Q1 2023 AZZ Inc Earnings Call
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Speaker 1: During previous recessionary periods. This is due to about 75% of their cost being variable, So they can shed cost quickly if necessary. As we complete the a's joint venture transaction and have more time to complete the precode purchase price accounting efforts, we will provide more coor on the balance of this fiscal year and beyond and with that we'll open it up for questions. We will now begin the question and answer session. To ask a question, you may press a Star than one on your telephone key pad. If you're using a speaker phone, Please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press a Star than two at this time we will pause momentarily to assemble our roster. Our first question is from John France, rep with sidoility and company. Please go aheadevery want to guys thanks taking questions or, if that want to boost precode here, the RE contribution and the two sure weeks part. The company is very, very impressive. The market you talk with a bit about the sustainability or this, something to a kind ither. We should be constant now.
Speaker 2: Metal coing. shouldit this another impressive quarter? Can you talk a little bit about your ably passed through zinc prices that you seems like a carrying higher zc atleast will bekind of balance of this year, despite the fact that we're looking at a foreign zinc market you kind of reconcile with what the the price pric environment's looking like for you going to uncle forward basis.
Speaker 1: Yes I think there's a couple of things there, John . It's 1: we've done a lot with digital galvanizing and how we provide customer service and how we manage customer jobs. So I think the value we bring as AZZ is far significant to probably what we delired several years ago. We have been able to provide value pricing given our network of facilities and, let's face it, even though whole zinc is going down.
Speaker 1: Every other cost we have and every other cost our customers are seeing is going up. So, whether it's LA or labor fuel energy transportation wire, So kind of you name it. Consequently, we've been able to pass prices through and continue to increase those by ensuring we provide the value. So I CAn't guarantee that's going to continue that way, but we have moved from.
Speaker 1: We did have surcharges. We're still doing some of that, but for the most part we've tried to deal with just the overall price increases, which reflects the higher cost but also the higher value we're delivery.
Speaker 3: And since we're going to maintain the stake in our is business, the margin profile that has been the best in years. Is there anything particular that roed that margin and how sustainable is that? The kind of the suggest is going to be kind of little bit of a flattish market and go-ll basis until we get to the fall.
Speaker 1: Yes I think there's a couple of things one if you would ask me three or four years ago. Whether we could book electrical projects with twelve.
Speaker 1: 12 -month lead times. I would have probably laughed and said we'd be out of business.
Speaker 1: But because of supplier component delivery cycles- and it's virtually every major component, from breakers to panels to even some of the steel in some cases is just out there, pretty significantly. So we've had a lot of customers that have booked projects well in advance of what they normally do. So that allows us to flex how we manufacture and produce.
Speaker 1: To utilize the labor that we have available to manage our supply chains and which is allowed us on the electrical side to improve our margins pretty significantly and we think that's sustainable going forward because everybody is scrambling for supply and predictability of delivery. So we're using a lot more contract labor to help us with where we have skilled craft shortages and then on the WSI or the industrial side.
Speaker 1: As we mentioned, the third quarter stacking up very nicely. We had taken some pretty significant costs out during 2020. So fiscal 21 for us because of COVID-19, and so I think their margins are more sustainable. And then, when we get the opportunities, particularly on some of these nice international jobs where we can get the engineering done early in, be ramped up to deploy the fall season.
Speaker 1: Then that also improves our surety of margins and- and I do think fernis, being consulting expertise-oriented, I look for them to continue to sustain that and maybe even improve it beyond what we've been able to do.
Speaker 3: Okay good guys. Thank, got's PT back into the queue.
Speaker 4: The next question is from Noel Dilts the steeel. Please go ahead.
Speaker 5: higuys I was hoping that you could sort of walk us through more of the details on the trends you're seeing in the end market for metal coatings. Both the legacy business and then what the legacy business and then also on the precode side. You know how you're thinking about some of the.
Speaker 6: More commercial and residential exposure and how you're thinking about higher interest rates impacting those markets.
Speaker 7: Yes high, no. Well, good morning it's David, I'll take those. So, starting off on the metal coodating side, particularly the legacy business, we're still seeing strong demand from the typical end markets, including utility, the T D markets, general construction, as well as renewables, particular and solar. So all those markets are holding up really well and we like what we're saying with respect to each of those when we switch over the preco metals and you take a look at that.
Speaker 8: Over to helplt for your other happyer question.
Speaker 9: On the financing, all the financing G, I mean we're looking at our- no, our interest rates will be a lot higher obviously this year sooffar-based.
Speaker 10: Work.
Speaker 11: We have good visibility to what it is going to cost us and the cash flows. We're generating should cover that I don't know if you have specific questions no.
Speaker 5: That's fine, Thank you, and then, I guess, just one sort of housekeeping question you talked about.
Speaker 6: Anticipating and seeing higher levels of amortization which is expected after the deal. Is that something you'd be adjusting out in adjusted EPS? Are you thinking about keeping including that? Just curious how you here thinking about treating that from the reporting perspective.
Speaker 11: Yes we're still evaluating that as we finish the purchase accounting. Well, but it is a big number, and so we will look to highlight that cost either in an adjusted basis or in our earnings presentation, because it's a significant number and much different than where we've been historically.
Speaker 12: Okay Thank youthe next question is from John brass, with Kansas City capital. Please go ahead.
Speaker 13: So uh, just going back to the, the borrowing costs, you know at this time a what you got: one point six billion outstanding w what's your, what's the rate you're paying on that the?
Speaker 13: On that debtright around five and a half percent. Our Blackstone Blackstone equity piece is 6%. Yes OK, then our term loan B is running about five and a half percent right now. Ok, given the formula used in that in that rate, assuming the Fed raises rates seventy five basis points, would you see that that number going up seventy five basis points too?
Speaker 14: We would okay okay, all right, all right. David, you mentioned some of the some of the stronger markets in metal coodatings and and.
Speaker 15: It seemed as though the solar market may be tailed off a little bit because of the the issues surrounding tariffs, but you said it was still fairly strong.
Speaker 15: Did you see it back off at all with the with the possible imposition of tariffs?
Speaker 16: There's always that possibility with the imposition of tariffs. For us in particular, what? What we see, of course, is that there's a lot of steel that has to get fabricated and then galvanized to support the panels, and I know earlier this year there were some issues with respect to panels and panel shortages. Those of are largely subsided and are starting to come back into the market, So that's why we still look pretty optimistic around what we're seeing in solar.
Speaker 1: Fight by the customer. So okay okay, all right, Thank you.
Speaker 4: The next question is from Josh tekowski, with credit suase, Please go ahead.
Speaker 17: Joshua line is open on R and perhaps you needed take. Can you hear me yes, or take. Good morning morning guys. Just a couple couple from me. First, more administrative: look at the reconciliation.
Speaker 18: 21 totally get the 12.6 in acquisition cost.
Speaker 18: But the fpre co contribution, the the negative 6.7. just trying to understand that it looks like you're you're stripping it out to show, I guess, the year over-year comparison of the base business, but I guess is that correct? And and then, how does that six point seven compare with?
Speaker 18: It looks like nine million of contribution from precode this quarter.
Speaker 17: yesthat is what it was. Just attempting to strip that out to be comparative for the legacy businesses, and it was: one was operating income and then the nine million was the EBITDA.
Speaker 1: So that was the only reason for doing that, since we were also scripping out all the onetime cost and incremental amortization that we picked up. Just because it was. They were on the books for two weeks.
Speaker 18: Got it. So is the difference between- if I look at I know this is we're talking two million of differential here, So apologize, but just curious is that the difference between like a a, a quote, unquote gap EBITDA figure and adjusted EBITDA?
Speaker 14: It is okay. Ok, got it, and then just the last one for me.
Speaker 18: No you mentioned in the prepared remarks. You know some issues. You know getting procurings, think. I was wondering if you could just comment a little bit further on that. What kind of issues are you seeing?
Speaker 18: What's the? uh, you know, how much do you have currently in in theckettles and and how long can you go?
Speaker 1: Yes it was more around just regional supply and lot the my warehouses were depleted.
Speaker 1: And I think there was a smelter in Brazil or there was just it was a mix of things. So the inventory I'm talking around about: we keep our kettles full, but we also carry some ingts.
Speaker 1: In certain plants, just for this eventuality, So that we can transport those, move them to ensure that our ketts remain full and functioning. So So that's the inventory I'm talking about and we were in good shape. We were able to move that. It was just part of the benefit of having over 40 locations and have the inventory and several of them that we can move over around.
Speaker 18: Sure sure, and is there any thought behind? I mean, I guess, to the extent you can, you can find it, but kind of just given where we're seeing spots, seeing prices today, you know any, any consideration in, you know purchasing in bulk and just kind of holding on to it?
Speaker 19: We typically don't purchase in large bulk. But as the pricings come down as quickly as it has we look across the facilities and.
Speaker 11: And purchase inventory as we can find availability and but we don't want to we typically don't load up on inventory but this is kind of a unique situation. So we are looking and we do we look at it well. The team looks at it every day but these are things we look at and try to.
Speaker 1: Primarily we're focused on availability, but in this caseace has just dropped so quickly. So we'will work with our banking advisers, and which we do every month and every quarter. Just so I don't want to preclude that we may not do that.
Speaker 15: As it's always a possibility, but that at the moment we're continuing to kind of let it rightide DAT a okay, and then maybe, if I could just sneak one last one in- I I know you touch on demand already, but any, any pockets.
Speaker 18: Of end mark at customers, where you're seeing it actually starting to weaken a bit more.
Speaker 20: Mi thought on the metal cating side no.
Speaker 15: There's always geographic things as we see for a while. We saw solar fabrication move into different parts of the country and.
Speaker 1: Things as we see for a while we saw solilar fabrication move into different parts of the country and.
Speaker 15: But yes, I CAn't think of any, not really. And even on the precoout side, you know, I know a lot of the analysts will follow things like nonres, nonresidential construction. However, the areas within nonresidential construction that we particularly play in on the precoout side are been performing quite well, So we're really not ING any particular end markets with slowdowns.
Speaker 4: Again if you have a question, please press Star then one the next question is from Bret kerney with the gibeli fronts. Please go ahead.
Speaker 21: Guys good morning. Congratulations on execution on the base business as well as all the moving pieces strategically. Just had one question on the J V partnership with fernway. It sounds like a great fit for that business going forward and I know you guys had highlight in the past. You know this business could benefit from someone kind of dedicated one hundred percent. You know operationally maybe even some increment.
Speaker 1: More fully and consistently to streamline processes and be some of that kind of thing that there would be a benefit.
Speaker 1: But for the last two years, since COVID-19, that had pretty much been put on hold. Now, interestingly enough, I had known the front of our guys is when they were still with McKenzie, So we'd actually been engaged with him in discussions around some of these potential process improvements, which is why it became one of our opportunities to pursue that fairly quickly as we pivoted to it. So I think it's around streamlining processes.
Speaker 1: Moving to quoting one product where it makes sense, like for Enclosures or switch here, including the best product from the best location, which means you've got to have rough cut capacity planning in place, nop stuff like that. So these are all things that I think firmwork can bring to the table quickly. We have a really, really good operating teams and these are these are mostly the ideas that they've been serving upthe last couple of years, but we hadven't been able to focus on it in terms of the capital investments or if they go do tuck-in acquisitition, things like that.
Speaker 11: We'll look at each one of those on its surface and decide whether to invest we're not required to by contract but obviously we'll have to make a decision around each one of those if it's significant and there would be additional capital required either for an acquisition or for a major growth investment. So we look at them. We we're not ready to call the ball on that we'll have a couple of Board seats. So.
Speaker 11: umso we look forward look forward to seeing those opportunities okay terrific and then just on the convertible with Blackstone is it the expectation just timing wise that that would if upon cheryer approval that would kind of convert to preferred equity. You know this week.
Speaker 19: Yes I think it's got a five day window, if I remember correctly, and so at our shareholder, me tomorrow, we anticipate that would be approved. If it's approved, then we'll go ahead and then move into that five -day or seven -day window of of exchanging.
Speaker 21: trrific. Thanks much, guys. All right, thanks. This concludes our question-and-answer session. I would like to turn the conference back over to Tom Ferguson for any closing remarks.
Speaker 15: All right. Well, Thank you and look, we appreciate your attention. We look forward to presenting the.
Speaker 15: Second quarter results here and just what seems like just a few weeks. But so we thank you for your time, we thank all of our employees that have also logged on to listen in and we look forward to talking about another quarter of success in completing another one of the major strategic transactions. Thank you.
Speaker 4: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.