Q2 FY2027 Earnings Conference Call and Webcast - AZZ INC

Financial Performance:

• Generated record quarterly sales of $486.9 million, a 16.7% year-over-year increase.
• Adjusted diluted EPS reached $2.00, representing a 29% year-over-year growth.
• Consolidated adjusted EBITDA was $110.9 million (22.8% of sales); Metal Coatings adjusted EBITDA margin held strong at 30.7%, while Pre-Coat Metals margin expanded 100 basis points to 21.2%.
• Gross margins improved 80 basis points to 25.1% driven by favorable mix, pricing discipline, and operational execution.
• Operating income increased to $83.8 million (17.2% of sales), an 80 basis point improvement year-over-year.
• Generated $102.8 million in operating cash flow; Net leverage decreased to 1.3x trailing 12-month adjusted EBITDA following $15 million in debt reduction.
• SG&A expenses were $38.3 million (7.9% of sales); excluding $2.8 million in acquisition-related costs, SG&A as a percentage of sales improved to 7.3%.
• Received $15.7 million net cash distribution from the Avail joint venture divestiture.

Guidance and Future Outlook:

• Raised full-year Fiscal 2027 sales guidance to $1.825 billion–$1.875 billion (previously lower).
• Increased full-year adjusted EBITDA guidance to $380 million–$420 million.
• Raised full-year adjusted diluted EPS guidance to $7.00–$7.30.
• Projected debt reduction of $100 million–$140 million for the full year, down from previous expectations due to the Seattle acquisition.
• Long-term outlook remains constructive supported by an estimated $1.3 trillion in U.S. utility capital investment (2026–2030), including $500+ billion for transmission and distribution.
• Anticipate continued margin strength in H2, though Q4 typically sees seasonal volume softness; price increases for raw material inflation have been fully passed through.

Business Segments and Product Lines:

• Metal Coatings: Sales grew 22.9% driven by infrastructure, industrial, and construction demand; pricing mechanisms successfully mitigated LME zinc volatility.
• Pre-Coat Metals: Sales grew 11.5% driven by volume ramp at the Washington, Missouri (WashMo) facility and value-added pricing; HVAC and appliance markets saw a 10% decline due to weak residential construction.
• Acquisitions: Completed acquisition of Seattle Galvanizing Company, establishing a presence in the Pacific Northwest with the region's largest hot-dip galvanizing kettle and a new spin galvanized facility.
• Greenfield/Brownfield: Initiated a new hot-dip galvanizing plant in Tulsa (brownfield); other greenfield opportunities are in discussion with major anchor customers.
• Digital & Technology: Leveraging AI and proprietary digital tools (e.g., Digital Galvanizing System, Coil Zone Platform) to enhance productivity and operational efficiency.
• WashMo Facility: On track to reach targeted utilization levels with its strategic partner; facility has already achieved 2027 contribution margin targets.

Market and Competitive Landscape:

• End Markets: Construction sales grew 15.5% (semiconductor/data centers); Industrial sales surged 39.6% (utility-scale power); Infrastructure sales grew 7.2%; Transportation sales rose 4%; Container sales skyrocketed 153%.
• Infrastructure Tailwinds: Department of Energy's SPARC initiative announced $5.25 billion in grid modernization projects unlocking 23 gigawatts of capacity.
• Substrate Constraints: Steel substrate markets remain tight with 8–10 week lead times due to tariffs (Section 232) and domestic mill capacity limits; company actively assists customers in sourcing material.
• Market Share: Actively pursuing bolt-on acquisitions and "de-verticalization" partnerships where manufacturers outsource non-core galvanizing operations.

Risks and Challenges:

• Seasonality: Fourth quarter remains the softest period due to winter weather conditions (freezes/storms) impacting construction working days.
• Supply Chain: Persistent tightness in flat-rolled steel and substrate availability, exacerbated by tariffs and reduced imports, complicating customer fulfillment.
• Interest Rates: Rising interest rates pose a headwind to the construction sector, though current backlog suggests immediate impact is limited.
• Data Center Moratoriums: Public backlash or moratoriums on data centers could impact a small but growing vertical, though AZZ remains less dependent on this segment than others.

Management Commentary and Tone:

• Tone is highly confident and optimistic, emphasizing record execution, resilient business model, and strong long-term secular trends.
• Management highlighted "disciplined capital allocation" balancing organic growth, acquisitions, and shareholder returns.
• Leadership expressed strong belief in the ability to capture demand via expanded capacity and strategic partnerships.
• CEO Tom Ferguson noted that while Q4 is typically cautious, current momentum supports the raised guidance.

Analyst Questions and Answers:

• Q: Drivers of Q2 upside? A: Strong performance of the Seattle acquisition (one month impact), operational volume growth, and effective price pass-throughs; winter weather remains a wildcard for Q4.
• Q: Impact of interest rates/data centers? A: Current backlog is stable with no cancellations; data centers represent a small portion of total revenue compared to grid infrastructure.
• Q: Seattle acquisition revenue run rate? A: Not disclosed, but considered a top-third facility in the fleet with above-average margins.
• Q: Substrate availability strategy? A: AZZ acts as an intermediary to help customers source steel from mills, service centers, and importers; maintains ~3 months of customer inventory in warehouses.
• Q: Capital allocation priorities? A: Organic growth and margin expansion are priority #1, followed by strategic M&A (active pipeline of ~3 deals) and shareholder returns (dividend increase to $0.24/share, $20M stock buyback).
• Q: Greenfield investment specifics? A: Tulsa brownfield and other projects require $35M–$50M in investment; construction timeline is ~18 months.

Other Key Points:

• Completed $20 million in stock repurchases during the quarter at an average price of $146.71 per share.
• Increased quarterly dividend to $0.24 per share.
• Total available liquidity stands at $376.4 million as of August 31, 2026.
• Metal Coatings digital galvanizing system and Pre-Coat Metals coil zone platform are key differentiators improving customer experience.
• AZZ operates a tolling model where customers own the substrate, and AZZ manages warehousing and logistics to mitigate supply chain friction.