AZZ Incorporated reported a strong financial performance for its fiscal third quarter of 2024, surpassing earnings per share (EPS) expectations. The company posted an EPS of $1.39, exceeding the forecasted $1.25, driven by significant revenue growth and operational efficiency. Despite the positive earnings surprise, AZZ’s stock fell by 2.17% in after-hours trading, reflecting broader market dynamics or investor concerns.
Key Takeaways
- AZZ's Q3 2024 EPS of $1.39 beats forecast by 11.2%.
- Revenue increased by 5.8% year-over-year to $404 million.
- Stock fell 2.17% post-earnings despite positive results.
- Strong growth in metal and precoat segments.
- Future guidance remains optimistic with strategic investments planned.
Company Performance
AZZ showcased robust growth in its third quarter, with sales reaching $404 million, marking a 5.8% increase from the previous year. The company experienced organic growth across its segments, notably a 3.3% rise in Metal Coatings and a 7.6% increase in Precoat Metals. This performance underscores AZZ’s strong market position and effective business strategies.
Financial Highlights
- Revenue: $404 million, up 5.8% year-over-year.
- EPS: $1.39, exceeding the forecast by $0.14.
- Gross profit: $97.8 million, representing 24.2% of sales.
- Net income: $33.6 million, up from $26.9 million last year.
- Adjusted net income: $41.9 million, a 20.5% increase.
Earnings vs. Forecast
AZZ's actual EPS of $1.39 surpassed the forecasted $1.25, representing an 11.2% positive surprise. This significant beat highlights the company’s operational strength and ability to manage costs effectively, contributing to improved profitability.
Market Reaction
Despite the earnings beat, AZZ's stock declined by 2.17% in after-hours trading, closing at $82.90. This movement may reflect broader market conditions or specific investor concerns, such as rising zinc costs or macroeconomic uncertainties. The stock remains near its 52-week high, indicating overall positive sentiment over the past year.
Outlook & Guidance
AZZ maintains a positive outlook, projecting full-year sales between $1.55 billion and $1.60 billion, with adjusted EPS guidance of $5.00 to $5.30. The company plans to continue investing in strategic initiatives, including a new aluminum coatings facility expected to ramp up in Q1 2025.
Executive Commentary
CEO Tom Ferguson emphasized the company’s commitment to growth, stating, "We are committed to both organic growth and strategic bolt-on acquisitions to maintain and grow our leadership positions." Ferguson also highlighted debt reduction efforts and shareholder returns, noting, "We continue to pay down debt and return capital to shareholders by consistently paying quarterly cash dividends."
Q&A
During the earnings call, analysts inquired about the impact of LNG permit renewals and the rising zinc cost environment. AZZ addressed these concerns, emphasizing its minimal sensitivity to interest rate movements and its focus on gaining market share.
Risks and Challenges
- Rising zinc costs could pressure margins in the future.
- Macroeconomic factors, including interest rate changes, may affect market conditions.
- Potential supply chain disruptions could impact operational efficiency.
- Competition in the metal coatings industry remains a constant challenge.
- Regulatory changes, particularly in environmental standards, could influence operational costs.
Full transcript - AZZ Inc (NYSE:AZZ) Q3 2025:
Conference Operator: Good day, and welcome to the AZZ Third Quarter Fiscal 2025 Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Sandy Martin of 3 Part Advisors.
Please go ahead.
Sandy Martin, Advisor, 3 Part Advisors: Thank you, operator. Good morning and thank you for joining us today to review AZZ's financial results for the fiscal 2025 Q3, which ended November 30, 2024. Joining the call today are Tom Ferguson, President and Chief Executive Officer Jason Crawford, Chief Financial Officer and David Nark, Senior Vice President of Marketing, Communications and Investor Relations Officer. After today's prepared remarks, we will open the call for questions. Please note the live webcast for today's call can be found at www.az.com/investor events.
Before we begin, I want to remind everyone that our discussion today will include forward looking statements made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. By their nature, forward looking statements are uncertain and outside of the company's control. Except for actual results, our 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 annual report on Form 10 ks for the fiscal year. 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. Non GAAP financial measures should be considered supplemental to, not a substitute for GAAP measures. We refer to the reconciliation from GAAP to non GAAP measures in today's earnings press release. I would now like to turn the call over to Tom Ferguson.
Tom Ferguson, President and Chief Executive Officer, AZZ: Good morning. Thank you for joining us and Happy New Year to you all. Today, I will discuss AZZ's Q3 and cover our outlook for the rest of the year. Jason Crawford will review our financial results and David Nark will provide an and Ark will provide an industry update
: on sales to our end markets.
Tom Ferguson, President and Chief Executive Officer, AZZ: Then we'll open up the call for questions. The 3rd quarter's results exceeded our expectations versus how we were feeling as we had entered the quarter. I give our teams tremendous credit for their focus, discipline and great execution in both segments. We are pleased with both segment teams' ability to sustain margins while generating solid sales growth. Fiscal 2025 sales through the 1st 9 months have been driven mainly by construction projects related to highways, new bridge construction and infrastructure renovations throughout the U.
S. In addition, spending on data centers, reshoring and manufacturing clean energy initiatives and power transitions accelerated in calendar 2024, resulting in positive impacts for our business. Our consolidated Q3 sales of $404,000,000 increased by 5.8% versus the prior year's quarter and this was all organic growth. The Metal Coatings segment increased overall sales by 3.3%, but grew galvanizing at 5.2% when compared to the prior year's Q3, while the Precoat Metal segment grew sales by 7.6%. Sales momentum in the Q3 was almost entirely based on volume with higher tonnage processed in both fabricated steel and coil coating.
Metal Coatings delivered EBITDA margin of 31.5 percent, again exceeding the prior year and our targeted range of 25% to 30%, primarily due to higher volume and improved zinc productivity. Precoat Metals EBITDA margin of 19.1 percent also exceeded the prior year and demonstrated strength primarily due to higher volume, more profitable mix of business and improved operational performance. In addition, strong EBITDA resulted in cash flow from operations of $186,000,000 for the 1st 9 months of the fiscal year, which allowed us to make substantial debt repayments of $80,000,000 Jason will discuss this in more detail, but the strong free cash flow this year allowed us to further deleverage our balance sheet while investing in operations for the future. We continue to hold lead market positions in our galvanized metal coatings and coil coating precoat segments. As a specialized metal coatings provider, our strong and enduring competitive moat gives us an advantage through trusted repeated customer relationships, economies of scale and innovative customer centric technology solutions.
Our reputation for reliability and excellence in customer service further enhances our value proposition. We are committed to both organic growth and strategic bolt on acquisitions to maintain and grow our leadership positions. Importantly, we do not own the steel process through our facilities, so we avoid exposure to commodity price risk associated with it. Operating as a highly profitable tolling model, we will continue to strengthen our significant economic moat in metal coatings and precoat metals. We plan to continue investing in AGZ's proprietary customer facing technologies that are utilized at all of our facilities.
Our innovative technology platforms provide paperless real time access and improved service transparency, positioning our company as a highly differentiated metal coatings provider and strategic partner to customers throughout North America. Jason will discuss our disciplined approach to capital deployment in a moment. But first, I want to underscore that we continue to pay down debt and return capital to shareholders by consistently paying quarterly cash dividends. As noted previously, we expect to reduce our debt by over $100,000,000 for the fiscal year ending in February. As I mentioned earlier, for the 1st 9 months of our fiscal year, our growth has been 100 percent organic compared to the prior year.
We continue to work the M and A pipeline by carefully evaluating potential acquisition targets to add inorganic growth in each segment. We remain patient while considering the best timing target valuations and AZZ's optimal leverage. Finally, in pursuit of our high ROI capital allocation strategy, we have invested in a durable secular trend supporting the beverage industry's plastic to aluminum conversions. We are finalizing construction milestones of our new aluminum coatings facility in Washington, Missouri. We are currently doing equipment certifications and testing and expect to ramp up the new facility during the Q1, which begins in March 2025.
We are excited about our spring launch of this new facility, particularly as this new facility also demonstrates AZZ's commitment to support a greener future for generations to come. With that, I'll turn it over to Jason.
Jason Crawford, Chief Financial Officer, AZZ: Thank you, Tom, and good morning. For the Q3, we reported sales of $403,700,000 an increase of 5.8% over the prior year's quarter. By segment, our metal coating sales increased 3.3%, within which galvanizing increased 5.2% and our precoated metals segment increased 7.6%. The 3rd quarter's gross profit was $97,800,000 or 24.2 percent of sales, an increase of 110 basis points from 23.1 percent of sales in the prior year quarter. Gross margins improved in both segments, supported by higher sales and volumes and improved zinc productivity in the Metal Coating segment and higher sales and improved operational performance in the PreCoat Metals segment.
In the 3rd quarter, selling, general and administrative expenses were $39,200,000 or 9.7 percent of sales compared to $35,300,000 or 9.3 percent of sales in the prior year quarter. The SG and A increase in the quarter was due to one off employee retirement costs, severance expenses and legal accruals for cases that were settled during the Q3. Operational income improved to $58,500,000 or 14.5 percent of sales compared to $52,800,000 or 13.8 percent of sales in the last year's Q3. Interest expense for the Q3 was $19,200,000 compared to $25,900,000 in the prior year. The decrease is due to consistently paying down debt and our lower weighted average interest rates from various debt repricings and recent Fed interest rate reductions.
Equity and earnings of unconsolidated subsidiaries for the Q3 was $7,200,000 compared to $8,700,000 for the same quarter last year. These equity and earnings are from our 40% minority ownership interest in the Avail JV. Current quarter income tax expense was $12,100,000 reflecting an effective tax rate of 26.5% compared to 24.6% in the prior year quarter. The increase in the effective rate was primarily attributable to higher non deductible items related to meals and entertainment and lower impact from our R and D tax credits. Reported net income from the Q3 was $33,600,000 compared to $26,900,000 for the prior year quarter.
On an adjusted basis, Q3 adjusted net income was $41,900,000 compared to $34,800,000 an increase of 20.5 percent from the prior year. 3rd quarter adjusted EBITDA was $90,700,000 or 22.5 percent of sales, which compares favorably to $86,400,000 or 22.6 percent of sales in the prior year. Turning to our financial position and balance sheet. As Tom mentioned, we generated significant cash flows from operations of $185,600,000 exceeding last year's $180,900,000 After funding the 1st 9 months of the company's capital expenditures of $85,900,000 our year to date free cash flow was $99,700,000 Year to date capital expenditures include spend of $46,800,000 on our new coiled coating facility in Washington, Missouri. With most of the remaining spend of this project of approximately $11,200,000 expected to be completed during the Q4.
As Tom noted, we have a disciplined capital allocation strategy that consists of investing in the business for growth, paying down debt, returning cash to our shareholders through dividends and share buybacks and evaluating potential bolt on acquisitions. During the Q3, which ended November 30, we reduced debt by $35,000,000 and expect total debt repayments to exceed $100,000,000 for the full year. Our current trailing 12 months debt to adjusted EBITDA is 2.6 times, which compares favorably to our leverage of 3.1 times in the Q3 of last year. Recall that in late September, we repriced our term loan B down to so far plus 2.5 percent. And with the Fed reductions in the quarter and another reduction announced in December, we expect these moves to benefit our bottom line in the Q4 of this fiscal year.
Our current interest rate swap agreement fixes our variable rate debt for a notional portion through September 30, 2025, and we do not have any debt maturities until 2027. Finally, we paid cash dividends of $5,100,000 to common shareholders in the Q3. This year, we have strengthened the balance sheet through multiple levers with investments in organic growth, reductions in debt and working capital and improvements to our capital structure with a full redemption of the company's Series A preferred stock by using the proceeds from the secondary equity offering that was completed in May of this year. With that, I'd like to turn the call over to David Nacht.
David Nark, Senior Vice President of Marketing, Communications and Investor Relations, AZZ: Thank you, Jason. Good morning, everyone. The sales momentum for the Q3 trended positive in nearly all of our reported end markets compared to the same quarter in the previous year. Sales within construction, industrial and electrical utility grew over the prior year and we saw strength in small but growing categories such as containers, HVAC and recreation over the same quarter a year ago. We attribute this organic growth to a continuation of market share gains and signs that we are in early innings of a multiyear transformative period for infrastructure spending with transmission and distribution as well as renewables growing versus the prior year same quarter.
As we have communicated all year, we remain optimistic about public and private sector spending. Looking ahead, we believe infrastructure outlays will be elevated for years to come. The reshoring of manufacturing and energy transitions, investments in AI and the requirements for affordable housing will spur the need for more data centers, housing and medical facilities to support the growing population. These investments are based on connecting larger, sprawling communities, which creates an ongoing necessity for further spending in our nation's infrastructure networks, particularly bridge and highway as well as electrical T and D. In addition, we know that pre painted aluminum and steel will play an essential role in many projects, as well as the conversion from plastics to aluminum in the food and beverage industries, which we believe is a critical long tail secular trend.
With that, I'd now like to turn it back over to Tom.
Tom Ferguson, President and Chief Executive Officer, AZZ: Thanks, Devin. We remain bullish about our near, medium and long term business prospects. Although I am incredibly pleased with the team's progress and accomplishments this year, We are also deeply involved in planning and setting new milestones for fiscal year 2026. As Jason and David shared, business momentum continued through the year's 1st 9 months. We expect the 4th quarter to be similar to last year's Q4, which is typically slower as construction is impacted in the winter months.
Concerning our annual guidance, we have narrowed our sales range to $1,550,000,000 to $1,600,000,000 and kept the midpoint unchanged. We also narrowed and raised our midpoint for EBITDA and EPS expectations to reflect the strength in our 1st 9 month period with lower interest costs for the balance of this fiscal year. We narrowed our adjusted EBITDA range to $340,000,000 to 3 $60,000,000 and increased adjusted EPS guidance to $5 to $5.30 Our overall guidance assumptions have not changed, which excludes any federal regulatory changes that may emerge. Finally, capital expenditures for the current fiscal year are expected to remain unchanged at $100,000,000 to $120,000,000 and embedded in this total is the new plant's final CapEx. The equity and earnings from our minority interest in the Avail joint venture continues to be within the $15,000,000 to $18,000,000 range and debt pay downs are expected to exceed $100,000,000 We continue to focus on paying down debt while actively evaluating potential acquisitions with our growing pipeline.
We remain enthusiastic about business prospects and are confident we will finish fiscal year 2025 well. In a few weeks, we plan to provide fiscal year 2026 guidance for the fiscal year that begins March 1. I want to thank our hardworking and talented team for executing AZZ's vision of unwavering customer service and growth and working on continuous improvements every single day. We are highly focused on creating long term value through servant leadership, service leadership, execution of our strategy and sustainable solutions. We plan to continue scaling our business through organic and inorganic growth, generating significant cash flow and leveraging our differentiated value proposition to customers.
With that operator, I would like to open up the call for questions.
Conference Operator: We will now begin the question and answer session. The first question comes from Matthew Krueger with Baird. Please go ahead.
Matthew Krueger, Analyst, Baird: Great. Good morning, everyone. Thanks a lot for taking my questions. Just to kick things off, maybe could you just talk a bit about what you're seeing from a big picture perspective as it relates to end market demand? If you could comment on maybe what you're seeing from a market growth perspective versus what AZZ is generating from a growth angle that would be terrific too.
I'll pause there.
Tom Ferguson, President and Chief Executive Officer, AZZ: Yes, a couple of things and then I'll let David opine as well. But I think we've seen the markets kind of choppy. So fortunately, we serve a real diverse set of markets in both segments. So, but I think we benefited from our emphasis on providing outstanding customer service, focus on innovation. So taking some market share, getting customers to convert to prepaint, getting customers to convert to hot dip galvanizing from whatever they're using.
So I feel like we're we've been able to perform particularly in the Q3 ahead of the markets. But generally the markets are okay. I think there's some hesitation. We've seen projects pending, what's going to happen with tariffs, steel availability, things like that. I don't believe those are significant hurdles going forward as we get into 2025.
But I do think it's created a little bit of choppiness in decision making on some projects. And that's kind of generally across markets. And David may want to add on some specifics.
David Nark, Senior Vice President of Marketing, Communications and Investor Relations, AZZ: Yes. Thanks, Tom. Matt, what I would just add is, as you look at our reportable end markets, as I mentioned on the call, nearly every end market was up over the same quarter prior year. We continue to see some real bright spots in markets like construction, industrial and utilities, particularly transmission and distribution, where we know there's literally thousands of miles of new projects that have been announced and awarded and have yet to come out of the ground. So I think that tracks pretty well when you take a look at some of the information related from and released from the U.
S. Census Bureau and you look at U. S. Construction spending and particularly either non building or building, there are some bright spots in there in areas like infrastructure around water as well as things like data centers, public safety and manufacturing spend. So I would agree with Tommy.
We feel like we definitely grew faster than the market in Q3 and we're optimistically looking forward to Q4 and the year ahead.
Matthew Krueger, Analyst, Baird: Great. That's super helpful. And then the Q3 was a nice sequential acceleration from the Q2. Were there any unique benefits to the Q3 growth rate that we should think about from a weather perspective? Is any demand pushed into the Q3?
Or were there any other one off factors that we should consider as we model out to the Q4 this year and kind of sequentially into 2026?
Tom Ferguson, President and Chief Executive Officer, AZZ: Yes, actually, Pat, there's two sides to this. So we had talked about how our galvanizing grew faster than the overall metal coatings. And part of the impact on that coming out of the hurricane, we've got a powder coating facility in Tampa that was really negatively impacted. So our surface technologies portion of the business, which isn't large, but it can move the needle a little bit in the quarter as you saw by the 3.3% overall growth versus 5.2% for galvanizing. So there's where the hurricane had a negative impact.
I think it had a little bit of a positive impact on the galvanizing side just up in South Carolina. We didn't see significant benefit out of that. I think there's still, as you can read and see on the news and in the media, there's still a lot of still going through a lot of turmoil in Western North Carolina. So I don't feel we benefited that much from hurricane at all, other than like I mentioned in the two sites. And then generally that was about it.
And of course now we're in the winter storms, but that's what we expect in the Q4. So impacts on construction. So for Q3, yes, not much one off. It was basically good blocking and tackling, taking care of customers, converting opportunities and out servicing our competitors.
Matthew Krueger, Analyst, Baird: Great. That's helpful. And then just lastly for me, I know you're going to be issuing formal guidance in a couple of weeks here. But as we model out to the next year, are there any high level variances that we should start to think about for FY 'twenty six versus FY 'twenty five across the business? Anything like volumes, interest expense, the Missouri plant opening, what contribution that could have?
Just big picture thoughts like that versus kind of getting into specific guidance would be helpful.
Tom Ferguson, President and Chief Executive Officer, AZZ: Yes, I'll mention a couple of things and Jason can talk about interest rates and some of the things we may continue to do on the debt front. But we do look to get an acquisition or 2 done hopefully over the next few months and kind of get back into that routine where we're bolting things on as part of our normal course of expansion in certain geographies and places and growing the business through those bolt ons and then hopefully improving their margins to our fleet level. So we're excited about that. We've gotten off the acquisition trail to pay down debt, but we feel very good about our leverage as we're trending down towards 2 times, which I think is a level that once we get to that, we all options are back on the table in terms of potentially increasing dividends, stock buybacks and of course acquisitions. So, but in terms of other things, volumes, we see kind of post the Trump administration taking over.
I think that settles things down in terms of what actions are going to be taken for tariffs. And we don't see tariffs having a big impact on us as we get into the year. There's kind of a mixed bag on the precoat side. And on the galvanizing side or metal coating side, it's a non factor as long as steel is available for projects. And Jason, you might want to add anything in for interest and what you're doing on the financing front.
Jason Crawford, Chief Financial Officer, AZZ: Yes. I mean, certainly from an interest point of view, I think we've made the majority of our moves this fiscal year. So really what you'll see next year is just the annualization impact of that. I don't see any major step functions. Obviously, what happens out there in the external world from a Fed point of view will impact us, but we have our underlying swap that kind of nullifies that to probably the 1st two quarters and then we'll look at extending that.
So really not any step functions. As you think about our cash flow, then certainly the last 2 years, we've heavily invested in the new facility in Washington, and we'll see that dropping off and get back to a more normalized CapEx point of view. So that's only through as we start to think about next year that I would say that have any impact.
Tom Ferguson, President and Chief Executive Officer, AZZ: And then I'd come back on the new facility start up. We'll give some more color on that when we give guidance. But as you would expect, it's a big facility and while everything is on schedule and things are testing out well and working well with the partner on getting test samples and certifications moving. It'll be a slow ramp up in the first half of the year and then full production as we get into the back half of the year and you start to get it to closer to the full run rate effect. So most of the effect for the new facility, you really expect to come later in fiscal 2026.
But like I said, we'll give more color on that
David Nark, Senior Vice President of Marketing, Communications and Investor Relations, AZZ: here in a couple of weeks.
Matthew Krueger, Analyst, Baird: Okay, great. That's very helpful. Thank you.
Conference Operator: The next question comes from John Franzreb with Sidoti and Company. Please go ahead.
John Franzreb, Analyst, Sidoti and Company: Good morning, everyone, and thanks for taking the questions. I'd like to start with the Metal Coatings business. In the Q, you mentioned there was a modest increase in average selling prices, but the margin profile remains really impressive throughout fiscal 2025 when compared to 20242023. Can you just kind of recap what's fundamentally different this year than the prior 2 years? And maybe should we think about resetting the guardrails of the margin profile for the segment?
Tom Ferguson, President and Chief Executive Officer, AZZ: Yes, we are considering resetting those and we'll talk about that in the next year's guidance. As we get our plans approved next week by the Board hopefully. So I think this is just back to the fundamental blocking and tackling and chasing opportunities. We've got scale, we've got capabilities, tremendous discipline around customer service and quality, zinc efficiencies and productivity as we talk about that. We've done some things using both our digital galvanizing system, but also we're able to test different alloy combinations and things like that and working with some partners that we believe differentiates us in the marketplace and allows us to maintain those zinc productivities at better than industry standards.
So we now believe that's sustainable and what you're witnessing is that as we ramp these things up, it's not like we flip the switch in all 41 sites and start doing all the positive things in all 41. So I think what's going on now is just in the vast majority of sites, they're running the playbook every day. And so we're just benefiting overall given our scale across the vast majority of the business units and plants versus only having a part of that impact, say, last year at this time. So I think it's sustainable and we've been, I'll say on one hand, ForceNet, but also it's a very dedicated effort on the team to keep people motivated, focused on the right things, train and develop leaders and have a good solid bench. So I think that's what makes it sustainable and I think we're getting close to that peak.
John Franzreb, Analyst, Sidoti and Company: Good to hear. And regarding the JV income, I noticed this year kind of near to last year where Q2 was weak and Q3 was strong. Is there some seasonality in that business? And I know you get a look see of what the order book looks like in the year ahead. Does everything look pretty sustainable on a go forward basis?
Tom Ferguson, President and Chief Executive Officer, AZZ: Yes, I think you nailed it. They've always had some seasonality because of that WSI, the Welding Solutions portion of the business that's really only busy 2 seasons during the turnarounds. But the electrical, they've got a very, very good backlog.
: And of
Tom Ferguson, President and Chief Executive Officer, AZZ: course, I always they've got a very, very good backlog. And of course, I always tell people to look at how Powell is doing to understand how Avail's electrical business is doing. So they've got really, really strong backlogs going into this year. They're on a calendar reporting this year. So they finished their year and I can say they finished it well.
So and their backlogs are strong on that electrical piece. And we are encouraging our partner that we think that they've gotten a lot of value out of this business and a good time to look at potentially transacting that over the next 12 months, 15 months, whatever. So because we think while there's some long term positive trends, they've also done a nice job using their FERNOI, former McKinsey consulting techniques to drive the margins and improve processes. So we think it's the business is in really good shape going into 2025. And while we like it and we like the performance, we also think that they've kind of reached a good performance level to look at potentially transacting some of that.
John Franzreb, Analyst, Sidoti and Company: Got it. And I guess one last question. Where do you stand in where do you stand on fulfilling the balance of the plant in Washington besides the primary customer? How does that look?
Tom Ferguson, President and Chief Executive Officer, AZZ: That looks really good. I think we've been chasing some opportunities to that would fill the balance of that. And keeping in mind, this is a brand new plant that kind of marries up to the existing St. Louis container plant that has two lines already. So this is we've got opportunities, we've got, I hate to call it backlog because we don't really have backlog, but we've definitely got opportunities.
And the customer that we're partnered with is focused on helping us get the line certified, getting it ramped up in the Q1, getting it to nominal production levels as quickly as possible, but also bringing in other kinds of business and moving that between the St. Louis and the Washington facilities as we optimize capacity, so to speak. So we feel real good about that. And it's a big facility, complex facility, so there's always the potential for start up issues, but boy the team has been so focused and so disciplined the last few months and hitting their milestones and working with the suppliers to get things ramped up. I won't say without a hitch because there's always things that go on, but I've started up a lot of factories in my career and this one is going very well right now.
So we're really excited as we enter the year.
John Franzreb, Analyst, Sidoti and Company: That's great to hear and congratulations on another good quarter.
David Nark, Senior Vice President of Marketing, Communications and Investor Relations, AZZ: Thank you.
Conference Operator: The next question comes from Mark Reitman with Noble Capital Markets. Please go ahead.
Mark Reitman, Analyst, Noble Capital Markets: Thank you. You already hit on some of the drivers for the strong performance in each segment during the quarter, but what would you consider normalized growth rates for each segment ex new builds and acquisitions?
Tom Ferguson, President and Chief Executive Officer, AZZ: Yes, I think we've always talked about ourselves as a GDP level growth business that balancing, protecting margins with growth is something that I think both teams are very disciplined about. So you look at basically underlying GDP growth and then as we can drive conversions, drive new applications, drive opportunities, then we can exceed that a little bit. And then the bolt on acquisitions just hopefully continue to give us new opportunities to drive synergies and drive our playbooks through. So but generally, yes, we're a GDP business. We follow that because we follow construction activities.
So when construction activities is good, I will say that right now and David talks about this a lot, For the next few years, we should be able to exceed that because a lot of the infrastructure spend that has to occur, whether it's transmission distribution, whether it's the green energy build out, whether it's pipelines and things like that. Those are all or chip plants reshoring. So I do think over the next 3, 4, 5 years, we should be able to exceed that GDP level growth nicely because of these prevailing tailwinds that we have. So we're in a really good spot in terms of timing. Go ahead.
Mark Reitman, Analyst, Noble Capital Markets: Is there any difference between the two segments in the way that you think about one exceeding GDP growth and one not or I mean in terms of they're not going to be growing at the same rate? Just
Tom Ferguson, President and Chief Executive Officer, AZZ: No, great question. Metal Coatings is more focused on infrastructure overall. So as that kind of spend occurs, then they will be the beneficiaries of that, more so over the next few years. I think, coat side, it's the overall construction activity, which is 75% of their demand. So you kind of look back to that's going to follow residential, commercial, industrial construction, some of which is related to infrastructure, some of which is more related to the general economy.
So that's how you can differentiate the 2.
Mark Reitman, Analyst, Noble Capital Markets: Okay. And then just the second question, just with respect to publicly funded projects, could you elaborate a little bit on the fiscal policy dynamics at the federal, state or local levels and kind of how they impact your business and are there any crosscurrents between the 3?
Tom Ferguson, President and Chief Executive Officer, AZZ: I think generally, I'll let David add on to this, but generally when it comes to public projects, so you're looking at bridges, highways, roads, things like that, that water projects. It's a longer process just for approvals going through the environmental impact studies and that's whether it's local, state, federal. I think the biggest thing we run into and what usually slows public projects up is that the cross requirements between the 3, any one of which can slow a project up while it goes through an additional level of review. So if there was anything the new administration could do to streamline permitting and that process review on these public projects, particularly that have federal funds attached to them obviously, that would help a lot because these things just get hung up for a long time before you're actually, call it shovel ready, so to speak. But David, if you want to add to that.
David Nark, Senior Vice President of Marketing, Communications and Investor Relations, AZZ: Yes. No, I would only add, Tom, that as you think about some of the spending that's been out there for several years now with IIJA, CHIPS Act and IRA that certainly has primed the pump for a lot of these projects that ultimately some of them fall within the public sector. But I think whether it's public sector or private sector, we feel again really good about the opportunities ahead from both of those segments as a result of that spending. And again, as Tom said, hopefully the new administration frees things up a bit so that permitting and planning gets streamlined and these things can come to ground quicker.
Mark Reitman, Analyst, Noble Capital Markets: That's very helpful. Thank you very much.
Tom Ferguson, President and Chief Executive Officer, AZZ: Thank you.
Conference Operator: The next question comes from Adam Thalhimer with Thompson Davis. Please go ahead.
Adam Thalhimer, Analyst, Thompson Davis: Hey, good morning, guys. Congrats on the Q3 beat. Thanks.
David Nark, Senior Vice President of Marketing, Communications and Investor Relations, AZZ: Thanks, Adam.
Adam Thalhimer, Analyst, Thompson Davis: I guess the question I've gotten the most this morning is on the revenue guidance.
: And I
Adam Thalhimer, Analyst, Thompson Davis: was curious, were you trying to imply that there's a potential for revenue decline year over year in one of the segments? And if so, where could that occur?
Tom Ferguson, President and Chief Executive Officer, AZZ: I mentioned the choppiness that as you some of these projects are dependent on both the cost of the capital, but also tariffs could impact supply and cost of steel. So you now have some projects be it the escalator clauses are being negotiated And that just sometimes slows things up. It doesn't make the project go away, so to speak, but it can delay it. And so what our concern is, we just looked at the Q4 was, if that continues as it seems like it is, then it just has a slowing effect on the revenue in the quarter. For us, that's not necessarily a terrible thing because we adjust shifts, we adjust our variable cost structure.
So it doesn't affect our profitability as much as it affects our top line. So that's the only concern. It's not that the market activity is not there. It's just that the timing of when does it move forward and does it fall within us getting to paint metal and ship it and galvanized steel and ship it. So that's all that's related to.
Adam Thalhimer, Analyst, Thompson Davis: Okay. And then just a quick one on the Washington plant. What's the I know there's a portion of the plant that was contracted to kind of the anchor customer. What's the process for filling up the rest of the capacity? Like when that plant starts up, do you start with the anchor customer and then later in the year fill in the extra capacity?
How does that work?
Tom Ferguson, President and Chief Executive Officer, AZZ: Yes, actually we've and I mentioned the St. Louis plant already having demand on it. That's an operating container facility just with 2 smaller lines. So our ability to move business between those two plants and provide demand for the new plant, we've got that capability. And of course, the current St.
Louis facility services both the partner, which by the way is Tri Arrows. But so it services the partner, but it also has other customers that have services. So our ability to ramp up that other 25%, I think it's more going to be around our caution of working with the partner where we've made the commitment. We want to make sure we take care of them and they're the ones committed to helping us get it certified and everything lined out. So in the early phase, we'll be a little cautious to not get too far out over our skis in terms of our ability to produce.
And then as the year wears on, we'll start to bring in other customers to fill demand opportunity or demand. Thanks. So I think that's how we how I'm looking at it at this point.
Adam Thalhimer, Analyst, Thompson Davis: Got it. Okay. Thanks guys.
John Franzreb, Analyst, Sidoti and Company: Talk to
Adam Thalhimer, Analyst, Thompson Davis: you soon. Thanks.
Conference Operator: The next question comes from Daniel Rizzo with Jefferies. Please go ahead.
: Good morning. Thank you for taking my question. I was just wondering, so you talked a lot about infrastructure spend and how important that is. I was wondering how much of a tailwind it could be if there is a cyclical recovery in private spending on things like commercial construction, what that's meant to you guys in the past and what do you expect going forward?
Tom Ferguson, President and Chief Executive Officer, AZZ: Yes, that's been a significant if we got a recovery in that sector that yes, we go from 65 percent utilization up to 80% utilization, those kinds of things. It can have a very positive impact on us. So we'd love to see it. We'd love to see it sustainable. And it tends to be those tend to be really good kinds of projects for us.
So where our capabilities are, for us. So where our capability is, our ability to this is more on the pre code side to provide different color combinations to basically give them to fill more specific needs versus more general needs, I think is a real positive. I don't know if Jason and David wants to add to that.
David Nark, Senior Vice President of Marketing, Communications and Investor Relations, AZZ: Yes. I think the only thing I would add is some of those sectors that have been down really kind of all year like warehouse, commercial and office spending areas, if those were to rebound that certainly can provide a nice tailwind for us. Yes. We'd see it
Tom Ferguson, President and Chief Executive Officer, AZZ: pretty quickly. That's the other nice part. Those projects tend to move fairly fast.
: Meaning they think it's open, I mean, in as little as a quarter or is it taking 6 months or how should we think about it?
Tom Ferguson, President and Chief Executive Officer, AZZ: Yes, I'd call it 1 to 2 quarters versus some of the public stuff that can take 1 to 2 years.
: And then just on your kind of capital allocation strategy. So I know debt reduction remains a focus. Just certainly speaking, I mean, have share buybacks been a big thing or do you kind of just do it to offset dilution? Is it something that Yes, just offset
Tom Ferguson, President and Chief Executive Officer, AZZ: dilution or a portion of dilution? And we would look at that as we look at our share price valuation, look at the benefit of continuing to reduce debt. We're also going to balance it versus or any acquisitions potentially actionable within the next quarter. And then we are taking a look at our dividend as well, because we haven't touched the dividend.
: I lost you guys. I don't know if you can hear me, but thank you. Okay. Thanks.
Sandy Martin, Advisor, 3 Part Advisors: Operator, can you still hear us?
Conference Operator: Yes, I hear you.
Tom Ferguson, President and Chief Executive Officer, AZZ: Okay, good.
Conference Operator: Yes. Our next question is going to be from Jon Braatz with Kansas City Capital. Please go ahead.
Sandy Martin, Advisor, 3 Part Advisors0: Good morning, everyone.
John Franzreb, Analyst, Sidoti and Company: Good morning, Jon.
Sandy Martin, Advisor, 3 Part Advisors0: Tom, and maybe, David, you can chime in and sort of follow on with the previous question. But when you look at your end markets, how much your business, how much your customer base is more sensitive to interest rates and interest rate movements. Obviously, we've seen interest rates move up a little bit. How much might be how much your business might be affected by rates continuing to go up? Any thoughts?
Tom Ferguson, President and Chief Executive Officer, AZZ: I don't think it's that much. I think most of these projects are not viability sensitive to 25 bps or so. I think the long term trend as long as interest rates, as you look at the forward curve and it's as long as it's going to be trending down, then I think that projects move forward now. And particularly when it comes to infrastructure and things like that. What I do think it does is they start to look at it can change the rate of return and does that move it out a little bit and does it just delay and cause them to have another review cycle before they approve it.
So I see an effect in timing and that's why we were a little bit more uncertain about the revenue for the Q4 just because these things that we thought might have been moving forward may just push into the Q1 as they try to get the interest rates tied down and they try to get their funding at whatever price point they're trying to get it fixed at. I think the tariffs probably create a little bit more uncertainty because that can have a bigger cost impact on a project. If steel cost moved up 10%, 15% that can have a significant impact on a project as well as steel availability, not that there's a likelihood of that in the longer term, but in the short term, we can move it around. So I think those are the kinds of things that are causing some, I've been calling it choppiness, but it's choppiness in the decision making on moving projects forward. So I think interest has a minor effect.
I think as the tariffs get buttoned down and they see what happens with that and the reaction to it, that that starts to give everybody more confidence that you don't have to have these significant price escalators into account for it.
Sandy Martin, Advisor, 3 Part Advisors0: Okay. Secondly, when you think when you look forward into 2026 and you look at the zinc cost environment, any pluses or minuses as we head into fiscal 2026 on the zinc front?
Tom Ferguson, President and Chief Executive Officer, AZZ: Yes, I mean zinc LME has continued to trend up. And so that as you know, that has an effect on the cost in our kettles 6 to 8 months out. We tend to adjust we talk about value pricing and everything like that. But obviously, when zinc costs, because it's the single largest component of cost on galvanizing, when that trends up, the competitors tend to trend up their prices as well. So yes, it's a factor.
Obviously, we can calculate that and do every month as we see the Elmi prices move and factor that into what our cost is going to be in our kettles 6, 8 months out. But that also gives us time to adjust our value proposition and adjust price expectations. So we're not viewing it as when it's moving up like this, which is relatively slowly, call it almost pretty steady, this is actually a good thing. When it really starts to bounce, that's when you get into surcharges and all sorts of things that just create a lot of uncertainty. So right now, this is not we don't view this as a terrible thing.
It's probably kind of a good thing.
Sandy Martin, Advisor, 3 Part Advisors0: Okay. One last question. One of the first things Trump is going to do is he's going to try and end the moratorium or the pause on LNG permits. And I don't know how successful he's going to be. There's probably going to be some core challenges.
But singularly, can the LNG renewal, rebirth, if you want to call it, does that can that have a positive impact on your galvanizing?
Tom Ferguson, President and Chief Executive Officer, AZZ: It sure can because when you especially when you look kind of through the Southeast, a lot of galvanizing capacity came online with the expectation that was going to occur. Some of that capacity has gone away. Some of it's been acquired, some of it's been closed. But there we you look through the where those terminals would go in, we've got galvanizing sites pretty much in the backyard of each one of them. So yes, that would be a nice positive and would help the overall market, particularly through that Southeast Texas quarter.
Sandy Martin, Advisor, 3 Part Advisors0: But we'll see what happens.
Tom Ferguson, President and Chief Executive Officer, AZZ: We will see what happens. But we would view that as a positive. All right. All right. Thank you very much.
Thanks.
Conference Operator: The next question is a follow-up from John Franzreb with Sidoti and Company.
John Franzreb, Analyst, Sidoti and Company: Just some thoughts on M and A. You said you might start to reengage as you pull down the leverage. I'm curious if that's limited to the galvanizing side or are there opportunities that you'd explore on the paint side of the business and if Silke can kind of just give us some examples?
Tom Ferguson, President and Chief Executive Officer, AZZ: Yes. I think, obviously, we're looking for the one off bolt ons for galvanizing. We'd look if any of the multi site deals came active again, we'd be right in the front line for those. Those are slam dugs that if we get them at a reasonable price, we run our playbook and bring them up to our fleet margins and everybody's happy. We almost view it as organic growth.
On the pre COVID side, they're going to tend to be bigger, because you're when you think about it, we invested $125,000,000
: in
Tom Ferguson, President and Chief Executive Officer, AZZ: a new line, which obviously that's on the high end of the high side of the scale. But still you're looking at bigger even a one off-site is going to be fairly significant. There are some opportunities out there. We still view it as bolt on for precoat just like we view it as bolt on. So leverage the G and A infrastructure, run the playbook, improve operating performance, take care of customers.
So same kind of playbook as we're looking at it. But so yes, those are on our radar screen, if you will, but there's not many of them.
John Franzreb, Analyst, Sidoti and Company: Okay. All right. Thank you for the clarity. I appreciate it. Congratulations again.
All
Tom Ferguson, President and Chief Executive Officer, AZZ: right. Thanks.
Conference Operator: The next question comes from Timna Tanners with Wolfe Research. Please go ahead.
Sandy Martin, Advisor, 3 Part Advisors1: Yes. Hey, good morning. I wanted to just ask a little bit about the competitive landscape. I know that you've been referring to some market share gains in recent quarters. Are there more opportunities for market share gains or has that competitor started to try to call back any of that lost market share?
Any update there, please?
Tom Ferguson, President and Chief Executive Officer, AZZ: Yes, a couple of things. Good, great question. On the galvanizing side, it's the typical players out there that either are adding some capacity or buying up capacity that so you've got the Valmonts and Hill and Smiths, which in the U. S. Operates as BNS (TSX:BNS), the multi site folks we talk about.
There's a couple of kettles coming. I mean, it's not abnormal. It's kind of like every year, there's a kettle or 2 coming online and we're kind of seeing that continue, which also is why we usually want to go be buying something to match that. I think that's all in line with the expected demand growth and normal economic growth in the marketplace. For us, it's more around where does that kettle go does it go in where we've already got several plants or does it go into kind of the open space where we don't have much.
So or is it for internal capacity that's being added. So not a lot of change there, just like I said, I think 2 or 3 new kettles coming online this year, which is not abnormal. And on the precoat side, it's the SDIs and folks like that that are adding a paint line to their mill capacity. I'd say it's relatively normal. There's a couple of lines coming on this year or expected to come online this year.
It does not fundamentally change the supply demand and for the most part, it's going these lines are being added where they're adding capacity themselves, so to paint their own capacity to a great extent. We're not seeing I don't on the precut side, I don't think we're seeing anything on the independents coming in. So and if anything, we're seeing lines either slowing down or and then we're still out trying to get customers to de vertically or unconvert, I guess, and let us paint instead of them running a 50 year old line or 20 or 30 year old line. So I don't think the market dynamics have shifted a whole lot. David or Jason if you want to add something to it particularly on the pre code side.
Sandy Martin, Advisor, 3 Part Advisors0: I don't think I can. No.
Sandy Martin, Advisor, 3 Part Advisors1: So with the additional paint lines you mentioned at SDI and the additional other capacity or attempts to regain share, you think there'll be corresponding additional demand to balance that? That, is that what you're saying?
Tom Ferguson, President and Chief Executive Officer, AZZ: Yes, that's how we're looking at it. And particularly, one of the impacts of the tariffs would be that if less painted steel is being imported, then that those paint lines are going to be necessary to paint the steel being manufactured here in countries. So that would just accelerate the use of that increased capacity.
: And then
Sandy Martin, Advisor, 3 Part Advisors1: as far as exports, like if exports were also restricted in line with the USMCA tariff structure, how would you think about that impact?
David Nark, Senior Vice President of Marketing, Communications and Investor Relations, AZZ: Yes, I think as you look at the exports, if we're going to see more exports, it's going to help our galvanizing side, but also on the precoat side, depending upon the type of product that's coming out and what its intended use for end use is, we've got a lot of customers in certain key markets that are using prepainted steel today. So we view that as a positive. Yes.
Sandy Martin, Advisor, 3 Part Advisors1: Okay, great. Thanks again. Have a great one.
Adam Thalhimer, Analyst, Thompson Davis: Thanks, Timna.
Conference Operator: This concludes our question and answer session. I would like to turn the conference back over to Tom Ferguson for any closing remarks.
Tom Ferguson, President and Chief Executive Officer, AZZ: All right. Thank you. Thank you everybody for joining us and hopefully you are now as excited as we are about future for the balance of this year going into next year and we look forward to issuing our guidance for fiscal 2026 and talking to you after we've finished out fiscal 2025 in a couple of months. So thank you for joining us and look forward to talking to you next time.
Conference Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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