Business Overview and History

AZZ Inc. (AZZ) is a leading provider of hot-dip galvanizing and coil coating solutions in North America, serving a diverse range of industries. With a rich history dating back to 1956, the company has established itself as a trusted partner for its customers, delivering high-quality products and innovative services. AZZ's strategic focus on organic growth and selective acquisitions has enabled it to continuously strengthen its market position and financial performance.

AZZ was established in 1956 and incorporated under the laws of the state of Texas, initially focusing on providing hot-dip galvanizing services to the steel fabrication industry in North America. Over the decades, the company expanded its metal coatings capabilities, adding spin galvanizing, powder coating, anodizing, and plating to its service offerings. This expansion allowed AZZ to diversify its product offerings and establish three distinct operating segments: AZZ Metal Coatings, AZZ Precoat Metals, and AZZ Infrastructure Solutions.

In 2022, AZZ made a significant move by acquiring Precoat Metals, a leading provider of aesthetic and corrosion protective coatings and related value-added services for steel and aluminum coil. This acquisition expanded AZZ's capabilities into the coil coating market, serving construction, appliance, HVAC, container, transportation, and other end markets.

The company faced some challenges in the early 2010s, including a recession that impacted demand across several of its end markets. AZZ responded by focusing on operational efficiency, cost control, and strategic customer relationships to maintain profitability during this period. The company also divested some non-core business units to streamline its operations and focus on its core metal coatings and precoat metals segments.

In 2017, AZZ encountered a legal dispute with a previous customer of its AIS business, which was retained following the sale of that division. The company defended the lawsuit aggressively and ultimately prevailed on appeal in 2024, demonstrating its commitment to protecting its interests. AZZ has also had to navigate supply chain disruptions, labor shortages, and fluctuations in commodity prices, such as zinc, over the past several years, but has remained focused on meeting customer needs and maintaining its industry-leading positions.

Throughout its history, AZZ has grown both organically and through strategic acquisitions, becoming a leading independent provider of hot-dip galvanizing and coil coating solutions in North America. The company's focus on operational excellence, customer service, and targeted growth initiatives has allowed it to navigate various industry challenges and emerge as a stronger, more diversified provider of metal coating solutions.

Financial Performance and Ratios

Over the past three fiscal years, AZZ has demonstrated solid financial performance. In the fiscal year ended February 29, 2024, the company reported total revenue of $1.54 billion, a 16.7% increase from the previous year. Net income for the same period was $101.61 million, with a net profit margin of 6.6%.

The company's balance sheet remains strong, with a current ratio of 1.89 and a debt-to-equity ratio of 1.04 as of February 29, 2024. AZZ's return on equity (ROE) for the fiscal year 2024 was 10.9%, and its return on assets (ROA) was 4.6%, indicating efficient utilization of its assets and equity.

The company's cash flow generation has been robust, with operating cash flow of $244.47 million and free cash flow of $149.35 million in the fiscal year 2024. This strong cash flow has enabled AZZ to invest in growth initiatives, such as the new coil coating facility, while also reducing debt and returning capital to shareholders through dividends.

Quarterly Performance and Guidance

In the most recent quarter ended November 30, 2024, AZZ reported sales of $403.7 million, a 5.8% increase compared to the same period in the prior year. The company's Metal Coatings segment experienced a 3.3% increase in sales, while the Precoat Metals segment grew by 7.6%, driven by higher volumes and improved operational performance. Gross margin improved to 24.2% compared to 23.1% in the prior year quarter, supported by higher sales and improved operational efficiency.

For the full fiscal year 2025, AZZ has narrowed its sales guidance range to $1.55 billion to $1.60 billion, keeping the midpoint unchanged. The company has also narrowed and raised the midpoint of its adjusted EBITDA guidance to $340 million to $360 million. AZZ has increased its adjusted EPS guidance to $5.00 to $5.30. Capital expenditures for fiscal 2025 are expected to remain unchanged at $100 million to $120 million. Equity and earnings from the AVAIL joint venture are expected to be within the $15 million to $18 million range. Debt paydowns are expected to exceed $100 million for the full fiscal year.

Looking ahead to fiscal year 2026, AZZ has provided preliminary guidance, anticipating sales in the range of $1.625 billion to $1.725 billion, adjusted EBITDA of $360 million to $400 million, and adjusted EPS of $5.50 to $6.10. This reflects the company's confidence in its ability to capitalize on favorable market trends and the anticipated contribution from the new coil coating facility in Washington, Missouri.

Liquidity

AZZ maintains a strong liquidity position, which is crucial for supporting its operations and future growth initiatives. As of November 30, 2024, the company had $1.48 million in cash and $345.7 million available under its $400 million Revolving Credit Facility. The company's debt-to-equity ratio stood at 0.026, while its current ratio was 1.77 and its quick ratio was 1.26. This robust liquidity allows AZZ to invest in strategic projects, pursue potential acquisitions, and navigate any short-term market fluctuations or economic uncertainties.

Segment Performance

AZZ operates through three distinct business segments: AZZ Metal Coatings, AZZ Precoat Metals, and AZZ Infrastructure Solutions.

The AZZ Metal Coatings segment provides metal finishing solutions for corrosion protection, including hot-dip galvanizing, spin galvanizing, powder coating, anodizing, and plating to the North American steel fabrication industry and other industries. For the nine months ended November 30, 2024, this segment reported sales of $516.75 million, an increase of 3% compared to the prior year period. Operating income for the segment was $142 million, up 10.6% year-over-year, driven by improved sales and lower selling, general and administrative expenses, partially offset by higher cost of sales.

The AZZ Precoat Metals segment offers aesthetic and corrosion protective coatings and related value-added services for steel and aluminum coil, primarily serving the construction, appliance, HVAC, container, transportation, and other end markets in North America. For the nine months ended November 30, 2024, this segment reported sales of $709.12 million, an increase of 6% compared to the prior year period. Operating income for the segment was $119.7 million, up 9.4% year-over-year, primarily due to the increase in sales, offset by higher cost of sales.

The AZZ Infrastructure Solutions segment represents the company's 40% non-controlling interest in AIS Investment Holdings LLC, the AVAIL JV. This joint venture focuses on delivering safe and reliable transmission of power from generation sources to end customers and automated weld overlay solutions for corrosion and erosion mitigation to critical infrastructure worldwide. For the nine months ended November 30, 2024, the AZZ Infrastructure Solutions segment reported equity in earnings of $12.47 million, up 11.9% compared to the prior year period.

Geographic Performance

AZZ primarily operates in the United States and Canada. For the nine months ended November 30, 2024, 96.9% of sales were generated in the United States, with the remaining 3.1% coming from Canada. This geographic concentration allows the company to leverage its strong market position in North America while potentially offering opportunities for international expansion in the future.

Industry Trends

The metal coatings and precoat metals industries are expected to grow at a compound annual growth rate (CAGR) of 4-6% over the next 5 years. This growth is driven by increased infrastructure spending, the reshoring of manufacturing, and the transition to renewable energy. AZZ is well-positioned to capitalize on these favorable industry trends, leveraging its strong market presence and diverse product offerings.

Risks and Challenges

While AZZ has demonstrated resilience and adaptability, the company faces several risks and challenges that investors should be aware of. These include:

1. Exposure to economic cycles: As a provider of industrial solutions, AZZ's performance is closely tied to the overall health of the construction, manufacturing, and infrastructure sectors, which can be cyclical in nature.

2. Commodity price volatility: Fluctuations in the prices of raw materials, such as zinc and natural gas, can impact the company's cost structure and profitability.

3. Competitive landscape: AZZ operates in a competitive industry, and the company must continually innovate and improve its offerings to maintain its market position.

4. Regulatory changes: Shifts in government policies, tariffs, or environmental regulations could have a significant impact on AZZ's operations and costs.

5. Integration risks: The successful integration of any future acquisitions will be crucial to AZZ's continued growth and profitability.

Despite these challenges, AZZ's diversified business model, strong market position, and focus on operational excellence position the company well to navigate the evolving industrial landscape and capitalize on emerging opportunities.

Conclusion

AZZ Inc. has established itself as a leading provider of hot-dip galvanizing and coil coating solutions in North America, serving a diverse range of industries. The company's strategic initiatives, including organic growth, selective acquisitions, and the development of innovative technologies, have enabled it to consistently deliver strong financial performance and enhance shareholder value.

With a robust balance sheet, healthy cash flow generation, and a promising outlook, AZZ is poised to continue its growth trajectory and solidify its position as a premier industrial solutions provider. The company's ability to exceed expectations in recent quarters, coupled with its narrowed and raised guidance for fiscal year 2025, demonstrates management's confidence in AZZ's business model and market positioning.

As AZZ navigates the evolving market dynamics, its focus on customer-centric strategies and operational execution should continue to drive growth across its business segments. The anticipated growth in the metal coatings and precoat metals industries, along with AZZ's strong presence in key markets, provides a solid foundation for future success.

Investors may find AZZ's compelling fundamental story, growth prospects, and ability to capitalize on industry trends worthy of further consideration. As the company continues to execute its strategic initiatives and deliver value to its customers and shareholders, AZZ remains well-positioned to maintain its leadership in the metal coatings and precoat metals markets while exploring new opportunities for expansion and innovation.