AZZ - NYSE

Good day, and welcome to the A

Thank you, operator. Good morning, and thank you for joining us today to review A

Good morning, and thank you for joining us today. Fiscal 2024 was an exciting and successful year for A

Thanks, Tom, and good morning, everybody. As Tom mentioned, we reported fiscal year 2024 fourth quarter sales of $367 million compared to $337 million in last year's fourth quarter. Total sales increased 8.9% over the fourth quarter of last year, with Metal Coatings sales up 3.3% Precoat Metals up 13.4%. Fourth quarter gross profit was $81 million or 22.1% of sales compared with $61.3 million or 18.2% of sales in the prior year fourth quarter. Gross margins improved by 390 basis points as a result of lower zinc costs in the Metal Coatings segment and lower overhead costs in the Precoat Metals segment as performance improved over a year ago period. Also, gross profit benefited from reclassifying intangible asset amortization to our corporate center, partially offset by increased labor and other variable costs. Selling, general and administrative expenses were $38.8 million in the fourth quarter compared with $25.1 million in the prior year fourth quarter. The fourth quarter included $6.8 million in legal accruals related to the resolution of long outstanding commercial disputes. Excluding the fourth quarter legal accruals, SG&A expenses for the fiscal fourth quarter would have been $32 million, 8.7% of sales compared to 7.4% in the prior year fourth quarter. Operating income was $42.3 million or 11.5% of sales, an improvement of 16.8% and 70 basis points from last year's fourth quarter of $36.2 million or 10.8% of sales. Interest expense for the fourth quarter was $24.7 million, compared to $27.1 million in the prior year due to lower outstanding debt and repricing the company's Term Loan B and revolving credit facility late in the year. I will discuss our capital allocation efforts in a moment. Equity and earnings of unconsolidated subsidiaries for the fourth quarter increased to $4.3 million compared to $1.6 million for the same quarter last year. The increase is due to higher minority interest earnings from our 40% ownership in the AVAIL JV as they continue to perform to expectations. Current quarter income tax was $4.1 million, reflecting an effective tax rate of 18.7% in the quarter compared to 34.8% in the prior year fourth quarter, where the rates were much higher due to the impact of the transformative M&A activities during the prior year. Reported net income for the fourth quarter was $17.9 million compared to $7.4 million for the fourth quarter of prior year. Adjusted net income for the fourth quarter was $27.5 million compared to $7.6 million in the prior year, up more than 2.5x over the prior year. Our adjusted diluting -- our adjusted diluted earnings per share of $0.93, as Tom spoke about, compared to $0.30 in the prior year fourth quarter. Since the preferred convertible shares are dilutive in the current quarter to adjusted EPS, the preferred dividends are added back to earnings for the company's adjusted EPS computation. Under a full conversion assumption, the preferred convertible shares weighted average shares outstanding in the quarter are approximately 29.5 million shares. Fourth quarter adjusted EBITDA was $73.9 million or 20.2% of sales compared to $57.2 million or 17% of sales in the last year. The 320 basis point improvement in adjusted EBITDA margin was primarily driven by improved operational efficiencies in our Precoat Metals segment and continued strong earnings by our Metal Coatings segment. For the full fiscal year ending in February, our sales were just over $1.5 billion, up 16.2% over last year. The Precoat results include 52 weeks of sales in the full fiscal year compared to only 42 weeks in the prior. Gross profit increased to $363 million or 23.6% of sales from a year ago, improving 120 basis points over the year ago gross margin on the same operational efficiencies I just spoke about during the fourth quarter. SG&A costs were $141.9 million, 9.2% of sales, on par with the SG&A as a percentage of sales from last year. Operating income was $221.6 million or 14.4% of sales or 130 basis points improved when compared to operating income of 13.1% of sales in the prior year. Reported net income from continuing operations was $101.6 million for the year compared to $66.3 million last year. Adjusted net income was $132.8 million for the year or $4.53 per share compared to $95.2 million or $3.36 per share last fiscal year, a solid 35% EPS improvement year-over-year. Adjusted EBITDA for the year was $333.6 million or 21.7% of sales compared to $267.4 million or 20.2% of sales in the prior fiscal year, which represents an increase in EBITDA dollars of 24.8% compared to the prior fiscal year. If I turn to our financial position and balance sheet now, we generated strong cash flow from operations of $244.5 million and free cash flow of $149.3 million as we executed on several working capital initiatives during the year. Our free cash flow is computed as cash flows from operating activities less capital expenditures. Capital expenditures for the year were $95.1 million, including typical safety, maintenance and gross spending as well as approximately $47.7 million related to the new greenfield aluminum coating plant under construction in Washington, Missouri. Tom will cover the project in a few moments. In fiscal '25, we expect capital expenditures to be approximately $100 million to $120 million, including $50 million to $60 million related to the Washington facility as we complete construction and ready the site for production. We reduced debt during the year by $115 million, exceeding the $75 million to $100 million target we provided as part of our annual guidance. Additionally, with our focus on working capital, and strong overall debt reduction, we exceeded our originally stated leverage goal back in May of '22, by reaching debt leverage -- net leverage ratio of 2.9x, with a target of getting under 3. In addition, during the last year, we successfully repriced our term loan B twice and repriced our $400 million revolving credit facility, repricing the term loan B in August '23 and again in March '24, each time reducing our margin by 50 basis points for a total one percentage point reduction. Additionally, we repriced our revolving credit facility in December 2023, which moved us from SOFR -- fixed SOFR rate of SOFR plus 425 margin to a tiered pricing grid at February '24, with our year-end leverage ratio being below 3, we expect our go-forward revolving credit rate to be margin of SOFR plus 275 or another 25 basis point reduction in margin. In addition, we are pleased to share that S&P Global upgraded our senior secured debt rating from BB- minus 2B from B, a 2-notch increase and Fitch Ratings initiated coverage on the company with a very similar rating, acknowledging the progress we have made since the acquisition of Precoat Metals in May of 2022. Our capital structure provides a strong foundation as we move forward and our liquidity position remains strong with no debt maturities until 2027. We continue to be under a swap agreement that fixes more than half of the variable rate debt. Finally, we paid cash dividends on common and preferred stock totaling $31.4 million for the year. We made no share repurchases during the year since we focus on debt reduction. With that, I'd like to turn the call over to David Nark.

Thank you, Philip. Good morning, everyone. Tom began today's discussion by describing A

Thanks, Dave. Fiscal 2024, was a pivotal year for the company. Our A

[Operator Instructions] The first question comes from Lucas Pipes with B. Riley Securities. Please go ahead.

Thank you very much, operator. Good morning, everyone.

Good morning.

My first question - is on the balance sheet. Good job there getting the leverage ratio - to 2.9 times. And I wondered with this, you plan to maybe hold a little bit more cash on the balance sheet and do you think about acquisitions? And if so, where do you see more opportunities on the Precoat side or on the Metal Coatings side? Thank you very much.

I can start, Tom, with the balance sheet question. Typically, what we have done is, we operate pretty low cash balances and use excess cash, to reduce the borrowings on the revolver. We have a $400 million revolver with about $355 million in capacity at the end of the year. So the acquisitions Tom was speaking to, we should be able to fund smaller bolt-on, through the revolving credit facility. Tom?

Yes Lucas, I think right now what we are seeing, is there is a couple of potential galvanizing opportunities that have popped up. The kind of bolt-on, one-off sites that our team likes to look at. No idea how active those will be, but we would fund those off of the revolver. And but naturally, we'd expect to have good EBITDAs above our multiple so.

Got it. And when you mention bolt-on, up to what level would you consider EBITDA, or volume would you consider bolt-on? I'm just trying to get a sense for kind of what is - the magnitude?

These are typically in the $10 million $20 million revenue side. So usually, they are going to have, say 3 or 4 - well yes, probably, $3 million or $4 million of EBITDA. We tend to pay roughly six times. So that's what we consider bolt-on. And then our team, we anticipate good, strong first year synergies, often in the 500,000 basis point improvement range.

Very helpful. And for this fiscal year here, how many of those do you think are realistic to tuck-in?

There had not been any last year. Of course, we had taken - the flag down that we were out there in acquisition mode. I think we kind of let folks know that as we have gotten our debt under three times - quicker than we had anticipated, that while we are still going to be focused on paying down debt, funding the facility in Washington and our normal CapEx needs. So, we have just recently kind of let it out that we're interested again. These usually have four to six-month cycle times, from when they become active to when we are able, to do due diligence and close. So maybe one or two. That would be about it.

That's very helpful. And maybe just to round out the conversation on growth, do you think about organic growth? Where would that factor in vis-a-vis some of these bolt-ons you mentioned? Thank you.

Yes, I think we still - our normal organic growth, particularly on the Metal Coatings side, tends to run with GDP. So when we can get a couple of acquisitions, that is going to add another 5% or 6% on a full year run rate basis. On the Precoat side, we've got two things going on. One, we feel volumes are improving as we saw in the fourth quarter. I believe we were up about 9% on volume. So, we are seeing the volumes pick up on the Precoat side, which gives us nice organic growth. And then as we get into next year, finish out this year, get into next calendar year, that is when we will start to have the Washington site coming online. So, let's not provide some additional revenue and EBITDA growth.

Gentlemen, very helpful. I appreciate all the color and continue best of luck.

Thank you.

Thanks.

Our next question comes from John Franzreb with Sidoti & Company. Please go ahead.

Good morning, guys. And congratulations on another good quarter.

Thanks, John.

I'd like to start with the revenue profile in the fourth quarter. You suggested there was unusually warm on a seasonal basis. I'm wondering two things. Does that suggest A) that business was pulled from the first quarter into the fourth quarter? And B) if that was the case, does that suggest that maintaining guidance is actually more of a positive thing, because you are able to backfill some of that revenue?

That is a good point, John. I think on the Metal Coatings side, yes, getting an earlier start. It kind of depends on what - yes. So, we did see some of that pull in and stay active. Hopefully, there are some additional projects that come in the pipeline - as we get into summer months and into fall. Then on the Precoat side, the normal ordering cycle, so the construction ramp up. I'm not sure a whole lot pulled in from first quarter, but potentially a little bit in terms of inventory buildup among some of our customers. So yes, we feel like the guidance is solid and as traditionally, we try to be conservative. And then that will continue to update that as the year goes on.

Fair enough. And you also mentioned in the press release there was market share gains on the Precoat side. Can you talk a little bit about the market share gains, and where you are getting them from?

Yes, John. This is Dave. I think, as you look at it, there are a couple of areas in the end markets, where we are seeing some improvement. We believe we are outperforming the market in the Construction segment. Also, in the appliance market, is another area where we are outperforming and seeing, some conversions taking place. So, those are the two main areas I'd point to.

Okay. And one last question and then I'll get back in the queue. You talked about pricing initiatives on the Metal Coatings side of business benefited the quarter. Can you just go a little bit deeper on that? Is that in response to zinc prices? What is going on in the pricing initiative front on MC?

We've always tried to talk about how we have tried to differentiate our value pricing versus zinc, but it does help.

Great, great. Thanks for the additional color. I'll get back into queue.

Thanks.

The next question comes from Adam Thalhimer with Thompson Davis. Please go ahead.

Hi, guys. Congrats on a strong quarter. And Philip, congrats on your retirement.

Thank you.

In Metal Coatings, so your gross margins were up 170 basis points in fiscal '24. Curious how that might trend in fiscal '25, if there is room for more improvement?

I think as - we talk a lot about DGS and the leadership teams, and our playbooks. We believe we are benefiting from that, and we should continue to benefit. And hopefully, hold those margin improvements and continue to benefit, from the various or - tactics that we are using. We feel pretty confident with the team. As long - as volumes hold up, I believe we can drive those margins.

Okay. And then at Precoat, is this normal seasonality between November and February or sound like you also just had a really good quarter in Precoat in February?

We did. So part of this is yes, it was a lighter winter than normal. But also I think just - we had mentioned last fourth quarter, where we were carrying a lot of customer inventory. And we cleaned that out as we got into the fiscal year. Good, good operating performance by the team in Precoat. And then, so this fourth quarter, I think it was the benefit of kind of normal customer inventory sitting in our facilities, which allows us to drive productivity and efficiency. And then the volume, just we start to get - when volume flows through, those margins tend to pop nicely.

Okay. And then, do you guys have - like an actual interest expense and tax rate forecast that is embedded in the guidance?

We do. I mean, we look at the forward curve on our interest rates. So, just like everybody else out there, we were expecting four to six cuts this year. Then we got out there and were able to reprice here in March '24, which wouldn't have been part of our original forecast.

Well, we don't have cuts factored in.

We have the...

Just the forward curve.

Just the forward curve.

Not any additional cuts.

Not any additional cuts. Then on the tax rate, we have a 21% stat rate. Then we're primarily North America, so call it 3%, 3.5% to 4%. So that's kind of 23.5% to 24% tax rate is what we utilize.

Okay. I'll turn it over. Thank you.

All right. Thanks, John.

Our next question comes from Jon Braatz with Kansas City Capital. Please go ahead.

Good morning, everyone.

Good morning, Jon.

Good morning, Jon.

Tom, talk a little bit about Washington, Missouri. As you ramp up, what can you say about maybe startup costs, costs you're absorbing prior to production? And is there a little bit of a drag on margins for this fiscal year?

No, there shouldn't be. I think we've got all that planned - in our budgets for how we're going to ramp up. And naturally, we've got a little bit of contingency in there, too. So, we've got some decisions to make, as the line gets tested out and comes online, whether we actually start producing at the end of the year, or whether we just carry in and meet the normal customer demand that's been committed. So, but in either case, I don't look for that to be a drag. So there should be an opportunity.

Okay. And how much of the production is committed at this point?

75% is contractually committed. And that's kind of - but that is how we've built the model and in fact that ends. So we've got 25% to go sell, although in this case, the customer that made that commitment, actually would have liked to have had 100% of it. So, we've got upside with this customer, which we hope to announce here in the next month or so.

Okay.

And then secondly there's - it does give us the opportunity to go chase some other business, which I always like having that ability to do that.

At the most, what would you like to see committed by one customer? You're 75% now? I mean, would you be okay, at 85%, 90%?

Yes, I think so. I always hesitate to get that dependent on one customer, but in this case, because it's a seven-year contractual arrangement. I'm less concerned, so to speak. And obviously, with that much business, we do have another plant in St. Louis that does - it's a smaller capability, but we do have another aluminum line well, too, actually. So, we do have that opportunity to pick up business and make sure that we balance it, between both plants.

Sure. Okay. Thank you very much.

Sure.

This concludes our question-and-answer session. I would like to turn the conference back over to Tom Ferguson, for any closing remarks.

Thank you for your time today. As you can tell, we're excited about our future, and I look forward to updating you, on our first quarter results in just a few months.