AZZ Inc. (AZZ) Earnings Call Transcript & Summary

Good day, and welcome to the AZZ Fiscal 2027 First Quarter Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Phillip Kupper, Managing Director of Three Part Advisors. Please go ahead.

Good morning. Thank you for joining us today to review AZZ's fiscal 2027 first quarter results for the period ended May 31, 2026. Joining the call today are Tom Ferguson, President and Chief Executive Officer; Jason Crawford, Chief Financial Officer; and David Nark, Chief Marketing, Communications and Investor Relations Officer. After today's prepared remarks, we will open the call for questions. Please note that the live webcast for today's call is available www.azz.com/investor-events. Before we begin, I would like to remind everyone that our discussion today will include forward-looking statements made in accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. By their nature, forward-looking statements are uncertain and outside the company's control, except for actual results, AZZ's comments containing forward-looking statements may 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 latest annual report on Form 10-K and quarterly reports on Form 10-Q. These statements are not guarantees of future performance. Therefore, undue reliance should not be placed upon them. Actual results could differ materially from these expectations. In addition, today's call will discuss non-GAAP financial measures, which should be considered supplemental and not as a substitute for GAAP financial measures. We refer shareholders to our reconciliations from GAAP to non-GAAP measures contained in today's earnings press release. I would now like to turn the call over to Tom Ferguson.

Thank you, Phillip. Good morning, everyone, and thank you for joining us today. We appreciate your interest in AZZ and the opportunity to discuss our first quarter fiscal 2027 results. We are off to a strong start. For the first quarter, we delivered record sales in both segments generated solid cash flow, maintained a strong balance sheet announced raising our dividend and raised our full year guidance. These results reflect the strength of our strategy, the durability of our end markets and the continued execution of our teams. Our results consistently reflect our ability to convert demand into high-quality profitable growth. We continue to leverage our market leadership positions in both Metal Coatings and Precoat Metals to expand earnings and generate robust cash flow while investing strategically to extend our competitive advantages. In Metal Coatings, we are investing in added capacity where demand supports attractive returns. In North Texas, for instance, we successfully commissioned a new large kettle to meet growing regional demand for hot dip galvanizing effectively doubling our capacity at Crowley, Texas. This low-risk, high-return investment supports growing customer demand and strong market fundamentals. David will discuss U.S. end market demand in more detail in just a moment. Additionally, a key element of our growth strategy is identifying innovative ways to grow share and deepen customer partnerships. One example of this is a vertically integrated manufacturer who chose to partner with AZZ to divest its noncore galvanizing operation to reduce complexity and cost. As part of this agreement, we acquired their galvanizing Kettle in zinc, providing them with immediate cash liquidity while securing a long-term service agreement. We believe this deverticalization model creates value for our customers while delivering long-term revenue streams for AZZ. We view this as a scalable blueprint for future partnerships. At Precoat Metals, our Washington, Missouri facility continues to ramp production as planned. We remain on track to reach targeted utilization with our strategic partner, while actively seeking the commercialization of the remaining capacity. Facility is approaching an expected contribution margin levels for this year and performance with our partner in this beer and beverage-related container category has been very encouraging. Across both segments, our focus remains clear, increased share of wallet, capture incremental market share and deploy capital into high confidence organic and inorganic growth opportunities. These investments drive operational efficiencies and position us to deliver sustained long-term growth. Underlying all this progress and momentum are structural advantages that differentiate AZZ, including our proprietary technologies. In Metal Coatings, our digital galvanizing system, drives consistency, efficiency and data-driven decision-making at scale. In Precoat Metals, CoilZone enhances customer visibility with real-time insights that improve throughput and enable benchmarking across our footprint. These digital capabilities are not just operational tools, they are scale, strategic assets that strengthen customer relationships, improve execution and are forming the basis for utilizing AI to improve customer intimacy, fine-tune pricing decisions and support operating efficiency improvements and sustainability. Looking ahead, we remain confident in our ability to execute on our strategic priorities, winning in our markets, deploying capital with discipline, investing in high-value capacity expansion, delivering superior customer service and leveraging AZZ's differentiated capabilities. Collectively, these efforts position us to drive profitable growth, enhance shareholder value and reinforce our leadership across our end markets. With that, I will turn it over to Jason.

Thank you, Tom. We delivered record first quarter sales of $448.5 million, up 6.3% year-over-year, driven by strong double-digit sales growth in our Metal Coatings segment which increased 12.3%. This performance reflects continued momentum across construction, industrial and infrastructure end markets. Precoat Metal sales increased 1.5% year-over-year supported by the pass-through of higher paint and input costs and the continued ramp-up at our Washington, Missouri facility, partially offset by softer volume in certain construction, HVAC and appliance end markets. From a profitability standpoint, gross profit was $112.2 million or 25% of sales, representing a 30 basis point improvement year-over-year. This reflects favorable mix, pricing discipline and improved operational execution. SG&A expenses were $35.1 million or 7.8% of sales compared to 8.2% last year. Even after excluding the $2.2 million noncash retiree incentive charge in the prior year, we demonstrated good cost control while supporting growth. Operating income increased to $77 million or 17.2% of sales, an improvement of 70 basis points versus the prior year, reflecting strong incremental margins on higher volumes. Turning briefly to the Vale JV. As a reminder, our first quarter of the prior year included $173.5 million of total equity and earnings of which a substantial portion was related to the divestiture of its electrical products group. While this creates a difficult year-over-year comparison, it's important to note that our current results reflect our 40% interest in the remaining business. Our JV partner continues to pursue the divestiture of its remaining available operations. Interest expense improved to $11.3 million, down $7.3 million from the prior year, driven by deliberate debt reduction following the Vale distribution and financing optimization initiatives discussed in more detail in our SEC filings. This highlights the strength of our balance sheet, support from our capital market partners and our continued focus on reducing debt and the company's cost of capital. First quarter's income tax expense of $14 million reflects an effective tax rate of 21.2% compared to 22.2% last year when we exclude the impact of the JV equity earnings. GAAP net income was $52 million, and adjusted diluted EPS was $1.85, up 3.9% year-over-year demonstrating continued earnings growth despite the absence of the prior year JV-related earnings. Consolidated adjusted EBITDA was $99.5 million or 22.2% of sales. Infrastructure Solutions adjusted EBITDA dropped from $7.6 million in the prior year first quarter to a loss of $0.8 million in the current quarter, reflecting the impact of the business divestitures in the [ Aveo ] JV that occurred throughout fiscal year 2026. In our Metal Coatings segment, an increase in large projects and the sale of land in the prior year quarter contributed to a drop on year-on-year margins. While margins in our Precoat Metals segment improved modestly, on operational performance and mix from our Washington, Missouri facility. Importantly, underlying margins remain strong and consistent with our long-term expectations. As Tom noted, our Washington, Missouri facility volumes continued to ramp in line with expectations, and we remain on track to contribute meaningfully to revenue and profitability as we move through fiscal year 2027. In addition, we are starting to make progress in commercializing the remaining capacity at this facility. Turning to our balance sheet and capital allocation. We generated $37.1 million of operating cash flow in the quarter driven by earnings growth and disciplined working capital management. Our net leverage remained low at 1.4x, providing significant flexibility to fund growth and return capital to our shareholders. Capital expenditures totaled $18.7 million, with a growing focus on high-return organic investments. We remain committed to returning capital to our shareholders. We recently increased our quarterly cash dividend from $0.20 per share to $0.24 per share, representing a 20% increase and further underscoring our confidence in the sustainability of our earnings and cash flows. In addition, we continue to maintain a strong share repurchase program with $133.2 million available. However, no shares were repurchased in the first quarter. Overall, our capital allocation priorities remain unchanged, that is to maintain a strong balance sheet, invest in high-return growth opportunities and return excess capital to our shareholders. With that, I'd like to turn the call over to David.

Thank you, Jason, and good morning, everyone. This quarter, we have enhanced our disaggregated sales disclosure in the 10-Q to provide greater transparency and improved end market comparability. Our reporting now reflects 6 primary categories: construction, which remains our largest end market and includes commercial, residential, agriculture and data centers. Industrial, mainly comprised of processing plants for a variety of applications, including power, food and water as examples. Infrastructure includes electrical, transmission and distribution, solar, petrochemical and bridge and highway projects. HVAC and appliances includes both residential and commercial HVAC as well as appliance. Transportation includes truck, trailer, bus and RVs and finally, container, which represents food and beverage-related end markets. Our other category represents all other miscellaneous sales. This updated framework better aligns our disclosures with how we manage and evaluate the business and no longer calls out consumer or electrical. Now turning to performance. Consolidated sales grew 6.3% year-over-year. Construction grew at 3.9% driven by continued strength in large data center and manufacturing-related projects. Industrial sales increased by 7.8%, supported by increased demand for utility scale power projects. Container was up 194% primarily resulting from the ramp at the new Washington, Missouri plant, as mentioned by both Tom and Jason. While infrastructure was essentially flat compared to the same quarter in the prior year, with mixed results by segment. Offsetting our growth in construction, industrial and container end markets were transportation down 1.2% on lower commercial trailer activity and HVAC and appliances down 2.4% on lower residential new construction. Looking ahead, we believe we are in early stages of a significant and sustained investment cycle. Modernizing the aging electric grid to support our nation's accelerating electrical demand will require a meaningful step-up in capacity and capital deployment. This dynamic, combined with ongoing investment in infrastructure, energy and industrial capacity supports our view that a once in a generation infrastructure rebuild is underway. Our thesis is that AZZ is well positioned to benefit from a multi-decade capital investment cycle across utility, transmission, distribution and grid technology. Importantly, these trends are not cyclical, they are structural long-duration drivers that are increasingly central to our customers' capital spending priorities. We continue to see strength at the customer level. For example, one of our largest galvanizing customers has recently reported a 35% growth in their utility-related structures backlog. While we do not operate the business on a backlog basis, this customer's demand forecast, along with others, provides us confidence in future activity and the durability of certain end markets. With that, I will turn the call over to Tom.

Thank you, Dave. Adding to Dave's commentary on industrial, infrastructure and utility momentum, we are evaluating how our footprint aligns with anticipated demand. Regionally, the Southern U.S., beginning with Texas and expanding East through key growth states is expected to account for nearly half of the country's proposed utility capital spending. This reinforces our recently completed capacity expansion in North Texas which we believe is both well timed and strategically aligned with our growth priorities. Reflecting strong sales momentum and operational resilience, we are confident in raising our fiscal 2027 outlook. We now expect sales of $1.8 billion to $1.85 billion, adjusted EBITDA of $375 million to $415 million, adjusted diluted EPS of $6.75 to $7.15. As we drive growth, we also expect to reduce debt by $130 million to $170 million, in fiscal 2027, demonstrating our continued commitment to balance sheet strength alongside expansion. Looking forward, our strategy remains clear and consistent. We are scaling the business through a combination of organic investments, market share gains and a disciplined M&A approach. We are actively evaluating a robust pipeline of high-quality acquisition targets that align with our core capabilities and meet our return thresholds. We expect to announce a deal later this month. We are also evaluating greenfield galvanizing opportunities where we can partner with strategic customers. These efforts position AZZ to capitalize on what we believe is a long-duration secular growth cycle driven by increasing demand for infrastructure, electrification, data centers and grid modernization. At the same time, aging infrastructure across North America continues to require significant reinvestment, further reinforcing the long-term opportunity set. Our confidence is reflected in the Board's recent decision to increase our quarterly cash dividend to $0.24 per share. Finally, we believe AZZ is uniquely positioned operationally, strategically and financially to deliver sustained, profitable growth and long-term shareholder value. Before we open the call to questions, I'd like to recognize and thank our employees. I am proud to work alongside such a talented and dedicated team that brings pride and passion to everything they do to serve our customers. Now, operator, we are ready to take questions from analysts.

[Operator Instructions] The first question today comes from Ghansham Panjabi with Baird.

It's actually Josh Westley on for Ghansham. Maybe, Tom, if we could just start off on just the overall market conditions. Obviously, it sounds like end market demand is pretty robust for you guys. But just in terms of the volatility over the past few months with energy costs from the Middle East, et cetera. Just curious how that's kind of translated into customer decision-making, how they're thinking about going forward with projects? Are they getting delayed right now and getting pushed into the back half of the calendar year? Anyway, any thoughts on year end would be great.

Sure thing, Josh. A couple of things. One, on the Metal Coatings side, I think the markets are robust. You see it in the growth in the quarter and has taken our guidance up is because we see a lot of strength there going forward for at least the balance of this calendar year. There's been talk of project delays depending somewhat on interest rates or energy costs and things like that. But for the most part, the things that we're seeing they've got to put towers and poles in the ground. They've got to continue to improve the grid and then data centers, I'd say the majority of our plants have at least one data center project going on at any given time lately. So we have not seen much in terms of headwinds there. As a matter of fact, it's mostly stuff moving forward, customers converting capacity to where they can focus more on poles, towers and things related to electrical infrastructure. On the Precoat side, I'd say we had encountered the tariff impact, which has made substrate less available in many ways or of higher cost. I think that's probably stabilized at this point as we're looking forward. So not much more impact on tariffs and the substrate prices have gone up, it could actually bring some imports back into play, which is generally good for our customers on the Precoat side. So I think everything we're looking at is pretty positive, and we feel like either like on Precoat, we've bottomed and stabilized in terms of market conditions. We're benefiting from the container demand on -- especially for the new Washington site, which has ramped up according to schedule and it pretty much hit its pace now and almost at its run rate early. And on the Metal Coatings side, there's just not a lot of clouds on the horizon. Obviously, we battle it out at 48 sites every day, but most of those sites are -- I'd say we're winning every day.

That's great. Maybe just for my second question, Tom, on that deverticalization model that you're talking about with your customers. Just any more color on that would be great. I mean it sounds like a lot of it are maybe customers that you kind of service flex capacity for right now. Is that correct? And is this a trend that's kind of growing across your customer -- sorry, customer base, how should we think about that?

Yes, it's something we talk about and we like and we talk to a lot of our customers about it if they've got a kettle and especially when that kettle goes down and they've got to replace it or repair it, that's a great time for our teams to be in there talking to them, why do you want to go through this headache. We've got plants within relatively short distances from you, we can negotiate a long-term agreement, and we can take that furnace and kettle off your hands and give you a decent price for your zinc. So we're having those conversations with customers all the time. There's a target list of those. We're happy that we finally got one closed. We had not done one of these since I'm going to say, about 5 or 6 years now. So we'd love to see this turn into -- and that's why we wanted to talk about it because we just want to make sure our customers -- we've got their attention that this is something we can do, and we're happy to deploy some of our capital towards helping them with what we think is a better long-term solution for them. And we just like to think we're a whole lot better at how dip galvanizing than they probably are since it's not their focus.

The next question comes from Nick Giles with B. Riley.

This is actually Henry [indiscernible] on for Nick Giles. Maybe to start off start off on M&A. It's been in the background for a while now, and you mentioned likely announcing one this month. I'm just curious on what some of the gating factors might be willing sellers, sites that make sense geographically? Any color there would be really helpful.

I think we've -- the one I'm hoping we're going to close. I'd say we got a little bit rusty, even though we did [indiscernible] last year. Normally, I'd like to see us get these done in 45 to 75 days, and this one's kind of drag along for about 6 months. So particularly on what I'll call a one-off galvanizer. So I think this is us being disciplined and making sure that it's not just that we're crossing the Ts and dotting the eyes. It's that we've got to have a sense of urgency by getting these things done. And because they just drag and, of course, it cost us money to do that, but it also delays our ability to take them on and get them into our process and our playbook. So there's more out there. I think we're having a lot of conversations. Obviously, galvanizing market is fairly hot right now. So some of these owners, I think they're kind of sitting on what they view as good demand at the moment and just not at that peak point where they're ready to to transact something. But yes, I'd say our guys are having conversations every week, every month with a pretty good number of these independent owners. And I'd like to see more of them break loose. We're paying better multiples than probably we have historically, but it's -- part of that is just our ability and our confidence in our ability to drive the synergies and grow those businesses. So I'm hoping some more break loose, but it will be good to get this next flag on the map for us. And then on the Precoat side, we're also working some things. Obviously, those are typically bigger. But just -- they would still be a bolt-on because we want to be able to bolt in on drive the synergies, run the playbook and not disrupt anything. So we're not looking for anything like a third leg.

Got you. That's very helpful color. And then just to confirm, with the one that might close at the end of this month, would that be the same one you mentioned on your last call that was in due diligence?

That's correct.

Okay. And then for my second question, 1Q came in really strong here and your EBITDA run rate is now at the higher end of your updated guide. As we try to model 2Q and 3Q knowing 4Q tends to be softer. Are there any seasonality or other factors we should be keeping in mind?

No, we're feeling pretty good. I mean the things that affect us, fourth quarter is usually tell us what the severity of the winter is going to be and we'll tell you what our forecast is going to be for that quarter. But I think -- which is why we'll reforecast that as we get towards the -- as we can see what winter stacking up to be. But in terms of -- unless it hits our sights directly, it's usually more positive than negative for us. So not that we're projecting any. But yes, there's nothing within our control or that we're hearing from our customers that would indicate we're going to see anything unusual. So we would anticipate second and third quarters tracking. And I will say we're almost halfway through the second quarter. And we got off to a really good start. So we're feeling good.

Next question comes from Daniel Rizzo with Jefferies.

Would there be like the customer has to be responsible for agreed to taking on 75% of EBITDA. How would it be structured -- is it like a take-or-pay component. I mean any color on, I guess, what would be the cost to you guys in terms of CapEx?

Yes. On the Galvanizing side, we typically on Precoat, we went with the take-or-pay because it was a huge investment. And particularly, for AZZ we are new into Precoat, so we wanted to make sure that we had the demand there and that we had a great partner customer committed. For galvanizing, we're just usually looking for anchor customers. So usually existing customers that we do a lot of business with, but maybe they've expanded the site. They've been investing in a new -- some new production capacity. And we want to be partnered with them. So we're not looking for a contractual arrangement. I would just say that we've probably got about a dozen of our sites that have that anchor customer that makes up anywhere from 10% to 25% of potential -- of volume. And as long as we've got that kind of knowledge and clearly, the relationship, yes, we don't require a contract. We're typically probably with inflation the way it's been on materials kettles, furnaces, everything else, what you've seen in our run rate CapEx, we're looking at $35 million, $40 million to -- including real estate or even, I would say, somewhat dependent on the cost of the real estate in some cases, 18 months build-out and then ramp up. And because they're -- we're talking to what we would consider anchor customers, the ramp-up should be much quicker than than we did in Reno, which was our last greenfield plant. And the ramp-up took longer, if we didn't have an anchor customer in the area. We did it just because it was a high-growth region that had a lot of potential for the future, which we're very pleased with at this time.

Are there other high-growth regions you could point to? I don't know if you can do that on a public call or anything like that or places you're looking within the U.S. or whatever?

Yes. I think -- yes, I'm not going to point to anything specifically. Once we commit to some real estate, we'll get an announcement out and let folks know where we're at and what we've committed to. There's quite a few. When we look at a map, even though we've got 42 high galvanizing plants. There's still quite a bit of open space out there with growth. We tend to be either in the high-growth states like Texas right now and some of the Southeast. And -- but yes, there's several places where we think we can provide a better solution than some of the competitors and provide it closer to some of the customer concentration. So it -- and I'd say this is a balanced strategy. If we could buy decent competitor in the area. We'd love to do it. But these are areas where there is some competition, but they're not going to be willing to sell. So that brings forward the greenfield opportunity and particularly when we're talking to major customers who want to have that discussion.

The next question comes from Adam Dalheimer with Thompson Davis Co.

Congrats on the strong Q1. Tom, I wanted to ask and you've talked around this, but I still feel like it's worth asking. You guys beat the first quarter by -- on the EBITDA line, $2 million but you raised the full year guide by at the midpoint by $15 million, which is a pretty -- it's a strong move, but I'm just curious what gave you the underlying confidence to do that?

Yes. Part of it is that the new Washington site, hit its dates and commitments, and so we're feeling bullish about that new site and working with our partner and what they're telling us. So a chunk of it is just tied to the new site getting to its run rate targets and we believe being sustainable at those run rates sooner than we had budgeted for, if you want to call it that. So that's 1 piece of it. As I mentioned, on the Precoat side, there's a couple of things going on. We're seeing even though the markets in some areas are still soft because of the lack of substrate. Still, you've got pain price increases that have gone through. You've got and we've got our usual material burden and stuff we put on top of that. And then we have -- we're now pushing price to either keep up with material inflation. And in some cases, we've added -- well, we are adding surcharges on the zinc because zinc stayed high. So you factor all those things in, and we felt good about taking the EBITDA up significantly more than what we had generated in the first quarter.

Awesome. Yes, it's great to see. And then on on the expansion at Crawley, is that fully ramped yet? And I'm curious if there are other facilities where you could do the same thing, adding a kettle.