Hello, and welcome to the AZZ Incorporated First Quarter 2024 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Sandy Martin with Three Part Advisors. Please go ahead.

Thank you, operator. Good morning, and thank you for joining us today to review AZZ's financial results for the fiscal 2024 first quarter ended May 31, 2023. Joining the call today are Tom Ferguson, President and Chief Executive Officer; Philip Schlom, Chief Financial Officer; and David Nark, Senior Vice President, Marketing, Communications and Investor Relations. After the conclusion of today's prepared remarks, we will open the call for questions. Please note, there is a webcast and slide presentation for today's call which can be found on AZZ's Investor Relations page under the Latest Earnings Presentation at azz.com. Before we begin, I would like to remind everyone that our discussion today will include forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements by their nature are uncertain and outside of the company's control. Except for actual results, our comments containing forward-looking statements may involve risks and uncertainties, some of which are detailed from time-to-time in documents filed by AZZ with the Securities and Exchange Commission, including the annual report on Form 10-K for the fiscal year. These statements are not guarantees of future performance and therefore undue reliance should not be placed upon them. Actual results could differ materially from these expectations. In addition, today's call will include a discussion of non-GAAP financial measures. Non-GAAP measures should be considered as a supplement to and not substitute for GAAP financial measures. We refer you to the reconciliation of non-GAAP to the nearest GAAP measure included in today's earnings press release and investor presentation for future detail -- further detail. The earnings press release and Q1 presentation are posted on our website and have been included in the Form 8-K submitted to the SEC. I would now like to turn the call over to Tom Ferguson. Tom?

Thank you, Sandy. Good morning, everyone. Thank you for joining us for a review of our fiscal 2024 first quarter results. Today, I will provide an overview of our first quarter performance, talk about progress made with our Digital Galvanizing System, or DGS, technology, and then with a discussion of what we are seeing in the demand environment this year, as well as our outlook for the rest of fiscal 2024. I'm quite pleased with the pride and passion of our employees as they kicked off fiscal year 2024 by continuing to provide outstanding customer service and drive operating performance. Please note that this quarter, we are focusing primarily on sequential comparisons due to only having Precoat for two weeks of first quarter last year. Turning to Slide 3. We are off to a strong start to the fiscal year with total sales of $391 million, up 16.2% on a sequential basis. Metal Coatings delivered a record setting sales quarter of $169 million, up 3.3% versus last year. I'm also pleased to report that our Precoat Metals business delivered sequentially higher sales this quarter, totaling $222 million, up 18.7% compared to the fourth quarter. On a comparable basis, Precoat sales declined slightly versus a record first quarter in fiscal 2023. This is primarily attributable to last year's inventory ramp up in reaction to supply chain disruptions and was not anticipated to repeat this year. We improved our profitability in the first quarter by delivering adjusted earnings per share of $1.14 against the prior year EPS comparison of $1.10, keeping in mind, these are on significantly different share counts, which Philip will cover late -- in a minute. In addition, we generated strong adjusted EBITDA of $85.4 million, up 62.6% over the prior year or 21.8% of sales. Our total adjusted EBITDA margin increased sequentially by 480 basis points over the fourth quarter due to seasonally higher sales that drove our improved fixed cost leverage, coupled with the impact of certain production improvement initiatives implemented previously. Our first quarter Metal Coatings EBITDA margin was 30.7%, up sequentially by 370 basis points, and our Precoat Metals EBITDA was 19.4%, up 560 basis points. In the past two quarters, we discussed the disruption caused by excessive customer-owned inventories at most Precoat plants. In the first quarter, we successfully resolved these issues and achieved margins for Precoat that fell comfortably within our intended targets. Precoat did see softer demand in HVAC, transportation and some construction markets in Q1, but we remain confident that the full year will be in line with projections as they continue to focus on converting customers to more environmentally-friendly pre-painted solutions. Like the Metal Coatings business, Precoat has a highly variable cost structure that allows them to protect margins when volume fluctuations do occur for any extended period. I will cover this more in our outlook discussion in a few moments. However, we anticipated this current demand environment, which was built into our annual guidance, and we are pleased that first quarter results met our expectations. Kurt and the team will continue to drive growth through their supply chain solution strategies, focusing on market expansion through post-paint conversions and strategic long-term supply agreements with blue chip customers. In a few minutes, Philip will provide more details of our first quarter results and speak to our current year capital allocation priorities. We continue to carefully manage cash and capital deployments to ensure that we invest in high return investments well above our cost of capital, pay down debt and delever the company in a disciplined way. For the balance of this year, we have taken acquisitions off the table as we focus on reducing debt. In addition to high-value investments and meaningful debt reduction, we are laser focused on value creation and high ROI projects and initiatives to drive incremental shareholder value. I will turn now to our Digital Galvanizing System, or DGS, technology. For the past seven years, we have been digitizing our galvanizing operations to improve productivity, efficiencies and energy consumption. Approximately 18 months ago, we enhanced our proprietary state-of-the-art technology on the customer side to allow us to have a more integrated relationship with our customers. This was an important pivot away from an off-the-shelf CRM tool to full utilization of an internally built tool, linking AZZ's important customer relationship management system to our enterprise-wide Oracle ERP system. We are excited to report that this technology has successfully eliminated nearly all paper in our shops and dramatically improved the quality and speed of our customer interactions. When combined with our outstanding servant-minded leadership team, deep management bench and intense focus on service and quality, we believe AZZ has built a sustainably differentiated hot dip galvanizing business. Precoat, which operates predominantly more continuous flow automated processes, has also developed primary -- proprietary applications such as CoilZone that provide them similar productivity and enhanced customer engagement. More broadly, we are very excited about the power and scale of the transformed AZZ. We are working collaboratively with our people, processes and technology to deliver services and solutions to customers from both our metal coatings and coil coatings businesses. Based on our transformative actions over the last 12 months, we have effectively added more than $100 million of incremental EBITDA annually between the sale of our majority interest in AIS and the acquisition of Precoat. This strategic pure play shift in the coatings segments that command industry-leading market positions accompanied by a broad portfolio of galvanizing and coil coating services and solutions allow us to deliver an exceptional customer experience. With that, I'll turn it over to Philip.

Thanks, Tom. Turning to Slide 4. As Tom mentioned, we reported fiscal year 2024 first quarter sales from continuing operations of $390.9 million or 88.7% above the $207.1 million reported in last year's first quarter. Current year results include Precoat Metals for the entire quarter, while the prior results include Precoat for only the last two weeks following the acquisition on May 13. Sequentially, total sales increased by 16.2%, which reflects typical seasonality moving from fourth quarter to first quarter for both segments. Gross profit increased to $97 million from $60.1 million in the prior year same period. Gross margins were 24.8% in the first quarter, primarily reflecting the impact of labor and material costs between years. Selling, general and administration expenses were $31.5 million in this year's first quarter compared to $32.1 million in the prior year first quarter. Recall that we recorded $12.6 million in acquisition and transaction related costs as well as incremental Precoat amortization of intangible assets in fiscal year 2023. The SG&A expenses in the first quarter of fiscal year 2024 are closer to a run rate number that can fluctuate over time. First year adjusted EBITDA of $85.4 million exceeded the prior year's $52.5 million by a strong $32.9 million. This was an increase of 62.6%, which reflects good earnings traction and the impact of incremental earnings of the Precoat business. Adjusted EBITDA margin for the first quarter were 21.8%, which trailed the prior year of 25.4%. This was primarily due to the labor and commodity pricing that flowed through the cost of sales in the quarter. If you reference our earnings release tables, EBITDA margin comparisons for both segments reflect sequential improvements for the quarter. Adjusted net income was $33.4 million compared to $28.2 million in the prior year's first quarter, up 18.4%. Adjusted diluted earnings per share of $1.14 was 3.6% above the adjusted EPS of $1.10 in the prior year first quarter. Since the preferred convertible shares are dilutive in both periods, presented on Slide 4, the preferred dividends are added back to earnings for the EPS computation. Also, shares are adjusted for a full conversion of the preferred convertible, which resulted in 29.2 million weighted average shares this year compared with last year's shares of 25.7 million. The prior year share compensations reflected the convertible debt outstanding for two weeks versus an entire quarter. Moving to Slide 5. We reported strong net cash provided by operating activities of $46.9 million and free cash flow of $29.9 million in the first quarter, almost double compared to the prior year amounts. This was a result of prudent working capital management and excellent operational performance. Also, capital expenditures for the period were $17 million and included normal safety, maintenance and gross spending, as well as approximately $5.3 million incurred on the new coil coating build in Washington, Missouri. We're slightly ahead of schedule on the newbuild as a result of favorable weather to plan and spending on the new facility is in line with our expectations during the quarter and compared with our full year CapEx budget. During the quarter, we paid dividends to our common shareholders of $4.2 million and also paid $3.6 million to our Series A preferred shareholders. I will discuss debt paydown, interest expense and taxes in a few moments. Turning to Slide 6. We continue to invest in organic growth, strategic customer partnerships, high return projects and productivity projects that meet our criteria for high ROI projects. Our focus on debt paydown continues and the Board as well as our leadership believe that returning capital to shareholders through a quarterly cash dividend remains a priority. And as Tom mentioned, acquisitions are not a near-term focus for the company. Turning to Slide 7. During the first quarter, we paid down debt of $20 million in what is normally a seasonally high cash outflow quarter. As we had discussed last quarter, we plan to pay down a total of $75 million to $100 million of debt this fiscal year with a near-term target leverage of 3 times trailing 12 months adjusted EBITDA. We recorded interest expense for the first quarter of $28.7 million compared to $7.5 million in the prior year due to acquisition-related borrowings, as well as the higher interest rate environment we operate in today. Last fall, we secured a cash flow hedge of half of our variable rate debt via a swap. This fixed rate -- this fixed our rate at approximately 8.6%, and we currently incur roughly 9.5% on the remaining variable rate debt. We have no maturities until 2027, and we know that our strong cash flow generation will continue to support our plan to delever. Our current quarter tax expense was $9.7 million, which reflects an interim effective tax rate of 25.3%, consistent with prior year. We expect our full year effective tax rates to remain around 24% for fiscal year 2024. With that, I'd like to turn the call back to Tom.

Thank you, Philip. As you can see on Slide 8, we are maintaining our full fiscal 2024 sales guidance of $1.4 billion to $1.55 billion; adjusted EBITDA guidance of $300 million to $325 million; and adjusted EPS guidance of $3.85 to $4.35. Our minority ownership in the AIS joint venture is not included in the balance of the year guidance, because we don't control it and they are still in the purchasing price accounting period, consequently which makes predicting a specific equity income amount difficult for now. We believe Avail is progressing well on their business plan and we will provide an outlook on equity income as soon as reasonably possible. Our financial outlook for the second quarter on Metal Coatings is a repeat of the first quarter, with many of our fabrication customers citing good backlogs as they benefit from increased infrastructure spending. Additionally, with improvements in labor availability and more predictable supply chain support, we are confident we can adjust our inventories of paints and ink to more normalized levels. Precoat continues to enjoy diverse end market activity and growing industries that directly relate to a broad range of construction markets and opportunities to convert customers from post paint to pre paint in sectors such as roofing and containers. As I mentioned, we did see some softening in HVAC, transportation and certain construction markets, which is why we remain focused on expanding our supply chain solution offerings, including converting customers from their own internal painting. We will have a better view of this after our second quarter is complete. We're also projecting a repeat of first quarter in the second quarter related to sales. As I noted earlier, customer inventories have normalized due to the actions we have taken, which allows us to benefit from process improvements and production efficiencies. Our corporate team continues to focus on cost initiatives, further debt reduction, customer credit metrics, governance and risk mitigation, and a disciplined method for allocating capital to the projects with the greatest return on investment. We are progressing with our greenfield plant construction that supports aluminum coatings with a valuable dedicated customer committed to filling the majority of our capacity in this new plant. As Philip mentioned, we are slightly ahead of schedule and continuing to track within budget. This is an exciting project for us and we will keep you updated each quarter on the progress. Finally, we are committed to growing sales and driving margins to our targeted ranges, which will generate significant cash flow and create shareholder value. I want to thank all of our shareholders and our Board for their support. And I again want to thank our AZZ team for delivering strong first quarter results. With that, operator, can you please open up the call for questions?

Of course. Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from John Franzreb with Sidoti & Company. Please go ahead.

Good morning, guys, and thanks for taking the questions. I'd like to start with Precoat. Tom, you mentioned that the sales profile should be similar in Q2 versus Q1. I'm curious normal seasonality, on a historic basis, how would that quarter kind of line up and how would normal historical margins differ in Q2 versus Q1? Because it seems like you have those headwinds that you called out on HVAC and transportation, just to kind of get a better sense of the business.

Yes. I think -- I mean, usually, as we've talked some, first half is the strongest part of the year. Q2, I'd say is usually slightly stronger than Q1 and we pretty much anticipate that. And the only reason is that Q1 as the spring kind of gains traction, so there's always a couple of weeks to ramp that up, whereas during the summer months, it's pretty much -- we get that full 12 or 13 weeks of solid production, efficiencies and demand. Margin is probably slightly better in Q2, but it is close. We're pretty close to that 20% target that we've talked about in the past. So, we're at the margin on that. But no, the outlook is good. Just toured some of the plants. The excess customer inventory is now fully under control. We've gotten rid of almost all of the excess warehouses that we had and which makes us more efficient, more productive. So I'm looking for what I hope becomes a very typical second quarter for Precoat as we go forward.

Got it. And rising interest rates, has that had any impact on your order intake in any of the businesses?

I think we may have seen some of that. It's hard to attribute it directly to it. I think we've seen some projects in both sides, Metal Coatings and Precoat, that have probably been deferred, not necessarily canceled. And so deferrals just drag things out a little bit, but in some cases, for our plants that are really busy this time of season, that can be good. So yes, I don't know that I can point to anything other than on the Precoat side, recreational vehicles, RVs, that businesses kind of in -- let's just call it, way off. But so I guess that's less affordable for people post COVID, maybe. But other than that, it's -- construction is a little -- commercial construction is a little bit softer, but we're in regions and geographies that tend to be strong right now. So here in Texas, throughout the Southeast, Midwest quarter, which is a lot of the area that I visited over the last month or so, you just see lots of activity, lots of infrastructure activity, lot of construction, lot of cranes, new ballparks, ag, spring, we saw docks going in. So, it's actually fairly normal. So, when we we're alluding to the areas that are softer, but on the other hand, there's areas that are actually stronger. So...

Well, interesting. And just lastly, on input costs, can you talk a little bit about how it's impacting the P&L? I noticed that zinc continues to slide downwards. Maybe a little bit of thoughts on what your input costs are looking like company-wide and maybe zinc in specific what we can talk about there?

Yes. I think as you look at our, particularly for Metal Coatings or our galvanizing business, specifically first quarter versus first quarter last year, the margin -- EBITDA margin, it's 30.7%, it's a really, really nice amount, but was off just a little bit as the higher zinc was continuing to flow through our kettles. And we've done a great job with discipline, value-added pricing and our customers recognize what we bring to the table. So -- but that's not to imply there has been -- if things soft a little bit, there gets to be some price pressure. But we're -- we pretty much disconnected the underlying zinc costs with our value-added pricing. Generally, labor has become more available. So while we had that inflationary impact last year, I'd say it's more normal now and also labor is more accessible. So that helps us with our productivity, keeping our -- not that we don't have significant overtime during this time of season, but it does allow us to keep our crews fully staffed, and hydration and safety is very important for us during the hot summer. So we're feeling good right now and zinc costs, they've peaked and should continue down in our kettles as the year goes on, keeping in mind that LME, while it's down, the premiums for this year were increased significantly. So, it's not a one-to-one comparison when you look at it year-over-year.

Got it. With that, I'll get back into queue. Thank you for taking the questions.

The next question comes from Adam Thalhimer with Thompson Davis. Please go ahead.

Hey, good morning, guys. Congrats on a solid start to the year.

Good morning.

First question on DGS. Is that something you can integrate with Precoat, or does Precoat already have a similar solution?

Yes. Precoat is one, we're looking at automated lines running at up to 700 feet per minute versus more of the batch process, although we do have some more automated processes on the hot dip side with our spin plans. So generally, they've got a lot of controls and automation already in place. They have their own proprietary software that allows them to manage those massive inventories in huge amounts of steel and aluminum going through their plants called CoilZone, and that -- which is also something that integrates them with their customers. So different proprietary software structures, but both accomplish -- both allow the businesses to accomplish the same kind of things from a productivity, efficiency and customer integration perspective.

Okay. And you alluded to this, but you said there were some stronger end markets that were offsetting weakness in HVAC, transportation and construction. Can you elaborate on those?

Yes, we've had strength in the solar market, particularly. So, when you look at infrastructure, bridge and highway, even ag for us has been -- have been some strong markets over the last few months. It looks like that's going to continue. And that's why I mentioned you just look at the amount of work that has to go into our bridge, highway, water systems, there's airport construction and activity going on everywhere. So I'll keep it tied to transmission distribution, renewable energy, including solar, and bridge and highway and general infrastructure. Those are strong and look to continue that way.

Great. And then just a couple of things for modeling purposes. Can you give us any help with corporate expenses and D&A going forward?

Phillip?

Corporate expenses should be fairly flat. We are just coming off the TSAs with AIS that we had, and then you'll see those kind of be -- remain pretty flat to where they were at the end of Q1. And then D&A similarly, we finished all the purchase accounting at the end of the first quarter related to the Precoat acquisition after the first year. So these should represent fairly good run rates.

Got it. Okay. Thank you, guys.

All right.

The next question comes from Brett Kearney with Gabelli Funds. Please go ahead.

Hi, guys. Good morning. Thanks for taking my question. Curious, Tom, particularly as you've recently toured some of the Precoat plants, to the extent they have some capacity maybe freeze up later this year, you mentioned opportunities expanding their supply chain solutions offering and converting some customers who run their own lines internally. Anything incrementally you guys are seeing in terms of maybe folks you already serve well on the galvanizing side that could also benefit in some area from Precoat solutions and kind of the cross-selling opportunity there?

Yes, I think I'm encouraged. It's -- in some ways it's still early, but our sales teams from both sides have gotten together on a couple of occasions and are now working in their own geographies, identifying leads, making introductions. So it's a hesitate to point anything real specific at this point. But we are fine and whether it's in trucking or just some of the customers that use a lot of sheet metal components and panels that -- there's opportunities. And I think we're -- our teams work well together and they're making those introductions. And I don't know that we've had any significant customers that have said changes their mind about us. But it's early and we do look for more opportunities there, and that's going to continue.

Yes, excellent. And then great to hear the new Precoat facility on track, even ahead of schedule a bit. I know it's early days. We can't predict the weather from here. But to the extent that facility were to come online, just even a bit early, does your agreement with the anchor customer there allow them -- allow for you to be providing volumes like as soon the plant comes online, or is it more of a fixed calendar date in the contract you have there?

No, I think there will be opportunities. The customer has existing demand. They're also building capacity as well. But there should be opportunities. That's something we probably need to probably check with Kurt and his team on the specifics. But I'd anticipate that. So we just want to keep it under control and -- but yes, it'd be great to have it up and run it faster.

Excellent. Thank you so much.

Sure.

Thanks.

This concludes our question-and-answer session. I would like to turn the call back to Tom Ferguson for closing remarks.

Well, hopefully, as you heard, we're excited about the opportunities in front of us. We look forward to continuing on our path with Precoat and Metal Coatings, and finding opportunities to work more closely together, offer even more solutions to our customers. So, we're excited about the balance of this year and look forward to talking to everybody after the second quarter. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.