Conference Transcript - AZZ 2026-06-10

Sandra Martin, Head of Investor Relations

I'm Sandy Martin with Three-Part Advisors, and up next we've got AZZ, which is a client for Three-Part Advisors, and AZZ is an exciting story. It's an NYSE-traded company with a ticker of the same AZZ and $4 billion market cap, gone through a major transformation over the last several years. They are a pure-play metal coatings business that is an essential sort of infrastructure play here with a lot of public and private money coming to all the metal coatings. So next up, we've got David Nark, and he's the CMO, IRO, and Corporate Strategy. So I'm going to hand it over to Dave.

David Nark, Analyst — Other

Thanks, Sandy. Good morning, everyone. So I'll be walking through our investor deck for you today, and if there's a time at the end we certainly can take some questions as well investor presentation for those that are listening online can be found at az.com on the investor relations page and just look for the the investor presentation dated may 28th that's when we uploaded the most recent version so walk everyone through that if you're not familiar with the company as sandy mentioned were in the in the metal coatings space so a very differentiated player there's not too many folks like us we have two segments serving North America a metal coatings business which is a post fabrication hot dip galvanizer so metal coating companies or excuse me metal fabricators are fabricating their product and then bringing it to us to galvanize so that's post fabrication and and then on the prefabrication side we're the one of the largest coil coders in the nation as well as we walk through the presentation you'll see we've got tremendous opportunities in front of us to grow sales and margins due to a lot of secular drivers that we'll cover the business generates a tremendous amount of free cash flow really focusing capital allocation on several things one of them is high roic investments and strategically aligned m a which for us if you've been following us for the past three or four years you know that's a change in the strategy we've been de-levering uh for the past four years after doing this the strategic acquisition so we're now back on the growth trajectory and looking to add to the business we'll do that while maintaining our leverage and you know kind of 1 to 2 times EBITDA and then returning you know capital to shareholders through continuous dividends that we've been paying and growing the dividend over time as well as share repurchases so as we get into it here's a quick snapshot of the business if you're not familiar we're located down in Fort Worth Texas we have about 3,800 employees on the metal coating side 46 locations 42 of those locations are are what we call our hot tip galvanizing facilities and the other four are powder coating plating and anonizing facilities and then 14 coil coating locations as I mentioned both of those businesses are market leading businesses we have the number one market share position in both segments and about two times the size of our nearest competitor so we've got a really formidable position in the marketplace I'm with a high moat around the business you can see at the graphs the breakdown of sales and adjusted EBITDA roughly split equally between the two and on a consolidated basis 1.65 billion in sales 368 million in adjusted EBITDA and that is inclusive of corporate costs in a 22.3% adjusted EBITDA margin so if you're not familiar with the the storyline on slide five you'll see our strategic journey over time this goes back to really when Tom Ferguson our CEO started the at the company and shows you kind of a quick look at at the past several years really transform the company we've you know are now at 1.6 billion and and eyeing uh two billion in top line sales as we move forward i think uh really what i would just leave you with is uh you know back in 2022 we really started looking at strategically transforming the company positioning away from a very diverse group of assets that we had in the portfolio to becoming a focused metal coatings company we're able to action that as we moved into 2023 through the disposition of all those disparate assets to a JV with a company called Fernwa, and then the acquisition of Precoat Metals, which really set the stage for us to be a pure play coatings company. And so as we look forward, what we're looking to do is, again, continue the disciplined capital allocation strategy, focusing on high ROIC opportunities, investing in the two segments that we have I often refer to them as swim lanes so we're looking to stay in the two swim lanes as we move the business forward and certainly look at you know how do we continue to invest in technology and drive return for the for our shareholders on slide six real quick look at the achievements we've made versus our commitments you can see we've kind of checked the box on all these things when we talk about leverage being kind of one to two times we're at 1.4 times debt to EBITDA on the trailing 12 ended February which is consistent with our the end of our fiscal year we have reduced debt down to 385 million in the in the most recent fiscal year we've said that we'd like to have adjusted EBITDA at 360 to 400 million as we ended the the last fiscal year and you can see we've achieved that as well as the EBITDA margin being you know coming right in where we wanted it to be uh talked about acquisitions and we said that we would like to pivot and and start working on m a again strategic m a we got one of those deals done last year in canton ohio and several others in the pipeline as we uh we meet here today and as i mentioned dividend you know we're consistent uh dividend payer we've increased the dividend recently we're committed to not only uh paying a dividend every quarter but looking at increasing that dividend commensurate with the growth of the business as we move forward and with respect to share repurchases we we have a 100 million dollar authorization in place we repurchased 20 million shares a 20 million dollars of shares last year and that was consistent with making sure that we we don't dilute the business through through equity comp so with pretty much offset that really quickly inside seven and markets mostly focused on construction we break that down into three categories infrastructure and then non-res construction and then residential construction and each one of those it's it's roughly about a third of that 56% that you see there other large markets for us include industrial electrical transportation all all big markets and what really is driving us and getting us excited are the things listed on the right side of the screen so infrastructure investment no doubt has been a huge driver for the business we'll talk about AIIJA and other things but no doubt about it that we're in a long-term secular growth trend for for infrastructure in the US and that bodes well particularly for our galvanizing business reshoring is certainly another thing and then of Of course, conversions happening in the pre-painted steel business where people are moving away from powder coating and wet sprays and looking to use the pre-painted steel in their manufacturing operations which has been a result of the technology has been much improved in terms of pre-painted steel so that allows them to use that and press breaks and stamp it without ruining the finish. I mentioned AIIJA real quick again this is just some of the areas that are affecting our business in a very positive way on slide eight you can see roads bridges major projects things like guardrails light poles signage highway signage all that steel that you see that's gray as you're driving down the road or the freeway it gets gray because we're hot dip galvanizing it that's what that's the process that makes the steel gray certainly no doubt clean energy and power, transmission towers, monopoles, utility towers. That's been a very big business for us and certainly has been a growth spot in the U.S. We benefit from that as well. Also data centers. We do have data center exposure as well as other types of infrastructure including airports, water, LNG terminals, et cetera. All those things are really helping propel the business forward. real quick on slide nine the strategic value proposition of the business when you put these two things together and and we were often asked four years ago you know what why are these two businesses together and why do they make sense you know what i would say fundamentally first is that you know both businesses are are a tolling business so we're not buying steel we're not buying aluminum our customers do that so we have no risk associated with the commodities of steel or aluminum we're just a pure play toll coater when you look at that you know we are certainly driving on common technologies the proprietary system so we run on oracle and then on top of that we have two two proprietary technologies coil zone on the pre-coat metal side and then our digital galvanizing system which we'll talk also about a little bit on the metal coating side and then of course very service focused you know when you're in the space that we're in you have to continue to provide outstanding customer service and lead on customer service and we really do that quite well we met measure measure that very often we do net promoter score for instance with customers on the projects that we're working on to make sure that we're continually focused on on that I I mentioned technology a little bit so on slide 10 of the presentation you can see I mentioned our digital galvanizing system very distinct competitive advantage for us this was a first-of-a-kind tool that was put in place it's eliminated a lot of paper in the organization it's improved processes so it's not only an operational effectiveness tool that's helped us reduce costs and improve the operations but it's also a customer focused tool that it gives the customers real-time visibility into where their steel is in the galvanizing process and when it's going to be delivered and certainly of course if there's any issues or concerns we can communicate through them using the tool as well and and resolve those very quickly and efficiently coil zone very much the same thing it it does really all the same things digital galvanizing system does as well as provides integration to our customers major ERP systems. So when a customer comes to pre-coat, we seamlessly integrate CoilZone into there. So we become very sticky with their systems and become sort of their coil coder of choice. With respect to IT infrastructure, we often get a question about AI. A couple of things that we're doing, we've been investing in systems infrastructure, making sure the business is ready. We've worked on policies and procedures, making sure that our folks in the organization know how to leverage AI. We've been doing a lot of training on AI. And then there's some specific applications and specific projects that the business is looking at to further improve processes, automate things, and make decisions in a quicker and more timely basis. So those are the areas that we've been focusing on so far, and we've been very pleased with what we've seen. R&D, real quick, on slide 11, we've had a longstanding partnership with Texas A&M back to 2019. What we're really doing with them, we've implemented and installed a small galvanizing kettle on the campus. And so the engineering students have been working on a lot of different formulations on how to improve the galvanizing efficiency and the zinc pickup by looking at different additives and chemistry so that's proven out very well we have a number of those solutions that they've come up with implemented in our systems and our kettles nationwide and very pleased with with what we've done with with the university real quick on slide 12 taking a quick look at sustainability i think the main driver here is that just that we are not only essential, as Sandy mentioned, to infrastructure, but also doing that in a very environmentally friendly manner. When you think about our hot tip galvanizing business, it uses zinc. Zinc is what's used to galvanize steel. It's 100% recyclable. It's a naturally occurring element. It's in our vitamins, our sunscreen. So it's something that is certainly very environmentally friendly as a as a coil code or as a galvanizing solution very committed to responsibility responsible sustainability initiatives and reporting we've been tracking scope one and scope two for quite some time we're also now moving into looking at scope three we've been targeting a 10% reduction in scope one and two and I think you know our results sort of speak for themselves we are the industry leader in terms of ESG scores amongst anyone in our category and that's been recognized by newsweek as you know one of the america's most responsible companies for four years in a row now so very very pleased with what we've accomplished in terms of sustainability initiatives and then lastly and as far as diversity goes we're a very diverse organization about half the organization is is diverse and you know we've been focused on driving things like our traits as part of that as well which stands for trust respect accountability integrity teamwork and safety that's a mantra again that tom has instilled in the business and also links back to our diverse culture and our values kind of talking about tom and the leadership team you can see them here on slide 13. we're led by tom ferguson who has a wealth of experience coming from flow serve and another organizations. Jason Crawford, our CFO, came to us through the acquisition of Precoat, but he has been in the industry for 16 years overall. Brian Stovall is just retired, and his successor is Todd Bella, who we have both of them listed here on the screen. Jeff Valines runs our Precoat business. And then you see myself, Tara, Haley, and Roy rounding out the rest of the organization um and again all of us have been together for for quite some time so moving on uh just kind of talk about where azz is headed excuse me on slide 15. so one of the things that we put out last year when we did our our analyst day at our new greenfield facility in washington missouri was some some three-year targets so we talked about the fact that we'd like to grow it 2x GDP on an organic basis moving over to you know two billion in annual sales and FY 2028 or higher we'll do that as well as focus on discipline M&A execution so looking at again the two swim lanes that I mentioned and looking at opportunities opportunistic both on activities that we can do on the M&A front for both of the two segments and then do all that while we maintain and or to grow the consolidated EBITDA margins so we're already at 22% consolidated EBITDA as you saw on one of my earlier screens and what we're really trying to communicate here is that you know we will look at M&A opportunity through that lens and make sure that you know we're not just growing the top line for the sake of growing the top line but also making sure that we maintain and grow the bottom line as well as we think about acquisitions and the the acquisition pipeline again I kind of alluded to this we're looking at both segments and and again very disciplined and how we look at M&A opportunities the good thing is is that our markets are still highly fragmented despite you know our our position in the market so it does provide some opportunities for us to roll up a few more locations on both sides of business and when you look at the targets again we're primarily looking through it through a lens of either adjacent solutions geographic expansion as well as a cultural alignment with the company and then finally you know making sure that from a financial standpoint that these things make sense that they're going to be a creative they create synergies and drive the the business higher particularly the margins so I'm going to dive in on slide 18 real quick on the segments and give you a kind of a quick look on each of the two segments that we operate. So metal coatings, as I mentioned, is a hot dip galvanizing business. For the trailing 12 months, again, ended February, $758 million in sales. Our input is fabricated steel. It's coming from our fabricators that are our customers. Things that we do, hot dip galvanizing, number one, but then we also offer spin, galvanizing powder coating plating anodizing in that segment roughly about a 2.8 billion dollar market our market share stands at 27 percent and you can see the graph on the far right shows you the historical adjusted EBIT outperformance of the business very consistent growth over the past six years here even you know through COVID and if we went back even further you'd see the same trend line the value prop I'm not going to go through all these but again when you think about the business one of the things that that stands out as our value prop is the footprint we've got a very formidable footprint as I mentioned 42 locations strategically located around the US and what's key for us is to remain very close and proximity to our customers our sweet spots generally about 250 mile radius from our business that we're serving from each plant again that will change based upon some geographic locations but that's that's certainly part of it the value-added services the technology that we talked about and then our flexibility we generally can turn steel around for our customers in three to five days that's the norm so very quick turnaround business short cycle not a big backlog but again by design that's kind of how this industry works it doesn't mean that we don't have good visibility to the backlog because our customers have you know long backlogs and they share that data with us many of those are companies that you would know in the industry is some of the leading metal fabricators that are out there today I mentioned the footprint on slide 20 you can kind of see the footprint here again scattered throughout the US as well as up into Canada we are completely North American focused so we don't have international exposure beyond Canada which is very nice when you kind of consider the business and as an investment choice you can see on the galvanizing side here our end markets it looks a little bit different than the end markets I showed you earlier more evenly distributed amongst construction industrial projects transportation and then certainly electrical and again electrical is a big growth area for us those utility poles substations you know anything electrical infrastructure typically tends to get galvanized and so we're ideally positioned to take advantage of that here's a quick look on slide 21 of the the segment historical financials I won't go through all that just to say that again when you look at the the CAGRs for both sales and adjusted EBITDA certainly performing very well over the excuse me over the past six years and and the margins have grown significantly over time to there on the bottom of the screen there might be a little hard to see in the room but you know back six years ago we're talking about 27% even a margins in this business and now we're talking you know north of 30% so we've grown those over time some of the growth drivers as I mentioned on slide 22 certainly reshoring near shoring infrastructure spending data centers we've seen a lot of organic growth in the business focusing on technology as I mentioned and value-added services expansion and then greenfield plant expansions something we've not done for for some time in this segment our last one was 2017 but we have developed a list of of greenfield plant expansions that we could take a look at going forward on this segment but really we've been more focused on just the M&A side the M&A landscape provides more immediate opportunity for us and a better return and a more immediate return than investing in a greenfield facility. So I'll now switch over to pre-coat metals real quick. On slide 24, $891 million segment. Again, steel and aluminum coils are the input. It's a very highly automated process and about a four billion dollar market with a 23 percent share and again you can kind of see the historical performance on EBITDA here as well the value prop very similar to what we talked about on the metal coating side again I think the the biggest difference I would say here is the complexity that the business embraces and we're often asked about you know how is this business different than maybe a mill or a service center and I would say that one of the big key drivers is the fact that we embrace the complexity that our customers have that's really demonstrated through the the amount of colors that we we have on file we've painted over 22,000 different shades and just white alone we've got 200 shades of white that we've done and And so that picture sort of on the bottom right there of some of the coils that have been painted and waiting in inventory, those are just in one location. You can see all the different shades there that we deal with on a daily basis. The footprint, a little more eastern focus, an eastern and Midwest focus. That's really where all the manufacturing takes place in the U.S. today for steel and coils. So we're ideally more positioned to be around where mills and service centers typically And you can see the end markets are a little more diverse than what the metal coatings business were, but it's still heavily focused on construction. Again, a quick little chart on slide 27 of the financials of the business. Again a category of 7% on the sales and adjusted EBITDA over time and pretty consistent on the margin profile. it's grown slightly but you know sitting right around 20 percent even of margins one of our big investments on slide 28 has been the new greenfield facility that's located in washington missouri that facility is now operational this was a 125 million dollar investment it took us two years to complete we're happy to report that it was completed on time and on budget we have a large take or pay customer that is committed to 75% of the contracted volume for this facility which is why we built it and very pleased that we've been able to you know ramp the production of this of this facility to where you know we've committed it to be for this time so so really excited about this and where we're at we expect run rate contracted sales of 50 million as we have now entered into our FY 2027 year from this facility and and even a margins that should come off of this facility that are going to be above the the pre-coat margin profile overall so so a nice addition to the fleet and we're really now in the process where we're adding customers in in addition to the the take-or-pay customers so we are looking at trials right now with three or four additional customers and running their product to hopefully get them qualified and committed to filling the remaining capacity as we move forward some of the strategic drivers for pre-code and slide 29 very similar to what we talked about earlier tailwinds nearshoring reshoring one of them that's a little different is the conversion of plastics to aluminum that's happening in the The beverage space, the facility that I just mentioned, is tailor-made for the light-gauge aluminum that's used in the tops of beverage cans. So when you think about Red Bull, Monster Energy, Budweiser, all those different colored tops were the folks that are bringing that color to the top that's used in the production of those cans. So real quick, as we kind of move into a consolidated look at the company, when you put all that together, again, nice growth in both sales and adjusted EBITDA over the past six years. And, you know, we feel really confident that this trajectory will continue as we move forward. So very happy and pleased with the performance of the business. The other thing I would say, you know, we often get asked about cycles and, you know, how do these businesses perform. were a little unique here in that we included that answer to the question in our slide deck on slide 32 so if I roll things way back to the financial crisis in 2008 and you look at the the performance of these businesses back in 2008 through 2009 during the financial crisis you know you see just a modest decline that happened and it really was just on the pre coat side of the business the metal coatings business actually grew through the cycle so So very resilient business is what I'm trying to communicate to you today when you factor in AZZ as an investment choice. And again, it really is a factor of all the things on the left side of the screen. We have very broad end markets. Usually what happens is even in COVID, if we look at an exam in COVID, you would see a similar type of chart. Things like stadium construction were down because people were not coming together in large groups but our exposure on residential boat docks and boat trailers and RVs all really took off so just a testament to again the broad spectrum of end markets that we serve as I mentioned we don't get affected by the price fluctuations in metals because we're not buying any metal so that plus the value added model and and the highly variable cost structure with about 75% of our costs are variable versus fixed really generates significant earnings so as we look at the capital structure and where we'll be deploying capital as I mentioned we've really transformed the business we jumped up to as high as 4.3 times debt to EBITDA when we acquired pre-coat metals and then have very steadily worked that down over time to where we're sitting at 1.4 times debt to EBITDA now and again all that generated through the the pay down of the debt so we're really happy with getting that transformation done and then paying for it and then as we look forward you know on the growth side of the equation maintaining that leverage kind of one to two times debt to EBITDA we can really we've got a balance sheet that's never been stronger and never in a better position and so we can go out and do some very significant M&A without really spiking the leverage much so it generates a lot of cash flow and a lot of you know firepower for us as we move forward and take a look at that what we want to do looking at that capital allocation transition again I won't go through all this but you can kind of see it laid out here where we were versus where we're going again strategic M&A bolt-on acquisitions and other strategic mna is what we're focused on while we again maintain that leverage and return capital to shareholders so very good position to be in because we can do all these things we don't have to pick and choose one or the other we can it's in all of the above strategy for us as you evaluate az on the left side of slide 35 versus other industries as you kind of compare revenue growth, EBITDA margin, or networking capital to sales, you'll see that it's a very strong performer. Sales growth has been right in line and or above certainly anybody else in the coding space or the building product space. Steel mills have had a little higher sales growth rate recently due to the tariffs and what's been happening there. But again, as you kind of take Take a look at our growth on the top line relative to what our margin looks like. We're certainly head and shoulders above just about everybody else as you make those comparisons. And then again, very low networking capital to sales compared to everyone else. That brings me to our guidance on slide 36. We've put out our guidance back in October. We generally will revisit guidance each quarter as we announce earnings. so our next quarterly earnings call is coming up on July 8th so we should be out with earnings on the on the 8th and then a call on the morning of the 9th but as we stand here today current sales guidance is 1.7 to 5 to 1.7 75 billion adjusted EBIT of 360 to 400 million and adjusted diluted EPS of 650 to seven dollars and you can see on the bottom of the screen all of the the guidance assumptions that go into that just to highlight a few of them we'll see about capex to be 80 to 100 million in the year again interest expense 35 to 45 million continued debt reduction of about 130 to 170 million is factored into that and this as we look at it excludes all potential M&A opportunities as well so M&A is certainly viewed as an upside to these numbers and with that that brings me to the end of the presentation I have about two and a half to three minutes of potential Q&A available if there's any questions in the room yes sir yeah great question so for those following online the question was do we see ourselves expanding outside of North America? At this point, I would say no. We view the market as certainly having enough opportunity for us domestically to sustain us through the planning period of the next three to five years. So I don't really see us looking outside the market until later on. And we have examined it quite extensively. Usually as you look at particularly galvanizing opportunities, generally lower margin profile outside the U.S. than in the U.S., so we are reluctant to kind of cross that bridge at this time.

Sandra Martin, Head of Investor Relations

Thank you, everyone. Have a great conference.