Everyone, welcome. I'm Timna. Timna Tanners, cover metals, mining, building materials, and waste here at Wolfe Research. Delighted to welcome you. We have here David Nark. He is the CMO of AZZ, not as AZZ, and also investor relations. Wears a lot of hats. We were just talking about them. David is going to do a fireside chat with me. We're going to talk about who is AZZ, what's interesting about them, and how they're positioned in this current market environment. We've just picked up AZZ kind of recently, and I think it'd be useful to kind of go through where you sit. We cover the steel industry now for 24 years, and we hadn't heard of AZZ.
AZZ is kind of this important player in the market who's a customer of a lot of our companies and related, but still kind of getting to be known in the investment community. I think it'd be helpful to kind of get a lay of the land directly from David, if t hat's all right.
Terrific. Happy to do that. Thanks for inviting us. We're happy to be here. This is our first conference with Wolfe since you picked us up. We're thrilled to be here today and sharing our story. I brought along a slide deck. I'll rip through that, but open forum. If there's something in here that you want to ask a question on, we do not have to wait till the end. You can jump in and interject. I'm perfectly comfortable doing that. I think just to level set folks on who we are, what we do, we are a metal coatings provider. What's important to know, there are a couple of things. Number one is that we are a toll coater. We do not buy steel. We do not buy aluminum. You might be saying, why are you here?
We're here because we're really an indispensable component, and we sit right in between mills and service centers and our end customers who are either fabricators in most cases, or in some cases, we might be working with a service center or something like that too. We have two lines of businesses, which I'll get into. They are what we call our metal coatings business, which is you'll hear me interchangeably refer to that as our hot dip galvanizing business. I think the other key thing to pick up and take away from this conference is that when I talk about hot dip galvanizing, and I'll get into that a little bit more, I'm referring to batch galvanizing, batch hot dip galvanizing. We do not have any lines that are coating or processing rolled steel.
Can I interject? Because for those of you listening, a batch is a very less commoditized approach. Not anybody, but you could just buy equipment and run a coating line. To batch coat is much more unique. I just wanted to make that clear.
Yep. Good point. Good point. We are based in Fort Worth, Texas. We are not new. We have been around since 1956. We are the largest independent hot dip batch galvanizer in the nation. We operate 41 of those locations. It is important to have a large footprint in this space because, as you all know, steel does not travel really well. It is expensive to move around. We sit very close to our customer base, generally each plant serving a radius of about 250 mi from its location. On the other side of the business, we operate 15 coil coating lines. What we are doing there, again, we are not coating, for instance, galvanizing and doing Galvalume or Galvanyl, but what we are doing is roll coating paint. We are known as sort of the premium finisher in the space. We do a lot of custom finishes, embossing, blanking, textures, just in terms of white.
You think about white and how uniform of a color that is. We have over 200 shades of white on our books alone. So very custom finish provider in that space. You can see the numbers of the business, $1.5 billion in sales in our last fiscal year. And again, a very strong EBITDA, $384 million, and a nice margin as well, 24.4%, which you typically do not see in a space like this. So often referred to as a shiny unicorn in the space, I think we will take that as a compliment and move on from there. This slide, a bit of an eye chart. What I will tell you on this slide, our strategic journey, what is not so important here is where we have been, but where we are going.
We are really focused on continuing to strengthen our position in the two segments that we operate in, both our Metal Coating segment and our Pre-Coat Metal segment. We have actively announced that we're back in the game and trying to build the M&A pipeline. We have a number of opportunities in there. We're opportunistically looking forward to closing a few of those this year. I think they're going to be bolt-on type acquisitions that we're looking at again in both segments. We are looking forward to doing that and also capitalizing on a lot of the continued strong secular tailwinds that we see in the space. Things like reshoring plastics to aluminum in the beverage space are certainly secular tailwinds that are helping our business. We do have data center exposure, which is exciting.
We have also exposure on, when you think about semis and the reshoring that's happening with semiconductors, we have that as well. Sure.
I think in the context of talking about the attractive margin that you had on the prior slide and talking about kind of where you sit in the steel supply chain, what keeps a mill? We have one around the corner, so they know about you all. What keeps a mill from kind of co-opting some of what you do? What's the barrier to entry for your business?
Yeah, I think a few things. When you think about on the roll coating side of the business first, certainly there are mills and service centers that have coil coating lines. And doing Galvalume, Galvanyl type stuff, it makes all the sense in the world to be at the end of the mill. Some of them will add a paint line. And again, depending upon their customer base, if it's maybe a uniform color or maybe they're just applying a base layer of primer to it, that makes sense because it's uniform and they can run that all day very effectively for them. We're unique and kind of insulated in all of the specialty things that we do. So not in addition to all the custom colors and the textures and those things that we have, but we also have large warehousing logistics facilities.
Mills in particular, they want to do one thing and they do it really well, which is produce steel and get it off their books as quickly as possible. There is a lot of inefficiency that exists in the supply chain overall for steel and aluminum. Oftentimes when buyers opportunistically are looking to purchase that from a mill, it needs to go somewhere for a period of time before it gets consumed. That often lands in our warehouses where we will be happy to store for a brief period of time, and then at some point there is a fee for that, and then paint that for them. We capture customers in that regard.
I think you're right. For the most part, historically, the mills have been let's churn out lots of steel. You talk to Nucor on their towers and structures business. You talk to Reliance, t hey also do some coating, I believe, this kind of stuff. Is that separate, though? Is that something that you still think? Because there's levels of niche. There's levels of value add, and maybe what you're doing is even more value add or not necessarily overlapping.
There are, yeah. There's a lot of value add in our equation on both sides of the house. On our hot dip galvanizing side of the house, for instance, you mentioned Nucor towers and structures. They've got the facility that they've announced down in the South. I think it's in Alabama. They'll add a galvanizing line to that. We're not too concerned about that. It's new capacity that's coming onto the market. They're going to purposely be galvanizing their own steel. I think that presents more of a competitive threat to somebody like a Valmont who's already in that business for quite some time. They'll be kind of competing head to head. That facility also sits in the Southeast, which we don't really have any galvanizing facilities near there.
There's another competitor that operates about eight locations in that market that I think would be more concerned than we would. Overall, we would signal that that expansion is great. We love it when our market collectively is expanding. That's what's really happening on both the metal coating side, the hot dip galvanizing side, as well as the coil coating side. As you know, in addition to AZZ completing a coil coating greenfield plan, which we did on time and on budget, I think it's been the only roll coating facility that's come online.
Probably also the only one on budget too.
That's right. Yeah. We're really excited about that. There have been others that have been announced as well. This is a space that is definitely growing.
Okay, great. I'll let you go through the presentation. We have to have time to talk about tariffs too.
Absolutely. Feel free. Again, we can pivot. I'm perfectly fine pivoting away from the slides if we need to. I'll skip ahead. A couple of things. We can kind of skip over the management team and all that stuff. You guys can look at that later. We get a lot of questions about end markets and our exposure there. What you'll see here is a very big weighting on construction. That's kind of a big catch-all bucket for us. We have both residential and commercial construction in there. When you peel that back, we have exposure across all of the subcategories that you would typically follow and track, whether that's warehouses, data centers, airports, and infrastructure type projects. All of the above are in our numbers with respect to construction.
Can I ask a bit more about the demand as well? We've been hearing that construction's a mixed bag, so I'd love to get your thoughts on it. Public construction, we're hearing quite steady. Housing, not so steady. I don't think, it says residential within your, how much is residential within your construction bucket?
Yeah, residential is probably in this number, call it sub 20%.
Okay. We're hearing that's the weakest, and then public is the strongest and non-res somewhere in between. Somebody last week told me, I'm fascinated with this. I keep bringing it up, that it is a building materials company, so not steel. He said that if there were clarity on tariffs, the demand would be 5%-10% higher. Other people are pointing out, of course, it's the interest rates that are the bigger constraint. Curious what you're seeing. Obviously, data center is super strong. Warehouses not weakening anymore. Any more color and any more thoughts about tariffs and interest rates?
Yeah, for us, what I would say first and foremost is tariffs, we've been largely not impacted because we are an independent toll processor and not buying aluminum and steel. We only see the tariff impact from a negative perspective. You even want to say that would be on sort of secondary supplies, things that we're using in the production facility. On the end markets, in reference to end markets and end market demand, I think there's a few things. I would echo the sentiments you've heard. Public projects certainly funded and moving forward. I think also large infrastructure projects continue to move forward. Things like airports, port construction, all those things, they're well-financed. They're multi-year projects. That's what we're really hearing is that anything that's these large, they have large tails to them, they're multi-year projects, whether in public or private, are pretty much well-financed and moving forward.
The only caution out there that we're really hearing is that people are just sort of playing, holding their cards a little more closely to the vest, maybe not announcing as many projects and kind of waiting to see. That's kind of been the overall take, has been there's a sort of wait and see approach because there's just a sort of churn in the news cycle that kind of gets everybody really edgy, whether it's we're all anxiously waiting to see what the Fed says today on interest rates, and we're watching the news cycles to see what's happening in the Middle East, and are things going to get blockaded, and is there going to be an oil shock. There's just all of this constant churn that just makes everyone get a little more conservative on their investment thesis.
Gotcha. Okay. So probably some of it is that jitters about the uncertainty. I do not know if it is 5%-10%. I thought that seemed high. And then interest rates, would you say if we saw a couple of basis points, a couple of cuts this year, could that result in a stronger 2026? How do you think about that?
We do. Yeah, we think that that would be a really strong signal if we start to see some cuts in the rates. I think it always helps spur investment, and projects will start to move forward and things. Again, large projects are already well-financed with long tails. It's just going to be those new projects that I think everyone's waiting and taking a wait and see approach.
Now, and then I don't know if this is part of how this framework would look, but if we have fewer imports coming in and the domestics are able to produce more, does that also improve your demand, or is it not relevant?
It will, yeah. Where we'll see the net benefit of something like that will be on our pre-coat metals side. We do know that about 10% of the imported coil steel market comes in as pre-painted steel. That would be something that competes with our pre-coat metals business. We feel that if all of that plays out, just like you said, there will be opportunities as inventories kind of get consumed that are in the supply chain now, that there would be a second half, back half of our year effect on a positive tailwind for pre-coat.
As they work through the cheaper inventory first, right? That makes sense. That's maybe one of the aspects of imports, so that some of the imports that come in are replaced by domestics, and then you coat that rather than you competing directly with imports.
Yep, absolutely.
Okay. I want to make sure I understood that. Is there any other angle on the import side before we move on?
Really, no. I mean, like I said, no really negative impact as far as the business is concerned. Large concerns, and we're looking forward to potential tailwinds on that.
We're looking for an understanding it all better. Another element actually is some chatter of restraint on imports of finished products, right? Things like appliances. I don't think you make appliances, but that could be a painted product, right? Could that be another positive catalyst if there's fewer derivative products that are allowed to be imported as well, or?
It could be. We have some exposure on appliance. We do. There are some of the large domestic appliance manufacturers that are out there today we have relationships with and will coat. For instance, when you think about your fingerprint-free refrigerator or appliances, there is no magic behind the stainless steel. It has just been coated with a clear coat. We provide that type of service out there. We do some other coatings for some like good products as well.
Conceptually, in the short term, to the extent that U.S. steel makers take share from imported steel, that could be a greater opportunity for AZZ. Then maybe down the road, to the extent that we get some more reshoring, I do not know how quickly any of that happens, automotive, appliances, things that are made from steel that maybe go through a painted or coated process, that could be another level of additional volume opportunity.
It could certainly be. Yeah. We don't have a lot of exposure on automotive per se, but many of the other manufacturing sectors in the U.S. that do rely on pre-painted steel certainly could be a benefit for pre-coat.
Anything you know that we do not about any timing or magnitude of any of those restrictions?
Yeah, I think our visibility there is probably just as good as everybody else in the room and certainly yours as well on the order magnitude and timing on that stuff. Generally, we've been kind of saying it feels like it would shape up to be a sort of second half of the year event.
In two weeks, you mean?
That's right. We'll keep an eye on it.
Okay, thank you.
All right, so I'll move on. That kind of gives you an idea of the end markets. We'll talk a little bit more of those throughout the presentation. This slide, again, really all I want to communicate with this slide on generational infrastructure investment is that even before the Biden administration was in office, there was investment in infrastructure projects. You think about the electrical grid infrastructure in the United States and the amount of investment that's been happening there. We are certainly seeing benefit from that. We galvanize a lot of monopoles and transmission towers that are used for high voltage projects throughout the U.S. We participated not that long ago with the Ten West Link project, which was 1,100 mi of new transmission lines that interconnected Arizona and California.
There's thousands of miles of additional projects that have been announced and awarded and funded and are moving forward to interconnect, for instance, areas up here in the Northeast to Canada, Texas, which is where we're based. ERCOT, which is the grid provider down there, if you're familiar with that and you follow grid infrastructure, ERCOT was the only provider in the nation that wasn't interconnected to the rest of the nation's grid infrastructure. With all the growth that's happening in the Texas market in particular, they need to make some changes. They have announced that they're going to interconnect to the rest of the grid. That's going to be, again, hundreds and hundreds of miles of new transmission distribution tower that will likely be galvanized.
We see a lot of things happening there with roads, bridges, clean energy, airports, data centers, all that stuff is all long-term, long-tail projects that we're exposed to and feel really good about.
Again, on that galvanized product, that's not going to be competing with imports. You don't import finished galvanized structures or things like that, right? Unless there's some sort of massive increase in the price where people find a workaround. Generally speaking, you're immune to imported product and not affected.
Yeah, exactly right. That is kind of a key distinction with AZZ is that when you think about these projects and the things that get hot dip galvanize, they're items that when they're galvanized, they have to be fabricated into their intended end use. They're not necessarily coming in that way and then being galvanized overseas. They're going to be using whether it's imported steel or domestic steel, and then they're going to be fabricated here. The reason for that is you have all those weld joints and how it's all been constructed, all has to be galvanized together. It is one cohesive unit.
I often tell people that when you think about AZZ, if you're listening in the first time or you're here for the first time, what you'll probably remember the most is that we're the people that make the steel gray that you see out in the environment, right? When you're driving down one of the interstate corridors and you see gray overpass beams or you see gray guardrails or gray light poles, we're the ones that make that stuff gray. That's.
Otherwise, they would be what color?
They would be rusty. Yeah, yeah. Or if they're painted, maybe. Moving on to your point about segments, these are our two segments, Metal Coatings on the top, Pre-Coat Metals on the bottom. You can see the sales dollars associated with each one of these for our fiscal year, which ended in February. The two different processes, again, one batch processing, we're moving things through the factory on a crane, dipping it in a molten tank of zinc. That's how you galvanize things. We've got market size, market share on here, and then the traditional chart there was showing EBITDA growth for both segments over time. Again, can't overestimate the fact that we're a value-added toll processor. We don't have exposure to aluminum and steel prices and fluctuations therein. Really makes us that, again, that unicorn in the space and different.
Remind us what on the pre-coat side, they're like slitting and blanking. Those are things that others can do. The painting, Nucor is adding a paint line, Steel Dynamics is adding some paint lines. Are they going to be similar to what you do?
As far as the paint lines go, they're going to be similar. They typically tend to like to run more uniform colors, longer runs, where we really specialize on pre-coat when we just talk about just one-for-one, like-for-like paint. We're going to specialize in colors and finishes, smaller runs, more custom runs. If you were SDI and let's say you're going to paint a coil for somebody, they're going to have the 40,000-pound coil. They're going to want to paint the whole coil and sell you the whole coil. For us, that 40,000-pound coil might come into our facility, be in the warehouse, and then our customer is going to place an order for maybe 10,000 pounds of that coil for black, and then maybe another 10,000 pounds for red and another 10,000 for white.
We'll be happy to chop that up into four different lengths for them over a period of weeks or months and sell that over time to that customer.
Got it.
All right. Moving forward, sort of again, kind of key benefits of us. Definitely market leaders, like I said, in both of our markets that we serve, already have hit twice, I think, on tolling, so I won't talk more about that. Technology, we've invested a lot in technology in the business. We have two proprietary technology solutions in the business on our metal coatings business. We refer to it as our Digital Galvanizing System or DGS. For those in the room and listening in, I'll tell you it's sort of the Domino's pizza tracker on steroids for our business. Prior to that, it was kind of the dark ages. You had to have a customer call you and say, "Where's my order?" and we'll go check or things coming into the facility.
It was, "Hey, I dropped off 100 monopoles to be galvanized, and you only gave me 98 back. Where are the other two?" People are running around trying to find those things. Now that has all been automated. We have taken paper out of the business. Orders are not only captured digitally as they are coming into the system, but the materials are also captured digitally. We take photographs of that as it comes in on the trailers, as it is running through the process, and then as it is ready for pickup and then delivery to the customer. Terrific solution. We have also even displaced, we used to run salesforce.com. We have displaced that with our own homegrown CRM solution, which is baked into the system as well. We do Net Promoter Score out of the tool as well. We are following up with customers, making sure that we have excellent quality.
On the pre-coat side, much the same, as well as some integration tools. We call that our CoilZone solution. A lot of investment in technology that others in our space do not necessarily have. Really focused, like I said, on service quality, turnaround times, and receptiveness to the customer. That is where we really excel. One of your favorite topics and one of my favorite topics on the next slide really quick. We did, as I mentioned earlier, invest in a new facility. That facility is now up and running. It is our 15th coil coating line here in North America. This one is purpose-built, serving the aluminum market, aluminum continuing to expand in the U.S. We are coating in this particular facility a lot of light gauge aluminum that is used in the container space. Think about your beverages.
When you see the little red tab on the top of a Budweiser or a blue tab on Bud Light, we're the folks that are painting that. When you see the gold on the top of Liquid Death water, if you drink that, that's coming out of our facilities. The blue tabs on Red Bull, the black top on Celsius. We're kind of in the space and around a lot of products that you know, you just didn't know that it was us doing it. Those tops and tabs are what we're coating out of this facility. We've been doing that for quite some time. We did it in our other St. Louis facility as well. The demand of that is increasing. We invested. We have a large customer.
That customer, which we can talk about now because we've been given permission, is Tri-Arrows, which is based out of Kentucky, one of the largest aluminum production facilities here in the U.S., which is exciting. We are getting shipments in every day from them that's feeding this facility. We have a seven-year take-or-pay agreement with them for 75% of the committed capacity in this facility, which is why we chose to invest $125 million. If we hadn't had that contract in place, we probably would not have done that. We are really excited about the project and the fact that, like you said, we got it done on budget and on time, and it's producing.
The question is, what next?
Yeah, so what next? We'll continue to ramp this one. We're in the process now of doing that. We're excited about ramping that. As you know, as this space continues to grow as far as coil coating goes, we're not going to make any large investments like this in the near future. Over time, if that needs to happen, then certainly we'd be interested in looking at that. In the meantime, we're looking at bolt-on acquisitions to bolster both segments.
Bolt-on means not too big and not something we probably would have necessarily heard of.
That's right. Yeah. That kind of is a perfect description of what a bolt-on for us would be. Not too big and, yeah, probably not something you've heard of. I might steal that line.
You're welcome to.
Technology, we already talked about that, so we can skip through that one. Sustainability. What I'll tell you about sustainability is if you need to read more about it, we have a whole section on our website about sustainability and our sustainability initiatives. We've got really good ESG scores, probably some of the leading scores in ESG. Those efforts have been recognized by people like Newsweek for three years in a row now, where we've been recognized as one of the most sustainable companies list. We're really transparent as far as everything we're doing on there and disclosing Scope 1, Scope 2 emissions and then focusing on safety. Safety is a real underpinning of sustainability. We believe that you have to have safe employees doing the right thing every day, or you're not going to be a sustainable company.
Like I said, you can read about more all that on our sustainability website. Quick look here of sales and EBITDA growth over time. Again, this kind of takes you back over the past five-plus years, even through COVID. We grew through COVID, as you can see, which is something that not a lot of companies can say. We're pretty excited about that. Again, consistent margin growth as well over time.
How much was the organic versus the acquisition timing in the chart there?
Yep. On this one, I've got just the two segments combined here. I've got just Metal Coatings and Pre-Coat Metals.
That's all organic.
This is everything you see here is all organic, yeah. One other kind of interesting slide is when you look at AZZ as an investment and you're looking at comps and how do I sort of go out and comp the stock versus others, there's not a lot of direct comparisons that you're going to find. In our space, the second largest hot dip galvanizer out there is going to be Valmont, but Valmont is also a metal fabricator and does a lot of other things.
I put this slide together because whether you look at us against coatings, building products, service centers, or steel mills, and you're looking at revenue growth, EBITDA margin, or working capital as a percent of sales, what you'll see is that we kind of jump out on the page compared to all these other things that are kind of adjacent spaces to us. Really strong company, really strong performance. The balance sheet is getting strengthened over time, which I think is a good lead into the next slide when we talk about debt- to- EBITDA. When we purchased pre-coat back three and a half years ago now, we had spiked the debt- to- EBITDA ratio up to about 4.3 times. That has now come down.
We're at the end of our last fiscal year, which again ended in February, and we're going to be announcing Q1 here in July. At the end of Q4, we were down to 2.5x , and we've brought that down through consistent debt reduction. It wasn't that we just drove EBITDA up and then as a percentage just kind of did the math that way. We have very methodically paid down debt more than $100 million every year for the past several years. That has continued. We also will have more to say about what we did here in the first quarter very shortly as well. We definitely de-risked the business and have strengthened the balance sheet.
I think in the last couple of minutes, I'd like to ask you a little bit more about the bolt-on acquisitions. What kinds of things would you be doing? Things that are a deviation at all with what you currently do or maybe businesses that are very similar to what you already do, those just small mom-and-pop kind of operations?
Certainly, yeah. What we're really looking at doing on the metal coating side would be there are a number of mom-and-pop family-run hot dip galvanizers that dot the landscape across the U.S. We would love to fill in the white space that we have. When you look at AZZ, we're particularly strong throughout the Rust Belt, Upper Midwest, Midwest, through the South. We've got some white space up in the Northeast, up here, out on the West Coast, particularly in places, maybe not necessarily California, but Washington, Oregon, Idaho, Utah, all those kind of places. There are several of these family-run businesses that operate in those local environments that, quite frankly, are looking, and they all have sort of their own timeline, but they do not have necessarily family members that are really keen on running mom- and- dad's galvanizing business, and they've got careers of their own.
We are known to be a very good acquirer of those. We have rolled up the space very methodically over time. We are getting back to our knitting on that side of the house. We will look to that. On the pre-coat side, I think there are a few things that we are doing that are kind of interesting with respect to M&A. One would be, of course, opportunistically, if there are any coil coating assets that we thought were available and would be a good fit, we would certainly take a look at those. The team has also been really good at converting captive lines that might exist that are, again, 20, 30-year-old lines that are very suboptimal. We will go to those customers that maybe have that vertical integration in place. Those lines are operating at 130 ft a minute.
You get coil coating lines now are operating at 900 ft a minute. Much more efficient to have us coat that stuff than have them do it themselves. We can help sort of de-verticalize them, for lack of a better term, and get them out of their old line, kind of decommission it, make sure it does not show up somewhere else, and then get a long-term customer for life.
Gotcha. I don't know why a kid wouldn't want to run a galvanizing line, but.
Really exciting stuff.
It does sound good to me. This is great. Do you have a final slide as we wrap up here?
Yeah, I think just a couple of things. You can see our capital allocation priorities on this slide. I will not go through all this, but we are looking at a lot of things. I think we talked about all of these things already in the presentation. The final thing would just be guidance. We do provide guidance, and we update our guidance quarterly. One of the, again, companies out there that gives you guidance on sales, adjusted EBITDA, and EPS for the year. We have not taken any guidance down. We put this guidance out that lasts the calendar year, probably around the October, November timeline. When we got to the fourth quarter and earnings, I think there were a lot of people in the market that had either adjusted guidance down. We did not.
Actually, we came out pretty strong that we felt the CEOs took a very optimistic tone on our call, which I think resonated with a lot of people. Again, we're looking forward to getting to our Q1 results and talking more about that when we get there.
Fantastic. Thanks for joining us, David. Thanks, everyone.
My pleasure. Thank you.