Hello, everyone. Welcome to the 2023 Jefferies Industrials Conference. My name is Sai Dulam, and it is my great pleasure to introduce you to today's speaker, David Nark, Senior Vice President in Marketing, Communications, and Investor Relations for AZZ Incorporated.
Thank you, Sai. Morning, everyone. Appreciate you being here today. All right, I'm gonna go ahead and get started on the presentation, and hopefully leave us enough time at the end for some questions as well. I'm gonna start out on slide 3, key messages, on AZZ. So if you're not familiar with us, just take a quick moment. We're a metal coatings provider. We are independent of mills, independent of service centers. We sit in that unique space between them and the end customer, and provide a lot of very specialized coating services. Both a hot-dip galvanizing business, which we refer to as our metal coatings business, and then also a coil coating business, referred to as Precoat Metals, and I'll refer to both throughout the presentation.
Very strong business, great margins in the business, as you'll see. Strong, strong cash generation, as well. Environmentally Friendly businesses. For instance, zinc is what's used in galvanizing. It's a common element, naturally occurring element, 100% recyclable, and certainly on the coil coating side of the business, a much more environmentally friendly process of coil coating for the steel industry versus, for instance, spray painting and painting in place. As you look at us, what you'll see, we're very unique on the capital side in that, right now we're able to do all things. We're not having to make the tough decisions that other companies are. So, our capital allocation is focused on debt reduction, first and foremost. We've been able to do that while servicing the debt.
We're also investing in our future through a new greenfield plant. We're investing in, just outside of St. Louis, it's going to be an aluminum coating line, as well as returning capital to shareholders through consistent dividend payments. And then finally, as you take a look at us, you know, EPS, our commitment to that, really gonna be driven through both that debt reduction and focus on operational excellence. We think that, you know, we'll be rewarded long term by multiple expansion, as well as just the opportunity to invest in the stock on a go-forward basis. So quickly, taking a look on slide four, the business itself, kind of unpacking it a bit. We are North America's leading hot-dip galvanizing and coil coating business.
We have number one market share position in both of those businesses, so extremely strong. We're based down in Fort Worth, Texas, if you're not familiar with us, 3,900 employees. Our market cap's at $1.2 billion. The sales in the business for the trailing twelve months ended in May of this year is $1.5 billion, $341 million in EBITDA, and a nice margin profile there. You can see 22.6% EBITDA margin, which is almost unheard of for an industrial company, so we're quite proud of that, as well. I know this is an iChart, so I won't spend a lot of time on it for those of you in the room.
But on page five, really just a quick look at the strategic journey of AZZ over the past 10 years. We started back then at about $571 million. We're at that $1.5 billion mark now through a lot of strategic repositioning of our portfolio. Back 10 years ago, we were essentially a couple of businesses. We had our strong galvanizing business and then a really diverse business of electrical and industrial assets. During the 2019-2022 timeframe, we took a look at that portfolio. We were able to divest of the electrical and industrial assets.
It was a group of businesses that we referred to as our infrastructure solutions portfolio, and then brought on the Precoat Metals business through a strategic transaction at the same time. But that sets us up really well, we believe, for the future, where we're a focused metal coatings company. As I mentioned, we're investing in the future, as I'll talk a little bit more out in our presentation, and really can capture unique opportunities associated with infrastructure renewal, with onshoring and several other key long-term growth drivers. So one of the questions I often get is, you know, "Why focus on metal coatings? Why did you take on that strategic transformation?
Help us understand that a little bit more." Really, you know, first and foremost, what I would share with you, you know, that first bullet point, you know, the, the strategic transformation has allowed us to compete in a market, the largest percentage of the market, when you look at North America on the top left chart, that 65%, size of the market, where we're providing coating solutions now for the coil coating industry. That's a market that we didn't play in previously. So we've moved into an adjacent market and really expanded the opportunity for AZZ, whereas before, we were competing in about 25% of the market.
Another unique feature for us that I think cannot be underemphasized is, or overemphasized, excuse me, is our independence, and our independence from the mills and the service centers allows us to provide solutions to customers. It doesn't matter if they import steel, if they use a domestic supply, if they use a mill, if they use a service center, we do not take any ownership of that steel on our books or that aluminum, that's always owned by the customer, which is a key distinction. So we have no exposure to fluctuations in metals and commodity prices, and that independence allows them to know that we're here to coat their product no matter where it's coming from.
So as markets flip back and forth, and domestic and overseas supplies continue to fight their battles, it doesn't make any difference. Steel and aluminum, very essential, obviously, to the restructuring of the U.S. infrastructure and the rebuild and renewal. So again, puts us ideally positioned there. We're really excited about the fact that things like reshoring, you know, green manufacturing, investment in infrastructure are all big drivers, and I'll touch on them a little bit later. Okay, on slide seven, real quick on our segments. I mentioned we have two segments in the business. Our Metal Coatings segment, which is listed across the top. I put a little picture in here, you know, give you kind of an idea of and flavor for what we do there. We're galvanizing fabricated steel.
So the steel gets shaped by the fabricator into its end use, right? It could be a structural beam, in this case. It could be a boat dock, a trailer. It could be a transmission tower, a light pole, a guardrail. So once it's fabricated into that end shape, they ship it to us, we galvanize it, and then ship it either back to them or back to that job site to be installed. Done through a batch processing method. You know, the market size and share there, again, about a $2.3 billion North American market. We are completely North American focused. We don't have any exposure outside of the U.S. other than Canada. You can see the chart there gives you kind of an eye chart of the five-year historical EBITDA performance in that business.
Solid performance. We had only one year where it went down slightly, and that was due to COVID. Precoat Metals, by comparison, what you see there, and again, steel and aluminum coil is the product that we're painting. So it's gonna come to us in a large roll. Typically, those rolls weigh anywhere from 28,000-46,000 pounds. We unroll that steel that's coming in, typically from a mill or a service center. We clean it, prime it, paint it, dry it, and roll it back up, and then it's sent out to the manufacturer, who then transforms that into its end-use product. And it can go into a variety of different products: roofing, garage doors, barns, HVAC, appliance. The sky is virtually the limit on what you might see that painted steel used for.
$3.7 billion market size there, and again, our one point, or our, our number one market share position, and you can see the acquisition date. Okay, moving forward, just wanna spend a little time on end markets and what we're seeing there. So we have a very diverse set of end markets. Our biggest end market is the construction market, and then within there, we've got both, the vast majority of our exposure being on the non-residential side, and then some residential exposure as well. Followed up by transportation, industrial, electrical utility, consumer, and other. So that's on the bottom left of the slide, on, on slide 8, for those who are following along online. I compare and contrast that to the overall, end demand on the top left.
That gives you an idea of what North American steel shipments look like by end market. So you can see we're very representative of the overall end markets in total. We like what we're seeing in the construction space in particular. We believe that they're gonna rise this year, and again, rise even more next year. That'll be driven largely by non-building, which is things like infrastructure, where again, we're ideally positioned, driven by things like public funding. We'll talk a little bit more about that in a bit. Institutional construction, healthcare, education, all expected to grow, and then, of course, residential expected to rebound next year as well. So I mentioned this a couple of times already during my presentation.
I wanna give you an idea of some of the secular trends that we see in the market that enhance our outlook and make us feel really bullish on the future. So kind of starting with infrastructure and renewables, we're ideally positioned, as I mentioned, to galvanize bridge and highway projects, transmission, distribution, power generation, particularly solar and wind. All those projects need to be galvanized, and as North America's largest hot-dip galvanizer, it puts us, like I said, right in the bullseye to take advantage of those opportunities. When you look at reshoring, we're seeing that happening in a variety of places, including as a result of the CHIPS Act.
And we're galvanizing as well as using coil-coated steel on a variety of projects in that space, including some very large chip manufacturers who are building new facilities here in North America. The pre-painted steel to aluminum migration, I won't spend a lot of time on that. I talked a little bit about it, but what we're seeing is our end customers are saying, "We increasingly want to move away from painting it ourselves and move into using pre-painted steel in our manufacturing space." That could be for a lot of reasons. It could be for an environmental or ESG type of reason. It can be simply cost, it can be simply efficiency, and they just wanna get out of that space. So terrific for us. We can do it in a much more environmentally friendly manner.
We can coat that steel. We're rolling the paint actually onto the steel and then running it through a set of dryers. And what we do is we'll do that in a clean room. We capture any VOCs that are coming off of that, 98% of them, in fact, and then we actually inject that into our ovens as a fuel source. So very efficient, very environmentally friendly process. And finally, the one I haven't spent a lot of time on yet, but a conversion of plastics to aluminum, particularly happening in the beverage space. And we see this as a tremendous opportunity. We've invested in a greenfield plant just outside of St. Louis, where we have a few other facilities located today, and that facility will be online next year.
I'll speak more about it in a couple of slides. On Slide 10, moving forward, just again, more macro tailwind information. Areas that we're seeing benefit from, you know, the IIJA. So starting with roads, bridges, major projects, you've all seen these statistics before, so I won't belabor them for you. But that investment that's earmarked for that area, really gonna benefit us, like I said, in terms of bridge beams, guardrails, and we're already starting to see that in the early innings coming through our plants now with a lot more to come, we believe. Clean energy and power, which I mentioned, solar and wind. We're doing a lot of galvanizing right now for the solar industry. We galvanize those beams and support structures that are used in those utility-grade solar projects.
So when you see those, you know, acres and acres and acres of solar farms, we're helping support that whole industry. And then finally, on water, airports, and others, a lot of investment here as well. And, again, a great place for our Precoat Metals business because you'll see when you walk down that, you know, that little terminal, the terminal at the airport, and you're walking through the tunnel, but that connects the airplane to the terminal, you know, that's all pre-painted steel, typically in those buildings. And so just gives you, again, an image of what we're working on, along with several other projects. So I mentioned the new facility on page 11 of our deck.
This gives you the artist's representation on the left of what that facility will look like. It'll be completed next year. We'll begin running some limited production, and then also getting the necessary approvals from the FDA and others, which we already have on other plants. And then we'll be running full production in 2025. So terrific strategic investment for us. We have 75% of the volume already contractually committed by one customer. They would have taken all of the volume, but we wanted to leave some room for other customers as well. That's a long-term contract, so we feel very comfortable with that. We're ahead of schedule and under budget, which is fantastic, on the build-out of this project. I've looked online. We've got a little time-lapse camera that we can kinda keep an eye on it.
The land's been cleared, the structural beams are already up, the siding and roofing is already going on, so it's moving right along. Wanna spend a little bit of time on our technology in the business. So we have two really unique differentiated technology solutions. One is called our Digital Galvanizing System, or DGS, as we refer to it. On our galvanizing business, we have virtually eliminated paper from our operation, and really streamlined the customer process, the operations process. This is a key driver of why we can confidently state our EBITDA margin range of 25%-30% for this side of our business, and we've been running at the high end of that all year. So we really love that technology.
And similarly, in Precoat, which we acquired a year ago, similar technology referred to as CoilZone, that does much of the same. And so we're really excited about what technology is doing for our business. Won't spend a lot of time on this. It's a bit of an eye chart on Slide 13, but you know, key points here: We are, as I mentioned, an essential business to what's happening in the renewal and rebuild in America. We're environmentally friendly, very committed to reporting and being transparent on things like, you know, sustainability initiatives and reporting. We have been punching up in our weight class in terms of this initiative, recognized by Newsweek this year as one of America's most responsible companies, which is terrific. You don't often see that for a small cap.
So the fact that we're getting that recognition already is great. We've been reporting on Scope One and Scope Two initiatives for the past two years in our sustainability report. We're working on Scope Three as we speak. And then we recognize that, you know, being a diverse company is important as well. We're actually quite diverse already. We have 47% of our workforce as recognized as being diverse, and the number of women in our operations continues to grow. We've seen a tremendous growth there as well. Quick look at the management team. Philip Schlom, our CFO, was actually supposed to be here, but unfortunately had to be called away. He had a funeral to run to, so unfortunately, he's not here today.
Starting off with Tom Ferguson, our CEO, he's been at the business, almost as long as myself. He'll be coming up on 10 years here in the next couple of months. Philip, as I mentioned, a tremendous leader on the financial side. We have two very strong operational leaders, Bryan, as well as Kurt, each with decades-long experience in either metal coatings or coil coating. That's all supported by our corporate staff there, on the bottom. Running really quick through some financial slides, and we'll get to some questions. You can see the growth in sales there. Again, this is showing you both just Precoat and metal coating.
So this is, you know, all based on continuing operations here, and you can see the growth in the margin profile as well over time. Very resilient business. I think this was a more important slide back when we were talking about whether, you know, recessions were gonna be a big R or a little R, but we did model this out for you. So again, showing both of these businesses stacked on top of each other and how they performed through the last cycle. A small dip just in one year, in calendar year 2009, and then a very strong recovery. So very resilient business. Again, strong cash flow generation. And why is that? It's really for all those things on the left. I already mentioned the fact that we have virtually no exposure to metal prices.
We have the value-added pricing model in place. Our cost structure, which we haven't talked about, is highly variable. It's a 75% variable cost structure, so that's another key driver, allows us to move very quickly and make changes very rapidly in the business and respond to cycles. Balance sheet and liquidity, real quick look there. We don't keep a lot of cash on the books. We've took out a large term loan B to pay for the Precoat transaction. We've been consistently working that down over time. We're currently sitting at 3.5 times debt to EBITDA leverage right now. Our target is to get between 2.5 to 3 times. We think we'll be at 3 times sometime at the beginning part of next year.
We do have a $400 million revolver out there with virtually nothing on it. And the other thing, we're also getting some cash tax benefits associated with the acquisition as well. So, balance sheet's in really good shape. Strong free cash flow, I mentioned this earlier. You can see the strong free cash flow coming off of these businesses. We're really focused on that cash to conversion cycle, deploying the capital in a smart manner, as we talked about. And we believe that that strong cash generation is gonna allow us to rapidly de-leverage the business. Okay? I talked about this on slide 19 already, our capital allocation priority. So again, focusing capital on high ROIC investments, like the plant that I mentioned we're building outside of St.
Louis. Reducing the leverage, returning the capital through dividend, consistent dividend payments, which we've been doing, since I've been here for over 10 years. Then acquisitions, currently deferred. We'll take a look at those, once we get into that 2.5-3 times range, but right now, we don't feel like we're missing out on any opportunities. Our M&A team is still active and engaged, but, there's really no short-term targets that we feel like we're missing, as a result of focusing more on debt reduction. Guidance, real quick, $1.4 billion-$1.55 billion for this fiscal year, which will end in February of 2024.
$300 million-$325 million in adjusted EBITDA and $3.85-$4.35 in terms of our adjusted EPS. So that's it in a nutshell. I'm going to start or finish where we started with this slide, but open it up to questions.
Can you just talk about the competitive dynamic? Is it mom and pops, small regional versus integrated as a group?
Sure, yep. Question for those listening in online was just the competitive dynamic on both sides of the business. So really on our metal coatings side, I'll start there, the competitive dynamic, we're sitting in the number one position, as I mentioned. The strong number two behind us, who has half the number of galvanizing facilities that we do, is Valmont. Interesting because they're also a fabricator as well as a service provider in the industry. A good competitor, also a customer in some cases for us, too. So we don't mind them.
Behind them, you've got, probably what I'd refer to as, a handful, about four or five super regionals that typically have anywhere from six to eight facilities, each, and then below that, you get into very fragmented, as you mentioned, mom-and-pop, type businesses that are single-site operators, which are usually been, good acquisition targets for us, over time. On the Precoat side, it's a little bit different. It's still fragmented, but the, the competitive dynamic is a little bit different. We have some larger players. You know, it starts out with, BlueScope, who's an Australian firm that, that bought, Cornerstone, earlier last year. Then you get into SDI, who has some coil coating, facilities. They're the, you know, service center.
And then you get below that into others like, MSC or Material Sciences Corporation, Vortech, and Ternium. So that's really the competitive environment on that side. I think I got time for one more, if there's, if there is one. In the back.
Hey, do you hedge commodities, NG?
Yeah. No, we do not hedge on the price of zinc at all. We enter into contracts associated with what we think our volume will be, so we'll make a commitment on volumes to a variety of suppliers for zinc, but we do not hedge. Okay. All right. Thank you, everyone.