Q3 2025 AZZ Inc Earnings Call
Good day and welcome to the AZZ third quarter fiscal 'twenty twenty-five conference call all participants will be in listen only mode.
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I'd now like to turn the conference over to Sandy Martin a three part advisors. Please go ahead.
Speaker Change: Thank you operator, good morning, and thank you for joining us today to review AZZ its financial results for the fiscal 'twenty 'twenty five third quarter, which ended November 32024.
Speaker Change: Joining the call today are Tom Ferguson, President and Chief Executive Officer, Jason Crawford, Chief Financial Officer, and David <unk> 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.
Speaker Change: Today's call can be found at www dot AZZ dot com.
Speaker Change: Cash investor Dash events.
Speaker Change: 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 or comments containing four.
Speaker Change: 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.
Speaker Change: Actual results could differ materially from these expectations. In addition, today's call, we'll discuss non-GAAP financial measures non-GAAP financial measures should be considered supplemental to and not a substitute for GAAP measures. We refer to the reconciliation from GAAP to non-GAAP measures in today's earnings press release.
Tom Ferguson: I would now like to turn the call over to Tom Ferguson.
Tom Ferguson: Good morning, Thank you for joining us and happy new year to you all.
I will discuss AZZ third quarter and cover our outlook for the rest of the year.
Jason Crawford, who will review our financial results and David <unk> will provide an industry update on sales to our end markets and then we'll open it up the call for questions.
Tom Ferguson: The third quarter's results exceeded our expectations versus how we were feeling as we had entered the quarter.
Tom Ferguson: I give our team 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.
Tom Ferguson: Fiscal 2025 sales through the first nine months have been driven mainly by construction projects related to highways, New bridge construction and infrastructure renovations throughout the U S.
Tom Ferguson: In addition, spending on data centers re shoring of manufacturing clean energy initiatives in power transitions accelerated in calendar 2024, resulting in positive impacts for our business.
Tom Ferguson: Our consolidated third quarter sales of $404 million increased by five 8% versus the prior year's quarter and this was all organic growth the metal coating segment increased overall sales by three 3%, but grew galvanizing at five 2% when compared to the prior year's third quarter, while the pre cut metal segment grew sales by.
Tom Ferguson: Seven 6%.
Sales momentum in the third quarter was almost entirely based on volume with higher tonnage processed in both fabricated steel and coil coating Melrose.
Tom Ferguson: Metal coatings delivered EBITDA margin of 31, 5% again exceeding the prior year and our targeted range of 25% to 30%, primarily due to higher volume and improved zinc productivity.
Tom Ferguson: Metals EBITDA margin of 19, 1% also exceeded the prior year and demonstrated strength, primarily due to higher volume more profitable mix of business and improved operational performance.
Tom Ferguson: In addition, strong EBITDA resulted in cash flow from operations of $186 million for the first nine months of the fiscal year, which allowed us to make substantial debt repayments of $80 million.
Tom Ferguson: 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 the operations for the future.
Tom Ferguson: We continue to hold leading market positions in our galvanized metal coatings and cool coating freak out segment.
Tom Ferguson: As a specialized melatonin's provider are strong and enduring competitive moat gives us an advantage through trusted repeated customer relationships economies of scale and innovative customer centric technology solutions.
Tom Ferguson: 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 position imports.
Tom Ferguson: Importantly, we do not own the steel processed through our facilities. So we avoid exposure to commodity price risks associated with it.
Operating as a highly profitable totally model, we will continue to strengthen our significant economic moat and metal coatings and presale matters.
Tom Ferguson: We plan to continue investing in Azz's proprietary customer facing technologies that are utilized at all of our facilities are.
Tom Ferguson: Our innovative technology platforms provide paperless real time access and improved service transparency positioning our company as a highly differentiated militaries provider and strategic partner to customers throughout North America.
Jason will discuss our disciplined approach to capital deployment in a moment.
Tom Ferguson: First I wanted to underscore that we continue to pay down debt and return capital to shareholders by consistently paying quarterly cash dividends.
Tom Ferguson: As noted previously we expect to reduce our debt by over $100 million for the fiscal year ending in February as.
Tom Ferguson: As I mentioned earlier for the first nine months of our fiscal year, our growth has been 100% organic compared to the prior year. We continue to work the M&A pipeline by carefully evaluating potential acquisition targets to add inorganic growth in each segment.
Tom Ferguson: We will remain patient what are considering the best timing target evaluations and azz's optimal leverage.
Tom Ferguson: Finally in pursuit of our high ROI capital allocation strategy, we have invested in a durable secular trends supporting the beverage industries plastic to aluminum conversions, we're finalizing construction milestones of our new aluminum coatings facility in Washington, Missouri.
Tom Ferguson: We are currently doing equipment certification and testing and expect to ramp up the new facility. During the first quarter, 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.
Tom Ferguson: Thank you Tom and good morning for the third quarter, we reported sales of $403 $7 million, an increase of five 8% over the prior year's quarter Bye.
By segment, our metal coatings sales increased 3.3% within Deutsche Galvanizing increased five 2% nobody called Metro segment increased seven 6%.
Tom Ferguson: The third quarter gross profit was $97 $8 million or 24, 3% of sales an increase of 110 basis points from 23, 1% of sales in the prior year quarter.
Tom Ferguson: Gross margins improved in both segments supported by higher sales and volumes and improved zinc productivity in our metal coatings segment and higher sales and improved operational performance and the Presort network segment.
Tom Ferguson: And the third quarter, selling general and administrative expenses were $59 $2 million or nine 7% of sales compared to $55.3 million or nine 3% of sales in the prior year quarter.
Tom Ferguson: The SG&A increase in the quarter was due to one off employee retirement costs severance expenses and legal accruals for Casey's that we'll sample Jerome that during the third quarter.
Operational income improved to $58 $5 million or 14, 5% of sales compared to $52 8 million a 15, 8% of sales in that last year's third quarter.
Tom Ferguson: Interest expense for the third quarter was $19 $2 million compared to $5.9 million in the prior year. The decrease is due to consistently paying down debt and a lower weighted average interest rates from various debt re pricings and recent fed interest rate reductions.
Tom Ferguson: Equity and earnings of unconsolidated subsidiaries for the third quarter was $7 $2 million compared to $8 $7 million for the same quarter last year. These.
Tom Ferguson: These equity and earnings are from a 40% minority ownership interest in the <unk> JV.
Tom Ferguson: Current quarter income tax expense was $12 $1 million, reflecting an effective tax rate of 26, 5% compared to 24, 6% in the prior year quarter.
Tom Ferguson: The increase in the effective rate was primarily attributable to higher nondeductible hate to items related to meals and entertainment.
Tom Ferguson: And more impact from our R&D tax credits.
Tom Ferguson: Reported net income from the third quarter was $33 $6 million compared to $6.9 million for the prior year quarter on an adjusted basis Q3, adjusted net income was $41 9 million compared to $34 $8 million, an increase of 25% from the prior year.
Tom Ferguson: Third quarter, adjusted EBITDA was $90 $7 million or 22, 5% of sales, which compares favorably to $86 $4 million or 22, 6% of sales in the prior year.
Tom Ferguson: Turning to our financial position and balance sheet.
Tom mentioned, we generated significant cash flows from operations of $185 $6 million exceeding last year's $189 million.
Tom Ferguson: After funding the first nine months of the company's capital expenditures of $85 $9 million a year to date free cash flow was $99 $7 million year.
Tom Ferguson: Year to date capital expenditures include spend of $46 $8 million on a new coil coating facility in Washington, Missouri.
Tom Ferguson: With most of the remaining spend of.
Tom Ferguson: This project of approximately $11 $2 million expected to be completed during the fourth quarter.
Tom Ferguson: As Tom noted, we have a disciplined capital allocation strategy that consists of investing in the business for growth paying down debt.
Tom Ferguson: Turning cash to our shareholders through dividends and share buybacks and evaluating potential bolt on acquisitions.
Tom Ferguson: During the third quarter, which ended November 30th we reduced debt by $35 million and expect total debt repayments to exceed $100 million for the full year.
Trailing 12 months debt to adjusted EBITDA is two six times, which compares favorably to a leverage of three one times in the third quarter of last year.
Tom Ferguson: Recall that in late September we repriced, our term loan b down to Salford plus two 5%.
Tom Ferguson: 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 fourth quarter of this fiscal year.
Tom Ferguson: Our current interest rate swap agreement fixes our variable rate debt for a notional portion through September 30th 2025, and we do not have any debt maturities until 2027.
Tom Ferguson: Finally, we paid cash dividends of $5 $1 million to common shareholders in the third quarter.
Tom Ferguson: 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 Cds a profound stopped by using the proceeds from the secondary equity offering that was completed in may of this year.
David: With that I'd like to turn the call over to David <unk>.
David: Thank you Jason good morning, everyone.
David: The sales momentum for the third quarter 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, H Bac and recreation over the same quarter a year ago.
David: 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.
David: 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 re shoring of manufacturing and energy transitions.
David: 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.
David: <unk> bridge and highway as well as electrical T&D in.
David: 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 Thanks, David.
Tom Ferguson: We remain bullish about our near medium and long term business prospects, although I'm incredibly pleased with the team's progress and accomplishments. This year were also deeply involved in planning and setting new milestones for fiscal year 2026.
Tom Ferguson: As Jason and David shared business momentum continued through the years first nine months, we expect the fourth quarter to be similar to last year's Q4, which is typically slower as construction is impacted in the winter months.
Tom Ferguson: Concerning our annual guidance, we have narrowed our sales range to $1 55 to $1 $6 billion and kept the midpoint unchanged.
Tom Ferguson: We also narrowed and raised our midpoint for EBITDA and EPS expectations to reflect the strength in our first nine months period with lower interest costs for the balance of this fiscal year.
Tom Ferguson: We narrowed our adjusted EBITDA range to $340 million to $360 million and increased adjusted EPS guidance to $5 to $5 30.
Our overall guidance assumptions have not changed which excludes any federal federal regulatory changes that may emerge finally capital expenditures for the current fiscal year are expected to remain unchanged at $100 million to $120 million and embedded in this total is the new plants final capex.
Tom Ferguson: The equity in earnings from our minority interest in avail joint venture continues to be within the $15 million to $18 million range and debt Paydowns are expected to exceed $100 million. We continue to focus on paying down debt, while actively evaluating potential acquisitions with a growing pipeline.
Tom Ferguson: We remain enthusiastic about business prospects and are confident we will finish fiscal year 2025, well.
Tom Ferguson: In a few weeks, we plan to provide fiscal year 2026 guidance for the fiscal year that begins March one.
Tom Ferguson: I want to thank our hardworking and talented team for executing Azz's vision of unwavering customer service and growth and working on a continuous improvements every single day. We are highly focused on creating long term value through served leadership execution of our strategy and sustainable solutions, we plan to continue scaling our business through organic.
Tom Ferguson: 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.
Tom Ferguson: Yeah.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the keys.
Tom Ferguson: Anytime you question has been addressed and you would like to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Tom Ferguson: Yes.
Tom Ferguson: Yeah.
Matthew Krueger: Your first question comes from Matthew Krueger with Baird. Please go ahead.
Matthew Krueger: Great. Good morning, everyone. Thanks, a lot for taking my questions.
Matthew Krueger: Just to kick things off maybe could you 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.
Matthew Krueger: AZZ is generating from our growth angle that that would be terrific too.
Matthew Krueger: I'll pause there.
Speaker Change: Yeah, a couple of things that I'll, let David opine as well, but I think where we've seen the markets kind of choppy.
Speaker Change: So unfortunately, we serve a real diverse set of markets in both segments.
Speaker Change: So.
Speaker Change: But I think we benefited from.
Speaker Change: Our emphasis on providing outstanding customer service focus on innovation, so taken some market share getting customers to convert the pre paint are getting customers to convert to hot dip galvanizing from whatever they're using so so I feel like were.
Speaker Change: We've been able to perform particularly in the third quarter.
Speaker Change: Ahead of the markets.
Speaker Change: But generally the markets R. R O K I think theres some hesitation, we've seen <unk>.
Speaker Change: Projects pending what's going to happen with tariffs steel availability things like that I don't believe those are.
Speaker Change: Significant.
Speaker Change: Hurdles going forward as we as we get into 2025, but.
Speaker Change: But I do think it's created a little bit of Choppiness in decision, making on some projects.
Speaker Change: And that's kind of generally across cross markets.
David May want to add on some specifics.
David: Yeah, Thanks, Tom Matt what I would just add as you know 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.
Speaker Change: We continue to see some real bright spots in.
Speaker Change: Markets like construction, industrial and utilities, particularly transmission and distribution.
Speaker Change: Where we know there's literally thousands of miles of 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.
Speaker Change: And you look at U S. A.
Speaker Change: Construction spending in particular, either non building or building a there are some bright spots in there in areas like infrastructure around water.
Speaker Change: As well as you know things like data centers public safety and manufacturing spend so I would agree with Tommy and we feel like we definitely grew faster than the market in Q3, and we're optimistically looking forward to.
Speaker Change: Q4 and are in the year ahead.
Speaker Change: Great.
Speaker Change: That's super helpful.
Speaker Change: The third quarter was a nice sequential acceleration from the second quarter were there any unique benefits.
Speaker Change: To the third quarter growth rate that we should think about.
Speaker Change: Other perspective, any demand pushed into the third quarter.
Speaker Change: Or were there any other one off factors that we should consider as we model out to the fourth quarter this year and kind of see.
Speaker Change: We enter 2026.
Speaker Change: Yeah actually back.
Speaker Change: 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 one of them. 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 you know it can move the needle a little bit in the quarter as you.
Speaker Change: Saw by the three 3% overall growth versus five 2% for galvanizing. So you know, 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 theres still.
Speaker Change: As you can read and seen on the news in the media, there's still a lot of.
Speaker Change: Still going through a lot of turmoil in Western North Carolina, So no.
Speaker Change: I don't I don't feel we benefited that much from hurricane at all other than like I mentioned in the two sites.
Speaker Change: And then generally that was about it and of course now we are in the winter storms, but that's what we expect in the fourth quarter. So.
Speaker Change: Impacts on construction so for Q3, yeah, not that not much one off it was basically good blocking and tackling taking care of customers converting opportunities in and out servicing our competitors.
Speaker Change: Great.
Speaker Change: That's helpful. And then just lastly for me I know youre going to be issuing formal guidance in a couple of weeks here, but as we model out to.
Speaker Change: The next year.
Speaker Change: 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 ER volumes.
Speaker Change: Interest expense in Missouri plant opening.
Speaker Change: What contribution that could have just big picture thoughts like that versus kind of getting into specific guidance would be helpful.
Speaker Change: Yeah, I'll I'll mention a couple of things Jason can talk about interest rates and some of the things. We may continue to do on the on the debt front, but we do look to get an acquisition or two done hopefully over the next few months and kind.
Speaker Change: Kind of get back into that routine where were a bolt on things on as part of our normal course of.
Speaker Change: Expansion in in certain geographies in places and they go into the business through those bolt ons, and then hopefully improving their margins too to our fleet level.
Speaker Change: So we're excited about that we've we'd gotten off the acquisition trail to pay down debt, but we feel very good about our leverage as were trending down towards two times, which I think is is a level that once we get to that we are all options are back on the table in terms of.
Speaker Change: Potentially increasing dividends.
Speaker Change: Stock buybacks in and of course acquisitions so.
Speaker Change: But in terms of other things volumes, we see kind of.
Speaker Change: Post.
Speaker Change: The Trump administration taken over I think that settles things down in terms of what actions are going to be taken for tear ups and.
Speaker Change: And we don't see tariffs, having a big impact on us as we as we get into the year, there's kind of a mixed bag on the pre coat side.
Speaker Change: And on the galvanizing side or metal coating side.
Speaker Change: It's a non factor as long as steels available for projects.
Speaker Change: And Jason you might want to add anything in for interest and what Youre doing on the financing front, yes, I mean, certainly from an interest point of view I think would meet the majority of our moves this fiscal year. So really what you'll see next year as you say annualized nation and part of that I don't see any major step functions obviously.
Speaker Change: What happens out there in the external world from a fed point of view will impact us, but we have our underlying swap.
Speaker Change: No if I use that through probably the first two quarters and then extending that so really no any step functions as you think about our cash flow then.
Speaker Change: The last two years, we've heavily invested in the.
Speaker Change: The new facility in Washington, and we will see that dropping off and get back to a more normalized capex point of view. So that's the only too as we start to think about next year.
Speaker Change: See the Albanian impact and then I'd come back on on the new facility startup will give some more color on that when we give guidance, but as you would expect it's a 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.
Speaker Change: Moving it.
Speaker Change: It'll be a slow ramp up in the first half of the year and then.
Speaker Change: Full production as we get into the back half of the year.
Speaker Change: To get it to closer to the full run rate effect. So.
Speaker Change: So most of the most of the effect for the new facility.
Speaker Change: You really expect to come later in fiscal 2026, but like I said, we'll give more color on that here in a couple of weeks.
Speaker Change: Okay, Great. That's very helpful. Thank you.
Speaker Change: Okay.
Jon: The next question comes from Jon <unk> with Sidoti <unk> Company. Please go ahead.
Jon: Hi, good morning, everyone and thanks for taking the questions.
Speaker Change: I'd like to start our metal coatings business in the Q you mentioned there was a.
Jon: The modest increase in average selling prices.
Jon: But the margin profile remains really impressive throughout fiscal 2025, when compared to 24 and 23.
Jon: Can you just kind of recap of what's fundamentally different this year than the prior two years.
Jon: And maybe should we think about resetting the guardrails on the margin profile for the segment.
Jon: Yeah, we are Oh, we are considering resetting those in and we'll talk about that in the next years next year's guidance.
Jon: 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.
Jon: Zinc efficiencies and productivity as we talked about that we've we've done some things using both our digital galvanizing system, but also we were able to test different alloy combinations and things like that.
Jon: And working with some partners that we believe differentiates us in the marketplace and allows us to maintain those zinc productivity.
Jon: Better than industry standards. So we.
Jon: We now believe that's sustainable and what you're what you're witnessing is that as we ramp these things up it's not like we flip the switch and all 41 sites and start doing all of the positive things in all 41. So I think what's going on now is just in the vast majority of sites. They they're running the playbook every day and and.
Jon: And so we're just benefiting overall given our scale.
Jon: Across the vast majority of the business units and plants.
Jon: Versus only having a part of that impact say last year at this time, so I think it's sustainable.
Jon: And and we've been we've been I'll say on one hand fortunate, 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.
Jon: So I think that's what makes it sustainable and I think we're getting close to that Pete.
Jon: Good good to hear.
Jon: And regarding the JV income I noticed this year kind of mirrored last year.
Jon: Q2 was weak in Q2 strong is there some seasonality in that business and I know you've got it looks here of what the order book looks like a muirhead does everything look pretty sustainable on a go forward basis.
Jon: Yeah I think.
Jon: You nailed it.
Jon: <unk> always had some seasonal seasonality because of that WSI welding solutions portion of the business.
Jon: It's really only busy to two seasons during the turnarounds.
Jon: But the electrical they've got a very very good backlog in and of course I always tell people to look at how Pal is doing two to understand how avails electrical business is doing so they've got really really strong backlogs going into this year there.
Jon: They are on a calendar reporting these years so.
Jon: So they finished their year.
Jon: And I can say they finished it well so.
And their backlogs are strong on that electrical piece and we are encouraging and 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 to 15 months whatever so.
Jon: Because we think while there are some long term positive trends they've also done a nice job using their firm law.
Jon: Former Mckinsey consulting techniques to to drive the margins and improve processes. So we think it's the business is in really good shape.
Jon: Going into 2025, and while we like it and we'd like to performance. We also think that.
Jon: They've kind of reached a.
Jon: Good good performance level to look at potentially.
Jon: Transacting some of that so.
Jon: Got it.
Jon: I guess, one last question where.
Speaker Change: Where do you stand and where you stand on fulfilling the balance.
Jon: The plant in Washington.
Jon: That was the primary customer how does that look.
Speaker Change: Oh that looks really good I think.
Speaker Change: We've we've been chasing some opportunities too that would fill the balance of that.
Speaker Change: And <unk>.
Speaker Change: 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.
Speaker Change: We've got opportunities, we've got a I hate to call. It backlog, because we don't really have backlog, but we've definitely got opportunities.
Speaker Change: And and the customer that we're partnered with is.
Speaker Change: <unk> is focused on helping us get the line certified getting it ramped up in the first quarter.
It too.
Speaker Change: Nominal production levels as quickly as possible.
Speaker Change: But also bringing in other kinds of business and move in that between the St. Louis and the Washington facilities as a as we optimize capacity so to speak.
Speaker Change: So we feel real good about that.
Speaker Change: It's a big facility complex facility. So there's always the potential for startup issues that or the team has been so focused and so disciplined.
Speaker Change: Last few months and hitting their milestones and working with the suppliers to get things ramped up.
Speaker Change: I won't say it without a hitch because theres always things that go on but.
Speaker Change: I've I've started up a lot of 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.
Speaker Change: Alright, that's great to hear and congratulations on another good quarter.
Speaker Change: Thank you.
Speaker Change: The next question comes from Mark Reichman with Noble capital markets. Please go ahead.
Speaker Change: Thank you you already hit on some of the drivers for the strong performance in each segment during the quarter.
Speaker Change: But what would you consider normalized growth rates for each segment ex new builds or acquisitions.
Speaker Change: I think we we've always talked.
Speaker Change: <unk> talked about ourselves as a GDP level growth business that.
Speaker Change: Balancing protecting margins with.
Speaker Change: With growth is something that I think both teams are are very disciplined about so so you look at basically underlying GDP growth and then as we can drive conversions drive new applications drive opportunities.
Speaker Change: Then we can exceed that a little bit and then and then the bolt on acquisitions, just hopefully continue to give us new opportunities to drive synergies.
Speaker Change: And drive our playbooks through so.
Speaker Change: But generally yes, we're a GDP business, we follow that because we followed construction activity. So when customers construction activities is good.
I will say that right now and David talks about this a lot up for the next few years, we should be able to exceed that because a lot of the infrastructure spend that has to occur.
Speaker Change: Whether it's transmission distribution, whether it's the green energy build out.
Speaker Change: Whether its pipelines and things like that those are all or chip plants re shoring. So I do think over the next 345 years, we should be able to exceed that GDP level growth nicely because of these prevailing tailwind that we have so we're in a really good spot in terms of timing go ahead.
Speaker Change: Any difference between the two segments and the way that you're thinking about one exceeding GDP growth and whatnot or I mean in terms of they're not going to be growing at the same rate.
Speaker Change: Just.
Speaker Change: No great question.
Speaker Change: Metal coatings is more more focused on infrastructure overall so.
Speaker Change: Is that kind of spend occurs then.
Speaker Change: They will be the beneficiaries of that more so over the next few years.
Speaker Change: Think on the <unk> side.
Speaker Change: It's the overall construction activity, which is 75% of the.
Speaker Change: Their demand so you kind of look back to that's going to follow.
Speaker Change: Residential commercial industrial construction.
Speaker Change: Some of which is related to infrastructure some of which is more related to the general economy. So so that's how you can differentiate the two.
Speaker Change: Alright, and then just the second question just with respect to publicly funded projects.
Speaker Change: 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 kind of are there any cross currents between the three.
Speaker Change: I think generally I'll, let David add onto this.
Speaker Change: But generally when it comes to public projects, so youre looking add bridges highways roads.
Speaker Change: Things like that that are water projects.
Speaker Change: It's a longer process just for approvals are going through the environmental impact studies and that's whether it's local state federal.
Speaker Change: I think the biggest thing we run into and what usually slows public projects up is that the cros.
Speaker Change: Requirements between the three anyone anyone.
Speaker Change: Can slow a project up while it goes through an additional level of review.
So if there was anything that new administration could do to streamline permitting and in that process review on these public projects, particularly that have federal funds attached to them obviously.
Speaker Change: That would help a lot because these things just get hung up for a long time before before.
Before you actually call it shovel ready so to speak but David if you want to add to that yes, I would only add Tom that you know as you think about some of the spending thats been out there for several years now with II JA Chips Act and that certainly has as prime the pump for a lot of these project.
Speaker Change: That ultimately some of them fall within the public sector, but I think whether it's public sector or private sector.
Speaker Change: We feel again really good about the opportunities ahead.
Speaker Change: From from both of those are those segments as a result of that spending and again as Tom said to hopefully the new administration free things up a bit so that permitting and planning gets streamline and these things can contempt to ground quicker.
Speaker Change: That's very helpful. Thank you very much thank you.
Speaker Change: The next question comes from Adam Thalheimer with Thompson Davis. Please go ahead.
Adam Thalheimer: Hey, good morning, guys. Congrats on the Q3 beat.
Speaker Change: Thanks, Adam.
Adam Thalheimer: I guess the question I have gotten them.
Speaker Change: Most this morning is on the.
Speaker Change: On the revenue guidance.
Speaker Change: And I was curious.
Speaker Change: What are you trying to imply that there is that.
Speaker Change: Potential for revenue.
Speaker Change: Line year over year, and one of the segments and if so.
Speaker Change: Where could that occur.
Speaker Change: I've mentioned that the Choppiness that as you get some.
Speaker Change: Some of these projects are dependent on.
Speaker Change: Both the cost of the capital, but also tariffs could imply impact supply and cost of steel so.
Speaker Change: I'll have some projects the escape 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 our concern is we just looked at the fourth quarter was.
Speaker Change: If that continues as it seems like it is.
Speaker Change: Then then it just has a slowing effect on the revenue in the quarter.
Speaker Change: For us that that's not necessarily a terrible thing because we adjust shifts we adjust.
Speaker Change: Our variable cost structure, so it doesn't affect our our profitability is as much as it affects our top line. So.
Speaker Change: That's the only concern is.
Not that the market activity is not there is just that the timing of when does it move forward. It does it does it fall within.
Speaker Change: Getting to paint metal and ship it and galvanized steel it and ship. It. So that's all of that that's related to.
Speaker Change: Yeah.
Speaker Change: Okay, and then just a quick one on the on the Washington plant.
Speaker Change: And then a portion of the plant that was contracted at kind of the anchor customer.
Speaker Change: Yes process for filling up the rest of the capacity like when that plant starts up.
Speaker Change: Let me start with the anchor customer and then later in the year if that wasn't the extra capacity.
Speaker Change: Does that work.
Speaker Change: Yes, actually we've and I've mentioned the St. Louis plant already having demand on it it's an operating container facility.
Speaker Change: With two smaller lines.
Speaker Change: 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 to the partner.
Speaker Change: Which by the way is try arrows, but.
Speaker Change: So it services the partner, but it also has other customers that it services. So you know our ability to ramp up that other 25% I think it's more going to be around our caution of <unk>.
Speaker Change: Working with the partner, where we've made the commitment we want to make sure we take care of them in.
Speaker Change: And they are the ones committed to helping us get it certified and everything lined out so you know.
Speaker Change: In the early phase will will be a little cautious to not get.
Speaker Change: 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 to other customers too.
To fill demand opportunity.
Speaker Change: <unk>.
Speaker Change: <unk>.
Speaker Change: So I think that's how I'm looking at it at this point.
Speaker Change: Got it okay. Thanks, guys.
Speaker Change: Sure.
Speaker Change: The next question comes from Daniel Rizzo with Jefferies. Please go ahead.
Daniel Rizzo: 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.
Daniel Rizzo: Cyclical recovery in private spending on things like commercial construction.
Daniel Rizzo: That's meant to you guys in the past and when do you expect going forward.
Daniel Rizzo: Yes, that's been a significant.
Daniel Rizzo: If we got a recovery in that sector that.
Daniel Rizzo: Sure.
Daniel Rizzo: Yes, we are we go from 65% utilization up to 80% utilization in those kinds of things that it can have a very positive impact on us so we'd love to see it and we'd love to see it sustainable.
Daniel Rizzo: And it tends to be those tend to be really good kinds of projects for us. So.
There are capabilities our ability to.
Daniel Rizzo: And this is more on the pre code side to provide different color combinations too.
Daniel Rizzo: Basically you have them.
Daniel Rizzo: To fill more specific needs versus more general needs I think is a real positive.
Speaker Change: No if Jason and David wants to add to that.
Speaker Change: Yeah, I think the only thing I would add is you know some of those sector.
Speaker Change: Sectors that have been down really kind of all.
Speaker Change: All year like warehouse commercial.
Speaker Change: And office spending areas. If those were to rebound that that's certainly can provide a nice tailwind for us yes.
Speaker Change: And we'd see it pretty quickly so that's the other nice part those projects tend to move fairly fast.
Speaker Change: Meaning they think it would show up in <unk> I mean.
Speaker Change: And as little as a quarter or does it take six months or how should we think about it.
Speaker Change: Yeah, I'd call it one to two quarters.
Speaker Change: Versus some of the public stuff that can take.
Speaker Change: One to two years so.
Speaker Change: And then just on your kind of capital allocation strategy. So I know that debt reduction remains a focus.
Speaker Change: Certainly speaking I mean have share buybacks.
Speaker Change: Our big thing or do you kind of just do it to offset dilution.
Speaker Change: It's something that probably gets.
Speaker Change: Asset depreciation or a portion of that dilution.
Speaker Change: And we would look at that as we look at our our share price valuation and look at.
Speaker Change: The benefit of continuing to reduce debt, we're also going to balance it versus our any act.
Speaker Change: Acquisitions are potentially.
Speaker Change: Actionable within the next quarter and then we are taking a look at our dividend as well because we have a touch the dividend.
Speaker Change: I lost you guys don't know if you can hear me. Thank you.
Speaker Change: Okay. Thanks.
Speaker Change: Okay.
Speaker Change: Operator can you hear us.
Speaker Change: Yep I hear Ya Oh, okay. Good.
Jon Braatz: Our next question is gonna be from Jon Braatz with Kansas City Capital. Please go ahead good morning, everyone.
Jon Braatz: John Tom and maybe Dave you can chime in and sort of a follow on with the previous question, but when you look at your end markets.
Jon Braatz: Sure.
Jon Braatz: Business, how much of it.
Jon Braatz: Customer bases.
Because more sensitive to interest rates and interest rate movements, obviously, we've seen interest rates move up a little bit.
Jon Braatz: How much might be how much of your business might be affected by.
Jon Braatz: Buy rates continuing to go up any.
Jon Braatz: Any thoughts.
Jon Braatz: I don't think it's that much I think most of these projects.
Jon Braatz: Or not.
Jon Braatz: Viability sensitive to 25 bps or so I think.
Jon Braatz: The long term trend of.
Jon Braatz: As long as interest rates as you look at the forward curve and it's.
Jon Braatz: As long as it's going to be trending down.
Jon Braatz: Think that projects move forward.
Now and particularly when it comes to infrastructure and things like that.
Jon Braatz: What I do think it does is.
Jon Braatz: They start to look at it can change the rate of return and does that move it.
Jon Braatz: Out a little bit and does it just delay it.
Cause them to have another review cycle before they approve it so.
Jon Braatz: I see it affect in timing and that's why we were a little bit more uncertain about the revenue for the fourth quarter just because.
These things that we thought might've been moving forward may just pushed into the first quarter.
Jon Braatz: As they try to get the interest rates tied down and then they tried to get their funding.
At whatever price point, they are trying to get it fixed that.
Jon Braatz: I think the tariffs probably create a little bit more uncertainty because that can have a bigger cost impact on a project.
Jon Braatz: If steel costs moved up 10, 15% that that can have a significant impact on our project as well as steel availability not that there's a.
Jon Braatz: A likelihood of that in the longer term, but in the short term it can move it around so.
Jon Braatz: Those are the kinds of things that are causing some.
Jon Braatz: I've been calling it choppiness, but its choppiness in the decision making on moving projects forward.
Jon Braatz: So I think interest has a minor effect.
Think as as the tariffs get buttoned down and they see what what happens with that.
Jon Braatz: And the reaction to it that that starts to give everybody more confidence that you don't have to have these significant price escalators and two to account for it.
Jon Braatz: Okay. Secondly, when you think when you look forward into 2026.
Jon Braatz: And you look at the zinc.
Jon Braatz: Zinc cost environment, any pluses or minuses as we are.
Jon Braatz: Heading into fiscal 2026 on the zinc front.
Jon Braatz: Yes, I mean zinc zinc <unk> has continued to trend up and so that as you know that has.
Jon Braatz: Effect on the cost and our kettles six to eight months out we tend to adjust we talk about value pricing and everything like that but obviously when zinc costs because it's.
Jon Braatz: Single largest component of cost on galvanizing when that trends up the competitors tend to trend up their prices as well so.
Jon Braatz: <unk>.
Jon Braatz: So yes, it's a factor obviously, we can calculate that.
Jon Braatz: And do every month as we see the elderly prices move and factor that into what our cost is going to be in our kettles six eight months out but that also gives us time to adjust our value proposition.
Jon Braatz: And adjust price expectation so.
Jon Braatz: You know, we're not viewing it as a.
Okay.
Jon Braatz: When it's moving up like this which is relatively slowly call. It almost <unk> to study. This is actually a good thing when it when it really starts to balance that's when you get into surcharges in.
Jon Braatz: All sorts of things that just create a lot of uncertainty.
Jon Braatz: So right now this is not we don't view this as a terrible thing.
Jon Braatz: Probably kind of a good thing okay. One last question one of the first things.
Jon Braatz: Trump is going to do is going to try and and the moratorium or the pause on LNG.
Jon Braatz: Uh huh.
Jon Braatz: Permits and I don't know how successful he is going to be.
Jon Braatz: It's probably going to be some core challenges but.
Jon Braatz: Singularly can the LNG.
Jon Braatz: Renewal.
Rebirth, if you want to call it.
Jon Braatz: Does that can that have a positive impact on on.
Jon Braatz: On your.
Jon Braatz: On the galvanizing.
Jon Braatz: It's gigantic is when you.
Jon Braatz: Especially when you look kind of through the southeast a lot of our galvanizing capacity.
Jon Braatz: Came online with the expectation that was going to occur.
Jon Braatz: Some of that cat capacity has gone away. Some of it's been acquired some of it's been closed but you know there we.
Jon Braatz: You look through the.
Where those terminals would go in.
We've got galvanizing sites pretty much.
Jon Braatz: In the backyard of each one of them. So yeah that would be a nice positive and.
Jon Braatz: It would help the overall overall market, particularly through that southeast, Texas quarter. So we'll see what happens.
Jon Braatz: We will see what happens, but we would view that as a positive alright, alright. Thank you very much.
Jon Braatz: Thanks.
Jon Braatz: Okay.
Speaker Change: The next question is a follow up from John <unk> with Sidoti <unk> Company. Please go ahead.
Yes, just some some thoughts on M&A, you said you might start to Reengage as it pulled down.
Speaker Change: The leverage.
Curious if that's limited to the galvanizing side or other opportunities that you would explore.
Speaker Change: On the on the paint side of the business and if so can you give us some examples.
Speaker Change: Yeah, 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.
Speaker Change: To begin we we'd be right in the front line for those.
Speaker Change: Those are slam dunks that if we get them.
Speaker Change: A reasonable price, we run our playbook and bring them up to our fleet margins and everybody's happy if we almost view it as organic growth on the pre outside they they're going to tend to be bigger because your what do you think about it we invested a $125 million in a new line, which obviously thats on the high end or the high side.
Speaker Change: The scale, but still youre looking at bigger.
Speaker Change: You know even a one off site is going to be fairly significant there are some opportunities out there we still view it as bolt ons for for Freak out just like we view it as bolt ons to leverage the.
Speaker Change: G&A infrastructure run the playbook improve operating performance take care of customers. So same same kind of playbook.
Speaker Change: As we're looking at it but.
So yeah those are.
Speaker Change: On our radar screen, if you will but theres not many of them. So.
Speaker Change: Okay, Alright, thank you for the priority I appreciate it and congratulate all right. Thanks.
Speaker Change: Thanks.
Speaker Change: The next question comes from Timna Tanners with Wolfe Research. Please go ahead.
Timna Tanners: Yeah, Hey, good morning, I wanted to just ask a little bit about the competitive landscape I know that you've been.
Speaker Change: Keith from market share gains in recent quarters.
Speaker Change: Are there more opportunities for market share gains or has that competitor sorry, the private claw back any of that lost market share.
Speaker Change: Okay.
Speaker Change: Yes couple of things good great question.
Speaker Change: The galvanizing side.
Speaker Change: It's the typical players out there that are.
Speaker Change: That either are adding some capacity or.
Speaker Change: Buying up capacity that so you've got the valve Monson Hill at Smiths, which in the U S operates as BNS.
Speaker Change: The multi site folks we talk about.
Speaker Change: There's a couple of kettles coming out I mean, it's not abnormal.
Speaker Change: It's kind of like every year, there's a kettle or two coming online.
Speaker Change: And we're kind of seeing that.
Speaker Change: Continue.
Speaker Change: Which also is why we usually want to be buying something to to match that.
I think thats all in line with the expected demand growth.
Speaker Change: And normal economic growth in the marketplace for us is more around where does that capital go in does it 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.
Speaker Change: So not a lot of change there just like I said, I think two years or three new kettles coming online this year.
Speaker Change: Which is not abnormal.
Speaker Change: And on.
Speaker Change: On the <unk> side.
Speaker Change: It's the SD EIS and folks like that that are adding a paint line too.
Speaker Change: To their mill capacity.
Speaker Change: I'd say, it's relatively normal there's a couple of lines coming on this year.
Speaker Change: Or expected to come online this year.
Speaker Change: It does not fundamentally change the.
Speaker Change: Supply demand.
Speaker Change: And for the most part its going these lines are being added where they are adding.
Speaker Change: Capacity in themselves so two to paint their own capacity to a greater extent.
Speaker Change: We're not seeing on the pre cuts I don't think we're seeing anything on the independents coming in so if anything we're seeing lines either slowing down or.
Speaker Change: We're still out trying to get our customers to.
Speaker Change: Two D vertically.
Speaker Change: Our unconverted I guess.
Speaker Change: And let us pay.
Speaker Change: Instead of that run at 50.
Speaker Change: 50 year align or 20 or 30 year life.
Speaker Change: So I don't think the market dynamics have shifted a whole lot David or Jason if you want to add something to it.
Speaker Change: Particularly on the pre code set.
No.
Speaker Change: So with the paint lines, you mentioned at SDI, and yes or no.
Other capacity our attempts to regain share you think there'll be corresponding index and on demand to bounce back is that what you think.
Speaker Change: Yes, that's how we're looking at it and particularly.
Speaker Change: One of the impacts of the tariffs would be that if if less painted steel is being imported then that those paint lines are you going to be necessary to paint the.
Speaker Change: The steel being manufactured here and in countries. So.
So that would just accelerate the use of that increased capacity.
Speaker Change: The tariff cycle and then as far as exports exports were also can be expected in line with.
Speaker Change: U S MCA tariff structure.
Speaker Change: Would you think about that impact.
Speaker Change: Yes, I think I think as you look at the exports.
Speaker Change: If we're going to see more and more exports.
Speaker Change: It's going to help our galvanizing side, but also on the pre coat side.
Speaker Change: Depending upon the.
Speaker Change: The type of product that's coming out.
Speaker Change: What its intended use.
Use is.
Speaker Change: We've got a lot of customers in certain key.
Speaker Change: Key markets that are using pre painted steel today, so we would view that as a positive.
Speaker Change: Okay, great. Thanks again.
Speaker Change: Thanks, Tim.
Speaker Change: Okay.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to Tom Ferguson for any closing remarks.
Speaker Change: Alright, Thank you and thank you everybody for joining us and hopefully if.
Speaker Change: You are now as excited as we are about our future for the balance of this year going into next year, and we look forward to issuing our guidance for fiscal 2026.
Speaker Change: Talking to you. After we've finished our fiscal 2025 and a couple of months. So thank you for joining us.
Look forward to talking to you next time.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.