on zinc demand -- or buying zinc for our demand. And I think the team, what they're doing now, they're really leveraging the knowledge of the organization across all the regions to make those decisions a lot better and at real time rather than in hindsight. So zinc's the biggest piece.

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Noelle Christine Dilts, Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst [18]

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Okay. That's helpful. Just one more question if I may. Shifting over to the Energy business. Can you give us any sense here for just sort of how to think about, again, kind of the cadence of revenues as we move through the year, you again have kind of a few different variables going on with the project shipment into China. Any thoughts on sort of how to think about the phasing of those shipments? And then how you're thinking about -- it sounds like the spring turnaround is progressing okay, but how you're thinking about the fall season as well?

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Thomas E. Ferguson, AZZ Inc. - President, CEO & Director [19]

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Yes. Noelle, I think on the electrical side, they do have that $140 million, $150 million of Chinese backlog. That spreads beyond this year, so that's going to continue going out. I have not personally looked through the quarterization of that, other than they did get out that slug of the one project in Q1, and that's all tracking in the first quarter. I think that kind of layers out through this year and then into next year. The other part, of course, is we are a bigger player, with 3 enclosure sites, 2 switchgear sites. We're seeing okay revenues in the oil patch-related businesses, not great but not bad. But in enclosures and switchgear, our backlogs are looking good. And those will -- they're project-oriented, so you're going to get some spikes as the quarters go on. But in general, those tend to ship a little smoother than the really big high-voltage bus stuff. When it comes to medium-voltage bus, where we're rebuilding their domestic business, and folks [that now mod the more] profitable piece of the domestic market. In terms of the industrial, nuclear is a little better. I think NLI has seen some opportunity. Some of the nuclear facilities are starting to spend at a -- not at a great level but a more normal level.

So NLI, that piece is looking kind of spread through this year, decent. Obviously, with it kind of spread through the quarters. WSI and SMS, mostly WSI, it's a solid spring season. And as I mentioned in my remarks, they're stacked up for a big fall season. Assuming it all comes through, they'll be in really, really good shape. I have to admit, though, we've seen we're sometimes -- not all of it tends to come through. But we're pretty optimistic about it, and so because that kind of starts in our second quarter and spreads into the third, we're looking at a nice ball for them. Hopefully, some of that carries over into the fourth and where we're really seeing that help us is when that carries through Christmas. And if we don't get a terrible winter, that can continue to play out as we get into January.

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Operator [20]

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(Operator Instructions) Today's next question comes from Jon Braatz of Kansas City Capital.

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Jonathan Paul Braatz, Kansas City Capital Associates - Partner and Research Analyst [21]

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Once again, you guys did a real good job in 2019 in generating free cash flow, and it certainly looks like it'll be similar in 2020. I guess how would you think about your -- the use of that capital between debt repayment, further acquisition and maybe dividend increase. How do you look at that allocation process?

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Paul Wesley Fehlman, AZZ Inc. - Senior VP of Finance & CFO [22]

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Well, Jon, if you look back in history, we're not going to give you a road map into the future. We'll just talk about we took out $60 million more in debt during fiscal '19, left the dividend where it is, and we gave ourselves a little bit of room to take a look at what we could do to bolster our portfolio. And as you saw, we picked up 2 acquisitions in the first month of fiscal '20, and we did pick up the 1 set of assets over at Lectrus out of bankruptcy. So I'd say we're looking for opportunistic pickups where it makes sense. We're looking to bolster the places we're interested in, in the future. But I'm not guiding with anything specific with that, but we will leave ourselves open to continue to bolster the portfolio where we feel we've got good growth opportunities in the future.

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Thomas E. Ferguson, AZZ Inc. - President, CEO & Director [23]

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Yes, a couple of things from my perspective. It's -- I think on the Metal Coatings side, you're going to see us continue to invest in Powder Coating and Galvabars, so there's some opportunities we have as you -- as the year wears on. We're seeing the margins of the Powder Coatings start to get up to where they're not a big drag -- as big of a drag on the galvanizing margins as has been, but we see some more acquisitions in that space. We'd like to get started on the next Galvabar plant as the volume start to take hold and working with our -- some of our partners. So I -- but that could easily be in the fourth quarter and probably stretch into the next fiscal year.

In terms of our maintenance capital, on galvanizing, I think the guys are doing a far better job of managing for maintainability rather than emergencies. It tends to be a lot more controllable when we spend it in a timely fashion and prevent the emergency. So we're doing that, and I think the team's had a lot better process employees for how they're managing that maintenance capital, [unit spend] without people having to screen for it. And we've added a little bit to the engineering side to ensure we do a better job of deploying that large $20 million, $25 million of maintenance capital into galvanizing.

And then finally, and we've mentioned this, we have a really, really good active pipeline not just on the Powder Coating side, but there's some more galvanizing deals out there. I think as long we can buy up the one-off sites and get them at a decent price and bring our team in and then sometimes work with the former owners as well. As we're doing at Tennessee Galv, we feel really good if we can get another one or two of those done this year. That's a good use of our capital and making sure we're finding the adjacencies.

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Jonathan Paul Braatz, Kansas City Capital Associates - Partner and Research Analyst [24]

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Did you mention what your CapEx spending would be for 2020?

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Paul Wesley Fehlman, AZZ Inc. - Senior VP of Finance & CFO [25]

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We expect it to be just a hair below right now where it was in '19. But again, we open ourselves up with the possibilities as they come up.

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Operator [26]

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And our next question is a follow-up from John Franzreb of Sidoti & Company.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [27]

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Tom, I -- just wondering about your thoughts about the current configuration of the business. You've hired some people, you've closed down some facilities. Are you kind of satisfied with the current structure of AZZ right now? Or is there more rationalization that's required at the firm?

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Thomas E. Ferguson, AZZ Inc. - President, CEO & Director [28]

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Yes. I think one of the things we've decided to do is -- and I'll start with the Metal Coatings side. We've -- over the last 3 years, I think we've closed about 6 plants. And so generally, we keep that fairly quiet. We don't like to do it unless we've given it a fair shot and -- or where we do have overlapping capacity so we're not going to disappoint any customers. We're always going to look at that. We have a lot of sites. There's -- but we don't want to be in the mode of closing plants every year. But I'd say they're -- we're pretty well done. If it happens, maybe there's one more, but I'd have a hard time putting my finger on it. So generally, we feel like we've done what we needed to do over the last 3 years to get the plants we need align. We're also not looking at many greenfields. Reno was our last one and probably be our last one for quite a while.

Now on the Galvabar side, we -- it has to be a greenfield because we've got the only one out there right now. I think in electrical, the structure we're really operating in it as an enclosure platform, if you will, trying to find the leverage across the 3 enclosure plants. There's also some leverage with the 2 switchgear plants. I know Ken Lavelle and his team are very focused on where can they find some leverage points whether it's in future or make continuous improvement, get the most of that -- most of those businesses are on our Oracle backbone already so leveraging back office as much as possible, but we feel that we're in good shape there. So now the focus is going to be more around supply chain, continuous improvements, standard designs, and we think there's opportunity there. So how we run those with more as platforms versus independent business units. That's been a shift that's been underway, and we'll continue doing that.

In terms of how -- what we're doing in industrial, that -- we have found some synergy mostly in the back office side across NLI, WSI, SMS, accounting, HR, what they're doing from a leadership perspective, we feel pretty good about. And then sales, we'll probably get about as much leverage as we can find in the sales organizations, calling on nuclear plants or calling on refineries. So we're probably in the -- I call it the seventh inning. We've got some things we can still do. We'll continue to look at those, but we feel like we've got a lot done, particularly in this past year, to really stabilize that with the leaders we've brought in, the controllers we brought in. The acquisitions, we've picked up some good talent in the acquisitions that helps us leverage things faster.

And then Metal Coatings, their reorganization -- they didn't want it at the beginning of last year. And of course, it's different team that reorganized at the end -- towards the end of the year. But we're seeing that traction, and we're feeling really good about the team. They've put in place the things they're focusing on, how they're leveraging DGS, how they're leveraging their sales organization to sell value, not just knock on doors and, as I used to call it, deliver donuts. But -- So I think the leadership is what we want to see right now in the businesses.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [29]

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Okay, fair enough. And I guess one last question. Paul, I don't know if you said this, but what kind of tax rate should we be using for fiscal 2020?

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Paul Wesley Fehlman, AZZ Inc. - Senior VP of Finance & CFO [30]

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I didn't put -- I'll guide -- we'll stay put around 21% right now.

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Operator [31]

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And our next question today comes from John Sturges of Oppenheimer.

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John S. Sturges, Oppenheimer & Co. Inc. - Director of Investments [32]

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It's a nice snapback on operating margins. And I see there was a nice -- some recovery in net income margins. Could you add some color? Operating margins are closer to where you'd been several years ago, and I was just curious if the direction was back towards those numbers?

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Thomas E. Ferguson, AZZ Inc. - President, CEO & Director [33]

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Yes, John, that's -- you nailed it. We want to see, particularly galvanizing, continue into -- they used to have some years which were kind of oddball years, 27% and 29%, so we're not trending into that, but we'd like to see trending back towards the, as I said in my remarks, 22% to 24% this year and then continue to make progress hopefully towards the north end of that. And I think from -- keep it in mind that in total Metal Coatings, we do have Powder Coating, which is lower asset investment, but it's also 15% to 20% margin. So that plays a bigger role. We think galvanizing is going to be where we see the first improvement. Powder Coating, as we get more leverage and more scale, they'll start trending more towards the 20% mark.

In terms of electrical, there are times, going back, where they were in the nice double-digit operating margins. That's where we'd like to see Ken get that team back to. I think there's -- we've done what we can do from a sales perspective in terms of finding the right mix of business, the right kinds of value-based customers, terms of driving volume. We still got some work to do on the operating efficiency and productivity side, how we find supply chain leverage. So I -- but yes, we're committed to driving those margins back in that direction over the next couple of years.

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Operator [34]

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And our next question is a follow-up from Jon Braatz of Kansas City Capital.

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Jonathan Paul Braatz, Kansas City Capital Associates - Partner and Research Analyst [35]

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Tom, I don't know if you discussed this, but are the trade issues that we're having with China impeding your ability at all to bid on new business in China?

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Thomas E. Ferguson, AZZ Inc. - President, CEO & Director [36]

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No, it's not impeding us on new business. It is -- we do have -- I want to be careful with this. The impact is really that the president of that group, Ken Lavelle, is spending a lot of time. He's like a commuter back and forth between here and China. We did establish capability in China, the manufacturer, and so we do have that opportunity. We can't manufacture everything for high-voltage bus there, but we can manufacture a lot of it. And so we're going to leverage that capability as the customers in China will let us do that. So that's our focus. And they are letting us bid, and our preference is to, right now, bid it from the China facility because we have the capacity there, and we're not at the mercy of whatever the tariffs turn out to be. So we prefer contracts in RMB that we deliver in RMB. And as long as we can bid those, we're in good shape. So -- and we do have some domestic opportunities to keep our Medway facility focused on domestic opportunities as well as they provide the technical support for the China operations.

So a few days ago, I -- we play it day by day. But a few days ago, when China responded with tariffs, it gave us some concern. We were able to manage through that and have a line of sight to be able to continue to ship. So, so far, something we're watching very, very carefully. It does create some, I don't know how to put it, some -- it does keep us on our toes. And in terms of how we bid, where we bid from and how we support that, so -- but we do have a very good product. The customers there have been very, very pleased with it, and these are big projects. So our focus is on making sure we can continue to deliver. So a long answer to a complicated question.

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Operator [37]

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And ladies and gentlemen, this concludes our question-and-answer session. I like to turn the conference back to Mr. Ferguson for any closing remarks.

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Thomas E. Ferguson, AZZ Inc. - President, CEO & Director [38]

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I think we've talked about everything that I can think of to talk about and -- so we thank you for listening to us today. I'd say stay tuned for fiscal year 2020. We like to see this -- it'd be a very stable year for us and one where we demonstrate we're back to normal and doing the things we need to do to generate the margins that we've committed to, to generate the profitability and the cash that our investors are used to. So thank you and I appreciate any patience you can grant us in that regard.

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Operator [39]

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Thank you, sir. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.