AZZ Inc.

Good day and welcome to the AZZ third quarter fiscal 2025 conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Sandy Martin of Three-Part Advisors. Please go ahead.

Sandy Martin Thank you, operator. Good morning, and thank you for joining us today to review AZZ's financial results for the fiscal 2025 third quarter, which ended November 30, 2024. Joining the call today are Tom Ferguson, President and Chief Executive Officer, Jason Crawford, Chief Financial Officer, and David Nark, Senior Vice President of Marketing, Communications, and Investor Relations Officer. After today's prepared remarks, we will open the call for questions. Please note the live webcast for today's call can be found at www.azz.com slash investor dash events. Before we begin, I want to remind everyone that our discussion today will include forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. By their nature, forward-looking statements 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. 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. Non-GAAP financial measures should be considered supplemental to, not a substitute for, GAAP measures. We refer to the reconciliation from GAAP to non-GAAP measures in today's earnings press release. I would now like to turn the call over to Tom Ferguson.

Good morning. Thank you for joining us, and Happy New Year to you all. Today I will discuss AZZ's third quarter and cover our outlook for the rest of the year. Jason Crawford will review our financial results, and David Nark will provide an industry update on sales to our end markets. Then we'll open up the call for questions. The third quarter's results exceeded our expectations versus how we were feeling as we had entered the quarter. I give our teams tremendous credit for their focus, discipline, and great execution in both segments. We are pleased with both segment teams' ability to sustain margins while generating solid sales growth. Fiscal 2025 sales through the first nine months have been driven mainly by construction projects related to highways, new bridge construction, and infrastructure renovations throughout the U.S. In addition, spending on data centers, reshoring of manufacturing, clean energy initiatives, and power transitions accelerated in calendar 2024, resulting in positive impacts for our business. Our consolidated third quarter sales of $404 million increased by 5.8% versus the prior year's quarter, and this was all organic growth. The metal coating segment increased overall sales by 3.3%, but grew galvanizing at 5.2% when compared to the prior year's third quarter, while the pre-coat metal segment grew sales by 7.6%. Sales momentum in the third quarter was almost entirely based on volume, with higher tonnage processed in both fabricated steel and coil coating. Metal coatings delivered EBITDA margin of 31.5 percent, again exceeding the prior year and our targeted range of 25 to 30 percent, primarily due to higher volume and improved zinc productivity. Pre-coated metals EBITDA margin of 19.1 percent also exceeded the prior year and demonstrated strength primarily due to higher volume, more profitable mix of business, and improved operational performance. In addition, Strong EBITDA resulted in cash flow from operations of $186 million for the first nine months of the fiscal year, which allowed us to make substantial debt repayments of $80 million. Jason will discuss this in more detail, but the strong free cash flow this year allowed us to further deleverage our balance sheet while investing in operations for the future. We continue to hold lean market positions in our galvanized metal coatings and coil coating pre-coat segments. As a specialized metal coatings provider, our strong and enduring competitive mode gives us an advantage through trusted, repeated customer relationships, economies of scale, and innovative customer-centric technology solutions. Our reputation for reliability and excellence in customer service further enhances our value proposition. We are committed to both organic growth and strategic bolt-on acquisitions to maintain and grow our leadership positions. Importantly, We do not own the steel process through our facilities, so we avoid exposure to commodity price risk associated with it. Operating as a highly profitable tolling model, we will continue to strengthen our significant economic moat in metal coatings and pre-coated metals. We plan to continue investing in ATZ's proprietary customer-facing technologies that are utilized at all of our facilities. Our innovative technology platform provide paperless real-time access and improved service transparency. positioning our company as a highly differentiated metal coatings provider and strategic partner to customers throughout North America. Jason will discuss our disciplined approach to capital deployment in a moment. But first, I want to underscore that we continue to pay down debt and return capital to shareholders by consistently paying quarterly cash dividends. As noted previously, we expect to reduce our debt by over $100 million for the fiscal year ending in February. As I mentioned earlier, for the first nine months of our fiscal year, our growth has been 100% organic compared to the prior year. We continue to work the M&A pipeline by carefully evaluating potential acquisition targets to add inorganic growth in each segment. We'll remain patient while considering the best timing, target valuations, and ACC's optimal leverage. Finally, in pursuit of our high ROI capital allocation strategy, We have invested in a durable secular trend supporting the beverage industry's plastic to aluminum conversions. We are finalizing construction milestones of our new aluminum coatings facility in Washington, Missouri. We are currently doing equipment certifications and testing and expect to ramp up the new facility during the first quarter, which begins in March 2025. We're excited about our spring launch of this new facility, particularly as this new facility also demonstrates AZZ's commitment to support a greener future for generations to come. With that, I'll turn it over to Jason.

Thank you, Tom, and good morning. For the third quarter, we reported sales of $403.7 million, an increase of 5.8% over the prior year's quarter. By segment, our metal coating sales increased 3.3%, within which galvanising increased 5.2% and our pre-coat metal segment increased 7.6%. The third quarter's gross profit was $97.8 million, or 24.2% of sales, an increase of 110 basis points from 23.1% of sales in the prior year quarter. Gross margins improved in both segments, supported by higher sales and volumes, and improved zinc productivity in the metal coating segment, and higher sales and improved operational performance in the pre-coat metal segment. In the third quarter, selling, general, and administrative expenses were $39.2 million, or 9.7% of sales, compared to $35.3 million, or 9.3% of sales in the prior year quarter. The SG&A increase in the quarter was due to one-off employee retirement costs, severance expenses, and legal accruals for cases that were settled during the third quarter. Operational income improved to $58.5 million, or 14.5% of sales, compared to $52.8 million, or 13.8% of sales in the last year's third quarter. Interest expense for the third quarter was $19.2 million compared to $25.9 million in the prior year. The decrease is due to consistently paying down debt and our lower weighted average interest rates from various debt repricings and recent Fed interest rate reductions. Equity and earnings of unconsolidated subsidiaries for the third quarter was $7.2 million compared to $8.7 million for the same quarter last year. These equity and earnings are from our 40% minority ownership interest in the availed JV. Current quarter income tax expense was $12.1 million, reflecting an effective tax rate of 26.5% compared to 24.6% in the prior year quarter. The increase in the effective rate was primarily attributable to higher non-deductible items related to meals and entertainment and lower impact from our R&D tax credits. Reported net income from the third quarter was $33.6 million compared to $26.9 million for the prior year quarter. On an adjusted basis, Q3 adjusted net income was $41.9 million compared to $34.8 million, an increase of 20.5% from the prior year. Third quarter adjusted EBITDA was $90.7 million, or 22.5% of sales, which compares favorably to $86.4 million or 22.6% of sales in the prior year. Turning to our financial position and balance sheet, as Tom mentioned, we generated significant cash flows from operations of $185.6 million, exceeding last year's $180.9 million. After funding the first nine months of the company's capital expenditures of $85.9 million, our year-to-date free cash flow was $99.7 million. Year-to-date capital expenditures include spend of $46.8 million on our new coil coating facility in Washington, Missouri, with most of the remaining spend of this project of approximately $11.2 million expected to be completed during the fourth quarter. As Tom noted, we have a disciplined capital allocation strategy that consists of investing in the business for growth, paying down debt, returning cash to our shareholders through dividends and share buybacks, and evaluating potential bolt-on acquisitions. During the third quarter, which ended November 30th, we reduced debt by $35 million and expect total debt repayments to exceed $100 million for the full year. Our current trailing 12-month debt to adjusted EBITDA is 2.6 times, which compares favorably to our leverage of 3.1 times in the third quarter of last year. Recall that in late September, we repriced our term loan B down to SOFR plus 2.5%, and with the Fed reductions in the quarter and another reduction announced in December, we expect these moves to benefit our bottom line in the fourth quarter of this fiscal year. Our current interest rate swap agreement fixes our variable rate debt for a notional portion through September 30th, 2025. and we do not have any debt maturities until 2027. Finally, we paid cash dividends of $5.1 million to common shareholders in the third quarter. This year, we have strengthened the balance sheet through multiple levers, with investments in organic growth, reductions in debt and working capital, and improvements to our capital structure with the full redemption of the company's Series A preferred stock by using the proceeds from the secondary equity offering that was completed in May of this year. With that, I'd like to turn the call over to David Nock.

Thank you, Jason. Good morning, everyone. The sales momentum for the third quarter trended positive in nearly all of our reported end markets compared to the same quarter in the previous year. Sales within construction, industrial, and electrical utility grew over the prior year, and we saw strength in small but growing categories such as containers, HVAC, and recreation over the same quarter a year ago. We attribute this organic growth to a continuation of market share gains and signs that we are in early innings of a multi-year transformative period for infrastructure spending with transmission and distribution as well as renewables growing versus the prior year same quarter. As we have communicated all year, we remain optimistic about public and private sector spending. Looking ahead, we believe infrastructure outlays will be elevated for years to come. the reshoring of manufacturing and energy transitions, investments in AI, and the requirements for affordable housing will spur the need for more data centers, housing, and medical facilities to support the growing population. These investments are based on connecting larger, sprawling communities, which creates an ongoing necessity for further spending in our nation's infrastructure networks, particularly bridge and highway, as well as electrical T&D. In addition, we know that pre-painted aluminum and steel will play an essential role in many projects, as well as a conversion from plastics to aluminum in the food and beverage industries, which we believe is a critical long-tail secular trend. With that, I'd now like to turn it back over to Tom.

Thanks, David. We remain bullish about our near, medium, and long-term business prospects. Although I am incredibly pleased with the team's progress and accomplishments this year, We are also deeply involved in planning and setting new milestones for fiscal year 2026. As Jason and David shared, business momentum continued through the year's first nine months. We expect the fourth quarter to be similar to last year's Q4, which is typically slower as construction is impacted in the winter months. Concerning our annual guidance, we have narrowed our sales range to $1.55 to $1.6 billion and kept the midpoint unchanged. We also narrowed and raised our midpoint for EBITDA and EPS expectations to reflect the strength in our first nine-month period, with lower interest costs for the balance of this fiscal year. We narrowed our adjusted EBITDA range to $340 to $360 million and increased adjusted EPS guidance to $5 to $5.30. Our overall guidance assumptions have not changed, which excludes any federal regulatory changes that may emerge. Finally, capital expenditures for the current fiscal year are expected to remain unchanged at $100 to $120 million, and embedded in this total is the new plant's final capex. The equity and earnings from our minority interest in the Vail joint venture continues to be within the $15 to $18 million range, and debt paydowns are expected to exceed $100 million. We continue to focus on paying down debt while actively evaluating potential acquisitions with our growing pipeline. We remain enthusiastic about business prospects and are confident we will finish fiscal year 2025 well. In a few weeks, we plan to provide fiscal year 2026 guidance for the fiscal year that begins March 1st. I want to thank our hardworking and talented team for executing ACC's vision of unwavering customer service and growth and working on continuous improvements every single day. We are highly focused on creating long-term value through servant leadership, execution of our strategy, and sustainable solutions. We plan to continue scaling our business through organic and inorganic growth, generating significant cash flow, and leveraging our differentiated value proposition to customers. With that, operator, I would like to open up the call for questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Matthew Kruger with Baird. Please go ahead.

Great. Good morning, everyone. Thanks a lot for taking my questions. You know, just to kick things off, you know, maybe could you talk a bit about what you're seeing from a big-picture perspective as it relates to, you know, end market demand? If you could comment on, you know, maybe what you're seeing from a market growth perspective versus what AZZ is generating from a growth angle, that would be terrific, too. I'll pause there.

Yeah, a couple of things, then I'll let David opine as well. But, you know, I think we've seen the markets kind of choppy. So, you know, fortunately, we serve a real diverse set of markets in both segments. But I think we benefited from our emphasis on providing outstanding customer service, focus on innovation. So taking some market share, getting customers to convert to pre-paying, getting customers to convert to hot-tip galvanizing from whatever they're using. So I feel like we've been able to perform, particularly in the third quarter, ahead of the markets. But generally the markets are okay. I think there's some hesitation. We've seen projects pending, what's going to happen with tariffs, steel availability, things like that. I don't believe those are – significant hurdles going forward as we get into 2025. But I do think it's created a little bit of choppiness in decision-making on some projects. And that's kind of generally across markets. And David may want to add on some specifics.

Yeah, thanks, Tom. Matt, what I would just add is, as you look at our reportable end markets, as I mentioned on the call, nearly every end market was up over the same quarter prior year. We continue to see some real bright spots in markets like construction, industrial, and utilities, particularly transmission and distribution, where we know there's literally thousands of miles of new projects that have been announced and awarded and have yet to come out of the ground. I think that tracks pretty well when you take a look at some of the information related and released from the U.S. Census Bureau, and you look at U.S. construction spending, and particularly either non-building or building, there's some bright spots in there in areas like infrastructure, around water, as well as things like data centers, public safety, and manufacturing spend. I would agree with Tommy. We feel like we definitely grew faster than the market in Q3, and we're optimistically looking forward to Q4 and the year ahead.

Great. That's super helpful. And then the third quarter was a nice sequential acceleration from the second quarter. Were there any unique benefits to the third quarter growth rate that we should think about from a weather perspective? Was any demand pushed into the third quarter? Or were there any other one-off factors that we should consider as we model out to the fourth quarter this year and kind of sequentially into 2026?

Yeah, actually, you know, there's two sides to this. So, you know, we had talked about how our galvanizing grew faster than the overall metal coatings. And part of the impact on that coming out of the hurricane, we've got a powder coating facility in Tampa that was really negatively impacted. So our surface technologies portion of the business, which isn't large, but You know, we can move the needle a little bit in the quarter as you saw by the 3.3% overall growth versus 5.2% for galvanizing. So, you know, there's where the hurricane had a negative impact. I think it had a little bit of a positive impact on the galvanizing side just up in South Carolina. We didn't see significant benefit out of that. I think there's still, you know, as you can read and see on the news and in the media, there's still a lot of, still going through a lot of turmoil in western North Carolina. So, You know, I don't feel we benefited that much from hurricane at all, other than, like I mentioned, in the two sites. And then, generally, that was about it. And, of course, now we're into winter storms, but that's what we expect in the fourth quarter. So, you know, impacts on construction. So, for Q3... Yeah, not much one-off. It was basically good blocking and tackling, taking care of customers, converting opportunities, and out-servicing our competitors.

Great. That's helpful. And just lastly for me, I know you're going to be issuing formal guidance in a couple weeks here, but as we model out to the next year, are there any high-level variances that we should start to think about for FY26 versus FY25? across the business, anything like, you know, volumes, you know, interest expense, the Missouri plant opening, what contribution that could have. Just, you know, big picture thoughts like that versus kind of getting into specific guidance would be helpful.

Yeah, I'll mention a couple of things, and Jason can talk about interest rates and some of the things we may continue to do on the debt front. But we do look to get an acquisition or two done, hopefully over the next few months, and, you know, kind of get back into that routine where we're bolting things on as part of our normal course of expansion in certain geographies and places and going the business through those bolt-ons and then hopefully improving their margins to our fleet level. So we're excited about that. We've gotten off the acquisition trail to pay down debt, but we feel very good about our leverage as we're trending down towards two times, which I think is a level that once we get to that, all options are back on the table in terms of potentially increasing dividends, stock buybacks, and, of course, acquisitions. So But in terms of other things, volumes we see kind of post the Trump administration taking over, I think that settles things down in terms of what actions are going to be taken for tariffs. And we don't see tariffs having a big impact on us as we get into the year. There's kind of a mixed bag on the pre-code side. And on the galvanizing side or metal coating side, it's a non-factor as long as steel is available for projects. And, Jason, you might want to add anything in for interest in what you're doing on the financing front.

Yeah. I mean, certainly from an interest point of view, I think we've made the majority of our moves this fiscal year. So really what you'll see next year is just the annualization impact of that. I don't see any major step functions. Obviously, what happens out there in the external world from, you know, a Fed point of view will impact us. But we have our underlying swap that, you know, kind of nullifies that to, you know, probably the first two quarters, and then we'll look at extending that. So really not any step functions. As you think about our cash flow, then certainly the last two years we've heavily invested in the new facility in Washington, and we'll see that dropping off and get back to a more normalized CapEx point of view. So that's only through, you know, as we start to think about next year that I would say that have any impact.

And then I'd come back on the new facility startup. We'll give some more color on that when we give guidance. But as you would expect, it's a big facility. And while everything's on schedule and things are testing out well and working well with the partner on getting test samples and certifications moving, you know, it'll be a slow ramp up in the first half of the year and then, you know, full production as we get into the back half of the year and you start to get it to closer to the full run rate effect. So... So most of the effect for the new facility, you really expect to come later in fiscal 2026. But like I said, we'll give more color on that here in a couple of weeks.

Okay, great. That's very helpful. Thank you.

The next question comes from John Franz Reb with Sidoti & Company. Please go ahead.

Good morning, everyone, and thanks for taking the questions. Good morning, John. I like to start with the metal coatings business. In the queue you mentioned, there was a modest increase in average selling prices, but the margin profile remains really impressive throughout fiscal 2025 when compared to 2024 and 2023. Can you just kind of recap what's fundamentally different this year than the prior two years? And maybe should we think about resetting the guardrails of the margin profile for the segment?

Yeah, we are considering resetting those, and we'll talk about that next year's guidance as we get our plans approved next week by the board, hopefully. So I think this is just back to the fundamental blocking and tackling and chasing opportunities. We've got scale. We've got capabilities, tremendous discipline around customer service and quality. zinc efficiencies and productivity as we talk about that. We've done some things using both our digital degalvanizing system, but also we're able to test different alloy combinations and things like that and working with some partners that we believe differentiates us in the marketplace and allows us to maintain those zinc productivities better than industry standards. We now believe that's sustainable, and what you're witnessing is that, you know, as we ramp these things up, it's not like we flipped the switch in all 41 sites and started doing all the positive things in all 41. So I think what's going on now is just in the vast majority of sites. They're running the playbook every day, and... And so we're just benefiting overall, given our scale, across the vast majority of the business units and plants versus only having a part of that impact, say, last year at this time. So I think it's sustainable. And we've been, I'll say on one hand, fortunate, but also it's a very dedicated effort on the team to keep people motivated, focused on the right things, train and develop leaders, and have a good, solid bench. So I think that's what makes it sustainable, and I think we're getting close to that peak.

Good to hear. And regarding the JV income, I noticed this year kind of mirrored last year where Q2 was weak and Q3 was strong. Is there some seasonality in that business? And I know you get a look-see of what the order book looks like in the year ahead. Does everything look pretty sustainable on a go-forward basis?

Yeah, I think you nailed it. They've always had some seasonality because of that WSI, the welding solutions portion of the business. It's really only busy two seasons during the turnarounds. But the electrical, they've got a very, very good backlog. And, of course, I always tell people to look at how Powell is doing. to understand how Avail's electrical business is doing. So they've got really, really strong backlogs going into this year. They're on a calendar reporting year. So they've finished their year, and I can say they finished it well. And their backlogs are strong on that electrical piece. And we are encouraging our partner that we think that they've gotten a lot of value out of this business and, you know, a good time to look at potentially transacting it over the next 12, 15 months, whatever. So because we think while there's some long-term positive trends, they've also done a nice job using their fern walk, you know, former McKinsey consulting techniques to, you know, to drive the margins and improve processes. So we think the business is in really good shape going into 2025. And while we like it and we like the performance, we also think that, you know, they've kind of reached a good performance level to look at potentially transacting some of that.

Got it. I guess one last question. Where do you stand on fulfilling the balance of the plant in Washington besides the primary customer? How does that look?

Oh, that looks really good. I think, you know, we've been chasing some opportunities that would fill the balance of that. And keeping in mind, this is a brand-new plant that kind of marries up to the existing St. Louis container plant that has two lines already. So this is, you know, we've got opportunities. We've got, I hate to call it backlog because we don't really have backlog, but we've definitely got opportunities. And the customer that we're partnered with, is focused on helping us get the line certified, getting it ramped up in the first quarter, getting it to nominal production levels as quickly as possible, but also bringing in other kinds of business and moving that between the St. Louis and the Washington facilities as we optimize capacity, so to speak. So we feel real good about that. You know, it's a big facility, complex facility, so there's always the potential for startup issues. But, boy, the team has been so focused and so disciplined the last few months and hitting their milestones and working with the suppliers to get things ramped up. I won't say without a hitch because there's always things that go on. But I've started up a lot of factories in my career, and this one is going very well right now. So we're really excited as we enter the year.

That's great to hear, and congratulations on another good quarter.

Thank you. The next question comes from Mark Reitman with Noble Capital Markets. Please go ahead.

Thank you. You already hit on some of the drivers for the strong performance in each segment during the quarter, but what would you consider normalized growth rates for each segment, ex-new builds and acquisitions?

Yeah, I think we've always talked about ourselves as a GDP-level growth business, that balancing, protecting margins with growth is something that I think both teams are very disciplined about. So you look at basically underlying GDP growth, and then as we can drive conversions, drive new applications, drive opportunities, then we can exceed that a little bit. And then the bolt-on acquisitions just hopefully continue to give us new opportunities to drive synergies and drive our playbooks through. But generally, yeah, we're a GDP business. We follow that because we follow construction activity. So construction activity is good. I will say that right now, and David talks about this a lot, for the next few years we should be able to exceed that because a lot of the infrastructure spend that has to occur, whether it's transmission distribution, whether it's the green energy buildout, whether it's pipelines and things like that, those are all, or chip plants, reshoring. So I do think over the next, you know, three, four, five years, we should be able to exceed that GDP level growth nicely because of these prevailing tailwinds that we have. So, we're in a really good spot in terms of timing. Go ahead.

Is there any difference between the two segments in the way that you think about one exceeding GDP growth and one not? I mean, in terms of they're not going to be growing at the same rate. Great question.

Metal coatings is more focused on infrastructure overall. So, you know, as that kind of spend occurs, then they will be the beneficiaries of that more so over the next few years. I think on the pre-code side, you know, it's the overall construction activity, which is 75 percent of their demand. So, you kind of look back to that's going to follow residential, commercial, industrial construction. some of which is related to infrastructure, some of which is more related to the general economy. So that's how you can differentiate the two.

And then just the second question, just with respect to publicly funded projects, could you elaborate a little bit on the fiscal policy dynamics at the federal, state, or local levels and kind of how they impact your business? And are there any cross currents between the three?

I think generally, I'll let David add on to this, but generally, you know, when it comes to public projects, so you're looking at bridges, highways, roads, you know, things like that, water projects, it's a longer process just for approvals, going through the environmental impact studies, and that's whether it's local, state, federal. I think the biggest thing we run into and what usually slows public projects up is the cross requirements between the three, any one of which can slow a project up while it goes through an additional level of review. So, if there was anything the new administration could do to streamline permitting and that process review on these public projects, particularly that have federal funds attached to them, obviously, That would help a lot because these things just get hung up for a long time before you actually call it shovel-ready, so to speak. David, if you want to add to that.

I would only add, Tom, that as you think about some of the spending that's been out there for several years now with IIJA, CHIPS Act, and IRA, that certainly has primed the pump for a lot of these projects that Ultimately, some of them fall within the public sector. But I think whether it's public sector or private sector, we feel, again, really good about the opportunities ahead from both of those segments as a result of that spending. And, again, as Tom said, hopefully the new administration frees things up a bit so that permitting and planning gets streamlined and these things can come to ground quicker.

That's very helpful. Thank you very much.

Thank you. The next question comes from Adam Thalheimer with Thompson Davis. Please go ahead.

Hey, good morning, guys. Congrats on the Q3 beat.

Thanks. Thanks, Adam.

I guess the question I've gotten the most this morning is on the revenue guidance. And I was curious, were you trying to apply that there's a potential for revenue decline year-over-year in one of the segments? If so, where could that occur?

I mentioned the choppiness. Some of these projects are dependent on both the cost of the capital, but also tariffs could impact supply and cost of steel. You know, you now have some projects, the escalator clauses are being negotiated, and that just sometimes slows things up. It doesn't make the project go away, so to speak, but it can delay it. And so what our concern is, we just looked at the fourth quarter, was if that continues as it seems like it is, then it just has a slowing effect on the revenue in the quarter. For us, that's not necessarily a terrible thing because we adjust shifts. We adjust our variable cost structure so it doesn't affect our profitability as much as it affects our top line. So that's the only concern. It's not that the market activity is not there. It's just that the timing of when does it move forward and does it fall within us getting to paint metal and ship it, and galvanized steel and ship it. So that's all that's related to.

Okay. And then just a quick one on the Washington plant. I know there was a portion of the plant that was contracted to kind of the anchor customer. What's the process for filling up the rest of the capacity? Like when that plant starts up, do you start with the anchor customer and then later in the year fill in the extra capacity? Okay. How does that work?

Yeah, actually, we've – and I mentioned the St. Louis plant already having demand on it. It's an operating container facility just with two smaller lines. So our ability to move business between those two plants and provide demand for the new plant, we've got that capability. And, of course, the current St. Louis facility services, both the partner – which, by the way, is Tri-Arrows – So it services the partner, but it also has other customers that it services. So, you know, our ability to ramp up that other 25%, I think it's more going to be around our caution of working with the partner where we've made the commitment. We want to make sure we take care of them and they're the ones committed to helping us get it certified and everything lined out. So, you know, in the early phase, we'll be a little cautious to not get too far out over our skis in terms of our ability to produce. And then as the year wears on, we'll start to bring in other customers to fill demand opportunities or demand things. So, you know, I think that's how I'm looking at it at this point. Got it.

Okay. Thanks, guys. Talk to you soon.

The next question comes from Daniel Rizzo with Jefferies. Please go ahead.

Good morning. Thank you for taking my question. I was just wondering, so you talked a lot about infrastructure spend and how important that is. I was wondering how much of a tailwind it could be if there is a cyclical recovery in private spending on things like commercial construction, what that's meant to you guys in the past, and what do you expect going forward?

Yeah, that's been a significant – if we got a recovery in that sector, that – Yeah, we go from 65% utilization up to 80% utilization, those kinds of things. It can have a very positive impact on us. So we'd love to see it. We'd love to see it sustainable. And it tends to be those tend to be really good kinds of projects for us. So where our capability is our ability to This is more on the pre-code side, to provide different color combinations to basically give them to fill more specific needs versus more general needs, I think is a real positive. I don't know if Jason and David wants to add to that.

Yeah, I think the only thing I would add is, you know, some of those sectors that have been down really kind of all year, like warehouse, commercial, and office spending areas, if those were to rebound, that certainly can provide a nice tailwind for us. Yeah.

And we'd see it pretty quickly. That's the other nice part. Those projects tend to move fairly fast.

Meaning that they could show up in as little as a quarter, or does it take like six months, or how should we think about it?

Yeah, I'd call it one to two quarters versus some of the public stuff that can take, you know, one to two years.

And then just on your kind of capital allocation strategy, so I know debt reduction remains a focus. Certainly speaking, I mean, have share buybacks been a big thing, or do you kind of just do it to offset dilution?

Yeah, offset dilution or a portion of dilution. And, you know, we would look at that as we look at our you know, our share price valuation and look at, you know, the benefit of continuing to reduce debt. We're also going to balance it versus, you know, are any acquisitions potentially actionable within the next quarter. And then we are taking a look at our dividend as well because we haven't touched the dividend.

I lost you guys. I don't know if you can hear me, but thank you.

Okay, thanks.

Operator, can you still hear us?

Yep, I hear you. Oh, okay, good. Yep, our next question is going to be from John Bratz with Kansas City Capital. Please go ahead.

Good morning, everyone. Good morning. Tom, and maybe, David, you can chime in and sort of follow on with the previous question. But when you look at your end markets, how much your business, how much your customer base is more sensitive to interest rates and interest rate movements? Obviously, we've seen interest rates move up a little bit. How much your business might be affected by rates continuing to go up? Any thoughts?

I don't think it's that much. I think most of these projects are not viability sensitive to 25 bps or so. I think the long-term trend, as long as interest rates, as you look at the forward curve, and as long as it's going to be trending down, then I think that projects move forward now, and particularly when it comes to infrastructure and things like that. What I do think it does is, you know, they start to look at it can change the rate of return, and does that move it out a little bit, and does it just delay and cause them to have another review cycle before they approve it? So I see it affecting timing, and that's why we were a little bit more uncertain about the revenue for the fourth quarter, just because You know, these things that we thought might have been moving forward might just push into the first quarter as they try to get the interest rates tied down and they try to get their funding at whatever price point they're trying to get it fixed at. I think the tariffs probably create a little bit more uncertainty because that can have a bigger cost impact on a project. If, you know, if steel costs moved up 10, 15 percent, that can have a significant impact on a project. As well as steel availability, not that there's a likelihood of that in the longer term, but in the short term, we can move it around. So I think those are the kinds of things that are causing some, I've been calling it choppiness, but it's choppiness in the decision-making on moving projects forward. So I think interest has a minor effect. I think as the tariffs get buttoned down and they see what happens with that, and the reaction to it, that that starts to give everybody more confidence that you don't have to have these significant price escalators in to account for it.

Okay, okay. Secondly, when you look forward into 2026 and you look at the zinc cost environment, any pluses or minuses as we head into fiscal 2026 on the zinc front?

Yeah, I mean, zinc LME has continued to trend up. And so that, you know, as you know, that has an effect on the cost in our kettles six to eight months out. We tend to adjust. You know, we talk about value pricing and everything like that. But obviously when zinc costs, because it's the single largest component of cost on galvanizing, when that trends up, the competitors tend to trend up their prices as well. So, yeah. So, yeah, it's a factor. Obviously, we can calculate that and do every month as we see the only prices move and factor that into what our cost is going to be in our kettles six, eight months out. But that also gives us time to adjust our value proposition and adjust price expectations. So, you know, we're not viewing it as a When it's moving up like this, which is relatively slowly, call it almost sort of steady, this is actually a good thing. When it really starts to bounce, that's when you get into surcharges and all sorts of things that just create a lot of uncertainty. So right now, we don't view this as a terrible thing. It's probably kind of a good thing.

Okay. One last question. One of the first things... Trump is going to do is he's going to try and end the moratorium or the pause on LNG permits. And I don't know how successful he's going to be. There's probably going to be some court challenges. But singularly, can the LNG renewal, rebirth, if you want to call it, can that have a positive impact on your business? on your galvanizing?

It sure can, because especially when you look kind of through the southeast, a lot of galvanizing capacity came online with the expectation that was going to occur. Some of that capacity has gone away. Some of it's been acquired. Some of it's been closed. But, you know, you look through where those terminals would go in, we've got galvanizing sites pretty much everywhere. in the backyard of each one of them. So, yeah, that would be a nice positive, and it would help the overall market, particularly through that southeast Texas quarter.

Well, we'll see what happens. We will see what happens, but we would view that as a positive. All right. All right. Thank you very much.

Thanks. The next question is a follow-up from John Franzrug with the Dodian Company. Please go ahead.

Yeah, just some thoughts on M&A. You said you might start to reengage as you pull down the leverage. I'm curious if that's limited to the galvanizing side or other opportunities that you'd explore on the pain side of the business. And if so, can you kind of just give us some examples?

Yeah, I think, you know, obviously we're looking for the one-off bolt-ons for galvanizing. We'd look if any of the multi-site deals came active again. We'd be, you know, right in the front of the line for those. Those are slam ducks that if we get them at a reasonable price, we run our playbook and bring them up to our fleet margins, and everybody's happy. We almost view it as organic growth. On the pre-code side, they're going to tend to be bigger because you're, well, you think about it. We invested $125 million in a new line, which obviously that's on the high end of the side, high side of the scale. But still, you're looking at bigger, you know, even a one-off site is going to be fairly significant. There are some opportunities out there. We still view it as bolt-on for pre-code, just like we view it as bolt-on to leverage the G&A infrastructure run the playbook, improve operating performance, take care of customers. So same kind of playbook as we're looking at it. So, yeah, those are on our radar screen, if you will. But there's not many of them.

Okay. Thank you for the clarity. I appreciate it. Congratulations again. Thanks.

The next question comes from Timna Tanners with Wolf Research. Please go ahead.

Yeah, hey, good morning. I wanted to just ask a little bit about the competitive landscape. I know that you've been referring to some market share gains in recent quarters. Are there more opportunities for market share gains, or has that competitor started to try to claw back any of that lost market share? Any update there, please?

Yeah, a couple of things. Good, great question. On the galvanizing side, you know, it's, It's the typical players out there that either are adding some capacity or buying up capacity. So you've got the Valmonts and the Hill and Smiths, which in the U.S. operates as B&S, the multi-site folks we talk about. There's a couple of kettles coming. I mean, it's not abnormal. It's kind of like every year there's a kettle or two coming online, and we're kind of seeing that. continue, which also is why we usually want to go be buying something to match that. I think that's all in line with the expected demand growth and normal economic growth in the marketplace. For us, it's more around where does that kettle go in? Does it go in where we've already got several plants, or does it go into kind of the open space where we don't have much? So Or is it for internal capacity that's being added? So not a lot of change there. Just, like I said, I think two or three new kettles coming online this year, which is not abnormal. And on the pre-code side, it's the SDIs and folks like that that are adding a paint line to their mill capacity. I'd say it's relatively normal. There's a couple of lines coming on this year or expected to come online this year. It does not fundamentally change the supply-demand. For the most part, these lines are being added where they're adding capacity themselves to paint their own capacity to a great extent. On the pre-code side, I don't think we're seeing anything on the independents coming in. And if anything, we're seeing lines either slowing down. And then we're still out trying to get customers to de-vertically or unconvert, I guess, and let us paint instead of their running a 50-year-old line or 30-year-old line. So I don't think the market dynamics have shifted a whole lot. David, or Jason, if you want to add something to it, particularly on the pre-code side.

I don't think, no.

So with the additional paint lines you mentioned at SDI and the additional other capacity or attempts to regain share, you think there'll be corresponding additional demand to balance that? Is that what you think?

Yeah, that's how we're looking at it, and particularly, You know, one of the impacts of the tariffs would be that if less painted steel is being imported, then those paint lines are going to be necessary to paint the steel being manufactured here in countries. So that would just accelerate the use of that increased capacity.

The tariffs. And then as far as exports, like if exports were also restricted in line with, you know, USMCA tariff structure, How would you think about that impact?

Yeah, I think as you look at the exports, you know, if we're going to see more exports, you know, it's going to help our galvanizing side, but also on the pre-coat side, you know, depending upon the type of product that's coming out and what its intended end use is, We've got a lot of customers in certain key markets that are using pre-painted steel today, so we view that as a positive. Yeah.

Okay, great. Thanks again. Have a great one. Thanks, Tim.

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

All right. Thank you. Thank you, everybody, for joining us, and hopefully you've – You are now as excited as we are about our future for the balance of this year going into next year. And we look forward to issuing our guidance for fiscal 2026 and talking to you after we finish out fiscal 2025 in a couple of months. So thank you for joining us and look forward to talking to you next time.

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