Q1 2024 AZZ Inc Earnings Call
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Hello, and welcome to the AZZ incorporated first quarter 'twenty 'twenty four earnings conference call and webcast. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions.
To ask a question you May press Star then one on your telephone keypad to withdraw from the question queue. Please press Star then two please note. This event is being recorded.
I'd now like to turn the conference over to Sandy Martin with three part advisors. Please go ahead.
Thank you operator, good morning, and thank you for joining us today to review Azz's financial results for the fiscal 2020 for first quarter ended May 31, 2023, joining the call today are Tom Ferguson, President and Chief Executive Officer, Phil that farm Chief Financial Officer.
And David <unk>, Senior Vice President marketing Communications and Investor Relations. After the conclusion of today's prepared remarks, we will open the call for questions. Please note. There is a webcast and slide presentation for today's call, which can be found on Azz's Investor Relations page under the latest earnings.
Presentation at AZZ Dot com.
Before we begin I would like to remind everyone that our discussion today will include forward looking statements that are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 forward looking statements by their nature are uncertain and outside of the company's control except for actual results are.
Much 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-K for the fiscal year. These statements are not guarantees of future performance and therefore undue reliance should not be placed upon them.
Actual results could differ materially from these expectations. In addition, today's call will include a discussion of non-GAAP financial measures non-GAAP measure should be considered as a supplement to and not substitute for GAAP financial measures. We refer you to the reconciliation of non-GAAP to the nearest GAAP measure included in <unk>.
Today's earnings press release, and Investor presentation for future detail.
Other detail the earnings press release, and Q1 presentation are posted on our website and have been included in our form 8-K submitted to the SEC I would now like to turn the call over to Tom Ferguson, Tom. Thank you Sandy good morning, everyone. Thank you for joining us for a review of our fiscal 2024 first quarter result.
Yes.
Today, I will provide an overview of our first quarter performance talk about progress made with our digital galvanizing system or D. G S technology.
And then with the discussion of what we are seeing in the demand environment. This year as well as our outlook for the rest of fiscal 2020.
I'm quite pleased with the pride and passion of our employees as they kicked off fiscal year 2024 by continuing to provide outstanding customer service and drive operating performance. Please note that this quarter, we are focusing primarily on sequential comparisons due to only having pre COVID-19 for two weeks of the first quarter last year.
Turning to slide three we're off to a strong start to the fiscal year with total sales of $391 million up 16, 2% on a sequential basis. Mel Dakota has delivered a record setting sales quarter of $169 million up three 3% versus last year I'm also pleased to report.
That are pre COVID-19 metals business delivered sequentially higher sales this quarter totaling $222 million.
18, 7% compared to the fourth quarter on a comparable basis pre care sales declined slightly versus a record first quarter in fiscal 2023. This is primarily attributable to last year's inventory ramp up in reaction to supply chain disruptions and was not anticipated to repeat this year.
We improved our profitability in the first quarter by delivering adjusted earnings per share of $1 14 against the prior year EPS comparison of one dollar tier keeping in mind. These are on significantly different share counts, which Philip will cover later.
In a minute.
In addition, we generated strong adjusted EBITDA of $85 4 million up 62, 6% over the prior year or 21, 8% of sales. Our total adjusted EBITDA margin increased sequentially by 480 basis points over the fourth quarter due to seasonally higher sales that drove our.
Improved fixed cost leverage coupled with the impact of certain production improvement initiatives implemented previously.
Our first quarter metal coatings, EBITDA margin was 37% up sequentially by 370 basis points and our pre Covid metals EBITDA was 19, 4% up 560 basis points. The past few quarters, we discussed the disruption caused by excessive customer owned inventories at most brito plants in the first quarter.
We successfully resolve these issues and achieve margins for pre COVID-19 that felt comfortably within our agenda targets.
Brito did see softer demand in HVA Sea transportation and some construction markets in Q1, but we remain confident that the full year will be in line with projections as they continue to focus on converting customers to more environmentally friendly prepaid solutions.
Like the metal coatings business pre Covid has a highly variable cost structure that allows them to protect margins when volume fluctuations do occur for any extended period I will cover this more in our outlets discussion in a few moments. However, we anticipated. This current demand environment, which was built into our annual guidance and we are pleased that first quarter.
Results met our expectations for it and the team will continue to drive growth through their supply chain solution strategies, focusing on market expansion through postpaid convergence and strategic long term supply agreements with blue chip customers.
In a few minutes Philip will provide more details of our first quarter results and speak to our current year capital allocation priorities, we continue to carefully manage cash and capital deployments to ensure that we invest in high return investments well above our cost of capital and pay down debt and Delever the company in a disciplined way.
For the balance of this year, we have taken acquisitions off the table as we focus on reducing debt. In addition to high value investments and meaningful debt reduction we are laser focused on value creation and high ROI projects and initiatives to drive incremental shareholder value.
I'll turn now to our digital galvanizing system or D. G S technology.
For the past seven years, we've been digitizing, our galvanizing operations to improve productivity efficiencies in energy consumption approximately 18 months ago, we enhanced our proprietary state of the art technology on the customer side to allow us to have a more integrated relationship with our customers. This was an important pivot away from an off the shelf CRM tool to full use.
Utilization of an internally built tool linking AZZ is important customer relationship management system to our enterprise wide Oracle ERP system.
We are excited to report that this technology has successfully eliminated nearly all paper in our shops and dramatically improve the quality and speed of our customer interactions when combined with our outstanding serving minor leadership team deep management bench and intense focus on service and quality. We believe AZZ has built a sustainably differentiated.
<unk> Hot dip galvanizing business freak out which operates predominantly more continuous flow automated processes has also developed primary.
Proprietary applications, such as coiled zone that provide them similar productivity and enhanced customer engagement.
More broadly we are very excited about the power and scale of the transformed AZZ.
We are working collaboratively with our people processes and technology to deliver services and solutions to customers from both our metal coatings and cool coatings businesses based on our transformative actions over the last 12 months, we've effectively added more than $100 million of incremental EBITDA annually between the sale of our majority interest in <unk>.
Yes, and the acquisition of pre cab this strategic pure play shift into coating segments that commands industry, leading market positions accompanied by a broad portfolio of galvanizing in coil coating services and solutions allow us to deliver an exceptional customer experience with that I will turn it over to Philip.
Thanks, Tom turning to slide four as Tom mentioned, we reported fiscal year 'twenty 'twenty four first quarter sales from continuing operations of $399 million or $88, 7% above the $207 $1 million reported in last year's first quarter current year results include pre cut metals for the entire quarter.
While the prior year results include pre Covid for only the last two weeks following the acquisition on May 13th sequentially total sales increased by 16.2%, which reflects typical seasonality moving from fourth quarter to first quarter for both segments gross profit increased $97 million to $97 million from $60.
$1 million in the prior year same period gross margins were 24, 8% in the first quarter, primarily reflecting the impact of labor and material costs between years.
Selling general and administration expenses were $31 5 million in this year's first quarter compared to $32 $1 million in the prior year first quarter recall that we recorded $12 6 million in acquisition and transaction related costs as well as incremental pre coda amortization of intangible assets in fiscal year 2023 D. S.
<unk> expenses in the first quarter of fiscal year 2024 are closer to a run rate number that can fluctuate over time.
First year, adjusted EBITDA of $85 $4 million exceeded the prior year's $52.5 million by a strong $32 9 million.
This was an increase of 62, 6%, which reflects good earnings traction and the impact of incremental earnings of the praetor business adjusted EBITDA margins for the first quarter were 21, 8%, which trailed the prior year of 24 25, 4%. This was primarily due to the labor and commodity pricing that flowed through the cost.
The sales in the quarter.
If you reference our earnings release tables, EBITA margin comparisons for both segments reflects sequential improvements for the quarter.
Adjusted net income was $33 $4 million compared to $28 $2 million in the prior year's first quarter up 18, 4%.
Adjusted diluted earnings per share of $1 14 was $3, 6% above the adjusted EPS of $1 10 in the prior year first quarter.
Since the preferred convertible shares are dilutive in both periods presented on slide four the preferred dividends are added back to earnings for the EPS computation also shares our adjusted for a full conversion of the preferred convertible which resulted in $29 2 million weighted average shares this year.
Compared with last year's shares of $25 7 million.
The prior year share compensations reflected the current convertible debt outstanding for two weeks versus an entire quarter.
Moving to slide five.
We reported strong net cash provided by operating activities of $46 $9 million and free cash flow of $29 $9 million in the first quarter almost double compared to the prior year amounts. This was the result of prudent working capital management and.
An excellent operational performance.
Also capital expenditures for the period were $17 million and included normal safety maintenance and growth spending as well as approximately $5 3 million incurred on the new coil coating Bill in Washington, Missouri. We're slightly ahead of schedule on the Newbuild as a result of favorable weather to plan and spending on the new facility is in line with our expectation.
During the quarter and care and compared with our full year Capex budget.
During the quarter, we paid dividends to our common shareholders of $4 2 million and also paid $3 $6 million to our series a preferred shareholders.
I will discuss debt pay down interest expense and taxes in a few moments.
Turning to slide six we continue to invest in organic growth strategic customer partnerships high return projects and productivity projects that meet our criteria for high ROI projects.
Our focus on debt Paydown continues and the board as well as our leadership believe that returning capital to shareholders through our quarterly cash dividend remains a priority.
And as Tom mentioned acquisitions are not a near term focus for the company.
Turning to slide seven.
During the first quarter, we paid down debt of 20 million in what is normally a seasonally high cash outflow quarter.
As we discussed last quarter, we plan to pay down a total of $75 million to $100 million of debt. This fiscal year with a near term target leverage of three times trailing 12 months adjusted EBITDA.
We reported interest expense for the first quarter of $28 $7 million compared to $7 $5 million in the prior year due to acquisition related borrowings as well as the higher interest rate environment, we operate in today.
Last fall, we secured a cash flow hedge of half of our variable rate debt via a swap this fixed rate.
This fixed are rated approximately eight 6% and we currently incur roughly nine 5% on the remaining variable rate debt.
We have no maturities until 2027, and we know that our strong cash flow generation will continue to support our plan to delever.
Our current quarter tax expense was $9 $7 million, which reflects an interim effective tax rate of 25, 3% consistent with prior year.
We expect our full year effective tax rate to remain around 24% for fiscal year 2024.
With that I'd like to turn the call back to Tom.
Thank you Philip.
As you can see on slide eight we are maintaining our full fiscal 'twenty 'twenty four sales guidance of one $4 billion to $1.55 billion adjusted EBITDA guidance of $300 million to $325 million and adjusted EPS guidance of $3.85 to $4 35 sites.
Our minority ownership in the a S. Joint venture is not included in the balance of the year guidance, because we don't control it and they are still in the purchasing price accounting period. Consequently.
Which makes.
Well, which makes predicting a specific equity income amount difficult for now.
We believe a vale is progressing well on their business plan and we will provide an outlook on equity income as soon as reasonably possible.
Our financial outlook for the second quarter, our metal coatings is a repeat of the first quarter.
With many of our fabrication customers, citing good backlogs as they benefit from increased infrastructure spending.
Additionally, with improvements in labor availability and more predictable supply chain support we're confident we can adjust our inventories with paint zinc to more normalized levels.
Pre COVID-19 continues to enjoy diverse end market activity and growing industries that directly relate to a broad range of construction markets and opportunities to convert customers from postpaid to prepaid in sectors, such as roofing and containers.
As I mentioned, we did see some softening in HVA Sea transportation and certain construction markets, which is why we remain focused on expanding our supply chain solution offerings, including converting customers from their own internal pain.
We will have a better view of this after our second quarter is complete we're also projecting a repeat of first quarter in the second quarter related to sales.
As I noted earlier customer inventories have normalized due to the actions we have taken which allows us to benefit from process improvements in production efficiencies. Our corporate team continues to focus on cost initiatives further debt reductions customer credit metrics governance, and risk mitigation and a disciplined method for allocating capital to the projects with them.
Greatest return on investment.
We are progressing with our Greenfield plant construction that supports aluminum coatings with a valuable dedicated customer committed to filling the majority of our capacity in this new plan as Philip mentioned, we were slightly ahead of schedule and continuing to track within budget. This is an exciting project for us and we will keep you updated each quarter on the progress fine.
We are committed to growing sales and driving margins to our targeted ranges, which will generate significant cash flow and create shareholder value I want to thank all of our shareholders and our board for their support and again want to thank our AZZ team for delivering strong first quarter results.
With that operator can you. Please open up the call for questions.
Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
Using a speakerphone please pick up your handset before pressing the keys.
Allison the question queue. Please press Star then two and at this time, we will pause.
Cause momentarily to assemble our roster.
Today's first question comes from John .
Sidoti and company. Please go ahead.
Good morning, guys and thanks for taking the questions.
I'd like to start with re coat, Tom you mentioned that the.
The sales profile should be similar in Q2 versus Q1.
Curious normal seasonality on a historic basis, how would that quota kind of lineup and how it normal historical margins differ in Q2 versus Q1, because it seems like you have those headwinds that you called out on H B, a C and transportation I'm, just kind of get a better sense of the business.
Yeah, I think second I mean, usually as we've talked some.
First half is the strongest part of the year.
Q2, I'd say is usually slightly stronger than Q1, and we pretty much anticipate that and the only reason is that our Q.
Q1 is the spring kind of gains traction so theres always a couple of weeks to ramp that up whereas during the summer months it is pretty much.
We get that full 12, or 13 weeks of solid production efficiencies and in demand.
Margins, probably slightly better in Q2, but it's close.
We're pretty close to that 20%.
Target that we've talked about in the past.
So you know we're at the margin on that.
But now at the outlook is good.
Just toured some of the plants.
The excess customer inventory is now fully under control, we've got rid of almost all of the excess warehouses that we had.
And which which makes us more efficient more productive so I'm looking for for.
What what I hope becomes a very typical.
Second quarter for pre Covid as we go forward.
Got it.
And rising interest rates has that had any impact on your order intake in any of the businesses.
You know I think we may have seen some of that it's hard to attributed directly to it.
We've seen some projects.
And both sides are metal coatings, and pre coat that have probably been deferred.
Not necessarily cancelled and you know so deferrals, just drag things out a little bit but in some cases for for our plants that are really busy this time of season that can be good.
So yeah, I don't know that I can point to anything other than on the freak outside.
Recreational vehicles Rvs that said that business has got in the.
The let's just call it way off but you know so I guess, that's less affordable for people.
Post Covid may but other than that it's a you know construction is a little commercial infrastructure is a little bit softer, but we're in regions and geographies that tend to be.
Strong right now so you know here in Texas throughout the southeast Midwest quarter.
Which is a lot of the area that I visited over the last month or so.
You just see lots of activity lots of infrastructure activity lot of construction a lot of cranes.
You know new new new Ballparks AG.
You know spring, we saw docs going in so you know, it's it's it's actually fairly normal. So when we were alluding to the areas that are that are softer but on the other hand, there's there's areas that are actually stronger.
Oh interesting all right and just lastly on input costs.
Can you talk a little bit about how it's impacting the P&L I noticed the zinc continues to slide downwards.
Maybe a little bit of Oh, what some on with your with your input costs are looking like companywide and maybe zinc and specific but we can talk about there.
Yeah, I think as you look at our particularly for metal coatings or our galvanizing business.
Specifically first quarter versus first quarter last year the margins.
EBITDA margin, it's 37%, it's a really really nice.
Amount, but was off just a little bit as the higher zinc was continuing to flow through our kettles.
And you know we've done a great job with disciplined value added pricing and our customers recognize what we bring to the table. So but that's not to imply there hasnt been you know if if if things soften a little bit there gets to be some price pressure, but where are we pretty much disconnected the underlying zinc costs with our with our value added.
<unk> generally labor has become more available so while we had that are inflationary impact last year.
Say it is more normal now and also labor more access so that helps us with our productivity keeping our.
Not that we don't have significant overtime. During this time of season, but it does allow us to keep our crews fully staffed and.
Hydration and safety is very important for us during the hot summer months. So we're feeling good right now and.
And zinc costs are.
They've peaked and should continue down in our kettles as the year goes on.
Keeping in mind that the L. O me, while it's down the <unk>.
Premiums for this year are were increased significantly. So so it's not a one to one comparison when you look at it year over year.
Got it got it.
With that I'll get back into queue. Thank you for taking the questions.
The next question comes from Adam Thalheimer with Thompson Davis. Please go ahead.
Hey, good morning, guys. Congrats on a solid start to the year.
First question on on D. G. S is that something you can integrate with pre cut or just pre COVID-19 already have a similar solution.
Yes, pre Covid you know one day.
We're looking at automated lines running at.
700 feet per minute versus more of the batch process. Although we do have some more automated processes on the hot dip side with our spin plant.
So generally they've got a lot a lot of controls and automation already in place they have their own proprietary software that allows them to manage those massive inventories and huge amounts of steel and aluminum going through their plans called COO zone and that which is also something that integrates them with their customers. So.
So different different proprietary software structures, but both accomplished both allow the businesses to accomplish the same kinds of things from a productivity.
Efficiency and customer integration perspective.
Okay.
And you alluded to this but you said there were some.
There were some stronger end markets that were offsetting weakness in HVAC transportation and construction can you elaborate on this.
Yeah, we've had strength in in the solar market, particularly so when you look at infrastructure Bridge and highway even AG for US has been had been some strong markets.
Last few months it looks like that's going to continue and that's why I mentioned you just look at the amount of work that has to go into our bridge highway water systems theirs airport construction activity going on everywhere. So I'll keep it tied to transmission distribution.
Renewable energy, including solar.
And bridge and highway and general infrastructure. Those are those are strong and look to continue that way.
Great and then just a couple of things for modeling purposes can you give.
Give us any help with corporate expenses and DNA going forward.
No.
Corporate expenses should.
Be fairly flat, we're just coming off the TSA is with I S.
That we had and then you'll see those be.
Remained pretty flat to where they were at the end of Q1.
And then DNA. Similarly, we finished all the purchase accounting at the end of the first quarter related to the pre cut acquisition. After the first year. So this should represent a fairly good run rates.
Got it okay. Thank you guys.
Alright.
The next question comes from Brett Kearney with Gabelli funds.
Good morning.
Guys. Good morning, Thanks for taking my question.
I'm curious, Tom, particularly as you know recently towards some of the pre co plants to the extent they have some capacity maybe frees up later this year, you mentioned opportunities expanding our supply chain solutions offering and converting some customers are who you know run their own.
On lines internally anything incrementally you guys are seeing in terms of maybe folks you already serve well on the galvanizing side that could also benefit and some area from pre Covid solutions and kind of the cross selling opportunity there.
Yeah, I think I'm encouraged it's you know in some ways, it's still early but our but our sales teams from both sides have got together on a couple of occasions in and are now working in their own geographies.
Identifying leads making introductions.
So it's it's a.
Hesitate to point anything real specific at this point, but but.
But we are fine and whether it's in trucking or.
Just some of the customers that use a lot of of sheet metal components.
No.
Panels that you know there's opportunities and I think we're our teams are working well together and you know, they're making those introductions in I don't know that we've had any any significant customers that have said you know the.
It changes their mind about us but bill.
It it's early and we do look for more opportunities there.
And that's going to continue.
Yes excellent.
And then great to hear the new pre Covid facility on track even ahead of schedule a bit I know, it's early days, we can't predict.
Predict the weather from here, but to the extent that facility were to come on line you know just even a bit early does your agreement with our anchor customer there.
Now then allow for you to be providing volumes like as soon as the plant comes online or is it more of a fixed calendar date in the contract you have there now.
I think there'll be opportunities are the customer has has you know existing demand they're also building capacity.
As well, but now there should be opportunities, that's something we'd probably need to.
Check with Kurt and his team on the specifics, but I would anticipate that so we just want to keep it.
Keep it under control and but yes, it'd be great to have it up and running faster.
Excellent. Thank you so much.
Sure. Thanks.
This concludes our question and answer session I would like to turn the call back to Tom Ferguson for closing remarks.
Well hopefully as you've heard we're excited about the opportunities in front of US we look forward to continuing on our path with the freak out in metal coatings and finding opportunities to work more closely together offer even more solutions to our customers. So we're excited about the balance of this year and look forward to.
Are you talking to everybody after the second quarter. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Yeah.
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