AZZ Inc. (AZZ) Q3 2026 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call summary and Q&A highlight strong market trends, strategic growth plans, and optimistic guidance, particularly in Metal Coatings and Precoat segments. Management's focus on M&A and data centers, along with improved margins and weather conditions, supports a positive outlook. Despite some uncertainties in guidance and pricing strategies, the overall sentiment is positive, suggesting a likely stock price increase.

Key Financial Performance

Total Sales $425.7 million, representing a 5.5% increase from $403.7 million in the prior year period. Growth was led by the Metal Coatings segment, where sales increased 15.7% year-over-year, driven by higher volumes and infrastructure-related spending.

Metal Coatings Sales Increased 15.7% year-over-year, fueled by higher volumes and strong demand from infrastructure projects. Segment EBITDA margins were 30.3%, reflecting an increased mix of larger projects in electrical, solar, and transmission and distribution work.

Precoat Metals Sales Down 1.8% year-over-year, primarily due to continued softness in construction, HVAC, and transportation markets. However, food and beverage container demand reached new record highs, driven by new customer acquisitions and market share gains.

Gross Profit $101.9 million, or 23.9% of sales, compared to $97.8 million or 24.2% of sales in the same quarter of the prior year. The slight decrease in margin percentage was due to operational improvements and nonrecurring items in the prior year.

Operating Income $69.5 million, or 16.3% of sales, a 180 basis point improvement compared with $58.5 million, or 14.5% of sales, in the prior year third quarter. This improvement was due to operational improvements and nonrecurring items included in last year's results.

Net Income $41.1 million, compared to $33.6 million for the third quarter of the prior year. Adjusted net income was $46 million, excluding amortization of intangible assets and equity loss adjustments.

Adjusted EBITDA $91.2 million, or 21.4% of sales, compared to $90.7 million, or 22.5% of sales, for the same period last year. The slight decrease in margin percentage was due to changes in sales mix.

Cash Flow from Operations $79.7 million for the quarter. Capital expenditures were $18.5 million, and stock repurchases totaled $20 million at an average price of $99.28 per share.

Net Debt Position $534.7 million, with $337.1 million in available borrowing capacity. The company paid down $35 million of debt in the quarter, achieving a net leverage ratio of 1.6x, within the target range of 1.5 to 2.5x.

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Operating Highlights

Metal Coatings: Achieved a 15.7% year-over-year sales increase, driven by higher volumes and strong demand from infrastructure projects. Segment EBITDA margins were 30.3%, reflecting larger projects in electrical, solar, and transmission and distribution work.

Precoat Metals: Sequential improvement over the prior quarter, though sales were down 1.8% year-over-year due to softness in construction, HVAC, and transportation markets. However, food and beverage container demand reached record highs, driven by new customer acquisitions and market share gains.

Infrastructure Modernization and Energy Transition: Growth driven by infrastructure modernization, energy transition, industrial reshoring, data center construction, LNG power generation, and renewable energy projects. These sectors rely on galvanized steel and coated materials, where AZZ has a strong position.

Solar Projects: Expected to remain strong due to customer backlogs extending beyond current tax credit expirations. These projects are tied to large-scale sites, including data centers.

ERP and Digital Platforms: AZZ's proprietary ERP platform, Digital Galvanizing System, and coil zone platforms enhance margins through higher throughput, improved yields, better zinc utilization, and increased customer connectivity. These systems also reduce waste and support sustainable operations.

Debt Management: Paid down $35 million of debt in the quarter, reducing net leverage ratio to 1.6x, within the target range of 1.5 to 2.5x.

Portfolio Simplification: Completed the sale of a majority interest in the Welding Solutions Business (WSI), simplifying the portfolio and creating shareholder value. Further divestitures are planned.

M&A Opportunities: Evaluating strategic tuck-in acquisitions to expand market reach in Metal Coatings and Precoat Metals, targeting sustainable growth and shareholder value.

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Risk or Challenges

Metal Coatings Segment: Segment EBITDA margins of 30.3% reflect an increased mix of larger projects in electrical, solar, and transmission and distribution work, which tend to be more price competitive. This indicates potential margin pressures due to competitive pricing.

Precoat Metals Segment: Sales were down 1.8% year-over-year due to continued softness in construction, HVAC, and transportation markets. Excess imported prepainted metal has impacted the market, though tariffs may provide some relief.

AVAIL Joint Venture: Losses in the quarter were primarily due to excess overhead costs resulting from divestitures. This indicates challenges in resizing overhead costs and managing the joint venture effectively.

Nonresidential Construction: Remains subdued due to interest rate and lingering tariff-related uncertainty, which could impact demand for related products and services.

Weather-Related Impacts: Last year's fourth quarter was impacted by unusually wet and cold weather, leading to a record number of lost production days, particularly in Texas. This poses a risk for operational disruptions in similar conditions.

Debt and Interest Expense: Although interest expense improved, the company still has a net debt position of $534.7 million, which could pose financial risks if market conditions worsen or interest rates rise.

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Guidance & Outlook

Fiscal 2026 Sales Guidance: Sales are anticipated to be in the range of $1.625 billion to $1.7 billion.

Fiscal 2026 Adjusted EBITDA Guidance: Adjusted EBITDA is expected to be in the range of $360 million to $380 million.

Fiscal 2026 Adjusted EPS Guidance: Adjusted diluted earnings per share is projected to be in the range of $5.90 to $6.20.

Market Trends and Demand Outlook: Positive long-term trends are expected in hyperscale data centers, solar projects, and infrastructure investments. Solar projects are anticipated to remain strong due to customer backlogs extending beyond current tax credit expirations. Residential reroofing market is gradually taking share from asphalt roofing.

Construction Market Outlook: Nonresidential construction is expected to remain subdued due to interest rate and tariff-related uncertainties. Residential construction is also soft, but modest growth is forecasted regionally through calendar year 2026.

Weather-Related Comparisons for Q4: The fourth quarter is expected to present easier year-over-year comparisons due to less severe weather impacts compared to the prior year.

M&A Strategy: The company is evaluating strategic tuck-in acquisitions in Metal Coatings and Precoat Metals to drive sustainable growth and expand market reach.

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Shareholder Return Plan

Cash Dividend: Maintained cash dividend of $0.20 per share for the quarter, marking 63 consecutive quarters of returning capital to shareholders through cash dividends.

Stock Repurchase: Repurchased $20 million worth of stock during the third quarter at an average price of $99.28 per share.

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Key Q&A

Q:Can you provide an update on the order backlogs for the Metal Coatings and Precoat segments, and the impact of the government shutdown?

A:The Metal Coatings segment does not have much backlog but has a good forward look from the sales organization. The segment is expected to finish the year strong unless weather conditions worsen significantly. The Precoat segment faces challenges with residential and commercial construction but benefits from data centers and metal roofing conversions. The government shutdown had no material impact on either segment.

Q:Is the operating environment for Precoat worsening as we head into calendar year 2026?

A:The markets for Precoat have bottomed and are stabilizing. The company is gaining market share to offset market softness. The Washington plant ramp-up is well-timed, especially with the shift from plastics to aluminum, and the company is optimistic about the full-year production at the new Washington site.

Q:Can you provide a preview of fiscal year 2027 guidance?

A:Management is optimistic about the Metal Coatings segment finishing strong and starting next year with good opportunities. However, formal guidance will be provided after the budget is approved by the Board in a few weeks.

Q:What kind of M&A opportunities are you seeing?

A:The M&A pipeline is active, focusing on bolt-on acquisitions. Management does not expect to close any deals by the end of the fiscal year but is optimistic about securing a couple of bolt-on acquisitions within the next year.

Q:Have aluminum prices impacted demand in the Precoat business?

A:Management does not expect significant sensitivity to aluminum prices due to the secular shift from plastics to aluminum, particularly in the container market. The Consumer segment was up 11%, and the Washington plant is ramping up well.

Q:What is the impact of the Washington, Missouri plant ramp-up on Precoat segment margins?

A:The Washington plant is expected to complement margins positively. The company is focused on ramping up capacity for its partner and will consider additional customers in early to mid-next year.

Q:How should we think about the benefit of favorable weather comparisons in fiscal Q4?

A:Last year, unseasonably cold and wet weather caused around 200 days of lost production. This year, better weather conditions are expected to positively impact results.

Q:Can you update us on pricing in the Metal Coatings segment and its impact on margins?

A:Pricing is tightly controlled, and the segment has been more open to taking on larger projects, which have slightly lower margins. Zinc costs are rising, but pricing adjustments are being made. Management expects margins to improve next year due to operational improvements and investments.

Q:Why is there a focus on data centers, and what opportunities do they present?

A:Data centers are a growing segment with multiple opportunities for the company, including structural steel, insulated wall panels, and coated metals. The company’s share in this segment is expanding.

Q:What is the share of metal roofing in new construction and replacement markets?

A:Metal roofing accounts for about 5% of the new construction market and 14% of the replacement market. The share is growing due to better storm resistance, building codes, and changing HOA standards.

Q:Is there a regional concentration for metal reroofing?

A:Metal reroofing is more prevalent in the southern U.S., including Florida, Texas, Arizona, and Southern California, due to corrosive environments and high sun exposure.

Q:What is the lag between easing credit conditions and increased demand for non-residential construction?

A:For residential construction, demand tracks mortgage rates, while for capital projects, there is typically a 6- to 9-month lag. Optimism is growing for calendar 2026 and fiscal year 2027.

Q:What drove the sales growth in the Metal Coatings segment, and what is the outlook for margins?

A:Sales growth was driven by large projects in transmission, distribution, and solar. Margins are expected to improve next year due to operational improvements and better capacity utilization.

Q:What is the company’s approach to dividend policy?

A:The company is committed to evaluating dividends annually and has the flexibility to consider increases due to reduced debt and improved financial position.

Q:How has the surplus of prepainted metal imports impacted the Precoat segment?

A:Prepainted metal imports, which account for about 10% of the U.S. market, are down 35% this year. This creates opportunities for AZZ Precoat, as it is one of the few players capable of serving this market.

Q:Review of Unclear Management Responses

A:Management avoided providing specific fiscal year 2027 guidance, citing the need for Board approval and formal budget finalization. Additionally, they did not provide detailed data on the impact of favorable weather comparisons or specifics on pricing strategies in the Metal Coatings segment due to competitive concerns.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

AZZ Transcript

AZZ Inc. (AZZ) Q3 2026 Earnings Call Transcript

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The earnings call summary and Q&A indicate a positive outlook for AZZ. The company has shown strong financial management with a reduced net leverage ratio and strategic acquisitions. Market share gains in Precoat due to tariffs, along with the ramp-up of the Washington facility, bolster growth prospects. Despite some uncertainties, such as Avail's future performance, the overall guidance is optimistic, with sustained margins and potential M&A opportunities. Given the company's market cap, these factors are likely to result in a positive stock price movement of 2% to 8% over the next two weeks.

AZZ Inc. (AZZ) Q1 2026 Earnings Call Transcript

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The earnings call summary and Q&A indicate strong financial performance, with record sales and improved margins. Debt reduction efforts, combined with the AVAIL divestiture cash flow, have strengthened financial health. The cautious approach to EBITDA guidance is offset by optimistic EPS guidance, indicating confidence in future profitability. The potential for increased share repurchases and the ramp-up of new facilities further support a positive outlook. While management avoided specific volume details, the overall sentiment remains positive, with expected growth in the solar segment and Precoat Metals.

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The earnings call summary shows solid financial performance with increased income and reduced debt. Despite a slight sales decline, margins improved, and the company recovered from weather impacts. The Q&A reveals positive sentiment, with strong short-term outlooks and successful recovery from previous setbacks. Management's commitment to debt reduction and acquisitions, along with optimistic guidance, supports a positive sentiment. The market cap suggests moderate volatility, aligning with a 'Positive' prediction of 2% to 8% stock price increase.

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