Adient Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
July 11, 2024

There are 10 speakers on the call.

Operator

Good day, and welcome to the AZZ Incorporated First Quarter 2025 Earnings Conference Call and Webcast. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Ms.

Operator

Sandy Martin of 3 Part Advisors. Please go ahead, ma'am.

Speaker 1

Thank you, operator. Good morning and thank you for joining us today to review AZZ's financial results for the fiscal 2025 Q1, which ended May 31, 2024. Joining the call 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.az.com/investor events.

Speaker 1

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 ks for the fiscal year. These statements are not guarantees of future performance. Therefore, undue reliance should not be placed upon them.

Speaker 1

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 financial measures. We refer to the reconciliation from GAAP to non GAAP in today's earnings press release. I would now like to turn the call over to Tom Ferguson.

Speaker 2

Thank you, Sandy. Good morning and thank you for joining us today. I will discuss the Q1 results and cover our outlook for the rest of the year. Jason Crawford, our newly appointed CFO will walk through our detailed financial results and David Nark will provide an industry update on our end markets. Then we'll open it up for some questions.

Speaker 2

Our first quarter results met the higher end of our expectations and we are very pleased with the performance and emphasis on execution in both segments. We reported record quarterly revenue of $413, 000, 000 improved segment profitability and expanded EBITDA in both dollars and in terms of margins. Our results generated significant cash flow from operations for the 1st 3 months Top line revenue growth by Focusing on the prior year and pre cut metal sales increased over

Speaker 3

the prior year

Speaker 2

both segments. In the Q1, we benefited from strength in a number of our end markets, including construction, bridge and highway, transmission and distribution and renewables. Non potential project spending for both public and private projects is now tracking higher than pre pandemic levels. This year, we have in public sector construction, which demonstrates a size of energy and manufacturing that David will cover. Private spending and commercial construction continuing to be interest rates, the shift in residential construction projects.

Speaker 2

Continuing with our Q1 results, Metal Coatings EBITDA margin grew to 30.9% exceeding the prior year and slightly ahead of our target margin range of 25% to 30% due to both and zinc productivity improvement. Preco Metals EBITDA margin of 20.2% was also meaningful as we have noted before that any reasonable uptick in volume helps drive margins above the 20% mark and towards the upper end of our communicated range of 17% to 22%. In addition to the solid execution of our operational initiatives in the Q1, we also completed a public offering of common stock to fully fund the redemption of AZZ Series A convertible preferred stock. Jason will discuss this more in a few moments, but the strategic rationale and timing were critical as redemption premium was set to escalate on May 12. The timing was right and we were pleased with the efficient execution of this transaction with the support of our capital markets partners.

Speaker 2

In less than 24 months, we have fully redeemed and retired the mezzanine financing associated with the acquisition of Precoat Metals. The Precoat acquisition further supported our long term strategy to improve the return profile and de risk our business by transforming into a pure play metal coatings company with significant scale, expertise, technology and a very strong balance sheet. This year, we remain focused on our operational and financial objectives. I'm gratified that our efforts in developing a strong servant miner leadership team with a solid bench of talent over the last several years have resulted in positive momentum with strong organic growth and profitability improvements in both segments. We attribute this success to our team's well executed strategic action centered on revenue growth, operational excellence, margin enhancements and working capital improvements, all of which contribute to the generation of free cash flow.

Speaker 2

I am proud of the work and dedication of our teams in both segments and in our corporate headquarters. We also continue to prudently deploy capital this year to high return investments for growth, further debt repay down and cash dividends to common shareholders, while we continue to strengthen the balance sheet. We're evaluating a growing list of acquisition candidates, but plan to be judicious as we evaluate leverage, strategic fit, ability to drive synergies and timing. We reduced debt by $25, 000, 000 this quarter and again repriced our term loan in March to lower interest costs. A significant company initiative this year is the completion of our new aluminum coil coating facility in Washington, Missouri.

Speaker 2

We expect to begin equipment testing in the Q3 with plans to be operational by early in calendar year 2025. Our decision to build this facility was evaluated based on a long term contractual customer commitment that accounts for 75% of the plant's total capacity. This facility should be well positioned to respond to the secular shift from plastic to aluminum in the beverage industry, and we are pleased to report that this important project remains on schedule. AZZ is recognized for its number 1 market position in both of our Metal Coating segments with strong and growing economic moats providing us with a significant competitive edge. This business edge is built on our differentiated highly sustainable environmentally friendly metal coating solutions.

Speaker 2

We bring over 65 years of technical expertise, customer centric technologies and strategically located facilities across North America. Our relationships with blue chip customers, our scale and culture of operational excellence are crucial elements that we believe will continue to drive our future success this year and for years to come. And with that, I'll turn it over to Jason.

Speaker 4

Good morning. As Tom mentioned, we reported 1st quarter sales of $413, 200, 000 compared to $390, 900, 000 in the prior year quarter. Total sales increased by 5.7% over the Q1 of last year with metal coating sales up 4.7% and pre cop metal sales up 6.5%. The first quarter's gross profit was $102, 700, 000 or 24.8 percent of sales compared to $97, 000, 000 or 24 point 8% of sales in the prior year quarter. Lower zinc costs in the Metal Coatings segment and productivity improvement in both segments helped offset wage and other inflationary headwinds resulting in steady gross margins as compared to the prior year.

Speaker 4

Selling, general and administrative expenses were $32, 900, 000 in the Q1 or 8% of sales compared to $31, 500, 000 or 8.1 percent of sales in the prior year Q1. Operating income improved to 69 point $7, 000, 000 or 16.9 percent of sales compared to $65, 500, 000 or 16.8 percent of sales in last year's Q1. Interest expense for the Q1 was $22, 800, 000 compared to $28, 700, 000 in the prior year. The decrease is primarily due to consistently paying down debt and our lower weighted average interest rates from various debt repricings that have occurred over the last 12 months. Equity and earnings of unconsolidated subsidiaries for the Q1 increased to $3, 800, 000 compared to $1, 400, 000 for the same quarter last year.

Speaker 4

This increase is due to higher earnings from our 40% JV ownership in Avail. Current quarter income tax expense was $11, 400, 000 reflecting an effective tax rate of 22.4% compared to 25.3 percent in the prior year quarter. Reported net income for the Q1 was $39, 600, 000 compared to $28, 500, 000 for the prior year quarter. As Tom mentioned, we redeemed our company's 6% Series A preferred stock on May 9 this year. The redemption premium, the amount in excess of the face value of the preferred stock of $75, 200, 000 was recorded as a dividend in our Q1 income statement.

Speaker 4

This resulted in a GAAP loss to common shareholders of $36, 800, 000 and a GAAP diluted loss per share of $1.38 Since our non GAAP measure for adjusted net income excludes the Series A redemption premium, AZZ reported adjusted net income of $44, 000, 000 or adjusted diluted EPS of 1.46 dollars This compares favorably to the prior year's adjusted net income of $33, 400, 000 or adjusted diluted EPS of 1.14 dollars On an adjusted basis, our earnings increased 31.9% from the Q1 of the prior fiscal year. The timing was right to redeem the Series A preferred stock to avoid further annual increases. While the redemption result is in a 1 time redemption premium payment of $75, 200, 000 the decision to redeem the Series A preferred stock during the first quarter allowed the company to avoid $14, 400, 000 in future annual preferred stock dividends and future escalations in the redemption premium by a minimum of $36, 000, 000 per year. First quarter adjusted EBITDA was $94, 100, 000 or 22.8 percent of sales compared to $85, 400, 000 or 21.8 percent of sales in the prior year. This 100 basis point improvement in adjusted EBITDA margin was primarily driven by improved earnings We generated cash flow from operations of $71, 900, 000 which was more than 50% higher than the Q1 of the prior year.

Speaker 4

After funding Q1 capital expenditures of $27, 400, 000 our free cash flow was $44, 600, 000 As Tom mentioned, we're expanding our coiled coating capabilities by constructing a new 25 Acre Aluminum Coiled Coating Facility in Washington, Missouri, which we anticipate to be operationally in calendar 2025. We expect to spend approximately $63, 000, 000 on the new facility this fiscal year, of which $16, 000, 000 was paid in the Q1. Our capital allocation strategy consists of investing in the business, paying down debt, returning cash to our shareholders through dividends and evaluating potential bolt on acquisitions. During the Q1, which ended May 31, we reduced that by $25, 000, 000 and we expect to pay down a total of $60, 000, 000 to $90, 000, 000 for the full fiscal year. Our current trailing 12 month debt to adjusted EBITDA is 2.8x, which compares favorably to 3.5x 12 months ago.

Speaker 4

As Tom touched on, we completed a secondary public offering earlier this year by issuing 4, 600, 000 shares of common stock and raising $322, 000, 000 or $308, 700, 000 net of transaction expenses. 100% of these net proceeds from the secondary offering were used to redeem the Series A preferred stock. We believe that full redemption of the preferred stock significantly improves the company's capital structure. At the end of the Q1 on May 31, we continued to maintain ample liquidity and flexibility through our $400, 000, 000 revolver with no debt maturities until calendar 2027. Finally, in addition to paying down debt, during March of this year, we re priced our Term Loan B, improving our margin from so far plus 3.75 percent to so far plus 3.25%.

Speaker 4

Our current interest rate swap agreement continues to fix our variable rate interest for a notional portion of our debt through September 30, 2025. With that, I'd like to turn the call over to David Knox.

Speaker 5

Thank you, Jason, and good morning, everyone. Momentum from year end in February carried into the first quarter with strength in a number of end markets. For Metal Coatings, we reported record high sales driven by high single digit volume expansion for the quarter. As Tom mentioned, we are now seeing an elevated number of public work projects related to essential industries that include bridge and highway, construction, utility T and D, renewables, namely solar, as well as critical chip plant construction projects. We believe that public sector has ongoing spending strength, which we expect to continue this year.

Speaker 5

The precoat metals segment continued to perform better than the market in the Q1 with total volume increases in the mid to high single digit range. In fact, certain end markets saw significantly higher increases ranging in the high single to double digit growth range for construction, HVAC fueled by inventory build of cooling products and the implementation of a new refrigerant change and transportation based upon a rebound in the recreational vehicle market. In addition, PreCote works on essential data center construction projects by pre painting steel for the insulated wall panels used in modern data centers, which is a growing market for them. We remain enthusiastic about public sector spending and believe if interest rates soften later this year, it could signal growth in private sector spending and commercial construction. We also expect to continue to see secular growth trends in reshoring of manufacturing, the migration to aluminum and pre painted steel, as well as the conversion from plastics to aluminum in the beverage space that will continue to benefit our business.

Speaker 5

As Tom mentioned, AZZ is the market leader in both metal coatings segments and providing superior capabilities as a high value add metal coatings provider with scale, innovative coatings technologies and customer centric systems that have become a cost advantages to our customers. With that, I would now like to turn

Speaker 2

it back over to Tom.

Speaker 3

Thank you, David. As Dave mentioned,

Speaker 2

we are optimistic about our business prospects this year and appreciate that our business is typically more brisk during the peak summer construction months. We also know that hurricanes as we saw recently with Hurricane Burrell and macroeconomic events or changes can impact our business. So we remain prepared for choppiness should it occur. While we don't have a crystal ball into what the economy holds the balance of this year nor the impact of the upcoming elections, we have accomplished what we set out to do in the Q1. We established new records for adjusted net income, for adjusted EPS and for sales.

Speaker 2

So credit to both of our segment teams and also to corporate to accomplish the redemption of our preferred shares during the same quarter. Today, we are pleased to reiterate previous guidance. Our fiscal 2025 sales guidance is $1, 525, 000, 000 to $1, 625, 000, 000 adjusted EBITDA guidance of $310, 000, 000 to 360, 000, 000 and adjusted EPS guidance of $4.50 to $5 Capital expenditures for the current fiscal year are expected to remain unchanged at $100, 000, 000 to $120, 000, 000 including approximately $63, 000, 000 related to the new Greenfield plant. The equity and earnings from our minority interest in the Avail joint venture is expected to be $15, 000, 000 to $18, 000, 000 this year and debt pay downs are planned in the $60, 000, 000 to $90, 000, 000 range. We are focused on paying down debt and we'll continue to evaluate bolt on acquisition opportunities that are beginning to enter the pipeline.

Speaker 2

Our long term strategic plans include continuing to focus on growing the business organically and inorganically. We offer a highly differentiated value proposition to customers through a totally model that positions us with fewer commodity and financial risks simply because we do not own the steel or aluminum that we cope. Our margin and return profiles position us well this year to continue to generate significant free cash flow and maintain adequate liquidity to grow the business while maintaining a solid balance sheet. This all translates into the creation of long term value for our shareholders through our sustainable solutions. We continue to recognize that by investing in our people and relentlessly executing our strategy, we can continue to accelerate AZZ's value creation.

Speaker 2

Now, would the operator please open up the call for questions?

Operator

Yes, sir. We will now begin the question and answer session. And the first question will come from Lucas Pipes with B. Riley Securities. Please go ahead.

Speaker 6

Good morning. Thank you so much for taking my question. The first 1 is just on your EBITDA guidance. Q1 very solid start to the year. You're annualizing to 376, 000, 000 dollars range for the full fiscal year $310, 000, 000 to $360, 000, 000 So, well well below kind of where you've been annualizing, especially at the midpoint.

Speaker 6

You mentioned some factors, seasonality, election, the hurricane, but to what extent are you really conservative when it comes to the rest of the fiscal year? Thank you very much for your color.

Speaker 2

Yes, Lucas. I mean, generally, we as you probably have seen, we tend to be conservative. So we're getting back in we had updated guidance in April, which was a little out of which was a little out of cycle and prior to then having the offering and then finishing up the quarter. But our normal cadence would be as we finish up the Q2 to look at updating guidance at that point. And that also gives us a better benchmark since we'll have finished what is typically a strong summer construction season and the quarter is off to a good start.

Speaker 2

So we feel good about our outlook at this point, but just a little hesitant given nothing specific. So I don't want to say that. And Hurricane Burrow, while it affected a couple of our sites, we're talking about a handful of man days of production that was affected. And for the most part, while our sites had lost power in I think in 3 sites, 3 or 4 sites, our customers did as well down in Houston. So that work is still going to get done and we'll clear that out within a few days.

Speaker 2

So overall, the net impact is very minor. And in the longer term, almost sadly in some cases, I'd say we do tend to pick up work after a hurricane because you just look at some of the photos of the down transmission towers and poles and docks and piers and things like that tends to be stuff that gets galvanized. So over the longer term, we tend to pick up work. And the economy, as we showed, we had record sales in the Q1. Our teams are striving hard, taking some market share, driving volumes.

Speaker 2

So we're confident, but we just want to get back into our normal conservative cadence of how we set guidance.

Speaker 6

That's very helpful. Thank you. And then my second question is somewhat related. On the Metal Coatings business, you came in at an EBITDA margin of 31%. I remember you've spoken to 25% to 30% as a target before.

Speaker 6

And so I wondered, was there anything unusual going on that margins were above kind of the target range? I guess they can always go higher. Sync, for example, was pretty volatile. Did that have an impact in any way? I would appreciate your perspective on this.

Speaker 6

Thank

Speaker 2

you. Yes, a couple of things. 1, zinc didn't have much didn't really have any impact at all. It's for us, the cost in our kettles is still trending down, but then it with the higher LME zinc costs right now, it will flip over and start to gradually head back up as the year wears on. But that's all factored into our forecast and our guidance already.

Speaker 2

I think the main thing was it shows that when our teams get a little bit of extra volume that and keep in mind, we have no backlog in technically no backlog in either segment, but at least on the precoat side, we do have some a lot of customer steel and aluminum sitting in our warehouses and plants. But on the galvanizing side, particularly, they basically have what's on their yards. So they're forecasting off of their sales. We've got a great sales relationship management capability and our teams do well. So picking up an extra 90 bps of EBITDA margin, that's pretty much I hate to say it's definitely not rounding there, but a little bit of volume goes a long way and they stayed focused on what they do and they maintain their value pricing philosophy and just the leadership team and the plants just executed outstandingly well and it's not that we anticipate that falls off.

Speaker 2

But after the summer construction cycle, then it gets a little choppier as we get into the fall. And then in winter, that's when construction does slow up, whether it's public sector or private sector. So that just keeping in mind the 4th quarter gets a little bit weaker. So we tend to look at that 25% to 30% being a consistent target. If we do find that they continue to sustain above 30%, we would naturally revisit that range, but I'm not anticipating that at this time.

Speaker 6

I really appreciate all the color to you and the team. Continue best of luck. Keep up the good work.

Speaker 2

Thanks Lucas.

Operator

The next question will come from Steven Volkmann with Jefferies. Please go ahead.

Speaker 7

Hi. Good morning, guys. Thank you. And maybe just sort of pull on the same thread a little bit. I'm just curious, as you think about your end market exposures, are there any it doesn't sound like this, David, but are there any end markets out there that are kind of choppy and giving you some concern for the rest of the year?

Speaker 7

Maybe there was some inventory stock or destock that we should keep in mind? Just anything that would keep you kind of conservative on the top line outlook?

Speaker 5

Yes. Great question. As you look at our stated Great question. As you look at our

Speaker 2

stated end markets and the results,

Speaker 5

we saw growth across every stated end market other than the catchall category of other. So kudos to the teams in both segments for strong performance there. When you look a little further into each segment, we saw some choppiness here and there, some give and take, but overall, we don't see anything that really worries us or brings too much concern to us across either segment.

Speaker 7

Okay, great. And then as I sort of skim through the 10 Q, I saw that there was some headwind on mix. Can you just elaborate a little bit on sort of what you're seeing there?

Speaker 5

Yes, I think again, as you look at each segment, we had some puts and takes through the quarter on mix. Nothing really that jumps out at us too much as far as any kind of issues or concerns. And again, I think when you look at the overall results by both segments, they were really solid.

Speaker 7

Yes, agreed. Does this mix headwind continue or how do we think about forecasting that for the rest of the year?

Speaker 2

No, I think for mix, it can shift. I mean, our plants with 40 particularly on the galvanizing side, we've got 41 different plants. And so they will chase they do a couple of different things. They've got their customers that they focus on and then as load shifts, they chase different segments of the market, different types of customers. So if they need load, they're going to go after structural stuff or if structural stuff slows up, then they're going to chase some smaller, as I like to call soap rope and dope.

Speaker 2

So that can move, but it's not anything I'd say we typically forecast. It's just as we see it, then we can use it to explain what happened. But looking forward, I don't I want to say that we're beyond maybe a weekly, monthly basis. Is not something that we have a lot of forecasting detail about. So we're anticipating normal mix going forward and continued good execution.

Speaker 7

All right. I appreciate it. Thank you.

Operator

The next question will come from Marc Reichman with Noble Capital Markets. Please go ahead.

Speaker 8

Yes. While sales were up in both business segments, it looked like the average selling price was down in metals coating due to the product mix and the average price was flat in precoat metals. So I was just wondering to follow-up on that last question, what's your outlook for pricing? Will it be will the results be more volume driven or do you expect kind of a change in the mix that might help the prices going forward?

Speaker 2

I think we're generally seeing so a couple of things. As even though we've tried to separate zinc costs from our pricing models, the reality is when zinc starts to trend up as it has been on the LME, it makes it easier to hold price. So because customers are expecting it, they see they know it's a significant part of our cost of goods sold. So I'd say as we look forward, it actually gets a little bit easier. Part of the problem of being a public company, we do talk about how the zinc cost is moving in our kettles.

Speaker 2

And as we talk about it going down in our kettles, customers are going to ask, so why is your price going down too? So it's good to see this flip over a little bit and head back up. And like I said, we try to sell on the value add. We sell multiple services that beyond just the hot dip galvanizing itself and that includes transportation. So there's a lot of things that affect mix, but generally, I think we see prices holding as we look forward, supported by the fact that we still have inflation on virtually everything from wages to our acid energy, you name it.

Speaker 2

And like I said, with zinc costs going up, that usually kind of bodes well for our ability to continue to drive and deliver value pricing.

Speaker 8

And the second question is you've got to take our pay contract for 75% of the output of the Washington, Missouri facility. And I guess that's what $50, 000, 000 to $60, 000, 000 of annual revenue. Do you expect to sign additional contracts before the facility is completed?

Speaker 2

I think that's possible. We've got other customers already. So this is not a new process for us. We actually have another plant in St. Louis that runs similar things just on a smaller with smaller capacity, so to speak.

Speaker 2

So we're balancing we're going to balance capacity and load as we ramp up and the key thing for us is to ramp up the quality and the capabilities effectively. So we will be looking for other customers, but keep in mind, we already do business with most of them. And so as we look to and feel confident with it, we can move some of the demand and give us those opportunities. In this case, the reason for the contract was just given the amount of the investment. Typically, our contracts are probably a little bit looser than this 1, so to speak.

Speaker 2

But yes, we'll be looking to get other customers to put some business in there so that we can run that effectively. And it is a new state of the art line. So we anticipate being run very effectively, efficiently and cost effectively too.

Operator

The next question will come from Kevin Gainey with Thompson Davis.

Speaker 3

Good morning, gentlemen. Congrats on the great quarter. Thanks. Maybe if we can start on pre coke margins. They were flat year over year.

Speaker 3

Is it more of like a 1 quarter phenomenon? Or are you guys what are you guys thinking for the balance of the year there? And then maybe how you see that over the longer term? Is there still opportunity to push those up?

Speaker 2

Yes, there's still opportunities and a couple of things. 1, the customer inventories in our plants has increased, which says at some point we're going to run that and paint it. So that tends to give us some confidence on the volume side of it. And as we can sustain the volumes, then we'll sustain those above 20% margins. There's other opportunities too.

Speaker 2

I think both segment teams focus on operational excellence, driving outstanding quality. And I'd say on the precoats side, we've got across the fleet of plants and 15 lines, we're going to have opportunities to improve quality, improve productivity, drive on throughput. So those are obvious things I think that when you think about some of the distractions as you go back to Q4 last year where we had too much customer inventory and it got in the way of our productivity, we're not going to allow that to happen again. So I think the 20% range is something we'd like to hold and continue to move towards the higher end of the 22% in the range.

Speaker 3

That sounds good. And then maybe welcome to the call, Jason. I'll give you this chance here. Thank you. How are you guys thinking about being able to generate cash from working capital as the year progresses?

Speaker 4

Yes. I think if you look at our last prior fiscal year, we really made a step change improvement in working capital. I think this year, if you look at our projections, then we're not necessarily projecting any step change. There's always opportunity, but really our focus is more operationally in driving cash from there. So anything that we pick up from working capital will be above and beyond that, but it's certainly not our number 1 focus given where we sit with our inventory levels and our other constituents within that working capital bracket.

Speaker 3

Appreciate that color. And then just to squeeze 1 more in as you guys brought it up, maybe if you can talk about the data center opportunity for PreCoat and if there's anything else you guys can give on that?

Speaker 5

Yes, just a little bit on that, Kevin. The data center market obviously is a large and growing market in the U. S. And has been. The Precoat business in particular has a customer where they're supplying pre painted steel to them and that customer makes a sandwiched insulated wall that is being used in a lot of that market.

Speaker 5

So it's a small but growing area for them. It's an initiative that they're focused on and we're opportunistic about the future for that.

Speaker 2

Yes. And I'd like to add too, even though in the AIS, which we sold the majority of, but a lot of that was electrical well, 5 of the facilities produced electrical enclosures and the skins on those enclosures were actually not prepainted. So that alone, the manufacturers that fabricate the enclosures that quite often form the basis or foundation of a data center farm, so to speak, is opportunity. So there's lots of opportunities for us to continue to convert post paint type things, in this case the electrical enclosures themselves to prepaint. So that's what the sales team is focused on and trying to just get customers understand.

Speaker 2

We're going to capture 99.9% of the emissions and we're going to do it far more efficiently, far more effectively and at a great cost. So that's what we like to pitch and it's what gets us excited. We have started doing some of that for now the Avail side.

Speaker 3

Yes, that sounds great. Looking forward to it. Appreciate the questions.

Operator

The next question will come from John Braatz with Kansas City Capital. Please go ahead.

Speaker 9

Good morning, everyone. Tom, a question for you. Broadly speaking, can you talk a little bit about the trend towards pre coated steel? And talk about relative to where what you were thinking back when you acquired Precoated and maybe you think it is today? Is the trend accelerating the same?

Speaker 9

Can you talk a little bit about that?

Speaker 2

Yes, I think a lot of it, the trend is tracking pretty much to how we had modeled it, I think. What we're finding is more opportunities as we have a strong balance sheet and we have access to cash, but working with customers to get them to get out of maybe their coiled paint lines and things like that, we're seeing opportunities that probably more than we thought. They do take longer to convert, but there's just a good strong list of those opportunities. And then the on the aluminum side, that's probably been actually a little bit slower than we anticipated, but we do see that conversion. I'm sitting here drinking water out of a painted metal can myself.

Speaker 2

So those things are happening. And so on 1 hand, we've got things moving faster. On the other hand, we've got some things moving a little bit slower. So overall though, the record sales tracking to ahead of our models from that perspective And then the margin profile, they're kind of dead center on what we had hoped for. So very, very positive overall.

Speaker 2

And I think what we're seeing with the sales teams is the ability to focus on these conversions. And as we read the weekly reports, we're winning a lot of battles and we hope that would continue. On the macro side, I think we still have to do a better job on the macro side of getting customers to understand the benefits of pre paint versus post paint. So that's work that's ongoing in the associations that we belong to as well as with our own sales teams. So I'd like to say we're still early innings on this conversion opportunity.

Speaker 9

Okay. Thank you. And secondly, in the press release you used the term, I haven't seen this before, improves zinc productivity. I don't think you're trying to imply that using less zinc in your galvanizing operations, but what is zinc productivity improvement?

Speaker 2

Yes, zinc productivity. So we track this. It's 1 of our key operating metrics. The idea is you want to put just enough zinc on the metal to protect it perfectly, but not too much zinc so that you're layering it on, which also affects the appearance. So for us that zinc productivity is just how effectively we utilize the zinc per pound or so to speak.

Speaker 2

So it is how effectively we can apply it. Tools like digital galvanizing system have made us operationally more efficient, more effective. We still have outstanding experienced kettle operators that do this as I call it, do it as a day job and make it look easy, but it's not. So that's a key measurement for us and something that technically we're using the we're trying to use the optimum amount of zinc to provide outstanding quality, not have any rework, but not clump a bunch of zinc on the fabrication.

Speaker 9

Does that is that making a big difference in the margins, the improvement in the margins? How much does that help?

Speaker 2

It's a decent it's got a decent impact. I don't want to give out too much competitive information. We do have some competitors on this call, but

Operator

Pardon me, our speaker line has reconnected.

Speaker 6

The floor is yours.

Speaker 5

Yes, let's go ahead and if we can operator jump to the next individual in queue.

Operator

That next question will come from Mr. John Franzreb with Sidoti and Company. Please go ahead.

Speaker 6

Yes. All my questions have been answered. Thank you.

Speaker 2

Hey, thanks, John. We're sorry for the disruption. We lost phone service here.

Speaker 6

No worries. Okay. Thank

Speaker 2

you. Thanks.

Operator

As there are no more questions, I would like to pass the call over to Mr. Tom Ferguson for any closing remarks.

Speaker 2

Thank you, operator, and thank you all for your time. Sorry for the phone disruption, but I look forward to updating you at the end of our Q2, which will just be in a couple of months. So thank you all and have a great day.

Operator

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

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