AZZ Inc. 2027 Q2 Earnings Call

Thank you for joining us today to review AZZ's fiscal 2027 second quarter results for the period ended August 31st, 2026. Joining the call today are Tom Ferguson, President and Chief Executive Officer, Jason Crawford, Chief Financial Officer, and David Nark, Chief Marketing Communications and Investor Relations Officer. After today's prepared remarks, we will open the call for questions. Please note that the live webcast of today's call is available at www.azz.com/investor-events. Before we begin, I would like to remind everyone that our discussion today will include forward-looking statements made in accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. By their nature, forward-looking statements are uncertain and outside the company's control.

Except for actual results, AZZ's comments containing forward-looking statements may involve risks and uncertainties, some of which are detailed time to time in documents filed by AZZ with the Securities and Exchange Commission, including the latest annual report on Form 10-K. These statements are not guarantees of future performance; therefore, undue reliance should not be placed upon them. Actual results could differ materially from these expectations. In addition, today's call will discuss non-GAAP financial measures, which should be considered supplemental and not as a substitute for GAAP financial measures. We refer shareholders to our reconciliations from GAAP to non-GAAP measures contained in today's earnings press release. I would now like to turn the call over to Tom Ferguson.

Thank you, Philip, and good morning. We delivered record second quarter sales up 16.7% from the prior year, reflecting strong execution, a resilient business model, and the strength of our growth strategy. Our performance and market demand continue to validate the investments we made to expand capacity, strengthen customer partnerships, and enhance our market positions. Segments achieved record quarterly sales. Metal Coatings sales increased 22.9%, driven by higher volumes across the construction, industrial infrastructure, and transportation end markets, along with inflationary price increases passed through by our team. Segment adjusted EBITDA margin remained strong at 30.7%, benefiting from operating leverage on record sales and volume. While LME zinc prices have increased, our pricing model and associated surcharge mechanisms continue to mitigate raw material price volatility.

Precoat Metals sales increased 11.5%, driven by volume growth from the continued ramp of our Washington, Missouri facility and value-added pricing initiatives, primarily to offset inflationary pressures on paint and other items. Segment adjusted EBITDA margin expanded 100 basis points to 21.2%, reflecting higher throughput and solid operational execution. During the second quarter, we completed the acquisition and integration of Seattle Galvanizing Company, establishing AZZ's presence in the Pacific Northwest. This acquisition expands our position in an attractive region that is experiencing favorable demand in the infrastructure, industrial, and construction markets. The acquisition adds a high-quality multi-site platform, including the region's largest hot-dip galvanizing kettle and a new spin galvanizing facility, extending our footprint into a new five-state region. Our growth strategy balances disciplined acquisitions with value accretive organic investments that strengthen our competitive position.

In Metal Coatings, we continue to expand capacity where demand fundamentals remain strong and returns are attractive. Our recently expanded Crowley, Texas, facility is providing additional capacity in a strong growth market, reinforcing our ability to capture demand and generate attractive returns on invested capital. We will discuss U.S. end market demand in more detail in a moment. We have also initiated a new greenfield hot-dip galvanizing plant in the Tulsa area linked to a major anchor customer. We have other greenfields in the works and hope to be able to discuss those in more detail later this fiscal year. The strength in infrastructure and the long-term outlook is creating opportunities for us to partner with major customers as they expand their capacity. We also continue to advance strategic business development initiatives through our deeper equalization opportunities.

These partnerships allow manufacturers to divest non-core galvanizing and coil coating operations while securing a long-term relationship with AZZ. These opportunities offer AZZ a capital efficient pathway to expand capacity, deepen customer relationships, and gain market share. Our pipeline remains active and provides a meaningful opportunity for future value creation. At Precoat Metals, the Washington, Missouri, facility continues to ramp as planned. We remain on track to reach targeted utilization levels with our strategic partner while commercializing the remaining capacity. The facility has already achieved its expected contribution margin targets for the year, and performance within the beer and beverage packaging category remains solid. Washington has already become an important contributor to Precoat's future earnings growth, and we look forward to its continued progress. Technology remains a key enabler of our strategy.

We are leveraging AI and proprietary digital tools to enhance productivity, improve operational efficiency, and scale our businesses more effectively. By integrating AI into our enterprise platforms, we are streamlining software development and operational workflows while accelerating better data-driven decisions. Across both segments, our digital platforms are increasing visibility and improving operational consistency. Our Metal Coatings Digital Galvanizing System and Precoat Metals Coilzone platform strengthen the customer experience while reinforcing our competitive advantages and operational excellence. We will continue investing in value-accretive opportunities, allocating capital with discipline, expanding our market leadership, and delivering exceptional customer service. With a strong balance sheet, differentiated capabilities, and a proven operating model, we believe we have the right platform to benefit from the long-term investment trends shaping our end markets. These trends provide a meaningful opportunity to drive profitable growth and create long-term shareholder value. With that, I'll turn it over to Jason.

Thank you, Tom. We delivered record quarterly sales of $486.9 million, up 16.7% year-over-year, with double-digit growth in both operating segments. Gross margins expanded 80 basis points, adjusted diluted EPS increased 29%, and we generated $102.8 million of operating cash flow. By segment, Metal Coatings sales increased 22.9%, reflecting continued momentum in the construction and industrial end markets. Precoat Metals sales increased 11.5%, driven by higher coil coating volume, the continued ramp-up of the Washington, Missouri facility, and pricing actions in response to higher material input costs. These gains were partially offset by softer volume in the HVAC and appliance end markets. From a profitability standpoint, gross profit was $122.1 million or 25.1% of sales, representing an 80 basis point improvement year-over-year. This reflects favorable mix, pricing discipline, and improved operational execution.

SG&A expenses were $38.3 million or 7.9% of sales, which was flat against last year's quarter. However, excluding this year's $2.8 million in acquisition-related costs, mostly associated with the Seattle Galvanizing transaction, SG&A as a percentage of sales improved to 7.3%, reflecting operating leverage on higher revenue. Operating income increased to $83.8 million or 17.2% of sales, an improvement of 80 basis points versus the prior year, reflecting strong operational execution and leverage on higher volumes. Turning briefly to the AVAIL JV. As a reminder, our second quarter of the prior year included $59.3 million in total equity and earnings, a substantial portion of which was attributable to the remaining gain recorded on the divestiture of the Electrical Products Group. During this year's second quarter, we recorded $7.3 million of equity and earnings related to the sale of the lighting business.

Separately, we received an $18.2 million cash distribution as part of the AVAIL divestitures, which netted to $15.7 million in our cash flow statement after accounting for less taxes paid by AVAIL on behalf of AZZ. Our JV partner continues to pursue the divestiture of its remaining assets, which operationally now consists of the Welding Solutions Brazil business. Interest expense improved to $10.8 million, down $2.9 million from the prior year, driven by deliberate debt reduction and capital market initiatives discussed in more detail in our SEC filings. The lower interest expense reflects our continued focus on managing our overall cost of capital and strengthening our balance sheet. The second quarter's income tax expense was $21.3 million, which reflects an effective tax rate of 26.7% compared to 21.9% last year.

Last year's lower tax rate was due to an increase in R&D tax credits attributable to the technology spend and the new build Washington, Missouri facility. GAAP net income was $58.5 million, and adjusted diluted EPS was $2, up 29% year-over-year. The increase reflects the combination of revenue growth, margin expansion, and lower interest expense. Consolidated adjusted EBITDA was $110.9 million or 22.8% of sales. Infrastructure Solutions adjusted EBITDA moved from a loss of $2.3 million in the prior year's second quarter to a small income of $0.1 million in the current quarter, further reflecting the impact of divestitures in the AVAIL JV. Metal Coatings adjusted EBITDA margins remain strong at 30.7%, while Precoat Metals adjusted EBITDA margin improved to 21.2%, supported by operational performance and product mix from our Washington, Missouri facility.

Volumes at the facility continue to ramp in line with expectations, and we remain on track for it to continue to contribute meaningfully to segment revenue and profitability in the second half of fiscal 2027. Turning to our cash flow and balance sheet. AZZ generated $102.8 million of operating cash flow during the quarter, demonstrating the fundamentals of our business model in converting EBITDA into cash and strong working capital execution. As of August 31st, our total available liquidity was $376.4 million, providing ample flexibility to fund both organic and inorganic growth opportunities. As noted, we completed the acquisition of Seattle Galvanizing during the quarter, establishing our Metal Coatings presence in the Pacific Northwest. This transaction expands our geographic coverage and customer service capabilities while providing a premier platform for future growth. We continue to evaluate a healthy acquisition pipeline across both segments against our strategic and financial criteria.

Our balance sheet remains a distinct competitive advantage. During the quarter, we reduced debt by $15 million and ended the quarter with a net leverage of 1.3 times the trailing 12 months adjusted EBITDA. Capital expenditures for the quarter totaled $18.5 million, with a growing focus on high return organic investments. Capital allocation priorities continue to include returning capital to shareholders while investing for future growth. During the quarter, we repurchased $20 million of stock at an average price of $146.71 per share, increased our quarterly dividend to $0.24 per share, and completed the Seattle Galvanizing strategic acquisition. These actions demonstrate the strength of our cash generation, the flexibility of our balance sheet, and our commitment to creating long-term shareholder value. Overall, the quarter reflected strong execution, margin expansion, cash generation, and disciplined capital deployment. With that, I will turn the call over to David.